FOCAL COMMUNICATIONS CORP, 10-K/A, 1999-04-07

FOCAL COMMUNICATIONS CORP
10-K/A, 1999-04-07
RADIOTELEPHONE COMMUNICATIONS

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

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FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark
One)

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 1998

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to .

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Commission file number 333-49397
Focal Communications Corporation
(Exact name of registrant as specified in its charter)

Delaware 36-4167094
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or
organization)

200 North LaSalle Street,
Suite 1100, Chicago, Illinois 60601
(Address of principal executive (Zip Code)
offices)

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: None.

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 [X] No [_]

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. [_]

As of February 28, 1999, there was no established trading market for any
class of the Registrant's common stock.

As of February 28, 1999, there were 75,674 shares of the Registrant's Class
A common stock, 22,000 shares of the Registrant's Class B common stock and no
shares of the Registrant's Class C common stock, each $.01 par value per
share, outstanding.

Documents Incorporated by Reference
None.

Index of Exhibits is located on page 34.

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The undersigned Registrant hereby amends the following items, financial
statements, exhibits or other portions of its Form 10-K for the year ended
December 31, 1998 as set forth on the pages attached hereto;

(list of all such items, financial statements, exhibits or other portions
amended)

PART II

Item 8--Financial Statements and Supplementary Data

PART III

Item 10--Directors and Executive Officers of the Registrant

PART IV

Item 14--Exhibits, Financial Statement Schedules and Reports on Form 8-K

All items included in this amendment on Form 10-K/A other than those listed
above are as originally filed in the Registrant's Form 10-K for the year ended
December 31, 1998, as filed with the Securities and Exchange Commission on
March 31, 1999. The purpose of this amendment is to, among other things, add
an electronic copy of Exhibits 4.16, 10.17, 10.33, 10.36 and 21.1, which were
previously filed in paper pursuant to a temporary hardship exemption.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

We have made 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:

. Our business strategy and competitive advantages

. Statements regarding the growth of the telecommunications industry and
our business

. The markets for our services and products

. Forecasts of when we will enter particular 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
affect these statements or prevent us from achieving our stated goals include,
but are not limited to, our failure to:

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

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

. Respond to competitors in our existing and planned markets

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

. Maintain our agreements for transport facilities

. Maintain acceptance of our services by new and existing customers

. Attract and retain talented employees

. 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

. Manage administrative, technical or operational issues presented by our
expansion plans

. Address Year 2000 remediation issues

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PART I

ITEM 1. BUSINESS

Except as otherwise required by the context, references in this report to
the "Company," "Focal," "we," "us," or "our" refer to the combined business of
Focal Communications Corporation and all of its subsidiaries.

Introduction

Focal is a competitive local exchange carrier, or CLEC, that provides local
telecommunications services to large corporations, value-added resellers
(VARs), and information service providers (including Internet service
providers (ISPs)) in large metropolitan markets. We began operations in 1996,
initiated service first in Chicago in May 1997 and currently offer service in
the following 12 markets:

Chicago New York Philadelphia
San Francisco San Jose Oakland
Orange County, California
Los Angeles Northern Virginia
Washington, D.C. Boston Northern New Jersey

As part of our expansion, we plan to offer services in Dallas, Ft. Worth,
Detroit, and Seattle by the end of 1999. An inability to effectively manage
our planned expansion could adversely affect our operations.

We have chosen to initially do business only in large metropolitan markets
with a high concentration of telecommunications-intensive customers. We select
our target geographical markets using several criteria:

.Sufficient market size

.Favorable state regulatory environment

.The existence of multiple fiber transport providers with extensive
networks

.The existence of or ability to obtain attractive interconnection
agreements with the incumbent local exchange carriers, or ILECs

We believe telecommunications-intensive users in large metropolitan markets
are inadequately supplied with highly reliable, local switched services. We
also believe that these types of users will increasingly demand diversity in
local telecommunications providers as they have already done in long distance
and private-line telecommunications services.

We believe that our primary competitor in each of our target markets is the
ILEC. Most CLECs initially chose to compete in smaller markets, effectively
ceding the large metropolitan markets to a select group of early generation
CLECs (i.e., MFS Communications and Teleport Communications Group). Moreover,
the vast majority of CLECs provide bundled communications services to
primarily small- and medium-sized business customers. Our experience has
supported our belief that, unlike residential and small- to medium-sized
businesses who may prefer "one-stop" telecommunications providers, large
telecommunications-intensive users will purchase different types of
telecommunications services from different providers. As such, we believe that
there are few competitors offering telecommunications-intensive users a stand-
alone alternative to ILEC-switched local services. We believe that we have a
competitive advantage over other local service providers as a result of our
decision to provide diverse, reliable and innovative local switched services
to this significant and underserved market segment.

As of December 31, 1998, we had sold 68,184 access lines, of which 52,011
were installed and in service. This compares to 13,411 lines sold and 7,394
lines installed and in service as of December 31, 1997.

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We were incorporated in Delaware in June 1997 in connection with a Plan of
Reorganization and Agreement dated June 12, 1997, whereby we became the
holding company of Focal Communications of Illinois and each of its
subsidiaries. Our principal executive offices are located at 200 North LaSalle
Street, Suite 1100, Chicago, Illinois 60601 and our phone number is (312) 895-
8400.

Networks

Focal has initially chosen to design networks using a "smart-build"
approach, which involves purchasing and maintaining our own switches while
leasing fiber transport facilities on an as-needed basis. This smart-build
approach is possible because there are multiple vendors of fiber transport
facilities in each of our large metropolitan markets, both current and
planned. Our switch-based, leased transport network architecture allows us to:

.Reduce the time and money required to launch a new market

.Minimize financial risk associated with under-utilized networks

.Generate revenue and cash flow more quickly

We lease 100% of our transport facilities from multiple vendors in each of
our markets. This provides us with added negotiating leverage in obtaining
favorable terms and allows us to offer our customers both 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 corporate customers.

We have the flexibility to add or subtract leased transport capacity on an
incremental basis with the addition or loss of customers. We believe that the
quantity of existing and planned fiber transport facilities available from
numerous carriers will be sufficient to satisfy our need for leased transport
facilities and permit us to obtain these facilities at competitive prices for
the foreseeable future. The fiber transport providers in our current and
planned 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. Because the costs of building and maintaining fiber
networks are high and the markets in which we compete are relatively well-
supplied, the fact that many of our fiber providers are our competitors in the
local switched services market does not affect our ability to obtain
competitively-priced transport facility leases. 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. However, any unexpected material
increase in the cost of leased fiber transport facilities could have a
material adverse effect on our results.

We currently lease a majority of our transport facilities from one carrier.
Although we believe that adequate alternative sources of transport facilities
exist, should this carrier's facilities become unavailable, our business could
be disrupted.

We are a party to a products purchase agreement with Northern Telecom that
expires March 5, 2001. This agreement establishes terms and conditions for our
purchase of Northern Telecom products, including switches and related
software, and services. This contract requires us to place orders for the
delivery and installation of Northern Telecom products, including DMS-500
central office switches, in a minimum amount of $15 million every 12 months,
or an aggregate over the term of the agreement of $45 million, at pre-
established prices. If we fail to meet our minimum requirements on an annual
basis, we are required to pay a penalty of 15% of the difference between our
requirement and the amount actually purchased. If we exceed our minimum annual
requirement, we receive a credit towards our purchase of Northern Telecom
software. We are required to purchase all of our requirements of particular
switching equipment from Northern Telecom during the term of the agreement,
with limited exceptions.

We have also entered into a software license agreement with DPI/TFS, Inc.,
dated as of April 10, 1997, under which we were granted a personal, non-
exclusive and non-transferable license to use select DPI/TFS

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billing software. We paid an initial license fee and are required to pay
specified incremental use fees based on the number of access lines for which
we use the software. Unless terminated by us or DPI/TFS as permitted by the
agreement, the license is perpetual.

Products and Services

We primarily offer local switched services to our customers. These services
can generally be segmented into inbound and outbound calling services.

Inbound Services. Our basic, inbound service allows for the completion of
calls to a new phone number we supply to our customers. Alternatively, local
number portability ("LNP") allows us to provide inbound services using a
customer's existing phone number. While LNP is occasionally unavailable and
cumbersome to implement, it permits us to serve customers without altering
their existing phone numbers.

We offer a number of inbound calling applications:

.Direct inward dial service allows inbound calls to reach a particular
station on a customer's phone system without operator intervention. We
market direct inward dial service to our corporate customers as both a
primary and backup service. As a primary service, the customer uses Focal
numbers where a new line and number are needed, as when a customer hires
a new employee. As a backup service, we can implement an alternative
numbering plan for the customer in case the customer's primary service
from the ILEC or another CLEC is interrupted.

.Focal Virtual Office is designed to allow a corporate customer's employees
to dial-in to the corporate customer's local area network by a telephone
number in the employee's unmetered local calling area. This allows the
employee to access the local area network without incurring per minute
charges and enables our corporate customer to avoid the higher cost of
maintaining region-wide 800 service for local area network access. We are
planning future enhancements to our inbound services that are expected to
increase the screening capabilities and add another layer of security to
a corporate customer's local area network.

.Focal Multi-Exchange Service(TM), a variant of the Focal Virtual Office
service marketed to ISPs, allows ISP customers to cost-effectively access
the ISP's remote access servers.

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 our least
cost routing application, a customer can utilize our service in conjunction
with its existing ILEC service to route calls using whichever carrier is least
expensive for that particular type of call or time of day.

Our other outbound applications include outbound 800 calling and long
distance overflow service. In order to encourage customers to use our service,
we offer customers an incentive for letting us provide their outbound 800
calls. In the case of long distance overflow service, 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.

FocalFLOW is an outbound service marketed to VARs that need to be able to
switch outbound traffic among multiple long distance or international
carriers. We partition our central office switch so VARs can utilize the core
switching capability of our equipment at reasonable per minute or per port
cost.

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. This averts our 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

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generated by the large telecommunications-intensive customers we target. Our
ability to directly interface existing customer equipment further minimizes
our capital investment and maximizes our overall return on capital.

We also offer our customers the ability to colocate equipment in our
switching and operations centers. Equipment colocation benefits the customer
by allowing it to inexpensively house its equipment without having to maintain
environmentally controlled space. In addition, customers that colocate qualify
for special discounts on our monthly line rates. This service is particularly
well-suited to our ISP customers, who frequently operate remote access servers
and routers in conjunction with our switched services.

Sales and Marketing

Our primary objective is to satisfy the need for highly reliable, local
switched telecommunications services for telecommunications-intensive users in
the large metropolitan markets in which we operate by providing diverse,
reliable and sophisticated services.

Diversity. Focal provides diversity to telecommunications-intensive users
by delivering highly reliable, local switched telecommunications services as
an alternative to the ILEC. This type of diversity already exists in other
areas of telecommunications services, such as long distance.
Telecommunications-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.

Reliability. We provide reliable service to telecommunications-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 switched services are perceived as
simple, basic services, the delivery of highly reliable, local switched
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 CLECs. Because we are a relatively new entrant to the markets
we serve, we must meet or exceed the performance quality of the existing local
networks in order to attract telecommunications-intensive users to our
networks. Unlike smaller users that tend to pre-qualify vendors based on
price, we believe that telecommunications-intensive customers choose vendors
based on the performance of their networks, and specifically, their
reliability. As a result, the design and operation of our network is a key
success factor in our business development process.

In choosing our equipment, we conducted extensive research to identify the
best hardware for the high-volume users that we serve. As a result of this
research, we selected Northern Telecom's 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 also engineer our fiber capacity to
avoid blocking. We typically connect to a large number of switches in the
ILEC's network. This 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 telecommunications-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. 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 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 Northern Telecom with
fully redundant processors and memory in the event of a temporary failure. Our
disaster prevention strategy includes service

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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.

Any expansion or adaptation of our networks will require substantial
additional financial, operational, technical and managerial resources. These
resources could include additional hardware or software to enable our network
and switching facilities to manage increased traffic loads and the addition of
new customers. If we are unable to expand or adapt our networks to respond to
these developments on a timely basis and at commercially reasonable costs, our
business will be materially adversely affected. Our business could also be
adversely affected if we fail to keep pace with the rapid technological
changes to which our industry is prone.

Sophistication. Our target customers are knowledgeable, sophisticated
buyers of telecommunications 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
telecommunications-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 the
grant of stock options and cash compensation incentives based on our revenue
and operating cash flow objectives.

Financial Information about Industry Segments

Focal operates in a single industry segment, telecommunication services.
Operations are managed and financial performance is evaluated based on the
delivery of multiple telecommunication services to customers over fiber
networks. See our Consolidated Financial Statements included in Item 8 of this
report for information related to revenues and operating profit or loss.

Significant Relationships

Ameritech Illinois accounted for approximately 81% of our consolidated
revenues in 1997. Ameritech Illinois and Bell Atlantic New York accounted for
approximately 59% and 16% of our consolidated revenues in 1998, respectively.
The revenues from these carriers in 1997 and 1998 are the result of
interconnection agreements we have entered into with them that provide for
reciprocal compensation relating to the transport and termination of
telecommunications traffic. Further discussion regarding reciprocal
compensation is located in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in this report. No other
entities accounted for more than 10% of 1997 or 1998 revenues.

Competition

Our industry is highly competitive. We face a variety of existing and
potential competitors, including:

. The ILECs in our current and target markets

. Other CLECs

. Long distance carriers

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

Our primary competitor in each of our existing markets is the ILEC.
Examples include BellSouth, Bell Atlantic, Ameritech, U S WEST, SBC and GTE.
These ILECs are generally required to file their prices with the states 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 applicable state utility commissions and the pricing must be
made available to

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similarly situated customers. As a result, while the ILECs in many states may
have some pricing flexibility for local services, they must usually file any
special pricing plans offered and make these plans available to all of their
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."

Certain Regional Bell Operating Companies recently requested that the
Federal Communications Commission (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-making that is
intended to establish the procedures and safeguards necessary before these
ILECs could, through separate subsidiary companies, provide these services on
a largely deregulated basis. If adopted, these rules may provide additional
opportunities for competition from these ILECs.

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.
Subsidies of this type could have a material adverse effect on our results. We
believe competition has limited the number of services dominated by ILECs. In
addition, state 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 a
growing number of other CLECs. There are typically several other CLECs
competing in each metropolitan market we serve or plan to enter. Examples of
CLECs in our markets include Allegiance Telecom, Inc., NEXTLINK
Communications, Inc., MFS Communications and Teleport Communications Group. In
some instances, these 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
large, telecommunications-intensive users. Although CLECs overall have only
captured approximately two to three percent of local access lines, we
nevertheless compete to some extent with other CLECs in our customer segments.

In addition to ILECs and other CLECs, we are increasingly competing with
long distance carriers. A number of long distance carriers have introduced
local telecommunications services to compete with us and the ILECs. 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
telecommunications-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 the
Regional Bell Operating Companies 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 level of competition with long distance providers. We also expect to face
competition from potential market entrants.

For a description of how we compete, see "--Sales and Marketing."

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Regulation

The following summary of regulatory developments and legislation is not
complete. 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 FCC exercises jurisdiction over all the facilities of,
and services offered by, telecommunications common carriers like us to the
extent we use our facilities to provide, originate or terminate interstate or
international communications. State regulatory commissions retain jurisdiction
over most of the same facilities and services to the extent they are used to
provide, originate or terminate intrastate communications. The decisions of
these regulatory bodies 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 deregulate the telecommunications industry to a significant
degree, thereby fostering increased competition among carriers. 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. We believe, however, that it will take
years for our industry to feel the full impact of the Telecom Act. Even so, it
is already clear that this legislation creates both opportunities and
challenges for us. One challenge is the lack of effective enforcement
mechanisms designed to speed resolutions of Telecom Act-related disputes
between competitors.

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 termination equipment in ILEC central offices.

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

. 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.

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

. 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 cooper lines, that CLECs can lease in order to
build 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 will be required to contribute to the shared
industry costs of number portability, with the first payments being due
in the fourth quarter of 1999.

. Dialing parity. This requires the ILECs and CLECs to establish dialing
parity so that customers do not perceive a quality difference between
networks when dialing.

. 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 and will enter into additional agreements as our build-out
progresses. We have existing interconnection agreements in each of our
existing markets and in several of our planned markets. Seven of the
interconnection agreements covering our existing markets, including the
agreement covering Chicago, expire in 1999. Five of the interconnection
agreements covering our existing markets, including the agreement covering New
York, expire in 2000. The expiration of these agreements will require that we
negotiate new interconnection terms with the ILECs, including new rates for
reciprocal compensation, which are subject to significant uncertainty due to
regulatory changes and other business trends. Pending conclusion of these
negotiations, the existing interconnection agreements will continue to govern
the payment of reciprocal compensation and other interconnection terms.

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, based in part on its finding that the FCC did
not have the authority to adopt some of the rules it adopted. 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 an FCC rule that allows requesting
carriers to "pick and choose" individual portions of existing interconnection
agreements with other carriers and to "opt-in" to only to those portions of
the interconnection agreement that they find most attractive. The Supreme
Court did not, however, address other challenges raised about the FCC's rules
at the Eighth Circuit because those challenges were not decided by the Eighth
Circuit. These challenges will have to be addressed by the Eighth Circuit in
light of the Supreme Court's decision. 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. This issue will have to be addressed by the FCC in a new rule-making
proceeding that the FCC intends to initiate in the spring of 1999.

The Eighth Circuit decisions and their reversal by the Supreme Court
continue to create uncertainty about the rules governing the pricing terms and
conditions of interconnection agreements. The Supreme Court's actions in
particular may give rise to the renegotiation of existing agreements. The
ILECs may, as a result of the Supreme Court reversal, seek to stop providing
some unbundled elements. Although state commissions continue to implement and
enforce interconnection agreements, the Supreme Court ruling and future FCC
and court rulings may affect these commissions' authority to implement or
enforce interconnection agreements or lead to additional rule-making by the
FCC. The resulting uncertainty 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 accelerates
the time prior to which changes to tariffed service rates may take effect and
removes FCC pre-approval requirements to the ILEC's construction of new
facilities. These developments enable the ILECs to change rates more quickly
in response to competitive pressures. The FCC has also proposed heightened
price flexibility for the ILECs, subject to specified caps. If implemented,
this flexibility may decrease our ability to effectively compete with the
ILECs in our markets. Finally, because the Telecom Act's interconnection
requirements also apply to long distance carriers and CLECs, including us, it
may make competitive entry into other services or geographic markets more
attractive to the ILECs, long distance carriers and other companies, which
would likely increase the level of competition we face.

9
<PAGE>

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. We expect that reciprocal compensation payments,
which we currently receive from the ILEC in each of our markets, will make up
a significant portion of our initial revenues in each of our markets.
Reciprocal compensation is the compensation paid by one carrier to send
particular calls to another carrier's network. Because ISPs and corporate
customers typically receive more calls than they make, and a large number of
our customers are ISPs and large corporations, we expect to receive more
reciprocal compensation than we pay for calls that originate on our networks.
As a result of several trends in our business and the current regulatory
environment, which are discussed below, we expect our revenues from reciprocal
compensation to decline significantly.

Some ILECs have refused to pay reciprocal compensation charges that they
estimate are the result of inbound ISP traffic because they believe that type
of traffic should be considered interstate in nature. For example, Ameritech
Illinois disputed a portion of the reciprocal compensation charges billed to
it by us, which it believes are related to Internet access charges. In March
of 1998, the Illinois Commerce Commission ruled in favor of Focal and other
CLECs regarding this dispute. In late March, Ameritech Illinois filed suit in
the U.S. District Court for the Northern District of Illinois seeking reversal
of the earlier Commission order. Ameritech Illinois was granted a stay of the
Commission order while the appeal was considered, but in July 1998, the court
affirmed the Commission order. Ameritech Illinois then appealed the decision
to the U.S. Court of Appeals for the Seventh Circuit and was denied a stay
while the appeal is pending. In October 1998, Ameritech complied with the
order and we received payment for past reciprocal compensation charges that
represent substantially all of the disputed amounts. Reciprocal compensation
payments from Ameritech Illinois comprised approximately 81% of our revenues
for the year ended December 31, 1997 and payments from Ameritech and another
ILEC comprised approximately 75% of our revenues for the year ended December
31, 1998. Briefing in the Seventh Circuit has been completed, but we cannot
predict when the court will make a final determination or what the outcome
will be. Any determination by the Seventh Circuit that Internet traffic is
ineligible for reciprocal compensation payments would have a material adverse
effect on our business and results of operations.

While some states in which our current and planned markets are located have
ordered the ILECs to pay reciprocal compensation for Internet-related calls,
other states have not yet considered the issue or the issue is subject to
judicial review, like in Illinois. States that have not yet addressed the
issue may determine that no reciprocal compensation is due for calls made to
ISPs. In addition, on February 26, 1999, the FCC issued a declaratory ruling
and Notice of Proposed Rulemaking concerning inbound ISP traffic. The FCC
concluded in its ruling that ISP traffic is jurisdictionally interstate in
nature. The FCC has requested comment as to what reciprocal compensation rules
should govern this traffic upon expiration of existing interconnection
agreements. The FCC also determined that no federal rule existed that governed
reciprocal compensation for ISP traffic at the time existing interconnection
agreements were negotiated and concluded that it should permit states to
determine whether reciprocal compensation should be paid for calls to ISPs
under existing interconnection agreements.

In light of the FCC's order, state commissions, which previously addressed
this issue and required reciprocal compensation to be paid for ISP traffic may
reconsider and may modify their prior rulings. The FCC order has been appealed
by several parties. No procedural calendar has been established yet. Several
ILECs, including Ameritech, have publicly stated that they will seek to
overturn prior orders that they claim are inconsistent with the FCC's February
26, 1999 order. Relief sought could include repayment of reciprocal
compensation amounts previously paid by the ILECs. In addition, at least one
ILEC has already filed suit seeking a refund from another carrier of
reciprocal compensation the ILEC has paid to that carrier.

Upon expiration of our existing interconnection agreements, we must
negotiate new rates for reciprocal compensation with each carrier. Pending
conclusion of these negotiations, the existing interconnection

10
<PAGE>

agreements will continue to govern the payment of reciprocal compensation.
Because of the uncertainty surrounding reciprocal compensation in general and
the FCC's February 26th ruling and our need to renegotiate our existing
interconnection agreements in particular, it is unlikely that current rates of
reciprocal compensation will continue in new interconnection agreements. A
reduction in rates payable for reciprocal compensation could have a material
adverse effect on us, as could any requirement to refund reciprocal
compensation paid to date.

Universal Support Fund. On May 8, 1997, in compliance with the requirements
of the Telecom Act, the FCC released an order establishing a new federal
universal service support fund, which provides subsidies to carriers that
provide service to under-served individuals and customers in high-cost or low-
income areas, and to companies that provide telecommunications services for
schools, libraries and rural health care providers. We are required to
contribute into the universal service fund and are also required to contribute
to state universal service funds. We may also obtain subsidies from the
universal service fund for some services we provide. The new universal service
rules are administered jointly by the FCC, the fund administrator, and state
regulatory authorities, many of which are still in the process of establishing
their administrative rules. Although we have already begun contributing to the
fund, the amount of our required contribution changes each quarter. As a
result, we cannot predict the revenue effect these regulations will have on us
in the future.

Tariff and Filing Requirements. Non-dominant carriers, including Focal,
must file tariffs with the FCC listing the rates, terms and conditions of
interstate and international services provided by the carrier. On October 29,
1996, the FCC adopted an order in which it eliminated the requirement that
non-dominant interstate carriers maintain tariffs on file with the FCC for
domestic interstate services. The FCC's order was issued pursuant to authority
granted in the Telecom Act to forebear from regulating any telecommunications
services provider if specified statutory analyses are satisfied. The FCC's
order, however, has been stayed by a federal court. Accordingly, non-dominant
interstate carriers, including Focal, currently must continue to file
interstate tariffs with the FCC until final determination of the issue.
Challenges to these tariffs by regulators or third parties could cause us to
incur substantial legal and administrative expenses.

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 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 March 1, 1999, we had obtained local exchange certification or
were otherwise authorized to provide local exchange service in:

California Illinois Michigan Texas
Delaware Indiana New Jersey Virginia
District of Columbia
Maryland New York Washington
Florida Massachusetts Pennsylvania

We also had applications pending for local exchange certification or other
authorization in Georgia and Missouri. 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. Our interconnection agreements
with the ILECs are also subject to approval by the applicable state
commission.

11
<PAGE>

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. These regulations may vary greatly from state
to state and from city to city.

Employees

As of December 31, 1998, we employed 233 full-time employees, none of whom
were represented by a union. We believe that our future success will depend on
our continued ability to attract and retain highly skilled and qualified
employees. We believe that our relations with our employees are good.

We rely on a relatively small number of senior management and operating
personnel. Losing any one or some members of this senior management team or
key operating personnel could have a material adverse effect on us.

ITEM 2. DESCRIPTION OF PROPERTY

We lease office space in a number of locations, primarily for network
equipment installations and sales and administrative offices. Our material
leased switching and network properties are listed below:

<TABLE>
<CAPTION>
Square
Location Feet Lease Term
-------- ------ ----------
<S> <C> <C>
Chicago,
Illinois 57,474 June 2004
Chicago,
Illinois 10,236 April 2007, with two five-year renewal options
New York, New
York 15,196 June 2012, with one five-year renewal option
San Francisco,
California 20,151 July 2008, with two five-year renewal options
Philadelphia,
Pennsylvania 17,608 June 2008, with two five-year renewal options
Washington,
D.C. 19,414 October 2013
Los Angeles,
California 19,199 December 2008
Southfield,
Michigan 22,600 August 2008, with two five-year renewal options
Seattle,
Washington 20,000 January 2009, with one four-year and one six-year renewal option
Cambridge,
Massachusetts 12,863 December 2008, with two five-year renewal options
Dallas, Texas 19,249 June 2009, with two five-year renewal options
Atlanta,
Georgia 21,948 May 2009, with two five-year renewal options
Jersey City,
New Jersey 18,500 February 2009, with two five-year renewal options
</TABLE>

12
<PAGE>

A number of these locations also house sales and administrative offices.
Our corporate headquarters are located in one of our Chicago, Illinois
facilities. In addition, we have sales offices in New York and San Jose. We
also own approximately 13 acres of real property in Elk Grove Township,
Illinois. This property, which includes a 52,000 square foot building, houses
our second Chicago switching center, national data center and national network
operations center.

ITEM 3. LEGAL PROCEEDINGS

With the exception of the matters discussed below, we are not aware of any
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.

On September 16, 1997, we filed a complaint and request for temporary
injunction against Ameritech Illinois with the Illinois Commerce Commission.
The complaint claimed breach of the terms of the interconnection agreement
between us and Ameritech Illinois because Ameritech Illinois refused to pay
reciprocal compensation for our transport and termination of calls to our end-
users that Ameritech Illinois believed were ISPs. In the interests of
obtaining a more timely judgment, we withdrew our complaint without prejudice
on October 17, 1997 and filed to intervene in a consolidated suit that
included similar complaints against Ameritech Illinois by several other CLECs.
On March 11, 1998, the Illinois Commerce Commission issued an order that
required Ameritech Illinois to pay reciprocal compensation for calls made to
ISPs. On March 15, 1998, Ameritech Illinois filed a motion with the Illinois
Commerce Commission to stay the order pending an appeal, which was denied on
March 23, 1998. On March 27, 1998, Ameritech Illinois filed suit in the United
States District Court for the Northern District of Illinois seeking reversal
of the Illinois Commerce Commission order. Ameritech Illinois also sought a
stay of the ICC order from the District Court, which was granted while the
case was decided. On July 21, 1998, the District Court upheld the Illinois
Commerce Commission's order, finding that calls to ISPs are local calls and
therefore subject to the reciprocal compensation rules contained in the
Telecom Act. The District Court stayed the decision to permit any party to
appeal. Ameritech Illinois then appealed the decision to the U.S. Court of
Appeals for the Seventh Circuit on August 25, 1998 and was denied a stay while
the appeal is pending. In October 1998, Ameritech Illinois complied with the
order and we received payment for past reciprocal compensation charges that
represent substantially all of the disputed amounts. Reciprocal compensation
payments from Ameritech Illinois comprised approximately 81% of our revenues
for the year ended December 31, 1997 and payments from Ameritech Illinois and
another ILEC comprised approximately 75% of our revenues for the year ended
December 31, 1998. Briefing in the Seventh Circuit has been completed, but we
cannot predict when the court will make a final determination or the outcome
of the Court's decision. Any determination by the Seventh Circuit that
Internet traffic is ineligible for reciprocal compensation payments would have
a material adverse effect on our business and our results of operations.

<TABLE>
<S> <C> <C> <C>
Alabama Hawaii New York Utah
Arizona Illinois North Carolina Virginia
Arkansas Indiana Ohio Washington
California Maryland Oklahoma West Virginia
Colorado Massachusetts Oregon Wisconsin
Connecticut Michigan Pennsylvania
Florida Minnesota Tennessee
Georgia Missouri Texas
</TABLE>

13
<PAGE>

These decisions are presently on appeal to federal courts in a number of these
states. These states and states that have not yet addressed the issue may
determine that no reciprocal compensation is due for calls made to ISPs. A
finding that reciprocal compensation is not payable for ISP traffic in
Illinois, New York or Pennsylvania would have a material adverse effect on us.
See Item I, "Business--Regulation" for a description of federal rule-making
and other developments affecting reciprocal compensation.

In addition, on February 26, 1999, the FCC issued a declaratory ruling and
Notice of Proposed Rulemaking concerning inbound ISP traffic. The FCC
concluded in its ruling that ISP traffic is jurisdictionally interstate in
nature. The FCC has requested comment as to what reciprocal compensation rules
should govern this traffic upon expiration of existing interconnection
agreements. The FCC also determined that no federal rule existed that governed
reciprocal compensation for ISP traffic at the time existing interconnection
agreements were negotiated and concluded that it should permit states to
determine whether reciprocal compensation should be paid for calls to ISPs
under existing interconnection agreements.

We were named as a defendant, along with other parties, in a case filed in
March 1998 in the Supreme Court of the State of New York, County of New York
involving the wrongful death of an electrician who was killed while working at
our leased premises in New York. The plaintiffs, the decedent's wife and his
estate, are seeking damages of $20 million. The decedent was not under
contract with us, nor was he working at our request. We tendered the defense
of this claim to, and it has been accepted by, our insurance carrier. The
aggregate amount of our insurance coverage is $7 million. We do not believe
that we were the cause of the injuries and subsequent death that gave rise to
this lawsuit.

On March 15, 1999, we filed a complaint against Ameritech Michigan seeking
redress from Ameritech Michigan's delay first in executing an interconnection
agreement, then in physically interconnecting its network with ours. We are
seeking expedited treatment of the complaint before the Michigan Public
Service Commission.

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

Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of December 31, 1998, there was no established market for any class of
our common stock, each par value $.01 per share.

As of December 31, 1998, there were approximately 41 holders of record of
our common stock taken as a single class. We currently have three classes of
equity securities outstanding: Class A common stock, Class B common stock and
Class C common stock. We have not made any distributions on any class of our
common stock at any time.

Recent sales of unregistered securities.

The following summarizes information relating to all equity securities of
Focal sold by us during the period covered by this report that were not
registered under the Securities Act of 1933. On November 23, 1998, we

14
<PAGE>

issued 66.667 shares of Class A common stock to Paul G. Yovovich and to Mr.
Yovovich or his wife as custodians for their children for an aggregate
purchase price of $100,000. No underwriters were engaged in connection with
these sales, and these sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, as transactions not involving
any public offering.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The selected consolidated financial and operating data presented below for
the seven month period ended December 31, 1996, and as of and for the years
ended December 31, 1997 and 1998, have been derived from our Consolidated
Financial Statements and the notes related thereto. Our Consolidated Financial
Statements for the seven month period ended December 31, 1996 and as of and
for the years ended December 31, 1996, 1997 and 1998 have been audited by
Arthur Andersen LLP, our independent auditors. The balance sheet data as of
December 31, 1996 has been derived from our audited consolidated financial
statements not included in this report. 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 notes related thereto appearing elsewhere in this
report.
<TABLE>
<CAPTION>
Period from
Commencement of
Operations
(May 31, 1996) Years Ended December 31,
to December 31, --------------------------
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues........................... $ -- $ 4,023,690 $ 43,531,846
Expenses:
Customer service and network
operations...................... -- 2,154,980 15,284,641
Selling, general and
administrative.................. 421,777 2,887,372 12,209,821
Depreciation and amortization.... 1,150 615,817 6,670,986
Non-cash compensation............ 108,333 1,300,000 3,069,553
---------- ------------ ------------
Operating income (loss)............ (531,260) (2,934,479) 6,296,845
Interest income (expense), net..... 17,626 67,626 (9,605,832)
Provision for income taxes......... -- -- (4,660,000)
---------- ------------ ------------
Net loss applicable to common
stockholders...................... $ (513,634) $ (2,970,418) $ (7,968,987)
========== ============ ============
Basic and diluted net loss per
share............................. $ (30.22) $ (35.21) $ (91.05)
========== ============ ============
Basic and diluted weighted average
common stock outstanding.......... 16,996 84,373 87,526
========== ============ ============
Other Financial Data:
EBITDA............................. $ (421,777) $ (1,018,662) $ 16,037,384
Capital expenditures............... 82,303 11,655,524 64,229,247
Summary Cash Flow Data:
Net cash provided by (used in)
operating activities.............. $ (152,576) $ (1,634,017) $ 22,596,957
Net cash used in investing
activities........................ (82,303) (11,655,524) (72,189,187)
Net cash provided by financing
activities........................ 4,025,000 11,755,972 173,376,679
Operating Data:
Access lines in service............ -- 7,394 52,011
Minutes of use (millions).......... -- 282 3,568
<CAPTION>
As of December 31,
------------------------------------------
1996 1997 1998
--------------- ------------ ------------
<S> <C> <C> <C>
Balance Sheet Data:
Current assets..................... $3,807,004 $ 4,737,808 $144,637,266
Fixed assets, net.................. 81,153 11,176,774 69,973,120
Total assets....................... 3,888,157 15,914,582 219,574,280
Long-term debt, including current
portion........................... -- 3,536,886 185,295,793
Redeemable Class A Common Stock.... 4,024,653 12,403,218 --
Total stockholders' equity
(deficit)......................... (404,954) (2,075,372) 19,328,412
</TABLE>

15
<PAGE>

You should not assume that the results of operations above are indicative
of the financial results we can achieve in the future. You should also keep
the following matters in mind when you read this information:

. Non-cash compensation charges are a result of two different transactions
and consist of:

--charges totaling $0.1 million for 1996 and $1.3 million for each of
1997 and 1998, which resulted from the vesting over time of shares of
common stock issued to some of our executive officers in November 1996

--charges of $1.8 million for 1998, which resulted from the vesting and
cancellation of shares of common stock in connection with the September
30, 1998 amendment of vesting agreements with some of our executive
officers and our institutional investors

. The line item, "Redeemable Class A Common Stock," is described in Note 11
to our Consolidated Financial Statements on page F-16.

. EBITDA represents earnings before interest, income taxes, depreciation
and amortization and other non-cash charges, including non-cash
compensation charges. EBITDA is not a measurement of financial
performance under generally accepted accounting principles, is not
intended to represent cash flow from operations, and should not be
considered as an alternative to net loss applicable to common
stockholders as an indicator of our operating performance or to cash
flows as a measure of liquidity. We believe that 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. See "Consolidated
Financial Statements--Consolidated Statements of Cash Flows," on page F-
6.

. We count access lines as of the end of the period indicated and on a one-
for-one basis using DS-0 equivalents.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to minimal market risks. We manage sensitivity of our
results of operations to these market risks 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.

We are exposed to interest rate risk, as additional financing is
periodically needed due to the large operating losses and capital expenditures
associated with establishing and expanding our network coverage. The interest
rate that we will be able to obtain on future debt financings will depend on
market conditions at that time, and may differ from the rates we have secured
on our current debt. Additionally, we are exposed to interest rate risk on
amounts borrowed under our secured equipment term loan facility as of December
31, 1998.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General. We provide voice and data communications services to large,
telecommunications-intensive users in major cities. We began operations in
1996 and initiated service first in Chicago in May 1997. We currently serve a
total of 12 markets, which encompass a total of 29 metropolitan statistical
areas, or MSAs, and plan to serve 16 markets, or 42 MSAs, by the end of 1999.
As of December 31, 1998, we had sold 68,184 access lines, of which 52,011 were
installed and in service.

Our operating results are expected to change over the next 18 months as a
result of several trends in our business and the regulatory environment.
First, we anticipate that the mix of lines we sell will shift from being
dominated by ISP customer lines to being more evenly balanced among ISP,
corporate and VAR customer lines due to expanded marketing efforts. Second,
the profitability from ISP lines is expected to decline significantly as
reciprocal compensation rates, the primary revenue driver for these lines, are
negotiated downward. Reciprocal

16
<PAGE>

compensation rates are expected to decline in discrete steps as our
interconnection agreements in each state in which we operate come up for
renewal. Third, our continued expansion may result in negative operating cash
flow and operating losses for a period of time. As a result, our historical
trend of generating positive operating cash flow on a consolidated basis is
expected to decline and could become negative for a period of time. If this
occurs, we expect to once again produce positive operating cash flows once
these trends stabilize and operating activities in our newer markets mature.
However, if these trends do not stabilize and our operating activities do not
mature as expected, we may continue to sustain negative operating cash flow
and net losses.

Revenue. Our revenue is comprised of monthly recurring charges, 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 end users for
each call made, fees paid by the ILEC and other CLECs as reciprocal
compensation, and access charges paid by the inter-exchange carriers, or IXCs,
for long distance traffic that we originate and terminate. Non-recurring
revenues are typically derived from fees charged to install new customer
lines.

We earn reciprocal compensation revenue for calls made by customers of
another local exchange carrier to our customers. Conversely, we incur
reciprocal compensation expense to other local exchange carriers for calls by
our customers to their customers. Reciprocal compensation has historically
been a significant component of our total revenue, representing approximately
75% of total revenue in 1998. This is a result of a preponderance of inbound
applications utilized by our customers.

We expect the proportion of revenue represented by reciprocal compensation
to substantially decrease in the future as a result of the expiration and
subsequent renegotiation of our existing interconnection agreements with the
ILECs and as a result of our focus on increasing the percentage of our lines
that are sold to non-ISP customers. We expect the most significant impact of
the reduction in reciprocal compensation to occur during the fourth quarter of
1999, when our existing interconnection agreement with Ameritech Illinois
expires. Although we expect to renew our existing interconnection agreements
on satisfactory terms, we expect that the new agreements will result in lower
negotiated interconnection rates for future reciprocal compensation. Revenues
from reciprocal compensation could also decline as a result of adverse
judicial or regulatory determinations. See Item 1, "Business--Regulation--
Reciprocal Compensation" and Item 3, "Legal Proceedings."

We believe we can produce positive return on capital despite a substantial
reduction in reciprocal compensation revenue resulting from lower rates for
reciprocal compensation. The table below represents 1998 fourth quarter
historical selected financial data for the Chicago market reflecting:

. actual results,

. pro forma results with the reciprocal compensation rate adjusted downward
to $0.003 per minute, compared to the current rate of $0.009 per minute

We cannot predict new rates at which reciprocal compensation payments will
be made or the types of traffic eligible for reciprocal compensation. These
rates may be more or less than the rates described in the table below. You
should not assume that the following results are indicative of results we can
achieve in the future.

<TABLE>
<CAPTION>
Pro Forma Results for the
Fourth Quarter of 1998
with the Reciprocal
Actual Results for the Compensation rate set to
Chicago Fourth Quarter of 1998 $0.003 per minute of use
------- ---------------------- -------------------------
($ in millions)
<S> <C> <C>
Revenues................. $12.9 $ 7.3
EBITDA (1)............... $ 9.2 $ 3.6
EBITDA Margin............ 71.4% 49.8%
</TABLE>
- --------
(1) EBITDA represents earnings before interest, income taxes, depreciation and
amortization and other non-cash charges, including non-cash compensation
charges. EBITDA is not a measurement of financial

17
<PAGE>

performance under generally accepted accounting principles, is not intended
to represent cash flow from operations, and should not be considered as an
alternative to net loss applicable to common stockholders as an indicator
of our operating performance or to cash flows as a measure of our
liquidity. We believe that 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.
See "Consolidated Financial Statements--Consolidated Statements of Cash
Flows."

Operating Expenses. Our operating expenses are categorized as customer
service and network operations, selling, general and administrative,
depreciation and amortization, and non-cash compensation expense. Settlement
costs are a significant portion of customer service and network operations
expense and are comprised of leased transport charges and reciprocal
compensation payments. Leased transport charges are the lease payments we make
for the use of fiber transport facilities connecting our customers to our
switches and for our connection to the ILECs' and other CLECs' networks. Our
strategy of leasing rather than building our own fiber transport facilities
has resulted in our cost of service being a significant component of total
costs. To date, 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. We pay reciprocal compensation to
the ILECs and other CLECs for terminating calls made by our customers to
customers of the ILECs or CLECs.

Other customer service and network operations expense consists of the costs
of operating our network and the costs of providing customer care, or customer
service, activities. Major components include wages, rent, power, equipment
maintenance, supplies and contract employees.

Selling, general and administrative expense consists of sales force
compensation and promotional expenses as well as the cost of corporate
activities related to regulatory, finance, human resources, legal, executive,
and other administrative activities. We expect our selling, general and
administrative expense to be lower as a percentage of revenue than our
competitors because we have relatively high sales productivity associated with
our strategy of serving telecommunications-intensive customers. These
customers generally utilize a large number of switched access lines relative
to the average business customer, resulting in more revenue per sale. Further,
fewer sales representatives are required to service the relatively smaller
number of telecommunications-intensive customers in a given region.

We record monthly non-cash compensation expense related to shares issued to
our founders in November 1996, and in connection with the September 30, 1998
amendments to vesting agreements with our founders and some of our
institutional investors. These events are described further in Note 10 to our
Consolidated Financial Statements. We will continue to record non-cash
compensation expense in future periods relating to these events.

Historically, we have chosen to lease, rather than build, our transport
network. To date, this has resulted in capital expenditures which we believe
are lower than those of CLECs of similar size that own their fiber networks.
Our capital expenditures have tended historically to be driven by customer
service demands and projected near-term revenue streams from our established
markets. In addition, we believe that the percentage of these "success-based"
capital expenditures is higher than those of fiber-based CLECs. In contrast,
we incur operating expenses for leased facilities that are proportionately
higher than those incurred by fiber-based CLECs. The margin impact of these
higher, anticipated operating expenses is expected to be mitigated, in part,
by a higher revenue per line, which we anticipate as a result of our focus on
telecommunications-intensive users.

Quarterly Results

The following table sets forth unaudited financial and operating data for
each of the specified quarters of 1997 and 1998. 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

18
<PAGE>

fairly state this information. The operating results for any quarter are not
necessarily indicative of results for any future period.

<TABLE>
<CAPTION>
1997 1998
------------------------- ----------------------------------------------------
Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,226,076 $2,710,706 $5,102,448 $8,078,043 $12,755,293 $17,596,062
EBITDA.................. $ (281,871) $ 423,862 $1,967,930 $3,326,827 $ 4,348,713 $ 6,393,914
Total lines in service
at end of quarter...... 2,965 7,394 14,528 24,357 33,188 52,011
Minutes of use switched
(in millions) during
quarter................ 84 191 402 683 1,039 1,444
</TABLE>

Although we have generated positive EBITDA in the most recent five
quarters, we anticipate that as a result of the recent operating and
regulatory trends described above, we may experience negative EBITDA for a
period of time until these trends stabilize and operating activities in our
newer markets mature.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Total revenues for 1998 were $43.5 million compared to $4.0 million for
1997. The significant increase is due to the rapid growth in our Chicago and
New York markets during 1998 and the fact that service was first initiated in
Chicago in May 1997. Customer service and network operations expense was $15.3
million in 1998 compared to $2.2 million during 1997. The increase resulted
from our rapid expansion and the related costs of leased facilities, usage
settlements, customer care and operations personnel, equipment maintenance and
other operating expenses. Selling, general and administrative expense also
increased from $2.9 million for 1997 to $12.2 million for 1998 due to our
expansion. Similarly, depreciation and amortization increased from $0.6
million in 1997 to $6.7 million in 1998 as a result of a significant increase
in the level of fixed assets put into service. Non-cash compensation expense
associated with the vesting over time of shares of common stock issued to our
executive officers in November 1996, and the vesting and cancellation of
shares of common stock in connection with the September 30, 1998 amendments to
vesting agreements with some of our executive officers and our institutional
investors, was $3.1 million for 1998 compared to $1.3 million for 1997. The
increase of $1.8 million is due to the September 30, 1998 amendment to these
vesting agreements.

Interest income increased from $0.2 million in 1997 to $6.5 million for
1998 due primarily to investment of the proceeds received in February 1998
from the sale of the Notes. Interest expense for 1998 was $16.1 million
compared to $0.1 million for 1997. The increase is primarily due to the
amortization of discount on the Notes. Interest on the Notes is not payable in
cash until February 2003.

Year Ended December 31, 1997 Compared to Seven-Month Period Ended December
31, 1996

We had total revenue of $4.0 million in 1997. We had no revenue in 1996.
The increase is due to the recording of our first revenue during May 1997.
Prior to May 1997, we incurred start-up and operating expenses in advance of
revenue as we prepared to launch our network services in the Chicago market.
Customer service and network operations expense increased from zero in 1996 to
$2.2 million in 1997. There were no customer service or network activities
during 1996. Such activities began as we initiated construction of our first
network in January 1997 and as we began to provide service in May 1997.
Selling, general and administrative expense increased from $0.4 million in
1996 to $2.9 million in 1997, largely due to a rapid increase in sales and
administrative personnel in 1997. Depreciation and amortization increased from
less than $.01 million in 1996 to $0.6 million in 1997 due to the increase in
assets put into service during 1997. Non-cash compensation expense associated
with certain shares issued to our founders in November 1996 increased from
$0.1 million in 1996 to $1.3 million in 1997 based on a full year's impact of
this expense during 1997 as compared to one month of non-cash compensation
expense during 1996.

19
<PAGE>

Interest income increased from $0.02 million in 1996 to $0.2 million in
1997 as a result of significantly greater cash balances we maintained after
receiving additional equity contributions during 1997. Interest expense was
$0.1 million in 1997 due to debt financing incurred by a subsidiary of Focal
Communications Corporation. We did not have any interest expense during 1996.

Liquidity and Capital Resources

We intend to continue to increase our coverage of major U.S. cities by
expanding our services to four additional markets in 1999. This business plan
will require that we expand our existing networks and services and fund our
initial operating losses, and may include the deployment of our own fiber
capacity in some of our markets where it makes economic sense. These
activities will require significant capital to fund the purchase and
installation of telecommunications switches, equipment, and infrastructure.
These expenditures, together with associated early operating expenses, may
result in our having substantial negative operating cash flow and substantial
net operating losses for the foreseeable future, including in 1999 and 2000.
Although we believe that our cost estimates and the scope and timing of our
build-out are reasonable, we cannot assure you that actual costs or the timing
of the expenditures, or that the scope and timing of our build-out, will not
deviate from current estimates.

Our capital expenditures were approximately $11.7 million in 1997 and $64.2
million in 1998, primarily reflecting capital spending for the build-out of
our first 11 markets. We estimate that our capital expenditures in connection
with our business plan will be approximately $90 million in 1999. The 1999
expenditures are expected to be made primarily for the build-out of additional
markets and the expansion of our existing markets and services. We currently
expect to meet these capital requirements with cash, cash equivalents and
short-term investments currently on hand, additional draw-downs under our $50
million equipment term loan facility, described below, and future cash flows
from ongoing operations.

Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. Our actual capital expenditures and
cash flows could differ significantly from these estimates. If we require
additional capital to complete our budgeted expansion or if customer demand
significantly differs from our current expectations, our funding needs may
increase. In addition, we may be unable to produce sufficient cash flows from
ongoing operations to fund our business plan and future growth. This would
require us to alter our business plan, including delaying or abandoning our
future expansion or spending plans, which could have a material adverse effect
on our business. In addition, we may elect to pursue other attractive business
opportunities, including accelerating the pace or expanding the geographic
scope of our build-out, that could require additional capital investments in
our networks. If any of these events were to happen, we could incur additional
borrowings, issue additional debt or equity securities or enter into joint
ventures.

We cannot assure you that we will be successful in producing sufficient
cash flows or raising sufficient debt or equity capital on terms that we will
consider acceptable. Further, there can be no assurance that expenses will not
exceed our estimates or that the funds needed will not likewise be higher than
estimated. Failure to generate sufficient funds may require us to delay,
abandon or reduce the scope of our future expansion or expenditures, which
could have a material adverse effect on the implementation of our business
plan and our results of operations.

Net cash used in operating activities was $0.2 million for the seven months
ended December 31, 1996 and $1.6 million for 1997. Net cash provided by
operations was $22.6 million in 1998, an increase of $24.2 million from 1997.
The increase was primarily due to an increase in non-cash reconciling items
for depreciation and amortization, non-cash compensation expense, amortization
of discount on the Notes and an increase in accounts payable and accrued
liabilities. Net cash used in investing activities was $0.1 million for the
seven months ended December 31, 1996, $11.7 million for 1997, and $72.2
million for 1998. The increase of $60.5 million from 1997 represents a $52.6
million increase in capital expenditures due to our 1998 expansion into new
markets and the purchase of short-term investments of $8.0 million. Short-term
investments primarily consist of debt

20
<PAGE>

securities, which typically mature between three months and one year. Net cash
provided by financing activities consisted of $4.0 million for the seven
months ended December 31, 1996, $11.8 million in 1997, and $173.4 million in
1998. The increase of $161.6 million from 1997 to 1998 is mainly the result of
net proceeds from the Notes offering of $143.9 million, after $6.1 million in
issuance costs and $19.2 million in borrowings under a secured equipment term
loan facility during 1998. We obtained this secured equipment term loan
facility from a third party with a maximum borrowing level of $25 million. The
borrowing level under this term loan facility was increased to $50 million in
March 1999. The term loan facility provides for equipment drawdowns through
December 30, 1999, and requires repayment based on 60 equal monthly
installments of principal and interest.

We have incurred net losses since inception and have an accumulated deficit
of $11.4 million as of December 31, 1998. Most recently, we funded a large
portion of our future operating losses and capital expenditures through the
1998 offering of the Notes and by other financings. On February 18, 1998, we
received $150 million in gross proceeds from the sale of the Notes. The Notes
will accrete to an aggregate stated principal amount of $270 million by
February 15, 2003. As of December 31, 1998, the principal amount of the Notes
had accreted to approximately $166.1 million. No interest is payable on the
Notes prior to August 15, 2003. Thereafter, cash interest will be payable
semiannually on August 15 and February 15 of each year. Our high level of debt
could adversely affect our future prospects by: (1) impairing our ability to
obtain additional financing, (2) requiring us to use a substantial portion of
our cash flow from operations to pay interest
or repay debt which will reduce the funds available to us for our operations,
acquisition opportunities, service offerings and capital expenditures, (3)
placing us at a competitive disadvantage with companies that are less
restricted by their debt agreements and (4) making us more vulnerable in the
event of a downturn in general economic conditions.

Prior to the issuance of the Notes in February 1998, a substantial portion
of our funding needs was met through the private sale of equity securities. In
November 1996, we entered into a stock purchase agreement that provided for
the contribution over time of approximately $26.1 million of equity funding by
a group of investors. As of February 13, 1998, we had received the entire
$26.1 million. In addition, in 1997, our Illinois subsidiary borrowed
approximately $3.5 million under a bank credit facility. We used a portion of
the net proceeds from the issuance of the Notes to repay this indebtedness and
cancel this facility.

Impact of the Year 2000 Issue

The year 2000 issue results from computer programs being written using two
digits rather than four to define the year. Any of our computer programs or
systems or of our suppliers that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculation causing disruption of operations,
including, among other things:

. A temporary inability to process transactions

. A temporary inability to send invoices

. A temporary inability to engage in similar normal business activities

. Interruptions of customer service

Our Year 2000 compliance program can be divided into several phases. These
phases include:

. Assessing our information systems and certain material hardware for Year
2000 readiness

. Assessing the year 2000 readiness of third parties with whom we have
significant business relationships and on whose systems and hardware we
rely

. Contingency planning

As part of our internal assessment phase, we examined our information
systems, including our DMS-500 SuperNode central office switches and hardware,
to determine whether these systems and hardware are Year 2000 compliant. We
have received assurances from all but one of our major software and hardware
vendors that the products we use are Year 2000 compliant and will function
adequately after December 31, 1999. Our billing system is not Year 2000
compliant. However, an upgrade to the system, which we expect will be
operational by

21
<PAGE>

June 1, 1999, is expected to be Year 2000 compliant. We estimate that the
total incremental costs of this upgrade will be approximately $0.5 million. We
did not incur any of these costs in 1998. We are also developing a new billing
system that is Year 2000 compliant, which is expected to be operational by
year-end. We have not nor do we plan to identify, validate as compliant or
remediate, embedded chips in our systems or hardware.

Our services are also dependent on network systems and transport facilities
maintained by other carriers, including ILECs and IXCs. We are in the process
of assessing the Year 2000 compliance status of other carriers with whom we
have material relationships. Our assessment relies, without any independent
verification, on the statements and assumptions underlying the statements
these carriers have made in their periodic reports filed with the Securities
and Exchange Commission. The risks associated with the failure of these
carriers' systems or transport facilities include potential interruption of
service, including blocked calls and delayed call completion. Interruptions of
this type would heavily impact our high-volume corporate customers and, if
prolonged, could have a material adverse effect on our business, financial
condition or results of operations.

Because we currently lease 100% of our transport facilities, we are
dependent on the availability of fiber transport facilities owned by other
carriers. There are few, if any, contingency measures we can take if Year 2000
problems cause these carriers' facilities to fail. We lease transport
facilities from multiple carriers in each
market in which we operate in an attempt to provide redundancy and diversity
in service. However, we can not assure you that there will not be multiple
network failures in a particular market. If our transport vendors experience
facilities failures, our business may be disrupted and we may suffer a
material adverse effect.

We incurred no expenses in 1998 or 1997 related to Year 2000 remediation.
We expect future expenditures to total approximately $0.5 million. All of
these costs will be expensed as they are incurred.

We intend to continue our Year 2000 compliance assessment of our software.
If it comes to our attention that any of our software is not Year 2000
compliant, we intend to develop an action plan and further assess the risks of
non-compliance and the resources that would be required to resolve the
problem. We also intend to develop contingency plans to the extent we believe
those plans would be useful.

Based on our current schedule for completion of our Year 2000 compliance
program, we believe that our planning is adequate to secure Year 2000
readiness of our critical systems. Nevertheless, Year 2000 readiness is
subject to a number of risks and uncertainties, some of which, like the
readiness of other carriers upon whom we rely, are out of our control. We are
not able to predict all the factors that could cause actual results to differ
materially from our current expectations about Year 2000 readiness. The cost
of our Year 2000 compliance program is based upon our management's best
estimates. At this time, we believe that the major risks associated with an
inability of our systems or software to process Year 2000 data correctly are a
system failure or miscalculation causing a disruption of business activities
or interruptions in customer service. If we, or third parties with whom we
have significant business relationships, fail to achieve Year 2000 readiness
with respect to critical systems, there could be a material adverse effect on
our business, financial condition or results of operations.

The discussions in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contain forward-looking statements. Our
future performance is subject to a number of risks and uncertainties that
could cause actual results to differ substantially from our projections.
Factors that could impact the variability of future results include those
described on page 1 of this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements required by Item 8,
together with the notes thereto and the report thereon of the independent
public accountants dated January 22, 1999, are set forth on pages F-1-F-18 of
this report. The financial statement schedule listed under Item 14(a)2,
together with the report thereon of the independent public accountants dated
January 22, 1999, are set forth on pages F-19 and F-20 of this report and
should be read in conjunction with our Consolidated Financial Statements.

22
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The table below contains information about the ages and positions of
Focal's directors and executive officers, and selected key employees, as of
December 31, 1998.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS:
Robert C. Taylor, Jr.... 39 Director, President and Chief Executive Officer
John R. Barnicle........ 34 Director, Executive Vice President and Chief Operating Officer
Joseph A. Beatty........ 35 Executive Vice President and Chief Financial Officer
Brian F. Addy........... 34 Executive Vice President
Renee M. Martin......... 43 Senior Vice President, General Counsel and Secretary
Robert M. Junkroski..... 35 Vice President and Treasurer
Gregory J. Swanson...... 31 Controller
KEY EMPLOYEES:
Leonardo A. Dedo........ 46 Senior Vice President of Marketing and Alternate Channels
Richard J. Metzger...... 50 Vice President of Regulatory Affairs and Public Policy

DIRECTORS:
James E. Crawford III... 53 Director
John A. Edwardson....... 49 Director
Paul J. Finnegan........ 46 Director
Richard D. Frisbie...... 49 Director
James N. Perry, Jr...... 39 Director
Paul G. Yovovich........ 45 Director
</TABLE>

Robert C. Taylor, Jr. Mr. Taylor has been President, Chief Executive
Officer and director since August 1996 and is a co-founder of Focal. From 1994
to 1996, Mr. Taylor was the Vice President of Global Accounts for MFS
Communications. At MFS Communications he was responsible for the operations
and management of the Global Services Group, which included MFS
Communications' fifty largest customers. His focus was on developing all
activities in Mexico and Canada. From 1993 to 1994, Mr. Taylor was one of the
original senior executives at McLeod Telecommunications Group, a Cedar Rapids,
Iowa based CLEC. Mr. Taylor has also held management positions with MCI
Communications Corporation (1990-1993) and Ameritech (1985-1990). Mr. Taylor
also serves as the Vice Chairman of the Association for Local
Telecommunications Services, the national trade association for facilities-
based providers of competitive local telecommunications services. Mr. Taylor
received his M.B.A. from the University of Chicago Graduate School of Business
and holds a Bachelor of Science degree in Mechanical Engineering.

John R. Barnicle. Mr. Barnicle has been Executive Vice President, Chief
Operating Officer and director since June 1996. Mr. Barnicle is a co-founder
of Focal and is responsible for day-to-day operations, engineering, marketing
and long-term planning. In 1996, Mr. Barnicle was Vice President of Marketing
for MFS Telecom Companies, a subsidiary of MFS Communications. From 1994 to
1996, Mr. Barnicle was a Vice President of Duff & Phelps Credit Rating Company
and before that held various marketing, operations and engineering positions
with MFS Telecom (1992-1994) and Centel Corporation, a local exchange carrier
(1986-1992). Mr. Barnicle received his M.B.A. with Distinction from DePaul
University and holds a Bachelor of Science degree in Electrical Engineering.

Joseph A. Beatty. Mr. Beatty has been Executive Vice President and Chief
Financial Officer since November 1996 and was also Treasurer from November
1996 through December 1998 and Secretary from November 1996 through April
1998. He was also a director from May 1996 to November 1996. Mr. Beatty is a
co-founder of

23
<PAGE>

Focal and is responsible for all financial operations and information systems.
From 1994 to 1996, Mr. Beatty was a Vice President with NationsBanc Capital
Markets, where he was responsible for investment research coverage of the
telecommunications industry. From 1992 to 1994, Mr. Beatty was a Vice
President of Duff & Phelps Credit Rating Company with responsibility for
credit ratings in the telecommunications and electric utility sectors. From
1985 to 1992, Mr. Beatty held various technical management positions with
Centel Corporation's local exchange carrier division. Mr. Beatty received his
M.B.A. with a concentration in Finance from the University of Chicago Graduate
School of Business and is a Chartered Financial Analyst. In addition, Mr.
Beatty holds a Bachelor of Science degree in Electrical Engineering.

Brian F. Addy. Mr. Addy has been Executive Vice President since May 1996.
Mr. Addy is a co-founder of Focal and is responsible for our new market
evaluation and development opportunities. From January 1998 to January 1999,
Mr. Addy directed our market development and construction activities. From
1996 to 1998, he led our sales efforts. He was also a director from May 1996
to November 1996. From 1993 to 1996, Mr. Addy was a Vice President and Officer
of Security Capital Industrial Trust, a real estate investment trust, where he
was responsible for acquisitions, development and national marketing. From
1986 to 1993, Mr. Addy held various management positions with Centel
Corporation's cellular, paging, telephone and telephone systems operating
units. Mr. Addy holds a Bachelor of Science degree in Electrical Engineering.

Renee M. Martin. Ms. Martin has been Senior Vice President, General Counsel
and Secretary since March 1998. Ms. Martin is responsible for our legal,
regulatory, real estate and human resources functions. From 1984 to 1998, Ms.
Martin held various executive positions at Ameritech, most recently as Vice
President and General Counsel Small Business Services where she directed
corporate legal resources to address contract negotiations, employment issues,
regulatory affairs and litigation, and managed outside legal counsel. From
1982 to 1984, Ms. Martin was an attorney at the law firm of Cook and Franke,
S.C. where she concentrated on general business and corporate law. Ms. Martin
received her J.D. from the University of Wisconsin and holds a Bachelor of
Arts degree in Journalism.

Robert M. Junkroski. Mr. Junkroski has been Vice President and Treasurer
since January 1999 and was Controller from January 1997 to January 1999. He is
responsible for all our accounting, revenue assurance, audit, cash and risk
management and customer credit functions. From 1995 to 1997, Mr. Junkroski was
Controller for Brambles Equipment Services, Inc., an equipment leasing
company, where he was responsible for establishing and maintaining the
divisional accounting, financial reporting and budgeting functions. From 1987
to 1994, Mr. Junkroski was Controller for Focus Leasing Corporation, an
equipment leasing company, where he was responsible for the development and
implementation of the accounting and financial reporting functions of several
emerging companies. Mr. Junkroski is a Certified Public Accountant, received
his M.B.A. with honors from Roosevelt University concentrating in Finance and
Accounting and holds a Bachelor of Business Administration degree.

Gregory J. Swanson. Mr. Swanson has been Controller since January 1999 and
is our principal accounting officer. He is responsible for all internal and
external accounting and reporting functions. From June 1998 to December 1998,
Mr. Swanson was Director of External Reporting for Allegiance Corporation, a
health care manufacturing and distribution company. Before that he spent
approximately nine years at Arthur Andersen LLP, a public accounting firm,
where he was responsible for audit and business advisory services to
technology and manufacturing companies. Mr. Swanson is a Certified Public
Accountant and holds a Bachelor of Science degree in Accounting.

Leonardo A. Dedo. Mr. Dedo has been Senior Vice President of Marketing and
Alternate Channels since November of 1998. Mr. Dedo is responsible for
marketing, product development, business analysis, and public relations
activities. From 1997 to 1998, Mr. Dedo was Vice President of Marketing for
Billing Concepts Corporation, a billing solution provider for the
telecommunications industry. From 1985 to 1997, Mr. Dedo held various
executive management positions in sales, marketing and strategic planning with
MCI Communications Corporation. Mr. Dedo received his Masters in Management
from Northwestern University. He also holds a Bachelor of Arts Degree in
Economics.

24
<PAGE>

Richard J. Metzger. Mr. Metzger has been Vice President of Regulatory
Affairs and Public Policy since September 1998. He is responsible for our
regulatory and public policy activities. From 1994 to 1998, he served as the
Vice President and General Counsel of the Association for Local
Telecommunications Services. From 1984 to 1993, he held various legal
positions with Ameritech, including serving as Vice President and General
Counsel of Wisconsin Bell and Michigan Bell. From 1976 to 1984, he was
attorney at the law firm of Sidley and Austin. Mr. Metzger received his J.D.
from the University of Chicago and holds a Bachelor of Arts Degree in
Philosophy of Science.

James E. Crawford, III. Mr. Crawford has served as a director of Focal
since November 1996. Since August 1992, he has been a general partner of
Frontenac Company, a venture capital firm. From February 1984 to August 1992,
Mr. Crawford was a general partner of William Blair Venture Management Co.,
the general partner of William Blair Venture Partners III, a venture capital
fund. He was also a general partner of William Blair & Company, an investment
bank and brokerage firm affiliated with William Blair Venture Management Co.,
from January 1987 to August 1992. Mr. Crawford serves as a director of Optika,
Inc., Input Software, Inc., Allegiance Telecom and several private companies.

John A. Edwardson. Mr. Edwardson has served as a director of Focal since
February 1999. He has been President and Chief Executive Officer of Borg-
Warner Security Corp., a security services company, since March 1999. From
1994 to 1998, Mr. Edwardson was President and Chief Operating Officer of UAL
Corporation, the holding company for United Airlines. He previously held
executive positions with Ameritech and Northwest Airlines. Mr. Edwardson also
serves as a director of Household International, Inc.

Paul J. Finnegan. Mr. Finnegan has served as a director of Focal since
November 1996. Since January 1993, Mr. Finnegan has been Managing Director of
Madison Dearborn Partners, Inc., the general partner of Madison Dearborn.
Previously, he served in various positions at First Capital Corporation of
Chicago and its affiliates. Mr. Finnegan currently serves on the Board of
Trustees of The Skyline Fund, and the Board of Directors or Managers, as
applicable, of Omnipoint Corporation, CompleTel LLC and Allegiance Telecom.

Richard D. Frisbie. Mr. Frisbie has served as a director of Focal since
November 1996. Mr. Frisbie is a founder and has been Managing Partner of
Battery Ventures since 1983. He is responsible for management of the Battery
Funds and focuses principally on communications opportunities. Mr. Frisbie
serves as a director of Allegiance Telecom, Conxus Communications, Inc. and
several private companies. He is also a member of the Board of Directors of
the National Venture Capital Association.

James N. Perry, Jr. Mr. Perry has been a director of Focal since November
1996. In January 1993, he became Managing Director of Madison Dearborn
Partners, Inc. Previously, Mr. Perry served in various positions at First
Capital Corporation of Chicago and its affiliates. Mr. Perry currently serves
as a director or manager, as applicable, of Clearnet Communications, Inc.,
Omnipoint Corporation, CompleTel LLC and Allegiance Telecom.

Paul G. Yovovich. Mr. Yovovich has served as a director of Focal since
March 1997. Mr. Yovovich served as President of Advance Ross Corporation, an
international transaction services company, from 1993 to 1996. He is currently
self-employed as a private investor. He served in several executive positions
with Centel Corporation from 1982 to 1992, where his last position was that of
President of its Central Telephone Company unit. Before joining Centel, he was
a Vice President in the investment banking unit of Dean Witter. Mr. Yovovich
also serves as a director of 3Com Corporation, APAC TeleServices, Inc., Van
Kampen Open End Funds, an investment company, Comarco, Inc. and several
private companies.

How Our Directors Are Elected

The Board of Directors consists of eight members. All directors are elected
annually and serve until the next annual meeting of stockholders or until the
election and qualification of their successors.

25
<PAGE>

Our existing stockholders are parties to a Stockholders Agreement dated as
of November 27, 1996. Each stockholder has agreed to vote all of their shares
so that our Board of Directors will consist of:

.Two representatives of Madison Dearborn Capital Partners, L.P.

.One representative of Frontenac VI, L.P.

.One representative of Battery Ventures III, L.P.

.Two of Mr. Addy, Mr. Barnicle, Mr. Beatty or Mr. Taylor

.Two non-employee directors

Currently, Mr. Finnegan and Mr. Perry serve as the Madison Dearborn
representatives, Mr. Crawford serves as the Frontenac representative, Mr.
Frisbie serves as the Battery Ventures representative, Mr. Barnicle and Mr.
Taylor serve as the executive representatives and Mr. Edwardson and Mr.
Yovovich serve as the non-employee directors. The terms of the Stockholders
Agreement relating to election of directors will terminate upon completion of
an initial public offering of our securities. Thereafter, each director will
be elected by a plurality vote.

Compliance with Section 16(a) of the Exchange Act.

Not applicable.

ITEM 11. EXECUTIVE COMPENSATION

The table below presents information about compensation earned by our Chief
Executive Officer and each of our four other most highly compensated executive
officers whose combined salary and bonus for 1998 exceeded $100,000 for
services rendered in all capacities for our last three fiscal years. The
officers listed in the following table are referred to as the Named Executive
Officers:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
Annual Long-term Compensation
Compensation Awards(1)
----------------- ---------------------- Other
Name and Principal Salary Bonus Securities Underlying Compensation
Position Year ($) ($) Options (#) (2)($)
------------------ ---- -------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Robert C. Taylor, 1996 $ 20,000 $ -- -- $ --
Jr.
Chief Executive 1997 120,000 50,000 -- --
Officer
1998 150,000 100,000 -- --

John R. Barnicle 1996 $ 20,000 $ -- -- $ --
Chief Operating 1997 120,000 47,000 -- --
Officer
1998 140,000 75,000 -- --

Joseph A. Beatty 1996 $ 20,000 $ -- -- $ --
Chief Financial 1997 120,000 45,000 -- 25,000(2)
Officer
1998 140,000 75,000 --

Brian F. Addy 1996 $ 20,000 $ -- -- $ --
Executive Vice 1997 120,000 38,000 -- --
President of
Market Development 1998 125,000 50,000 -- --

Renee M. Martin 1996 $ -- $ -- -- $ --
Senior Vice 1997 -- -- -- --
President
and General Counsel 1998 127,000 45,000 254 --
</TABLE>
- --------
(1) Does not include 5,000 shares of Class B common stock issued to each of
Mr. Taylor, Mr. Barnicle, Mr. Beatty and Mr. Addy in 1996 that are subject
to time-vesting requirements set forth in their Employment

26
<PAGE>

Agreements with Focal, of which 1,000 shares vested in each of 1996, 1997
and 1998. The remaining 2,000 shares will vest 1,000 in each of 1999 and
2000, subject to acceleration in specified circumstances. These 2,000 shares
were worth $3 million at December 31, 1998. Also does not include 3,677.885
shares of Class C common stock issued to each of Mr. Taylor, Mr. Barnicle,
Mr. Beatty and Mr. Addy in 1996 that were subject to performance-vesting
requirements set forth in their Vesting Agreements with some of our
institutional investors. Of these shares, 3,177.885 were canceled in
connection with September 30, 1998 amendments to these Vesting Agreements.
The remaining 500 shares converted to shares of Class B common stock and are
subject to time-vesting requirements set forth in Restricted Stock
Agreements signed at the time of the September 30, 1998 amendments to these
Vesting Agreements. Of these shares, 400 remain subject to future vesting
requirements. These 400 shares were worth $600,000 at December 31, 1998.
(2) Represents reimbursement of moving expenses.

The table below provides information regarding stock options granted to the
Named Executive Officers during 1998. None of the Named Executive Officers
received SARs. All options referred to below are exercisable to purchase shares
of our Class A common stock.

<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation
for Option
Individual Grants(1) Term(2)
------------------------------------------------------ -----------------
Number of % of Total
Securities of Options
Underlying Granted to Exercise or
Options Employees in Base Price
Name Granted Fiscal Year (per share) Expiration Date 5% 10%
---- ------------- ------------ ----------- --------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Taylor, Jr.... -- -- -- -- -- --
John R. Barnicle........ -- -- -- -- -- --
Joseph A. Beatty........ -- -- -- -- -- --
Brian F. Addy........... -- -- -- -- -- --
Renee M. Martin......... 134 2.2% $1,050 March 31, 2008 $ 88,485 $224,239
120 2.0% $1,500 August 20, 2008 $113,200 $286,874
</TABLE>
- --------
(1) The options granted to Ms. Martin were granted under the Company's 1997
Non-Qualified Stock Option Plan (the "1997 Plan"). The 134 options were
granted on April 1, 1998 and vest 25% on the first anniversary of the date
of grant and 12.5% every six months thereafter. The 120 options were
granted on August 21, 1998. Of these options, 20% vested immediately and
10%, 15%, 20%, and 35%, respectively, will vest on the subsequent four
anniversaries of the date of grant.
(2) Based on a ten-year option term and annual compounding, the 5% and 10%
calculations are set forth in compliance with the rules of the Securities
and Exchange Commission. The appreciation calculations do not take into
account any appreciation in the price of the Class A common stock to date
and are not necessarily indicative of future values of stock options or the
Class A common stock.

27
<PAGE>

Exercise of Stock Options and Year-End Values

The following table sets forth information regarding the number and value
of unexercised stock options held by each of the Named Executive Officers as
of December 31, 1998. None of the Named Executive Officers exercised stock
options in 1998.

<TABLE>
<CAPTION>
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options ($) at
Fiscal Year End Fiscal Year End(2)
---------------- ------------------
Exercisable/ Exercisable/
Name Unexercisable(1) Unexercisable
---- ---------------- ------------------
<S> <C> <C>
Robert C. Taylor, Jr....................... -- --
John R. Barnicle........................... -- --
Joseph A. Beatty........................... -- --
Brian F. Addy.............................. -- --
Renee M. Martin............................ 24/230 $36,000/$345,000
</TABLE>
- --------
(1) These shares represent shares issuable pursuant to stock options granted
under our 1997 Plan and are exercisable to purchase shares of our Class A
common stock.
(2) At December 31, 1998, an estimated market value of $1,500 per share of
Class A common stock was used to determine the value of the in-the-money
options.

Compensation of Our Directors

Except for Mr. Edwardson and Mr. Yovovich, our directors do not receive
directors fees or other compensation for serving as directors or for attending
meetings of the Board of Directors or its committees. In April 1997, Mr.
Yovovich was granted an option to purchase 260 shares of our Class A common
stock under our 1997 Plan. Ten percent of the shares covered by the option
vested immediately and an additional 15% of the shares vest each six months
thereafter. In January 1999, Mr. Yovovich was granted an additional option to
purchase 40 shares of Class A common stock under the 1997 Plan, which has the
same vesting terms as his earlier grant. In February 1999, we granted Mr.
Edwardson an option under our 1997 Plan to purchase 260 shares of our Class A
common stock on the same vesting terms as the options previously granted to
Mr. Yovovich. We reimburse directors for out-of-pocket expenses incurred in
connection with attendance at meetings of the Board of Directors or committees
of the Board.

Employment Agreements

Focal is a party to identical Executive Stock Agreement and Employment
Agreements ( "Employment Agreements") with each of Mr. Taylor, Mr. Barnicle,
Mr. Beatty and Mr. Addy (collectively, the "Executive Investors"). The
Employment Agreements provide that each Executive Investor will receive a
minimum base salary of $120,000 (or any greater amount approved by a majority
of the Board of Directors, including the Madison Dearborn designee and one of
the Frontenac or Battery Ventures designees) and bonuses determined by the
Board of Directors and based upon our achievement of performance goals set in
advance of each year in the sole discretion of the Board of Directors. Unless
he is terminated for cause, each Executive Investor is entitled for a period
of between six and 12 months following termination of his employment with us
(depending on the basis for termination) to continue to receive his salary and
medical benefits, net of any amounts the Executive Investor receives as
compensation for other employment. We entered into an employment agreement
with Ms. Martin on March 20, 1998, on substantially the same employment terms
as the Executive Investors.

Each Employment Agreement and Ms. Martin's agreement also require the
Executive Investor or Ms. Martin, as applicable, to assign to us all
inventions developed in the course of employment, maintain the confidentiality
of our proprietary information and refrain from competing with and soliciting
employees from Focal during his or her employment and for a period of up to
eighteen months after his or her termination. During this period, after any
applicable severance pay period has expired, the Executive Investor or Ms.
Martin, as

28
<PAGE>

applicable, is entitled to receive noncompetition compensation equal to his or
her salary and medical benefits (net of any amounts he or she receives as
compensation for other employment), unless he or she breaches his or her non-
disclosure, non-compete or non-solicitation obligations.

Pursuant to the Employment Agreements and in exchange for shares of common
stock held by each of the Executive Investors prior to November 27, 1996:

. 5,000 shares of Class B common stock subject to time-vesting requirements
set forth in the Employment Agreements were issued to each of the
Executive Investors on November 27, 1996

and

. 3,677.885 shares of Class C common stock subject to performance-vesting
requirements set forth in the Vesting Agreements (as defined below) were
issued to each of the Executive Investors on November 27, 1996. Of these
shares, 3,177.885 were canceled in connection with the September 30, 1998
amendments to the Vesting Agreements. The remaining 500 shares converted
to shares of Class B common stock and are subject to time-vesting
requirements set forth in Restricted Stock Agreements signed at the time
of the September 30, 1998 amendments to the Vesting Agreements. See "--
Vesting Agreements"

Of the 5,000 shares of Class B common stock issued on November 27, 1996
that are subject to time-vesting requirements under the Employment Agreements,
1,000 shares vested immediately and the remaining shares vest in equal
installments over a four year period that commenced November 27, 1997 so long
as the Executive Investor remains employed by Focal. Pursuant to this
schedule, 1,000 shares vested on each of November 27, 1997 and 1998. 1,000
shares of the 2,000 shares that remain subject to vesting under the Employment
Agreements will vest on November 27, 1999 and the remaining 1,000 shares will
vest on November 27, 2000, if the Executive Investor remains in our employ.
The Employment Agreements contain provisions that provide for partial
acceleration of vesting upon specific business combinations and the completion
of an initial public offering of our securities and total acceleration of
vesting upon other business combinations or the Executive Investor's death or
disability.

Each Employment Agreement further provides Focal and other existing
stockholders with specified rights if the Executive Investor ceases to be
employed by Focal for any reason.

Vesting Agreements

Pursuant to the original terms of three separate Vesting Agreements (the
"Vesting Agreements"), each dated November 27, 1996, among Focal, the
Executive Investors and each of Madison Dearborn, Frontenac and Battery
Ventures (collectively, the "Institutional Investors"), each of the Executive
Investors was entitled to earn 3,677.885 shares of Class C common stock if
certain financial performance criteria were satisfied. If any shares of Class
C common stock vested, an equal number of shares of Class A common stock held
by the Institutional Investors would be forfeited by the Institutional
Investors.

Pursuant to amendments to the Vesting Agreements, on September 30, 1998,
the Vesting Agreements terminated and:

. The Institutional Investors collectively forfeited 5,000 shares of the
Class A common stock held by them

. The Executive Investors each forfeited 3,177.888 shares of Class C common
stock held by them (or a total of 12,711.54 shares for all Executive
Investors)

. 500 shares of Class C common stock held by each Executive Investor were
vested and converted to 500 shares of Class B common stock and became
subject to new time-vesting requirements based on periods of continuous
service with us (the "Restricted Shares"). Twenty percent of the
Restricted Shares immediately vested and the remaining Restricted Shares
will vest 10% on September 30, 1999, 15% on September 30, 2000, 20% on
September 30, 2001 and 35% on September 30, 2002. The Executive Investors
are entitled to voting, dividend and other ownership rights with respect
to the Restricted Shares, but the Restricted Shares are subject to
restrictions on transfer until they vest. Vesting of the Restricted

29
<PAGE>

Shares is accelerated under specified circumstances, including upon a
Change in Control (as defined in our 1997 Plan) or the Executive
Investor's death or disability

Compensation Committee Interlocks and Insider Participation

The Compensation Committee of the Board of Directors currently consists of
five directors, including Mr. Taylor, our President and Chief Executive
Officer. All matters concerning executive compensation in 1998 were addressed
by the full Board of Directors, including Messrs. Taylor and Barnicle, who
were executive officers of Focal during 1998. None of our executive officers
served as a member of the compensation committee or as a director of any other
entity.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below sets forth information regarding beneficial ownership of
our Class A common stock and Class B common stock as of March 1, 1999 for:

. Each of the Named Executive Officers

. Each of our directors

. All of our executive officers and directors as a group

. Each other person who we know beneficially owns 5% or more of any class
of our common stock

At March 1, 1999, there were no shares of our Class C common stock
outstanding. Unless otherwise noted, the address of each Named Executive
Officer and director of Focal is 200 North LaSalle Street, Suite 1100,
Chicago, Illinois 60601.

<TABLE>
<CAPTION>
Class A Common Stock Class B Common Stock
----------------------- -----------------------
Number of Number of
Shares Shares
Beneficially Percent of Beneficially Percent of
Owned (1) Shares Owned (1) Shares
Name ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Named Executive Officers
Robert C. Taylor, Jr. (2)...... 230.77 * 5,500 25.0%
John R. Barnicle (3)........... 230.77 * 5,361 24.4%
Joseph A. Beatty (4)........... 230.77 * 5,500 25.0%
Brian F. Addy (5).............. 230.77 * 5,500 25.0%
Renee M. Martin (6)............ 57.50 * -- --

Directors
James N. Perry, Jr. (7)........ 43,212.85 57.1% -- --
Paul J. Finnegan (8)........... 43,212.85 57.1% -- --
James E. Crawford III (9)...... 20,165.96 26.7% -- --
Richard D. Frisbie (10)........ 10,082.73 13.3% -- --
Paul G. Yovovich (11).......... 493.44 * -- --
John A. Edwardson (12)......... 326.00 * -- --

All Executive Officers and
Directors as a Group
(13 persons) (13)............. 75,347.56 99.1% 21,861 99.4%

Other 5% Owners
Madison Dearborn Capital
Partnership, L.P. (14)........ 43,212.85 57.1% -- --
Frontenac VI, L.P. (15)........ 20,165.96 26.7% -- --
Battery Ventures III, L.P.
(16).......................... 10,082.73 13.3% -- --
Ad-Venture Capital Partners,
L.P. (17)..................... 230.77 * 2,000 9.1%
Coventry Court Partners, L.P.
(18).......................... -- -- 1,730 7.9%
Mistral Partners, L.P. (19).... 230.77 * 2,000 9.1%
</TABLE>
- --------
* Less than 1% of the issued and outstanding shares of our common stock.

30
<PAGE>

(1) In accordance with the rules of the Securities and Exchange Commission,
each beneficial owner's holding have been calculated assuming full
exercise of outstanding warrants and options exercisable by the holder
within 60 days after March 1, 1999, but no exercise of outstanding
warrants and options held by any other person. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and
sole investment power with respect to all shares beneficially owned by
them, subject to applicable community property laws.
(2) Includes 2,000 and 400 shares of Class B common stock subject to vesting
provisions contained in the executive's Employment Agreement and
Restricted Stock Agreement, respectively. See Item 11, "Executive
Compensation--Employment Agreements" and "--Vesting Agreements." Also
includes 2,230.77 shares of common stock held by Mistral Partners, L.P.,
a family limited partnership. Mr. Taylor exercises sole voting and
investment power over shares held by this partnership.
(3) Includes 2,000 and 400 shares of Class B common stock subject to vesting
provisions contained in the executive's Employment Agreement and
Restricted Stock Agreement, respectively. See Item 11, "Executive
Compensation--Employment Agreements" and "--Vesting Agreements." Also
includes 700 shares of Class B common stock held by JRB Partners, L.P., a
family limited partnership. Mr. Barnicle exercises sole voting and
investment power over shares held by this partnership.
(4) Includes 2,000 and 400 shares of Class B common stock subject to vesting
provisions contained in the executive's Employment Agreement and
Restricted Stock Agreement, respectively. See Item 11, "Executive
Compensation--Employment Agreements" and "--Vesting Agreements." Also
includes 1,730 shares of Class B common stock held by Coventry Court
Partners, L.P., a family limited partnership. Mr. Beatty exercises sole
voting and investment power over shares held by this partnership.
(5) Includes 2,000 and 400 shares of Class B common stock subject to vesting
provisions contained in the executive's Employment Agreement and
Restricted Stock Agreement, respectively. See Item II, "Executive
Compensation--Employment Agreements" and "--Vesting Agreements." Also
includes 2,230.77 shares of common stock held by Ad-Venture Capital
Partners, L.P., a family limited partnership. Mr. Addy exercises sole
voting and investment power over shares held by this partnership.
(6) Consists of shares of Class A common stock subject to options which are
exercisable within 60 days of March 1, 1999.
(7) Mr. Perry, a director, owns no shares in his own name. Consists of shares
of Class A common stock owned by Madison Dearborn. See footnote 14 below.
Mr. Perry's address is c/o Madison Dearborn Partners, Inc., Three First
National Plaza, Suite 3800, Chicago, IL 60602.
(8) Mr. Finnegan, a director, owns no shares in his own name. Consists of
shares of Class A common stock owned by Madison Dearborn. See footnote 14
below. Mr. Finnegan's address is c/o Madison Dearborn Partners, Inc.,
Three First National Plaza, Suite 3800, Chicago, IL 60602.
(9) Mr. Crawford, a director, owns no shares in his own name. Consists of
shares of Class A common stock owned by Frontenac. See footnote 15 below.
Mr. Crawford's address is c/o Frontenac Company, 135 S. LaSalle Street,
Suite 3800, Chicago, IL 60603.
(10) Mr. Frisbie, a director, owns no shares in his own name. Consists of
shares of Class A common stock owned by Battery. See footnote 16 below.
Mr. Frisbie's address is c/o Battery Ventures, 20 William Street,
Wellesley, MA 02481.
(11) Includes 297.44 shares of Class A common stock and an additional 196
shares of Class A common stock subject to options which are exercisable
within 60 days of March 1, 1999.
(12) Includes 300 shares of Class A common stock and an additional 26 shares
of Class A common stock subject to options which are exercisable within
60 days of March 1, 1999.
(13) Includes 74,982.06 shares of Class A common stock and 21,861 shares of
Class B common stock and an additional 365.5 shares of Class A common
stock subject to options which are exercisable within 60 days of March 1,
1999.
(14) Consists of shares of Class A common stock owned by Madison Dearborn.
Messrs. Perry and Finnegan, directors of the Company, are principals of
Madison Dearborn Capital Partners, Inc., the general partner of Madison
Dearborn. Because of these positions, Messrs. Perry and Finnegan share
voting and investment power with respect to the shares owned by Madison
Dearborn. See Item 13, "Certain Relationships and Related Party
Transactions."

31
<PAGE>

(15) Consists of shares of Class A common stock owned by Frontenac. Mr.
Crawford, a director, is a general partner of Frontenac Company, the
general partner of Frontenac. Because of this position, Mr. Crawford
shares voting and investment power with respect to the shares owned by
Frontenac. See Item 13, "Certain Relationships and Related Party
Transactions."
(16) Consists of shares of Class A common stock owned by Battery Ventures. Mr.
Frisbie, a director, is a managing general partner of Battery Ventures.
Because of this position, Mr. Frisbie shares voting and investment power
with respect to the shares owned by Battery Ventures. See Item 13,
"Certain Relationships and Related Party Transactions."
(17) Consists of shares of Class A common stock and Class B common stock owned
by Ad-Venture Capital Partners, L.P., a family limited partnership. Mr.
Addy exercises sole voting and investment power over these shares. The
address of this partnership is 200 North LaSalle Street, Suite 1100,
Chicago, Illinois 60601.
(18) Consists of shares of Class B common stock owned by Coventry Court
Partners, L.P., a family limited partnership. Mr. Beatty exercises sole
voting and investment power over these shares. The address of this
partnership is 200 North LaSalle Street, Suite 1100, Chicago, Illinois
60601.
(19) Consists of shares of Class A common stock and Class B common stock owned
by Mistral Partners, L.P., a family limited partnership. Mr. Taylor
exercises sole voting and investment power over these shares. The address
of this partnership is 200 North LaSalle Street, Suite 1100, Chicago,
Illinois 60601.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

In addition to serving as members of our Board of Directors, Mr. Crawford,
Mr. Finnegan, Mr. Frisbie and Mr. Perry each serve as directors of other
telecommunications services companies and other private companies. As a
result, these four directors may be subject to conflicts of interest during
their tenure on our Board of Directors. Accordingly, they may be periodically
required to inform us and the other companies to which they owe fiduciary
duties of financial or business opportunities We do not currently have any
standard procedures for resolving potential conflicts of interest relating to
corporate opportunities or otherwise.

Mr. Crawford, Mr. Finnegan, Mr. Frisbie and Mr. Perry also serve on the
boards of directors of companies with which we may compete or enter into
agreements. Specifically, these directors are directors of Allegiance Telecom,
a Dallas-based CLEC. Allegiance Telecom is one of our competitors.

The Stock Purchase Agreement and Stockholders' Agreement

We have entered into a Stock Purchase Agreement with some of our
stockholders, dated as of November 27, 1996 and amended after that date.
Pursuant to the Stock Purchase Agreement and additional related agreements,
our existing stockholders were granted put rights, voting rights, and
registration rights described below and elsewhere in this report.

The Stock Purchase Agreement contains standard representations and
warranties by Focal and affirmative and restrictive covenants and permits the
Institutional Investors to force us to liquidate after February 2003. Most of
the affirmative and restrictive covenants in the Stock Purchase Agreement and
the right to force liquidation will terminate upon the completion of an
initial public offering of our securities. However, after completion of such
an offering, we will continue to be required to:

. Deliver financial information to the Institutional Investors and certain
of their transferees in a private sale of shares of common stock

. Provide access by the Institutional Investors, and certain of their
transferees in a private sale of shares of common stock, to our physical
properties, books and records

. Comply with the periodic reporting requirements under the Securities
Exchange Act of 1934 to enable holders of "restricted shares" of common
stock to sell those shares of common stock pursuant to Rule 144 under
the Securities Act of 1933 or a short-form registration statement under
the Securities Act of 1933

32
<PAGE>

The Stockholders' Agreement contains provisions relating to:

. Election of our directors (see Item 10, "Directors and Executive
Officers of the Registrant--How We Elect Our Directors")

. Business combinations involving Focal

. Transfer restrictions and rights of first refusal and participation
related to sales of shares of common stock by existing stockholders

All of these provisions and restrictions, other than transfer restrictions
on unvested shares of common stock held by the Executive Investors, will
terminate upon completion of an initial public offering of our securities.

See Item 11, "Executive Compensation--Employment Agreements" and "--Vesting
Agreements" for a more detailed discussion of the various provisions of the
Employment Agreements and Vesting Agreements.

Registration Rights

Focal has granted registration rights to all existing holders of its common
stock. The existing holders of common stock have the benefit of the following
demand registration:

. Subject to minimum dollar amounts, Madison Dearborn may demand two
registrations on Form S-1

. Frontenac and Battery may each demand one registration on Form S-1

. The holders of 8% of all shares of common stock (including shares of
Class A common stock and Class B common stock) subject to the
registration agreement, approximately 7,813.92 shares of common stock
(including shares of Class A common stock and Class B common stock), may
demand an unlimited number of registrations on Form S-2 or Form S-3

In addition, our existing stockholders have unlimited "piggyback"
registration rights under which they have the right to request that we
register their shares of common stock whenever we register any of our
securities under the Securities Act of 1933 and the registration form to be
used may be used for the registration of their shares of common stock. These
piggyback registration rights will not, however, be available:

. If the piggyback registration is in connection with an underwritten
registration and the managing underwriter concludes that including
shares of common stock owned by holders of "piggyback" registration
rights would have an adverse impact on the marketing of the securities
to be sold in the underwritten offering

. For registrations undertaken because of a demand registration

Stock Purchases by Our Directors

In May 1997, Mr. Yovovich purchased 230.77 shares of Class A common stock
for a purchase price of $75,000. In November 1998, he purchased an additional
66.667 shares of Class A common stock for himself and members of his family
for a purchase price of $100,000. In February 1999, Mr. Edwardson purchased
300 shares of Class A common stock for a purchase price of $472,500.

33
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The consolidated financial statements of Focal Communications Corporation
and Subsidiaries for the year ended December 31, 1998, together with the
Report of Independent Public Accountants, are set forth on pages F-1
through F-18 of this report. The supplemental financial information listed
and appearing hereafter should be read in conjunction with the consolidated
financial statements included in the report.

(2) Financial Statement Schedules

The following are included in Part IV of this report for each of the years
ended December 31, 1996, 1997 and 1998 as applicable:

Report of Independent Public Accountants F-19

Schedule II--Valuation and Qualifying Accounts F-20

Financial statement schedules not included in this report have been omitted
either because they are not applicable or because the required information
is shown in the consolidated financial statements or notes thereto,
included in this report.

(3) The exhibits listed below were previously filed with or incorporated by
reference to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, pursuant to Item 601 of Regulation S-K and are
incorporated herein by reference. Exhibits 4.16, 10.17, 10.33, 10.36 and
21.1 are being filed electronically herewith but were previously filed in
paper pursuant to a temporary hardship exemption.

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
2.1 Plan of Reorganization and Agreement by and among Focal
Communications Corporation and its Subsidiaries, dated June 12,
1997. (Incorporated by reference to Exhibit No. 2.1 to the
Registrant's Registration Statement on Form S-4 originally filed
with the Securities and Exchange Commission on August 13, 1998
(Registration No. 333-49397) (the "S-4"))
3.1 Certificate of Incorporation. (Incorporated by reference to
Exhibit No. 3.1 of the S-4)
3.2 Amendment to Certificate of Incorporation.
3.3 By-Laws. (Incorporated by reference to Exhibit No. 3.2 of the S-
4)
4.1 Indenture with Harris Trust and Savings Bank, dated February 18,
1998. (Incorporated by reference to Exhibit No. 4.1 of the S-4)
4.2 Initial Global 12.125% Senior Discount Note Due February 15,
2008, dated February 18, 1998. (Incorporated by reference to
Exhibit No. 4.2 of the S-4)
4.3 Stock Purchase Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit
No. 4.5 of the S-4)
4.4 Amendment No. 1 to Stock Purchase Agreement with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph
Beatty, and Robert C. Taylor Jr., dated January 23, 1998.
(Incorporated by reference to Exhibit No. 4.6 of the S-4)
</TABLE>

34
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.5 Amendment No. 2 to Stock Purchase Agreement with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph
Beatty and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.8 to the
Registrant's Quarterly Report on Form 10-Q for the period ending
September 30, 1998, originally filed with the Securities and
Exchange Commission on November 16, 1998 (the "3rd Quarter 10-
Q"))
4.6 Vesting Agreement with Madison Dearborn Capital Partners, L.P.,
Brian F. Addy, John R. Barnicle, Joseph Beatty and Robert C.
Taylor, Jr., dated as of November 27, 1996. (Incorporated by
reference to Exhibit No. 4.1 of the 3rd Quarter 10-Q)
4.7 Vesting Agreement with Frontenac VI, L.P., Brian F. Addy, John
R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr., dated as
of November 27, 1996. (Incorporated by reference to Exhibit No.
4.2 of the 3rd Quarter 10-Q)
4.8 Vesting Agreement with Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty and Robert C. Taylor, Jr.,
dated as of November 27, 1996. (Incorporated by reference to
Exhibit No. 4.3 of the 3rd Quarter 10-Q)
4.9 Amendment No. 1 to Vesting Agreement and Consent as of August
21, 1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph
Beatty and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.4 of the 3rd Quarter
10-Q)
4.10 Amendment No. 1 to Vesting Agreement and Consent as of August
21, 1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph
Beatty and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.5 of the 3rd Quarter
10-Q)
4.11 Amendment No. 1 to Vesting Agreement and Consent as of August
21, 1998, between Focal Communications Corporation with Madison
Dearborn Capital Partners, L.P., Frontenac VI, L.P., Battery
Ventures III, L.P., Brian F. Addy, John R. Barnicle, Joseph
Beatty and Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.6 of the 3rd Quarter
10-Q)
4.12 Form of Restricted Stock Agreement, dated September 30, 1998
between Focal Communications Corporation and each of Brian F.
Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor, Jr.
(Incorporated by reference to Exhibit No. 4.7 of the 3rd Quarter
10-Q)
4.13 Stockholders Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit
No. 4.11 of the S-4)
4.14 Amendment No. 1 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and
Robert C. Taylor, Jr., dated as of July 7, 1998. (Incorporated
by reference to Exhibit No. 4.9 of the 3rd Quarter 10-Q)
4.15 Amendment No. 2 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and
Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.10 of the 3rd
Quarter 10-Q)
</TABLE>

35
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.16 Amendment No. 3 to Stockholders Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty, and
Robert C. Taylor, Jr., dated February 16, 1999.

4.17 Executive Stock Agreement and Employment Agreement with Brian F.
Addy, dated November 27, 1996. (Incorporated by reference to
Exhibit No. 4.12 of the S-4)+
4.18 Executive Stock Agreement and Employment Agreement with John R.
Barnicle, dated November 27, 1996. (Incorporated by reference to
Exhibit No. 4.13 of the S-4)+
4.19 Executive Stock Agreement and Employment Agreement with Joseph
A. Beatty, dated November 27, 1996. (Incorporated by reference
to Exhibit No. 4.14 of the S-4)+
4.20 Executive Stock Agreement and Employment Agreement with Robert
C. Taylor, Jr., dated November 27, 1996. (Incorporated by
reference to Exhibit No. 4.15 of the S-4)+
4.21 Amendment No. 1 to Executive Employment Agreement and Consent
with Brian F. Addy, dated as of August 21, 1998. (Incorporated
by reference to Exhibit No. 4.11 of the 3rd Quarter 10-Q)+
4.22 Amendment No. 1 to Executive Employment Agreement and Consent
with John R. Barnicle, dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.12 of the 3rd
Quarter 10-Q)+
4.23 Amendment No. 1 to Executive Employment Agreement and Consent
with Joseph Beatty, dated as of August 21, 1998. (Incorporated
by reference to Exhibit No. 4.13 of the 3rd Quarter 10-Q)+
4.24 Amendment No. 1 to Executive Employment Agreement and Consent
with Robert C. Taylor, dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.14 of the 3rd
Quarter 10-Q)+
4.25 Registration Agreement with Madison Dearborn Capital Partners,
L.P., Frontenac VI, L.P., Battery Ventures III, L.P., Brian F.
Addy, John R. Barnicle, Joseph Beatty, and Robert C. Taylor Jr.,
dated November 27, 1996. (Incorporated by reference to Exhibit
No. 4.16 of the S-4)
4.26 Amendment No. 1 to Registration Agreement with Madison Dearborn
Capital Partners, L.P., Frontenac VI, L.P., Battery Ventures
III, L.P., Brian F. Addy, John R. Barnicle, Joseph Beatty and
Robert C. Taylor, Jr., dated as of August 21, 1998.
(Incorporated by reference to Exhibit No. 4.15 of the 3rd
Quarter 10-Q)
10.1 Interconnection Agreement with Ameritech Information Industry
Services, dated October 28, 1996. (Incorporated by reference to
Exhibit No. 10.1 of the S-4)
10.2 Interconnection Agreement with Ameritech Information Industry
Services, dated October 24, 1997. (Incorporated by reference to
Exhibit No. 10.2 of the S-4)
10.3 Interconnection Agreement with New York Telephone Company, dated
November 10, 1997. (Incorporated by reference to Exhibit No.
10.3 of the S-4)
10.4 Amended and Restated Interconnection Agreement with Ameritech
Information Industry Services, dated March 16, 1998.
(Incorporated by reference to Exhibit No. 10.4 of the 1998 S-4)
</TABLE>

36
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.5 Interconnection Agreement with Bell Atlantic-Pennsylvania, dated
April 27, 1998. (Incorporated by reference to Exhibit No. 10.26
of the S-4)
10.6 Interconnection Agreement with Bell Atlantic-Delaware, dated
April 27, 1998. (Incorporated by reference to Exhibit No. 10.25
of the S-4)
10.7 Interconnection Agreement with Bell Atlantic-New Jersey, dated
April 27, 1998. (Incorporated by reference to Exhibit No. 10.24
of the S-4)
10.8 Interconnection Agreement with GTE--California, dated June 12,
1998. (Incorporated by reference to Exhibit No. 10.23 of the S-
4)
10.9 Interconnection Agreement with Pacific Bell, dated June 15,
1998. (Incorporated by reference to Exhibit No. 10.22 of the S-
4)
10.10 First Amendment to the Interconnection Agreement with Ameritech
Information Industry Services, dated September 8, 1998.
(Incorporated by reference to Exhibit No. 10.1 of the 3rd
Quarter 10-Q)
10.11 Network Products Purchase Agreement with Northern Telecom Inc.,
dated January 21, 1997. (Incorporated by reference to Exhibit
No. 10.5 of the S-4)
10.12 Amendments No. 1 and No. 2 to Network Products Purchase
Agreement with Northern Telecom Inc., both dated March 6, 1998.
(Incorporated by reference to Exhibit No. 10.6 of the S-4)*
10.13 Software License with DPI/TFS, Inc., dated April 10, 1997.
(Incorporated by reference to Exhibit No. 10.17 of the S-4)*
10.14 Second Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated November 15, 1997.
(Incorporated by reference to Exhibit No. 10.9 of the S-4)
10.15 Lease Agreement for property located at 200 North LaSalle,
Chicago, IL, dated December 31, 1996. (Incorporated by reference
to Exhibit No. 10.7 of the S-4)
10.16 First Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated May 14, 1997. (Incorporated by
reference to Exhibit No. 10.8 of the S-4)
10.17 Loan and Security Agreement with NTFC Capital Corporation dated
December 30, 1998.*
10.18 Third Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated March 2, 1998. (Incorporated
by reference to Exhibit No. 10.10 of the S-4)
10.19 Fourth Amendment to Lease Agreement for property located at 200
North LaSalle, Chicago, IL, dated April 4, 1998. (Incorporated
by reference to Exhibit No. 10.18 of the
S-4)
10.20 Lease Agreement for property located at 32 Old Slip, New York,
NY, dated May 20, 1997. (Incorporated by reference to Exhibit
No. 10.11 of the S-4)
10.21 Lease Agreement for property located at 650 Townsend Street, San
Francisco, CA, dated January 26, 1998. (Incorporated by
reference to Exhibit No. 10.12 of the S-4)
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
10.22 Lease Agreement for property located at 701 Market Street,
Philadelphia, Pennsylvania, dated March 10, 1998. (Incorporated
by reference to Exhibit No. 10.13 of the S-4)
10.23 Lease Agreement for property located at 1120 Vermont Avenue,
NW., Washington, D.C., dated as of May 4, 1998. (Incorporated by
reference to Exhibit No. 10.19 of the S-4)
10.24 First Amendment to Lease Agreement for property located at 1120
Vermont, NW, Washington, D.C., dated July 23, 1998.
(Incorporated by reference to Exhibit No. 10.6 of the 3rd
Quarter 10-Q)
10.25 Lease Agreement for property located at 1200 West Seventh
Street, Los Angeles, California, dated as of May 19, 1998.
(Incorporated by reference to Exhibit No. 10.20 of the 1998 S-4)
10.26 First Amendment to Lease Agreement for property located at 1200
West 7th Street, Los Angeles, CA, dated July 8, 1998.
(Incorporated by reference to Exhibit No. 10.5 of the 3rd
Quarter 10-Q)
10.27 Lease Agreement for property located at 1511 6th Avenue,
Seattle, WA, dated August 7, 1998. (Incorporated by reference to
Exhibit No. 10.2 of the 3rd Quarter 10-Q)
10.28 Lease Agreement for property located at 23800 West Ten Mile
Road, Southfield, MI, dated August 31, 1998. (Incorporated by
reference to Exhibit No. 10.3 of the 3rd Quarter 10-Q)
10.29 Lease Agreement for property located at One Penn Plaza, New
York, NY, dated September 25, 1998. (Incorporated by reference
to Exhibit No. 10.4 of the 3rd Quarter 10-Q)
10.30 Employment Agreement with Renee M. Martin, dated March 20, 1998.
(Incorporated by reference to Exhibit No. 10.16 of the S-4)+
10.31 Amendment No. 1 to Executive Employment Agreement with Renee M.
Martin, dated as of August 21, 1998. (Incorporated by reference
to Exhibit No. 10.10 of the 3rd Quarter 10-Q)
10.32 1997 Nonqualified Stock Option Plan, amended and restated as of
August 21, 1998. (Incorporated by reference to Exhibit No. 10.7
of the 3rd Quarter 10-Q)+
10.33 Form of Amended and Restated Stock Option Agreement.+
10.34 1998 Equity and Performance Incentive Plan. (Incorporated by
reference to Exhibit No. 10.8 of the 3rd Quarter 10-Q)+
10.35 1998 Equity Plan for Non-Employee Directors. (Incorporated by
reference to Exhibit No. 10.9 of the 3rd Quarter 10-Q)+
10.36 Agreement for Sale of Real Property between Focal Communications
Corporation and United Air Lines, Inc. dated August 13, 1998.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
</TABLE>

- --------
*Portions of these exhibits have been omitted pursuant to a request for
confidential treatment, and the omitted portions have been filed separately
with the Securities and Exchange Commission.
+Management contract or compensatory plan

38
<PAGE>

(b) Reports on Form 8-K

The Company filed a report on Form 8-K dated November 16, 1998, which
related to an error made in the calculation of the Company's basic and diluted
loss per share.

The financial statement schedules filed as part of this Annual Report on
Form 10-K are as specified in item 14(a)(2) herein.

SUPPLEMENTAL INFORMATION TO BE FILED PURSUANT TO SECTION 15(d) OF THE ACT
BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF
THE ACT.

No annual report or proxy material has been sent to security holders.

39
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Annual Report on Form 10-K/A to be signed on its behalf by the undersigned,
there unto duly authorized.

Focal Communications Corporation

/s/ Robert C. Taylor, Jr.
By: _________________________________
Robert C. Taylor, Jr.
President and Chief Executive
Officer
April 6, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title
--------- -----

<S> <C> <C>
/s/ Robert C. Taylor, Jr. President, Chief Executive April 6, 1999
____________________________________ Officer and Director
Robert C. Taylor, Jr. (Principal Executive
Officer)

/s/ John R. Barnicle Executive Vice President, April 6, 1999
____________________________________ Chief Operating Officer, and
John R. Barnicle Director
.
/s/ Joseph A. Beatty Executive Vice President and April 6, 1999
____________________________________ Chief Financial Officer
Joseph A. Beatty (Principal Financial Officer)

/s/ Gregory J. Swanson Controller (Principal April 6, 1999
____________________________________ Accounting Officer)
Gregory J. Swanson

/s/ James E. Crawford, III* Director April 6, 1999
____________________________________
James E. Crawford, III

/s/ John A. Edwardson* Director April 6, 1999
____________________________________
John A. Edwardson

/s/ Paul J. Finnegan* Director April 6, 1999
____________________________________
Paul J. Finnegan

/s/ Richard D. Frisbie* Director April 6, 1999
____________________________________
Richard D. Frisbie

/s/ James N. Perry, Jr.* Director April 6, 1999
____________________________________
James N. Perry, Jr.
/s/ Paul G. Yovovich* Director April 6, 1999
____________________________________
Paul G. Yovovich

</TABLE>
- --------
*Signed by Joseph A. Beatty pursuant to a power of attorney previously filed
with the Commission.

40
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-2

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 1997 and 1998............ F-3

Consolidated Statements of Operations for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996 and for the Years
Ended December 31, 1997 and 1998....................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the Period
from May 31, 1996 (Commencement of Operations), to December 31, 1996,
and for the Years Ended
December 31, 1997 and 1998............................................. F-5

Consolidated Statements of Cash Flows for the Period from May 31, 1996
(Commencement of Operations), to December 31, 1996, and for the Years
Ended December 31, 1997 and 1998....................................... F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-7

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................................. F-19

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS............................. F-20
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Focal Communications Corporation:

We have audited the accompanying consolidated balance sheets of FOCAL
COMMUNICATIONS CORPORATION AND SUBSIDIARIES (a Delaware corporation) as of
December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the period from
May 31, 1996 (commencement of operations), to December 31, 1996, and for the
years ended December 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Focal
Communications Corporation and Subsidiaries as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for the period from
May 31, 1996 (commencement of operations), to December 31, 1996, and for the
years ended December 31, 1997 and 1998, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
January 22, 1999

F-2
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998

<TABLE>
<CAPTION>
ASSETS 1997 1998
------ ----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 2,256,552 $126,041,001
Short-term investments............................ -- 7,959,940
Accounts receivable, net of allowance for doubtful
accounts of $469,000 and $1,189,000 in 1997 and
1998, respectively............................... 2,355,814 9,792,532
Related-party receivables......................... 34,883 --
Other current assets.............................. 90,559 843,793
----------- ------------
Total current assets............................ 4,737,808 144,637,266
----------- ------------
Fixed assets, at cost:
Buildings and improvements........................ -- 2,350,000
Communications network............................ 7,906,336 44,774,965
Construction in progress.......................... 1,938,236 15,103,564
Computer equipment................................ 941,237 3,503,512
Leasehold improvements............................ 652,173 8,577,724
Furniture and fixtures............................ 355,759 1,790,596
Motor vehicles.................................... -- 19,289
----------- ------------
11,793,741 76,119,650
Less--Accumulated depreciation and amortization... 616,967 6,146,530
----------- ------------
Fixed assets, net............................... 11,176,774 69,973,120
----------- ------------
Other noncurrent assets............................. -- 4,963,894
----------- ------------
$15,914,582 $219,574,280
=========== ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.................................. $ 1,502,479 $ 8,365,470
Accrued liabilities............................... 367,890 1,941,377
Income taxes payable.............................. -- 4,055,000
Current maturities of long-term debt.............. 943,621 2,887,036
----------- ------------
Total current liabilities....................... 2,813,990 17,248,883
----------- ------------
Long-term debt, net of current maturities........... 2,593,265 182,408,757
----------- ------------
Other noncurrent liabilities........................ 179,481 588,228
----------- ------------
Redeemable common stock:
Class A, $.01 par value; 85,567 shares authorized;
80,307 and 0 shares issued and outstanding at
December 31, 1997 and 1998, respectively......... 12,403,218 --
----------- ------------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, Class A, $.01 par value; 85,567
shares authorized; 0 and 75,374 shares issued and
outstanding at December 31, 1997 and 1998,
respectively..................................... -- 753
Common Stock, Class B, $.01 par value; 35,000
shares authorized; 20,000 and 22,000 shares
issued at December 31, 1997 and 1998,
respectively..................................... 200 220
Common Stock, Class C, $.01 par value; 15,000
shares authorized; 14,711 and 0 issued at
December 31, 1997 and 1998, respectively......... 147 --
Additional paid-in capital........................ 5,096,435 35,413,345
Deferred compensation............................. (3,791,667) (4,736,432)
Accumulated deficit............................... (3,380,487) (11,349,474)
----------- ------------
Total stockholders' equity (deficit)............ (2,075,372) 19,328,412
----------- ------------
$15,914,582 $219,574,280
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Period from May 31, 1996 (Commencement of Operations), to
December 31, 1996, and for the Years Ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
1996 1997 1998
--------- ----------- ------------
<S> <C> <C> <C>
Revenues................................. $ -- $ 4,023,690 $ 43,531,846
--------- ----------- ------------
Expenses:
Customer service and network
operations............................ -- 2,154,980 15,284,641
Selling, general and administrative.... 421,777 2,887,372 12,209,821
Depreciation and amortization.......... 1,150 615,817 6,670,986
Non-cash compensation expense.......... 108,333 1,300,000 3,069,553
--------- ----------- ------------
Total expenses....................... 531,260 6,958,169 37,235,001
--------- ----------- ------------
Operating income (loss).............. (531,260) (2,934,479) 6,296,845
--------- ----------- ------------
Other income (expense):
Interest income........................ 17,626 195,696 6,528,541
Interest expense....................... -- (128,070) (16,134,373)
--------- ----------- ------------
Total other income (expense)......... 17,626 67,626 (9,605,832)
--------- ----------- ------------
Loss before income taxes............. (513,634) (2,866,853) (3,308,987)
Provision for income taxes............... -- -- (4,660,000)
--------- ----------- ------------
Net loss................................. (513,634) (2,866,853) (7,968,987)
Accretion to redemption value of class A
common stock............................ -- (103,565) --
--------- ----------- ------------
Net loss applicable to common
stockholders............................ $(513,634) $(2,970,418) $ (7,968,987)
========= =========== ============
Basic and diluted net loss per share of
common stock............................ $ (30.22) $ (35.21) $ (91.05)
========= =========== ============
Basic and diluted weighted average number
of shares of common stock outstanding... 16,996 84,373 87,526
========= =========== ============
</TABLE>

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

F-4
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from May 31, 1996 (Commencement of Operations), to
December 31, 1996, and for the Years Ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
Common Stock, $.01 Par Value
---------------------------------------------
Common Stock Class A Class B Class C Additional
-------------- -------------- ------------- --------------- Paid-in Deferred Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Capital Compensation Deficit
------ ------ ------ ------ ------ ------ ------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
May 31, 1996
(commencement of
operations)..... -- $ -- -- $ -- -- $ -- -- $ -- $ -- $ -- $ --
Issuance of
Common Stock.... 1,500 -- -- -- -- -- -- -- -- -- --
Conversion of
Common Stock to
Class B Common.. (1,125) -- -- -- 20,000 200 -- -- -- -- --
Conversion of
Common Stock to
Class C Common.. (375) -- -- -- -- -- 14,711 147 -- -- --
Deferred
compensation.... -- -- -- -- -- -- -- -- 5,200,000 (5,200,000) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 108,333 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (513,634)
------ ----- ------ ----- ------ ----- ------- ----- ----------- ----------- ------------
BALANCE,
December 31,
1996............ -- -- -- -- 20,000 200 14,711 147 5,200,000 (5,091,667) (513,634)
Accretion of
redeemable
Common Stock.... -- -- -- -- -- -- -- -- (103,565) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 1,300,000 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (2,866,853)
------ ----- ------ ----- ------ ----- ------- ----- ----------- ----------- ------------
BALANCE,
December 31,
1997............ -- -- -- -- 20,000 200 14,711 147 5,096,435 (3,791,667) (3,380,487)
Reclassification
resulting from
amendment to
stock purchase
agreement....... -- -- 80,307 803 -- -- -- -- 12,402,415 -- --
Class A Common
capital
contributions... -- -- -- -- -- -- -- -- 13,800,000 -- --
Issuance of
Class A Common
Stock........... -- -- 67 -- -- -- -- -- 100,000 -- --
Cancellation and
conversion of
Common Stock.... -- -- (5,000) (50) 2,000 20 (14,711) (147) 4,014,495 (4,014,318) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- -- 3,069,553 --
Net loss........ -- -- -- -- -- -- -- -- -- -- (7,968,987)
------ ----- ------ ----- ------ ----- ------- ----- ----------- ----------- ------------
BALANCE,
December 31,
1998............ -- $ -- 75,374 $ 753 22,000 $ 220 -- $ -- $35,413,345 $(4,736,432) $(11,349,474)
====== ===== ====== ===== ====== ===== ======= ===== =========== =========== ============
<CAPTION>
Total
------------
<S> <C>
May 31, 1996
(commencement of
operations)..... $ --
Issuance of
Common Stock.... --
Conversion of
Common Stock to
Class B Common.. 200
Conversion of
Common Stock to
Class C Common.. 147
Deferred
compensation.... --
Amortization of
deferred
compensation.... 108,333
Net loss........ (513,634)
------------
BALANCE,
December 31,
1996............ (404,954)
Accretion of
redeemable
Common Stock.... (103,565)
Amortization of
deferred
compensation.... 1,300,000
Net loss........ (2,866,853)
------------
BALANCE,
December 31,
1997............ (2,075,372)
Reclassification
resulting from
amendment to
stock purchase
agreement....... 12,403,218
Class A Common
capital
contributions... 13,800,000
Issuance of
Class A Common
Stock........... 100,000
Cancellation and
conversion of
Common Stock.... --
Amortization of
deferred
compensation.... 3,069,553
Net loss........ (7,968,987)
------------
BALANCE,
December 31,
1998............ $19,328,412
============
</TABLE>

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

F-5
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period from May 31, 1996 (Commencement of Operations), to
December 31, 1996, and for the Years Ended December 31, 1997 and 1998

<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $ (513,634) $ (2,866,853) $ (7,968,987)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities--
Depreciation and amortization...... 1,150 615,817 6,670,986
Deferred lease costs............... -- 179,481 408,747
Non-cash compensation expense...... 108,333 1,300,000 3,069,553
Amortization of discount on senior
discount notes.................... -- -- 16,080,249
Provision for losses on accounts
receivable........................ -- 469,000 720,000
Changes in operating assets and
liabilities--
Accounts receivable.............. -- (2,824,814) (8,156,718)
Related-party receivables........ (16,883) (18,000) 34,883
Other current assets............. -- (90,559) (753,234)
Accounts payable and accrued
liabilities..................... 268,458 1,601,911 8,436,478
Income taxes payable............. -- -- 4,055,000
---------- ------------ ------------
Net cash provided by (used in)
operating activities.......... (152,576) (1,634,017) 22,596,957
---------- ------------ ------------
Cash flows from investing activities:
Capital Expenditures................. (82,303) (11,655,524) (64,229,247)
Purchases of short-term investments.. -- -- (7,959,940)
---------- ------------ ------------
Net cash used in investing
activities.................... (82,303) (11,655,524) (72,189,187)
---------- ------------ ------------
Cash flows from financing activities:
Loan origination fees................ -- -- (90,000)
Proceeds from issuance of long-term
debt................................ -- 3,697,500 163,103,565
Payments on long-term debt........... -- (216,528) (3,536,886)
Proceeds from the issuance of Class A
Common Stock........................ 4,025,000 8,275,000 13,900,000
---------- ------------ ------------
Net cash provided by financing
activities.................... 4,025,000 11,755,972 173,376,679
---------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents...................... 3,790,121 (1,533,569) 123,784,449
Cash and cash equivalents
beginning of year.................... -- 3,790,121 2,256,552
---------- ------------ ------------
Cash and cash equivalents
end of year.......................... $3,790,121 $ 2,256,552 $126,041,001
========== ============ ============
</TABLE>

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

F-6
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1998

1. ORGANIZATION AND OPERATIONS

Focal Communications Corporation began operations on May 31, 1996. Focal
Communications Corporation and Subsidiaries (the "Company") is a competitive
local exchange carrier ("CLEC") in the United States and offers a range of
telecommunications services. The Company currently has operations in Illinois,
Los Angeles, San Francisco, Michigan, New York, Pennsylvania, Washington and
Washington D.C. The Company competes with incumbent local exchange carriers
("ILECs") by providing high-quality, local telecommunications services,
primarily over fiber digital networks, to meet the voice and data transmission
needs of its customers. The Company's customers are principally
telecommunications-intensive businesses, other carriers, resellers and
internet service providers.

The Company incurred an accumulated deficit of $11,349,474, from May 31,
1996 (commencement of operations), through December 31, 1998. The Company must
recognize significant sales and obtain additional capital to adequately grow
its operations. Future profitability of the Company is dependent upon
continued market acceptance and the Company continuing to adequately provide
and maintain its services. Management believes that current financial
forecasts, marketing strategies and capital raising plans are adequate to
address these issues.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The 1997 and 1998 consolidated balance sheets include the accounts of the
Company and all wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.

Basis of Accounting

The accompanying consolidated financial statements have been prepared on
the accrual basis of accounting.

Use of Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Risks and Uncertainties

The Company recorded revenues and related accounts receivable of
approximately $1.7 million as of December 31, 1997, from another carrier who
was disputing this obligation to the Company. This dispute was ultimately
ruled on in favor of the Company by the Illinois Commerce Commission ("ICC")
in March, 1998, and by a federal court in July, 1998. During the fourth
quarter of 1998 the Company received substantially all of the disputed amount.

Concentration of Suppliers

The Company currently leases its transport capacity from a limited amount
of suppliers and is dependent upon the availability of fiber transmission
facilities owned by the suppliers. The Company is currently vulnerable to the
risk of renewing favorable supplier contracts, timeliness of the supplier in
processing the Company's orders for customers and is at risk to regulatory
agreements that govern the rates to be charged to the Company.

F-7
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Financial Instruments

The Company considers all liquid interest-earning investments with a
maturity of three months or less at the date of purchase to be cash
equivalents. Short-term investments primarily consist of debt securities,
which typically mature between three months and one year from the purchase
date and are held to maturity and valued at amortized cost, which approximates
fair value. The carrying value for current assets and current liabilities as
of December 31, 1997 and 1998, reasonably approximates fair value due to the
nature of the financial instrument and the short maturity of these items. Fair
value for the Company's long-term debt is based on market quotes, where
available or by discounting expected cash flows at the rates currently offered
to the Company for debt of the same remaining maturities. The fair value of
the Company's long-term debt is approximately $3,500,000 and $165,000,000 as
of December 31, 1997 and 1998, respectively.

Revenue Recognition

Revenue is recognized over the period in which the services are provided.
Monthly recurring charges include fees paid by customers for lines in service,
additional features on those lines and colocation space. These charges are
billed monthly, in advance, and are fully earned during the month. Usage
charges, initial, nonrecurring charges and reciprocal compensation charges are
billed in arrears and are fully earned when billed.

Depreciation and Amortization

Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets as follows:

<TABLE>
<CAPTION>
Asset Description Useful Life
----------------- --------------------------------------
<S> <C>
Buildings and improvements......... 20 years
Communications network............. 3-8 years
Computer equipment................. 3 years
Leasehold improvements............. Shorter of asset life or life of lease
Furniture and fixtures............. 2-5 years
Motor vehicles..................... 2-3 years
</TABLE>

When depreciable assets are replaced or retired, the amounts at which such
assets were carried are removed from the respective accounts and charged to
accumulated depreciation and any gains or losses on disposition is recorded
currently in the consolidated statements of operations.

Maintenance and repairs are charged to expense as incurred, while major
replacements and improvements are capitalized.

Impairment of Long-Lived Assets

The Company periodically assesses the recoverability of the carrying cost
of its long-lived assets based on a review of its projected undiscounted cash
flows related to the asset held for use. If assets are determined to be
impaired, then the asset is written down to its fair value based on the
present value of the discounted cash flows of the related asset or other
relevant measures (quoted market prices, third-party offers, etc.). Based on
its review, management does not believe that an impairment of the long-lived
assets has occurred.

Income Taxes

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," pursuant to which deferred income tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities, using enacted tax rates currently in effect.
State and local taxes may be based on factors other than income.

F-8
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Segment Information

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry approach" with the "management approach." The management approach
designates the internal reporting that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The adoption of SFAS No. 131 did not affect the Company's
results of operations or financial position but did affect the disclosure of
segment information (Note 13).

Stock-Based Compensation

The Company has chosen to account for all stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25,
the exercise price of the employee stock options equals the fair value of the
underlying stock on the date of grant and no compensation expense is recorded.
The Company has adopted the disclosure only provisions of the SFAS No. 123,
"Accounting for Stock-Based Compensation."

Accretion to Redemption Value of Class A Common Stock

Accretion to redemption value of redeemable Class A Common Stock represents
the change in the redemption value of all outstanding Class A Common Stock
allocable to each period. The redemption values for all Class A Common shares
are based on fair market value and accretion is calculated using the effective
interest method (Note 11).

Comprehensive Income

In June, 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 established reporting and
disclosure requirements for comprehensive income and its components within the
financial statements. Other than net loss applicable to Common stockholders,
the Company had no comprehensive income components for the period from May 31,
1996, to December 31, 1996, and for the years ended December 31, 1997 and
1998.

Accounting for Derivative Instruments and Hedging Activities

In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires that all derivatives be recognized at fair value as either assets
or liabilities. SFAS No. 133 also requires an entity that elects to apply
hedge accounting to establish the method to be used in assessing the
effectiveness of the hedging derivatives and the measurement approach for
determining the ineffectiveness of the hedge at the inception of the hedge.
The methods chosen must be consistent with the entity's approach to managing
risk. The standard is effective for the Company's 2000 fiscal year. The
Company will adopt SFAS No. 133 during 1999. Adoption of SFAS No. 133 is not
expected to have a material effect on the Company based on the Company not
currently using derivatives or participating in hedging activities.

Reclassifications

Certain prior-year amounts have been reclassified to conform to the fiscal
1998 presentation. These changes had no impact on the Company's previously
reported financial position or results of operations.

F-9
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. RELATED-PARTY RECEIVABLES

As part of the stock purchase agreement (Note 10), executive shareholders,
as defined, purchased their Class A Common shares with 90-day promissory
notes. The promissory notes are with recourse to each executive and have a
prepayment provision without penalty. The notes are secured by a pledge of all
Company Common Stock and other assets held by the executives. Interest accrues
on a daily basis at a rate equal to the applicable federal rate for
obligations of similar duration. These notes were paid in January 1998.

4. LONG-TERM DEBT

During September, 1997, the Company entered into a credit facility with a
bank which provides for, among other things, a committed equipment line of up
to a maximum principal amount of $6,000,000. In February, 1998, all amounts
outstanding on this credit facility were repaid and the credit facility was
terminated.

In February, 1998, the Company completed its offering of $270 million
stated principal amount at maturity of its 12.125% senior discount notes due
2008 (the "Notes"), which resulted in gross proceeds of $150,027,606. The
Notes bear interest at the rate of 12.125% per annum (computed on a semiannual
Note equivalent basis). In the period prior to February 15, 2003, interest
will accrue but will not be payable in cash. From February 15, 2003, interest
on the stated principal amount at maturity of the Notes will be payable in
cash semiannually on August 15 and February 15 of each year, beginning on
August 15, 2003.

The Notes are senior unsecured obligations of the Company ranking pari
passu in right of payment with all other existing and future senior
indebtedness of the Company, if any, and will rank senior in right of payment
to all existing and future subordinated indebtedness of the Company, if any.
Holders of secured indebtedness of the Company, however, will have claims that
are prior to the claims of the holders of the Notes with respect to the assets
securing such other indebtedness. The Notes will be effectively subordinated
to all existing and future indebtedness and other liabilities of the Company's
subsidiaries (including accounts payable).

The Notes are redeemable, at the Company's option, in whole or in part, at
any time or from time to time, on or after February 15, 2003, at 106.063% of
their stated principal amount at maturity, plus accrued and unpaid current
interest, declining ratably to 100% of their stated principal amount at
maturity, plus accrued and unpaid current interest, on or after February 15,
2006. In addition, at any time and from time to time, prior to February 15,
2001, the Company may redeem in the aggregate up to 35% of the original
aggregate stated principal amount at maturity of the Notes with the proceeds
from one or more public equity offerings following which there is a public
market, at a redemption price (expressed as a percentage of accreted value on
the redemption date) of 112.125%, plus additional interest, if any; provided
that at least 65% of the original aggregate stated principal amount at
maturity of the Notes remains outstanding after each such redemption.

The Notes indenture contains certain covenants which, among other things,
restrict the ability of the Company and certain of its subsidiaries to incur
additional indebtedness (and, in the case of certain subsidiaries, issue
preferred stock), pay dividends or make distributions in respect of the
Company's or such subsidiaries' capital stock, make other restricted payments,
enter into sale and leaseback transactions, incur liens, cause encumbrances or
restrictions to exist on the ability of certain subsidiaries to pay dividends
or make distributions in respect of their capital stock, issue and sell
capital stock of certain subsidiaries, enter into transactions with
affiliates, sell assets, or amalgamate, consolidate, merge or sell or
otherwise dispose of all or substantially all of their property and assets.
These covenants are subject to exceptions and qualifications. The Company is
in compliance with these covenants as of December 31, 1998.

In December, 1998, the Company obtained a secured equipment term loan (the
"Facility") from a third party with a maximum borrowing level of $25,000,000.
The Facility provides for, among other things, equipment drawdowns through
December 30, 1999, and requires repayment based on 60 equal monthly
installments of

F-10
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

principal and interest for each drawdown. All drawdowns under the Facility
bear interest at the five-year swap rate percent plus additional basis points,
as defined in the Facility. Total drawdowns of $19,192,809 were outstanding
under the Facility as of December 31, 1998. The Facility provides for certain
restrictive financial and nonfinancial covenants. Among other things, these
covenants require the maintenance of minimum cash flow and revenue levels. The
Company was in compliance with these covenants as of December 31, 1998.

Long-term debt at December 31, 1997 and 1998, consists of the following:

<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Credit facility with a bank, maximum borrowing
level at $6,000,000................................... $3,480,972 $ --
12.125% senior discount notes due 2008, net of
unamortized discount of $103,897,016.................. -- 166,102,984
Secured equipment term loan, maximum borrowing level at
$25,000,000........................................... -- 19,192,809
Capital leases on equipment with interest at
14.66%, $2,327 due monthly through April, 2000........ 55,914 --
---------- ------------
3,536,886 185,295,793
Less--Current maturities............................... 943,621 2,887,036
---------- ------------
$2,593,265 $182,408,757
========== ============
</TABLE>

Aggregate maturities of long-term debt outstanding as of December 31, 1998,
is as follows:

<TABLE>
<S> <C>
1999......................................................... $ 2,887,036
2000......................................................... 3,442,991
2001......................................................... 3,777,502
2002......................................................... 4,143,053
2003......................................................... 4,544,309
Thereafter................................................... 166,500,902
------------
Total.................................................... $185,295,793
============
</TABLE>

5. STOCK OPTIONS

The Company established the Focal Communications Corporation 1997 Non
Qualified Stock Option Plan (the "1997 Plan") effective February 27, 1997. The
1997 Plan is administered by the compensation committee of the Company's Board
of Directors (the "Board"). The Board has sole and complete authority to
select participants and grant options for the Company's Class A Common shares
which shall not exceed 5,260 shares, as defined in the plan. On August 21,
1998, the 1997 Plan was amended and the Board increased the number of shares
available for issuance under the 1997 Plan to up to 17,060.

The Company adopted the Focal Communications Corporation 1998 Equity and
Performance Incentive Plan (the "1998 Plan") on August 21, 1998. The Board has
sole and complete authority to select participants and grant options, and
other equity-based instruments for the Company's Class A Common shares. The
total number of shares authorized for issuance pursuant to the 1998 Plan shall
not exceed 11,500 shares, and is dependent upon, among other things, the
number of shares issued, or reserved for issuance, under the 1997 Plan prior
to the consummation of an initial public offering of Common Stock by the
Company.

On August 21, 1998, the Company also adopted the 1998 Equity Plan for Non-
Employee Directors of Focal Communications Corporation (the "1998 Non-Employee
Plan"). The Board has sole and complete authority to

F-11
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

select participants and grant options for the Company's Class A Common shares
which shall not exceed 300 shares, as defined in the 1998 Non-Employee Plan.

The total number of shares available under the amended 1997 Plan, the 1998
Plan and the 1998 Non-Employee Plan shall not exceed 17,060 shares.

Under the Company's stock option plans, the Board has complete discretion
in determining vesting periods and terms of each participant's options
granted. The options granted to participants under the Company's stock option
plans typically vest at 25% on the first-year anniversary from grant date and
vesting at 12.5% every six months for the remainder of vesting years. The term
of each option has a life of 10 years. In addition, the plans provide for
accelerated vesting upon certain events, as defined.

The following summarizes option activity:

<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Shares Prices Prices
------ ----------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1996................. -- $ -- $ --
Granted during 1997............................ 1,222 290-320 296.61
----- ----------- ---------
Outstanding at December 31, 1997................. 1,222 290-320 296.61
Granted during 1998............................ 6,110 335-1,500 1,229.16
Canceled during 1998........................... (142) 315-1,500 133.80
----- ----------- ---------
Outstanding at December 31, 1998................. 7,190 $290-$1,500 $1,090.06
===== =========== =========
</TABLE>

The following table summarizes information about fixed stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$290-$335 1,799 8.6 $ 311.01 569 $301
$1,050-$1,500 5,391 9.6 1,350.04 -- --
----- --- --------- --- ----
7,190 9.3 $1,090.06 569 $301
===== === ========= === ====
</TABLE>

The Company utilized the Black-Scholes option pricing model to estimate the
fair value of options at the date of grant during 1997 and 1998. Had the
Company adopted SFAS No. 123, pro forma net loss applicable to Common
stockholders and pro forma basic and diluted net loss per share of Common
Stock would have been approximately $(3,010,434) and $(35.68) and $(8,602,554)
and $(98.29) for the years ended December 31, 1997 and 1998, respectively. The
pro forma disclosure is not likely to be indicative of pro forma results which
may be expected in future years because of the fact that options vest over
several years, compensation expense is recognized over the vesting period and
additional awards may also be granted.

The Black-Scholes option model estimated the weighted average fair value at
the date of grant of options granted in 1997 and 1998 to be approximately $167
and $1,114 per option, respectively. The remaining contractual life of all
options was approximately 9 years. Principal assumptions used in applying the
Black-Scholes model were as follows:

<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Risk-free interest rates............................ 5.6%-6.7% 4.4%-5.6%
Expected life....................................... 5 years 5 years
Expected volatility................................. 41.67% 142.03%
Expected dividend yield............................. -- --
========= =========
</TABLE>

F-12
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. INCOME TAXES

There is no current or deferred tax expense for the period from May 31,
1996 (commencement of operations), to December 31, 1996, and for the year
ended December 31, 1997. Valuation allowances were provided which offset the
tax benefits recorded as deferred tax assets relating primarily to operating
loss carryforwards. The state and local taxes, net of the federal tax benefit,
and the change in valuation allowances are the only differences between the
U.S. federal statutory tax rate and the Company's effective tax rate for these
periods.

For the year ended December 31, 1998, the Company recorded an income tax
provision of $4,660,000. Even though the Company is reporting a loss before
income taxes, the Company has a positive taxable income and is paying income
taxes. This is primarily the result of the nondeductibility, for tax purposes,
of the interest accrued on the Company's 12.125% discount Notes. This interest
expense is subject to the high yield discount obligation ("HYDO") rules which
limits the amount of original issue discount ("OID") which can be deducted in
the current taxable period. This interest will become deductible for tax
purposes in the period in which the Notes are redeemed or when the interest is
paid. The deferred tax consequences related to the interest accrued and other
temporary differences in reporting items for financial statement and income
tax purposes are recognized, if appropriate. Realization of future tax
benefits related to the deferred tax assets is dependent on many factors,
including the Company's ability to generate taxable income. Management has
considered these factors and has concluded that a full valuation allowance for
financial reporting purposes is required for the deferred tax assets.

The income tax provision for the year ended December 31, 1998, consists of
the following:

<TABLE>
<S> <C>
Current taxes--
U.S. federal................................................. $4,100,000
State and local.............................................. 560,000
----------
4,660,000
----------
Deferred taxes--
U.S. federal................................................. --
State and local.............................................. --
----------
--
----------
Income tax provision....................................... $4,660,000
==========
</TABLE>
U.S. income tax benefit at the statutory tax rate is reconciled below to
the Company's overall provision for income taxes for the year ended December
31, 1998:

<TABLE>
<S> <C>
Tax at U.S. federal income tax rate......................... $(1,125,000)
State and local taxes, net of U.S. federal tax benefit...... 560,000
Noncash compensation expense................................ 1,044,000
Change in valuation allowance............................... 4,005,000
Other....................................................... 176,000
-----------
Provision for income taxes.............................. $ 4,660,000
===========
</TABLE>

F-13
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The income tax effect of temporary differences comprising the net deferred
tax assets and tax liabilities as of December 31, 1997 and 1998, consists of
the following:

<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Deferred income tax liabilities--
Depreciation................................... $(227,000) $(2,331,000)
Deferred income tax assets--
Net operating loss carryforwards............... 724,000 --
Interest on 12.125% discount notes............. -- 6,432,000
Allowance for doubtful accounts................ 17,500 476,000
Employment related accruals.................... 187,500 130,000
--------- -----------
929,000 7,038,000
Less--Valuation allowance........................ (702,000) (4,707,000)
--------- -----------
Net deferred tax assets...................... $ -- $ --
========= ===========
</TABLE>

The Company has an alternative minimum tax ("AMT") credit carryforward as
of December 31, 1998, of approximately $320,000 for tax purposes to offset the
Company's future regular federal income tax liability. The AMT benefit has not
been recorded as an asset due to the uncertainty of its realization. The AMT
credit does not expire.

7. LOSS PER SHARE

SFAS No. 128, "Earnings Per Share," requires the Company to calculate its
earnings per share based on basic and diluted earnings per share, as defined.
Basic and diluted loss per share for the period from May 31, 1996
(commencement of operations), to December 31, 1996, and for the years ended
December 31, 1997 and 1998, was computed by dividing net loss applicable to
Common stockholders by the weighted average number of shares of Common Stock
(Class A Common Stock and the vested Class B Common Stock).

The 14,711 Class C Common shares and the Company's 1,222 stock options
granted during 1997 are antidilutive and have been excluded from diluted loss
per share calculation for the year ended December 31, 1997. The Company's
7,190 stock options granted during 1997 and 1998 are antidilutive and have
been excluded from diluted loss per share calculation for the year ended
December 31, 1998.

8. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Plan (the "Plan") covering substantially all
eligible employees. Under the Plan, participants may make pretax contributions
from 1% to 15% of eligible earnings, as defined. The Company may elect to
contribute to the Plan at its discretion. There have been no Company
contributions to the Plan for the period from May 31, 1996, to December 31,
1996, and for the year ended December 31, 1997. In February, 1998, the Company
elected to match 30% of the first 10% that an employee contributes to the
Plan. The Company's matching contributions totaled approximately $145,000 for
the year ended December 31, 1998.

9. COMMITMENTS AND CONTINGENCIES

Under the terms of various short- and long-term contracts, the Company is
obligated to pay office rents and rent for leasing fiber transmission
facilities. The Company is obligated to pay office rents with its operations
through 2012. The office rent contracts provide for certain scheduled
increases and for possible escalation of basic rentals based on a change in
the cost of living or on other factors. The Company expects to enter into
other contracts for additional office space, other facilities, equipment and
maintenance services in the future. A summary of such fixed commitments at
December 31, 1998, is as follows:

F-14
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
1999.......................................................... $ 3,388,548
2000.......................................................... 3,667,922
2001.......................................................... 3,614,522
2002.......................................................... 3,721,598
2003.......................................................... 3,787,627
Thereafter.................................................... 20,438,214
-----------
Total..................................................... $38,618,431
===========
</TABLE>

Rent expense under operating leases for office rent and rent for leasing
fiber transmission facilities was approximately $6,488, $651,159 and
$1,522,499, respectively, for the period from May 31, 1996, to December 31,
1996, and for the years ended December 31, 1997 and 1998.

In the ordinary course of business, the Company is involved in various
regulatory matters (Note 2), proceedings and claims. In the opinion of the
Company's management, the outcome of such proceedings will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.

10. STOCK PURCHASE AGREEMENT

On November 27, 1996, the Company entered into a Stock Purchase Agreement
(the "Agreement") with Institutional Investors and Executives ("Investors"),
as defined. The Agreement resulted in 79,384 shares of Class A Common Stock,
par value $.01 per share being issued for an aggregate purchase price of $4
million, and subsequent transactions in which Investors were required to make
pro rata contributions to the capital of the Company (with no additional
shares being issued) of up to an additional $21.8 million (total investment of
up to $25.8 million). Total capital contributions to the Company for the
issuance of Class A Common were $4,025,000, $8,275,000 and $13,900,000,
respectively, for the period from May 31, 1996, to December 31, 1996, and for
the years ended December 31, 1997 and 1998, respectively.

Subsequent to the closing of the Agreement, the Company sold 77 shares and
846 shares of Class A Common shares to Designees (as defined in the Agreement)
of the Institutional Investors, for a total purchase price of $25,000 and
$275,000, for the period from May 31, 1996, to December 31, 1996, and for the
years ended December 31, 1997, respectively.

As part of the Agreement, the existing Common Stock held by the Executives
was converted into newly issued Class B Common and Class C Common shares (the
"Exchange"). The closing of the Exchange and issuance of Class B Common and
Class C Common shares took place simultaneously with the initial closing of
the issuance of Class A Common shares under the Agreement. In connection with
this transaction, compensation expense totaling approximately $5.2 million
will be charged to income over the vesting period of the Class B Common shares
issued that did not vest immediately. Total compensation expense of $108,333,
$1,300,000 and $1,300,000 was recorded for the period from May 31, 1996, to
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively.

The Company amended certain vesting agreements of the Executives and
Institutional Investors on September 30, 1998, which effected the cancellation
of 12,711 shares of the Company's Class C Common Stock then outstanding,
cancellation of 5,000 shares of the Company's Class A Common Stock held by
certain institutional shareholders and the conversion of 2,000 shares of the
Company's Class C Common Stock into Class B Common Stock. The new converted
Class B Common Stock is subject to certain restrictions, and was issued to the
Company's executives (founding shareholders) in satisfaction of the
obligations of the Company and such shareholders set forth in certain vesting
agreements as defined in the Agreement. In connection with such transactions,
compensation expense totaling approximately $4 million will be charged to
income over the

F-15
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

vesting period of the restricted Class B Common shares issued. Total
compensation expense of $1,769,553 was recorded during 1998 relating to this
matter. A summary of the Company's Class A, B and C Common Stock is as
follows:

Class A Common--A total of 85,567 shares have been authorized and 80,307
and 75,374 are issued and outstanding as of December 31, 1997 and 1998,
respectively. Institutional Investors, as defined, who hold Class A Common
shares had the right to put the shares to the Company at fair market value but
the Agreement was amended and the put right was replaced by a provision which
would require the Company to voluntarily liquidate (Note 11). The Class A
Common Stock held by Institutional Investors have demand registration rights;
all Class A Common stockholders have voting rights, piggyback registration
rights, participate in earnings and dividends and other preference features,
as defined.

Class B Common--A total of 35,000 shares have been authorized and 20,000
and 22,000 shares are issued and outstanding as of December 31, 1997 and 1998,
respectively. Class B Common stockholders have demand registration rights,
voting rights, piggyback registration rights, participate in earnings and
dividends and other preference features, as defined. The Class B Common issued
upon the Exchange will vest 20% on the closing of the Agreement and 20% on
each of the four anniversaries of the closing date of the Agreement.
Accelerated vesting will occur on the dates of certain (as defined) events:
(a) qualified sale of the Company; (b) qualified reorganization; and (c)
public offering of the Company's stock. For the Class B Common converted from
Class C Common, the Restricted Stock Agreement ("RSA") provides, among other
things, vesting of 20% at the closing of the RSA (September 30, 1998), 10%,
15%, 20% and 35% on each of the consecutive anniversaries of the closing of
the RSA, respectively, with immediate vesting upon a Change in Control, as
defined in the RSA.

Class C Common--A total of 15,000 shares have been authorized and 14,711
and 0 shares are issued and outstanding as of December 31, 1997 and 1998,
respectively. The Company amended certain vesting agreements of the Executives
and Institutional Investors on September 30, 1998, which effected the
cancellation of 12,711 shares of the Company's Class C Common Stock then
outstanding and the conversion of 2,000 shares of the Company's Class C Common
Stock into Class B Common Stock.

11. REDEEMABLE COMMON STOCK

As defined in the Agreement (Note 10), Institutional Investors which hold
an aggregate of 78,461 shares of Class A Common shares had the right to put
the shares to the Company on or after November 27, 2003, at the greater of the
initial purchase price per share of Class A Common owned by the Institutional
Investors or fair market value, as defined in the Agreement. On January 23,
1998, the Agreement was amended and the aforementioned put right was replaced
by a provision which would allow the Class A Common Institutional Investors,
Executive Investors and Designees of Institutional Investors, as defined, to
require the Company to voluntarily liquidate. The Institutional Investors at
any time and from time to time on or after November 27, 2003, but not after
the consummation of a public offering, shall have the right to require the
Company to voluntarily liquidate the assets of the Company. Upon receipt of
notice of the required liquidation, the Company may elect to purchase all but
not less than all of the Institutional Investors' Class A Common shares.

Although management had not obtained an appraisal of the fair market value
of the Company during 1997, certain public equity transactions have occurred
within the industry upon which management has based its estimate on the
potential redemption value of the aforementioned shares to be $333 per share
as of December 31, 1997. The Company recorded accretion totaling $0 and
$103,565 for the period from May 31, 1996, to December 31, 1996, and for the
year ended December 31, 1997.

F-16
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest and non-cash investing and financing activities for
the period from May 31, 1996 (commencement of operations), to December 31,
1996, and for the years ended December 31, 1997 and 1998, was as follows:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash paid during the year for interest.............. $ -- $ 94,533 $ 69,079
Fixed assets acquired under capital leases.......... $ -- $ 68,589 $ --
Payments made under capital leases.................. $ -- $ 12,675 $ 51,908
Accretion to redemption value of Class A Common
Stock.............................................. $ -- $103,565 $ --
Cash paid for income taxes.......................... $ -- $ -- $605,000
</TABLE>

13. SEGMENT INFORMATION

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company is organized primarily on
the basis of strategic geographic operating segments that provide
telecommunications services in each respective geographic region. The Company
has eight strategic geographic operating segments as of December 31, 1998. The
eight operating segments have been aggregated into one reportable segment,
"Telecommunications Services," for the year and as of December 31, 1998. The
Company has two strategic geographic operating segments as of December 31,
1997, and they have been aggregated into one reportable segment,
"Telecommunications Services," for the year and as of December 31, 1997. For
the period from May 31, 1996, to December 31, 1996, the Company did not
separately track its only geographic operating segment from its corporate
operations, and it is not practicable to restate its results by operating
segment for that period.

The accounting policies of the segments are the same as those described in
the "Summary of Significant Accounting Policies." The Company's chief
operating decision maker views earnings before interest, taxes, depreciation
and amortization ("EBITDA") as the primary measure of profit and loss. The
following represents information about revenues and EBITDA which excludes non-
cash compensation, total assets and capital expenditures for the
Telecommunications Services reportable segment as of and for the years ended
December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Revenues......................................... $ 4,023,690 $43,531,846
EBITDA........................................... (986,815) 15,161,031
Total assets..................................... 13,006,600 73,436,768
Capital expenditures............................. 11,655,524 64,229,247
=========== ===========
</TABLE>

The following reconciles total segment EBITDA to consolidated net loss
before income taxes for the years ended December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Total EBITDA for reportable segment........... $ (986,815) $ 15,161,031
Corporate EBITDA.............................. (31,847) 876,353
Depreciation and amortization................. (615,817) (6,670,986)
Interest expense.............................. (128,070) (16,134,373)
Interest income............................... 195,696 6,528,541
Noncash compensation.......................... (1,300,000) (3,069,553)
----------- ------------
Net loss before income taxes.............. $(2,866,853) $ (3,308,987)
=========== ============
</TABLE>

F-17
<PAGE>

FOCAL COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following reconciles segment total assets to consolidated total assets
as of December 31, 1997 and 1998:

<TABLE>
<CAPTION>
1997 1998
----------- ------------
<S> <C> <C>
Total assets for reportable segment............. $13,006,600 $ 73,436,768
Cash and short-term investments................. 2,037,861 133,307,515
Other current assets............................ 41,864 1,125,124
Fixed assets, net............................... 828,257 6,740,979
Other noncurrent assets......................... -- 4,963,894
----------- ------------
Total consolidated assets................... $15,914,582 $219,574,280
=========== ============
</TABLE>

The Company currently only operates in the United States. Revenues by major
customer for the years ended December 31, 1997 and 1998, are as follows:

<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Revenues from major customer A.................... $3,266,853 $25,747,481
Revenues from major customer B.................... -- 6,735,663
</TABLE>

14. SELECTED QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
1st
Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997--
Revenues.................. $ -- $ 86,908 $ 1,226,076 $ 2,710,706
Loss from operations...... (757,521) (1,145,689) (786,384) (244,885)
Net loss applicable to
Common stockholders...... (740,492) (1,119,257) (791,445) (319,224)
========== =========== =========== ===========
Basic and diluted net loss
per share................ $ (8.87) $ (13.34) $ (9.39) $ (3.72)
========== =========== =========== ===========
1998--
Revenues.................. $5,102,448 $ 8,078,043 $12,755,293 $17,596,062
Income from operations.... 752,059 1,886,430 418,968 3,239,388
Net loss applicable to
Common stockholders...... (341,191) (583,399) (4,653,717) (2,390,680)
========== =========== =========== ===========
Basic and diluted net loss
per share................ $ (3.86) $ (6.61) $ (52.73) $ (28.04)
========== =========== =========== ===========
</TABLE>

The Company's net loss applicable to Common stockholders and basic and
diluted net loss per share increased significantly in the third quarter of
1998 from the second quarter of 1998 due primarily to the immediate
recognition of approximately $1,697,000 of non-cash compensation resulting
from the amendment of certain vesting agreements (Note 10). Additionally, the
Company determined that it would become liable for income taxes in the third
quarter, and a tax provision of approximately $2,197,000 was recorded.

15. SUBSEQUENT EVENT

On January 6, 1999, the Company entered into a Purchase Agreement (the
"Agreement") to acquire network assets and associated infrastructure from
Level 3 Communications for $7.7 million, as defined in the Agreement

F-18
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Focal Communications Corporation:

We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of Focal Communications Corporation and
its Subsidiaries included in this annual report and issued our report thereon
dated January 22, 1999. Our audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule of
Valuation and Qualifying Accounts, is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

Arthur Andersen LLP

Chicago, Illinois
January 22, 1999

F-19
<PAGE>

Schedule II

FOCAL COMMUNICATIONS CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance
at the
Beginning Charged to Charged Balance at
of the Cost and to other the End of
Accounts Period Expense Accounts Deductions the Period
- -------- --------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1996:
Allowance for Doubtful
Accounts................ $ -- $ -- $-- $ -- $ --
1997:
Allowance for Doubtful
Accounts................ $ -- $ 469,000 $-- $ -- $ 469,000
1998:
Allowance for Doubtful
Accounts................ $469,000 $1,348,000 $-- $628,000 $1,189,000
</TABLE>

F-20

<PAGE>

Exhibit 4.16

AMENDMENT NO.3 TO
STOCKHOLDERS AGREEMENT, WAIVER AND CONSENT
------------------------------------------

This Amendment No. 3 to Stockholders Agreement and Consent (this
"Amendment") is entered into as of this 16th day of February, 1999, among Focal
Communications Corporation, a Delaware corporation (the "Company") and the
stockholders listed on the signature page hereof (the "Stockholders").
Capitalized terms not otherwise defined in this Agreement are used herein with
the meanings assigned to such terms in the Stock Purchase Agreement, dated
November 27, 1996, by and among the Company and the other parties thereto (as
amended, the "Stock Purchase Agreement").

WHEREAS, the Company and the Stockholders wish to amend the provisions of
the Stockholders Agreement, dated November 27, 1996, by and among the Company
and the other parties thereto (as amended, the "Stockholders Agreement") as
provided in paragraph 1 of this Amendment;

WHEREAS, the Stockholders collectively own all of the Institutional
Investor Stock and at least a majority of the Executive Stock; and

WHEREAS, the Stockholders wish to consent to the amendment (as provided in
paragraph 1 of this Amendment) for purposes of the Stock Purchase Agreement and
to waive certain rights they have with respect to related actions;

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties to this Amendment
hereby agree as follows:

1. Amendment to Stockholders Agreement. Pursuant to Section 9 of the
-----------------------------------
Stockholders Agreement:

(a) Section 1(a)(i) of the Stockholders Agreement is hereby amended
and restated to read as follows:

"(i) The authorized number of directors on the Board shall be
established at and remain at eight directors."

(b) Section 1(a)(ii)(E) of the Stockholders Agreement is hereby
amended and restated to read as follows:

"(E) two representatives (the "Outside Directors") designated by
holders of a majority of the outstanding shares of Institutional
Investor Stock and reasonably acceptable to holders of a majority
of the outstanding shares of Management Stock, provided that each
of the representatives

<PAGE>

is not a member of the Company's management or an employee or
officer of the Company or any of its Subsidiaries.

(c) All references in the Stockholders Agreement to "Outside
Director" shall hereafter be deemed to refer to "Outside
Directors."

2. Acknowledgment. The parties to this Amendment hereby acknowledge
--------------
that, as of the date of this Amendment, Paul G. Yovovich and John A. Edwardson
constitute the "Outside Directors" as defined above.

3. Consent. For all purposes of the Stock Purchase Agreement (including,
-------
without limitation, Sections 4C(iii), 4C(xii) and 4E thereof), each of the
Stockholders consents to:

a. the amendments set forth in paragraph 1 of this Amendment;

b. the issuance of up to 300 shares of the Company's Class A Common
Stock for $1,576.00 per share (the "Share Issuance");

c. the grant of a stock option (the "Option") to John A. Edwardson
covering 130,000 option units or 260 shares of the Company's
--------------------------------
Class A Common Stock at an exercise price of $ 3.15
--------------
per unit (the "Option Grant").

4. Waiver. On behalf of all holders of Investor Stock, the Stockholders
------
hereby waive any and all rights of holders of Investor Stock under Section 4J of
the Stock Purchase Agreement arising from (i) the Share Issuance, and (ii) the
Option Grant, and (iii) issuance by the Company of any shares of the Company's
capital stock pursuant to any exercise of the Option in accordance with its
terms.

5. Counterparts. This Amendment may be executed in multiple
------------
counterparts, each of which shall be an original and all of which taken together
shall constitute one and the same agreement.

6. Descriptive Headings. The descriptive headings of this Amendment are
--------------------
inserted for convenience only and do not constitute a part of this Amendment.

IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first above written.

2
<PAGE>

/s/ Brian F. Addy
- ------------------------------------
Brian F. Addy

/s/ Joseph A. Beatty
- ------------------------------------
Joseph A. Beatty

/s/ John R. Barnicle
- ------------------------------------
John R. Barnicle

/s/ Robert C. Taylor, Jr.
- ------------------------------------
Robert C. Taylor, Jr.

AD-VENTURE
CAPITAL PARTNERS, L.P.

By: /s/ Brian F. Addy
--------------------------------
Brian F. Addy

MISTRAL PARTNERS, L.P.

By: /s/ Robert C. Taylor, Jr
-------------------------------
Robert C. Taylor, Jr.

JRB PARTNERS, L.P.

By: /s/ John R. Barnicle
-------------------------------
John R. Barnicle

COVENTRY COURT PARNERS, L.P.

By: /s/ Joseph A. Beatty
-------------------------------
Joseph A. Beatty

FOCAL COMMUNICATIONS CORPORATION

By: /s/ Robert C. Taylor, Jr.
-------------------------------

MADISON DEARBORN
CAPITAL PARTNERS, L.P.

By: /s/ James N. Perry, Jr.
-------------------------------

Its:_______________________________

FRONTENAC VI, L.P.

By: /s/ James E. Crawford, III
-------------------------------

Its:_______________________________

BATTERY VENTURES III, L.P.

By: /s/ Richard D. Frisbie
-------------------------------

Its:_______________________________

<PAGE>

Exhibit 10.17

LOAN AND SECURITY AGREEMENT
---------------------------

This LOAN AND SECURITY AGREEMENT ("Agreement"), is dated as of December
___, 1998 (the "Closing Date"), by and between the following parties:

LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation with
offices at 501 Corporate Centre Drive, Franklin,
Tennessee 37067 ("Lender")

BORROWER/DEBTOR: FOCAL COMMUNICATIONS CORPORATION, a Delaware
corporation with its principal place of business at 200
North LaSalle Street, Chicago, Illinois 60601
("Borrower")

This Loan and Security Agreement includes the general terms and conditions
contained herein and all the exhibits and schedules attached hereto, all of
which are incorporated herein. In the event of a conflict between the general
terms and conditions and any schedule, the additional terms and conditions
stated in the schedule shall control.

By executing this Loan and Security Agreement, Lender agrees to make loans to
Borrower, and Borrower agrees to borrow from Lender and to provide collateral to
secure such loans, all on the terms and conditions set forth herein.

IN WITNESS WHEREOF, the parties have executed this Loan and Security Agreement
by their duly authorized representatives:

LENDER: BORROWER:
- ------ --------

NTFC CAPITAL CORPORATION FOCAL COMMUNICATIONS CORPORATION

BY: /s/ L.W. MIDDLETON BY: /s/ JOSEPH A. BEATTY
--------------------- ---------------------------
TITLE: Vice President TITLE: Executive V.P./CFO
----------------- -----------------------
DATE: 12/30/98 DATE: 12/30/98
----------------- -----------------------

<PAGE>

LOAN AND SECURITY AGREEMENT
---------------------------

This LOAN AND SECURITY AGREEMENT ("Agreement"), is dated as of December___,
1998 (the "Closing Date"), by and between the following parties:

LENDER/SECURED PARTY: NTFC CAPITAL CORPORATION, a Delaware corporation with
offices at 501 Corporate Centre Drive, Franklin,
Tennessee 37067 ("Lender")

BORROWER/DEBTOR: FOCAL COMMUNICATIONS CORPORATION, a Delaware
corporation with its principal place of business at
200 North LaSalle Street, Chicago, Illinois 60601
("Borrower")

By executing this Loan and Security Agreement, Lender agrees to make loans, to
Borrower, and Borrower agrees to borrow from Lender and to provide collateral to
secure such loans, all on the terms and conditions set forth herein.

IN WITNESS WHEREOF, the parties have executed this Loan and Security Agreement
by their duly authorized representatives:

LENDER: BORROWER:
- ------ --------

NTFC CAPITAL CORPORATION FOCAL COMMUNICATIONS CORPORATION

BY:_____________________ BY:_____________________________

TITLE:__________________ TITLE:__________________________

DATE:___________________ DATE:___________________________

<PAGE>

TABLE OF CONTENTS
-----------------
Page
----
ARTICLE 1: DEFINITIONS...................................................... 1
1.01. Certain Definitions............................................. 1
1.02. Accounting Principles; Subsidiaries............................. 9
1.03. UCC Terms....................................................... 9
1.04. General Construction; Captions.................................. 10
1.05. References to Documents and Laws................................ 10

ARTICLE 2: LOANS............................................................ 10
2.01. Commitment...................................................... 10
2.02. Note and Payment Terms.......................................... 10
2.03. Procedures for Borrowing........................................ 12
2.04. Prepayments..................................................... 13
2.05. Computation of Interest......................................... 14
2.06. Payments........................................................ 14
2.07. Indemnity....................................................... 14
2.08. Use of Proceeds................................................. 14
2.09. Fees............................................................ 14
2.10. Lender's Expenses............................................... 15

ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT................................ 15
3.01. Grant of Security Interest...................................... 15
3.02. Priority of Security Interests.................................. 16
3.03. Further Documentation; Pledge of Instruments.................... 16
3.04. Further Identification of Collateral............................ 17
3.05. Remedies........................................................ 17
3.06. Standard of Care................................................ 17
3.07. Advances to Protect Collateral.................................. 17
3.08. License to Use.................................................. 17
3.09. Subsidiary Guaranties........................................... 17

ARTICLE 4: REPRESENTATIONS AND WARRANTIES................................... 18
4.01. Organization and Qualification.................................. 18
4.02. Authority and Authorization..................................... 18
4.03. Execution and Binding Effect.................................... 18
4.04. Governmental Authorizations..................................... 18
4.05. Regulatory Authorizations....................................... 18
4.06. Material Agreement; Absence of Conflicts........................ 18
4.07. No Restrictions................................................. 19
4.08. Financial Statements............................................ 19
4.09. Financial Accounting Practices.................................. 19
4.10. Accurate and Complete Disclosure................................ 19
4.11. No Event of Default; Compliance with Material Agreements........ 20

i
<PAGE>

4.12. Litigation....................................................... 20
4.13. Rights to Property............................................... 20
4.14. Financial Condition.............................................. 20
4.15. Taxes............................................................ 20
4.16. No Material Adverse Change....................................... 20
4.17. No Regulatory Event.............................................. 20
4.18. Trade Relations.................................................. 21
4.19. No Brokerage Fees................................................ 21
4.20. Margin Stock; Regulation U....................................... 21
4.21. Investment Company; Public Utility Holding Company............... 21
4.22. Personal Holding Company; Subchapter S........................... 21
4.23. ERISA............................................................ 21
4.24. Environmental Warranties......................................... 22
4.25. Security Interests............................................... 22
4.26. Place of Business................................................ 22
4.27. Location of Collateral........................................... 22
4.28. Clear Title To Collateral........................................ 22
4.29. Assumed Names.................................................... 22
4.30. Transactions with Affiliates..................................... 22
4.31. Nortel and Vendor Purchase Agreement............................. 22

ARTICLE 5: CONDITIONS OF CLOSING............................................. 23
5.01. Borrower's Certificate........................................... 23
5.02. Opinions of Counsel.............................................. 23
5.03. Closing Documents................................................ 23

ARTICLE 6: CONDITIONS OF LENDING............................................. 24
6.01. Conditions for Initial Advance................................... 24
6.02. Conditions for All Advances...................................... 24
6.03. Affirmation of Representations and Warranties.................... 26
6.04. Deadline for Funding Conditions.................................. 26

ARTICLE 7: AFFIRMATIVE COVENANTS............................................. 26
7.01. Reporting and Information Requirements........................... 26
7.02. Other Notices.................................................... 27
7.03. Notice of Pension-Related Events................................. 28
7.04. Inspection Rights................................................ 28
7.05. Preservation of Corporate Existence and Qualification............ 29
7.06. Continuation of Business......................................... 29
7.07. Insurance........................................................ 29
7.08. Payment of Taxes, Charges, Claims and Current Liabilities........ 30
7.09. Financial Accounting Practices................................... 31
7.10. Compliance with Laws............................................. 31
7.11. Use of Proceeds.................................................. 31
7.12. Government Authorizations; Regulatory Authorizations, Etc........ 31
7.13. Contracts and Franchises......................................... 32
7.14. Consents......................................................... 32

ii
<PAGE>

7.15. Financial Covenants.............................................. 32
7.16. Construction and Storage......................................... 32
7.17. Upgrade Equipment................................................ 32

ARTICLE 8: NEGATIVE COVENANTS................................................ 32
8.01. Additional Indebtedness.......................................... 33
8.02. Restrictions on Liens and Sale of Collateral..................... 33
8.03. Limitation on Contingent Obligations............................. 33
8.04. Prohibition of Mergers, Acquisitions,
Name, Office or Business Changes................................ 33
8.05. Limitation on Equity Payments.................................... 34
8.06. Limitation on Investments, Advances and Loans.................... 34
8.07. Capital Expenditures............................................. 35
8.08. Limitation on Leases............................................. 35
8.09. Termination of Nortel Purchase Agreement......................... 35
8.10. Removal of Collateral............................................ 35
8.11. Assumed Names.................................................... 35

ARTICLE 9: EVENTS OF DEFAULT................................................. 35
9.01. Events of Default................................................ 35
9.02. Consequences of an Event of Default.............................. 38
9.03. Exercise of Rights............................................... 38
9.04. Rights of Secured Party.......................................... 38
9.05. Notices, Etc. Waived............................................. 39
9.06. Additional Remedies.............................................. 39
9.07. Application of Proceeds.......................................... 40
9.08. Discontinuance of Proceedings.................................... 40
9.09. Power of Attorney................................................ 40
9.10. Regulatory Matters............................................... 41

ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS................................. 41
10.01. Modifications and Waivers....................................... 41
10.02. Advances Not Implied Waivers.................................... 42
10.03. Deviation from Covenants........................................ 42
10.04. Holidays........................................................ 42
10.05. Records......................................................... 42
10.06. Notices......................................................... 43
10.07. FCC and PUC Approval............................................ 43
10.08. Lender Sole Beneficiary......................................... 43
10.09. Lender's Review of Information.................................. 44
10.10. No Joint Venture................................................ 44
10.11. Severability.................................................... 44
10.12. Rights Cumulative............................................... 44
10.13. Duration; Survival.............................................. 44
10.14. Governing Law................................................... 44
10.15. Counterparts.................................................... 45
10.16. Successors and Assigns.......................................... 45
10.17. Participation................................................... 45

iii
<PAGE>

10.18. Time of Essence................................................. 45
10.19. Disclosures and Confidentiality................................. 45
10.20. Jurisdiction and Venue.......................................... 47
10.21. Jury Waiver..................................................... 47
10.22. Limitation on Liability......................................... 48
10.23. Borrower Waivers................................................ 48
10.24. Schedules....................................................... 48
10.25. Agreement to Govern............................................. 48
10.26. Entire Agreement................................................ 48

iv
<PAGE>

SCHEDULES TO LOAN AND SECURITY AGREEMENT
----------------------------------------

Schedule 1 Borrower Information
Schedule 1.01(a) Subsidiary Execution Page(s)
Schedule 1.01(b) Subsidiary Information
Schedule 2.01 Maximum Loan Amount
Schedule 2.02 Payment Terms and Governing Law
Schedule 2.09 Fees
Schedule 4.04 Required Consents
Schedule 4.05 Regulatory Authorizations
Schedule 4.07 Restrictions on Loans
Schedule 4.08 Financial Statements
Schedule 4.12 Pending Litigation
Schedule 4.25 UCC Filing Offices
Schedule 4.26 Principal Offices and Location of Collateral
Schedule 4.29 Assumed Names
Schedule 4.31 Nortel Purchase Agreement
Schedule 6.02 Post-Closing Items
Schedule 7.07 Insurance/Certificate
Schedule 7.16 Financial Covenants
Schedule 8.02 Permitted Specific Encumbrances
Schedule 8.06 Permitted Equity Payments

EXHIBITS TO LOAN AND SECURITY AGREEMENT
---------------------------------------

Exhibit A Form of Note
Exhibit B Form of Borrowing Certificate
Exhibit C Form of Opinion of Counsel for Borrower
Exhibit D Form of Opinion of Regulatory Counsel for Borrower
Exhibit E Form of Landlord's Consent
Exhibit F Form of Mortgagee's Consent
Exhibit G Form of Guaranty
<PAGE>

LOAN AND SECURITY AGREEMENT
---------------------------

THIS LOAN AND SECURITY AGREEMENT ("Agreement") is dated as of the "Closing
Date" set forth on Schedule 2.02 hereto, by and between the entity or entities
described on Schedule 1 hereto (collectively, "Borrower") and NTFC CAPITAL
CORPORATION, a Delaware corporation ("Lender"), with offices at 501 Corporate
Centre Drive, Franklin, Tennessee 37067.

B A C K G R O U N D:
-------------------

A. Borrower has entered into a certain purchase agreement with Northern
Telecom Inc., as described on Schedule 4.31 hereto, providing for Borrower's
purchase of certain telecommunications equipment and the license of associated
software, all as described therein, and has requested Lender to extend credit to
Borrower to finance such purchase and license, as described on Schedule 4.31
hereto, and to make credit available for the purchase of additional
telecommunications equipment, in each case as described herein.

B. Lender is willing to extend such credit to Borrower upon the terms and
conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and intending to be legally bound hereby, the parties
hereto agree as follows:

ARTICLE 1: DEFINITIONS
----------------------

1.01. Certain Definitions. Certain terms are defined on Schedule 2.02
hereto. In addition to other words and terms defined in the preamble hereof or
elsewhere in this Agreement, or on the Schedules hereto, the following words and
terms shall have the following meanings unless the context otherwise clearly
requires:

"Advance(s)": any advance or loan of funds made by Lender to Borrower
pursuant to this Agreement.

"Affiliate": as applied to any Person, any second Person directly or
indirectly controlling, controlled by, or under common control with that Person,
or related to such Person by blood, marriage or adoption. For purposes of this
definition and the definition of "Subsidiary", a Person shall be deemed to
control another Person if such first Person possesses, directly or indirectly,
the power to direct, or to cause the direction of, the management and policies
of such other Person, whether through ownership of voting securities, by
contract or otherwise. The "Affiliates" of Borrower shall also include the
Owners.

"Basic Agreements": a collective reference to this Agreement, the Note, and
the Security Documents.

"Borrowing Certificate": a certificate substantially in the form of Exhibit
B hereto.

"Borrowing Date": any Business Day on which an Advance is made to Borrower
<PAGE>

hereunder.

"Business Day": a day other than a Saturday, Sunday or other day on which
commercial banks in Nashville, Tennessee or Chicago, Illinois are authorized or
required by law to close.

"Calendar Quarter": each three month period starting on each January 1,
April 1, July 1, and October 1, during the term of this Agreement.

"Carrier": any interexchange carrier or other provider of
telecommunications long distance service, or local exchange company or other
provider of local telecommunications service.

"Cash": at any time, the cash, cash equivalents or marketable investment
grade securities held by Borrower free of any claims or encumbrances.

"Cash Flow": during any fiscal period of Borrower, EBITDA, less any Equity
Payments pursuant to Section 8.06 hereof or payments on Subordinated
Indebtedness made during such period.

"Change in Control": any "Change of Control" as defined in that certain
Indenture with respect to Borrower's 12.125% Senior Discount Notes Due 2008,
dated as of February 18,1998, by and between Borrower and Harris Trust and
Savings Bank.

"Closing Date": as defined on Schedule 2.02 hereto.

"Code": the Internal Revenue Code of 1986, as amended from time to time.

"Collateral": as defined in Section 3.01 hereof.

"Commitment": as defined in Section 2.01 hereof.

"Communications Law": any and all of (i) the Communications Act of 1934, as
amended and any similar or successor federal statute, and the rules and
regulations of the FCC thereunder, (ii) any state law governing the provision of
telecommunications services, and the rules and regulations of the PUC, all as
the same may be in effect from time to time.

"Consent": a consent to a collateral assignment of the NTI Purchase
Agreement, a consent to a collateral assignment of the Vendor Purchase
Agreement, a Landlord Consent, and/or a Mortgagee's Consent.

"Contingent Obligation": as to any Person, any obligation of such Person
guaranteeing, directly or indirectly, any Indebtedness, leases, dividends or
other obligations ("primary obligations") of any other Person (the "primary
obligor") in any manner, whether directly or

9
<PAGE>

indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or payment of any such primary obligation or
(ii) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (c) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (d) otherwise to assure or hold
harmless the owner of such primary obligation against loss in respect thereof.

"Debt Service": for any fiscal period of Borrower, the sum of all
principal and interest payments that Borrower is required to make during such
period on account of all of its Indebtedness including, without limitation, (a)
amounts due during such period on account of capitalized leases, (b) the then
current portion of any long-term Indebtedness, including any Subordinated
Indebtedness, (c) amounts due on short-term Indebtedness, and (d) amounts due
under this Agreement and the Note.

"Default": any of the conditions or occurrences specified in Section 9.01,
whether or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition has been satisfied.

"Default Rate": a rate of interest equal to the lesser of (i) three percent
(3%) over the Interest Rate, or (ii) the maximum permissible rate under
applicable law in effect at any time.

"EBITDA": for any fiscal period, Borrower's actual operating earnings from
ongoing operations and before interest, taxes, depreciation and amortization and
non-cash charges for such fiscal period.

"Environmental Law": any current or future federal, state and local law
(including common law), statute, regulation, ordinance, rulings, codes, judicial
order, administrative order or terms of licenses or permits applicable to
environmental conditions (including without limitation conditions relating to
ambient air, surface water, groundwater, land surface or subsurface strata),
including without limitation all such laws governing the employment, generation,
use, storage, disposal or transportation of toxic or hazardous substances or
wastes (including, without limitation, asbestos and petroleum products), the
Comprehensive Environmental Response, Compensation and Liability Act, the
Resource Conservation and Recovery Act, the Superfund Amendment and
Reauthorization Act of 1986, the Toxic Substances Control Act, the Clean Air
Act, the Water Pollution Control Act, the Hazardous Waste Management Act, the
Mineral Lands and Leasing Act, the Surface Mining Control and Reclamation Act,
U.S. Department of Transportation Regulations, and all similar state and local
laws, regulations, all as now or hereafter amended.

"ERISA": the Employee Retirement Income Security Act of 1974, as amended
from time

3
<PAGE>

to time, and any successor statute.

"Equipment": as defined in Section 3.01 hereof.

"Equity Payment": any distribution of earnings or capital to any Owner, or
any redemption of stock or other ownership interests, either directly or
indirectly, whether in cash or property or in obligations of Borrower.

"Event of Default": any of the events specified in Section 9.01 hereof,
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, under Section 9.01 or otherwise, has been
satisfied.

"FCC": the Federal Communications Commission of the United States of
America, and any successor, in whole or in part, to its jurisdiction.

"Financing Termination Date": as defined on Schedule 2.02 hereto.

"First Borrowing Date": the date of the first borrowing by Borrower
hereunder.

"Fixed Charges": for any fiscal period of Borrower, its Debt Service, plus
non-financed capital expenditures.

"GAAP": subject to Section 1.02 hereof, generally accepted accounting
principles in the United States of America (as such principles may change from
time to time) applied on a consistent basis (except for changes in application
in which Borrower's independent certified public accountants concur), applied
both to classification of items and amounts.

"General Intangibles": as defined in Section 3.01 hereof.

"Governmental Actions": actions by any Governmental Authority.

"Governmental Authority": the federal government, any state or political
subdivision thereof, any city or municipal entity, and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.

"Indebtedness": as to any Person, at a particular time, (a) indebtedness
for borrowed money or for the deferred purchase price of property or services in
respect of which such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which such Person otherwise assures a
creditor against loss, (b) obligations under leases which shall have been or
should be, in accordance with GAAP, recorded as capital leases in respect of
which obligations such Person is liable, contingently or otherwise, as obligor,
guarantor or otherwise, or in respect of which obligations such Person assures a
creditor against loss (c) obligations of such Person to purchase or repurchase
accounts receivable, chattel paper or other payment rights

4
<PAGE>

sold or assigned by such Person, and (d) indebtedness or obligations of such
Person under or with respect to letters of credit, notes, bonds or other debt
instruments.

"Initial Payment Date": as defined on Schedule 2.02 hereto.

"Interest Rate": as defined on Schedule 2.02 hereto.

"Landlord Consent": a consent substantially in the form of Exhibit E hereto
or in other form acceptable to Lender, to be executed by the owner/landlord,
sublessor and/or licensor (including carriers) of any real property where any of
the Collateral is to be located.

"Law": any law (including common law), constitution, statute, regulation,
rule, ordinance, order, injunction, writ, decree or award of any governmental
body or court of competent jurisdiction or of any arbitrator (including but not
limited to ERISA, the Code, the UCC, any applicable tax law, product safety law,
occupational safety or health law, Communications Law, Environmental Law and/or
securities laws).

"Lender's Expenses": as defined in Section 2.10 hereof.

"Lien": any mortgage, pledge, hypothecation, lien (statutory or other),
judgment lien, security interest, security agreement, charge or other
encumbrance, or other security arrangement of any nature whatsoever, including,
without limitation, any installment contract, conditional sale or other title
retention arrangement, any sale of accounts receivable or chattel paper, and any
assignment, deposit arrangement or lease intended as, or having the effect of,
security and the filing of any financing statement under the UCC or comparable
law of any jurisdiction.

"Loan": each of the loans and loan facilities described in Section 2.01
hereof and all Advances pursuant hereto.

"Loan Documents": a collective reference to this Agreement, the Note, the
Security Documents, and all other documents, instruments, agreements and
certificates evidencing or securing any advance hereunder or any obligation for
the payment or performance thereof and/or executed and delivered in connection
with any of the foregoing.

"Mandatory Prepayments": as defined in Section 2.04(b) hereof.

"Material Adverse Effect": or "Material Adverse Change": a material adverse
effect on, or material adverse change in, (i) the business, operations or
financial condition of Borrower, (ii) the ability of Borrower to perform its
obligations under this Loan Agreement, the Note, or the other Loan Documents, or
(iii) Lender's ability to enforce the rights and remedies granted under this
Agreement or the other Loan Documents, in all cases whether attributable to a
single circumstance or event or an aggregation of circumstances or events.

5
<PAGE>

"Mortgagee's Consent": a consent substantially in the form of Exhibit F
hereto, to be executed by any Person holding a lien on real property leased or
otherwise provided to Borrower, on which any of the Equipment is located.

"Maturity Date": the date defined on Schedule 2.02 hereto, on which all
principal, interest, premium if any, expenses, fees, penalties and other amounts
due under the Note shall be finally due and payable.

"Nortel": Northern Telecom Inc., a Delaware corporation.

"Nortel Equipment": the equipment and licensed or sub-licensed software
manufactured or supplied by Nortel to Borrower with respect to which Advances
hereunder are used directly or indirectly to finance the acquisition cost
thereof at any time pursuant to the Nortel Purchase Agreement or any purchase
order issued by Borrower to Nortel or otherwise, including installation and
construction services provided by Nortel pursuant thereto.

"Nortel Purchase Agreement": the Nortel Purchase Agreement identified on
Schedule 4.31 hereto, together with any amendments or supplements thereto, and
any other purchase agreement between Nortel and Borrower and all purchase orders
and invoices issued pursuant thereto, all subject to the approval of Lender.

"Note": collectively, one or more promissory notes issued by Borrower to
Lender pursuant to this Agreement, and all extensions, renewals, modifications,
replacements, amendments, restatements and refinancings thereof.

"Obligations": all indebtedness, liabilities and obligations of Borrower to
Lender of any class or nature, arising under or in connection with this
Agreement and/or the other Loan Documents, whether now existing or hereafter
incurred, direct or indirect, absolute or contingent, secured or unsecured,
matured or unmatured, joint or several, whether for principal, interest, fees,
expenses, lease obligations, indemnities or otherwise, including, without
limitation, future advances of any sort, all future advances made by Lender for
taxes, levies, insurance and/or repairs to or maintenance of the Collateral, the
unpaid principal amount of, and accrued interest on, the Note, and any expenses
of collection or protection of Lender's rights, including reasonable attorneys'
fees.

"Organizational Documents": with respect to a corporation, the articles of
incorporation and by-laws of such corporation; with respect to a partnership,
the certificate of partnership (or limited partnership, as applicable) and
partnership agreement, together with the analogous documents for any corporate
or partnership general partner; with respect to a limited liability company, the
articles of organization and operating agreement of such limited liability
company; and in any case, any other document governing the formation and conduct
of business by such entity.

6
<PAGE>

"Owners": all presently existing and future shareholders of Borrower and
all other Persons with direct ownership interests in Borrower.

"Payment Date": as defined on Schedule 2.02 hereto.

"Payment Schedule": as defined on Schedule 2.02 hereto.

"PBGC": the Pension Benefit Guaranty Corporation established under Title IV
of ERISA or any other governmental agency, department or instrumentality
succeeding to its functions.

"Permits": all consents, licenses, notices, approvals, authorizations,
filings, orders, registrations, and permits required by any Governmental
Authority for the construction and operation of the Equipment (excluding
Regulatory Authorizations), issued or obtained as and when required in
accordance with all Requirements of Law.

"Permitted Encumbrances": the Liens permitted under Section 8.02 hereof.

"Person": an individual, corporation, limited liability company,
partnership, business or other trust, unincorporated association, joint venture,
joint-stock company, Governmental Authority or any other entity.

"Plan": any employee pension benefit plan to which Section 4021 of ERISA
applies and (i) which is maintained for employees of Borrower or (ii) to which
Borrower made, or was required to make, contributions at any time within the
preceding five (5) years.

"Proceeds": as defined in Section 3.01 hereof.

"PUC": the public utilities commission for the state or any other
jurisdiction in which Borrower operates its telecommunications business or any
portion of the Equipment is located, or any successor agency, and any successor,
in whole or in part, to its functions or jurisdictions, and any other Persons
specified as such on Schedule 2.02 hereto.

"Purchase Agreement": individually and collectively, the Nortel Purchase
Agreement and the Vendor Purchase Agreement.

"Regulatory Authorizations": all approvals, authorizations, licenses,
filings, notices, registrations, consents, permits, exemptions, registrations,
qualifications, designations, declarations, or other actions or undertakings now
or hereafter made by, to or in respect of any telecommunications governmental or
other regulatory authority, including, without limitation, any certificates of
public convenience and all grants, approvals, licenses, filings and
registrations from or to the FCC or PUC or under any Communications Law
necessary in order to enable Borrower to own, construct, maintain and operate
the Equipment, and any authorizations

7
<PAGE>

specified on Schedule 4.05 hereto.

"Regulatory Event": any of the following events: (i) Lender becomes subject
to regulation as a "carrier," a "telephone company," a "common carrier," a
"public utility" or otherwise under any applicable law or governmental
regulation, federal, state or local, solely as a result of the transactions
contemplated by this Agreement and the other Loan Documents, or (ii) Borrower
becomes subject to regulation by any Governmental Authority in any way that is
materially different from the regulation existing at the Closing Date and that
could materially adversely affect Borrower's ability to perform its material
obligations under the Loan Documents or Lender's rights thereunder, or (iii) the
FCC or PUC issues an order revoking, denying or refusing to renew, or
recommending the revocation, denial or non-renewal of, any Regulatory
Authorization.

"Reportable Event": (i) a reportable event described in Section 4043 of
ERISA and regulations thereunder, (ii) a withdrawal by a substantial employer
from a Plan to which more than one employer contributes, as referred to in
Section 4063(b) of ERISA, or (iii) a cessation of operations at a facility
causing more than twenty percent (20%) of Plan participants to be separated from
employment, as referred to in Section 4062(f) of ERISA.

"Required Consents": the Governmental Authority approvals or consents of
other Persons required with respect to Borrower's execution, delivery and
performance of this Agreement and the other Loan Documents, as described in
Section 4.04 hereto.

"Requirement of Law": as to any Person, the Organizational Documents of
such Person, and any law, treaty, rule or regulation, or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its properties or transactions or to
which such Person or any of its property or transactions is subject, including
without limitation, all applicable common law and equitable principles, all
provisions of all applicable state and federal constitutions, statutes, rules,
regulations and orders of governmental bodies, all Permits or Regulatory
Authorizations issued to Borrower, all Communications Laws, and all
Environmental Laws.

"Responsible Officer": with respect to a corporation, its President or any
Vice President or Treasurer; with respect to a partnership, its general partner
(or the President, any Vice President or Treasurer of any corporate general
partner, as applicable); with respect to a limited liability company, a member
or manager (or the President, any Vice President or Treasurer of any corporate
member or manager), or the President or any Vice President of any other Person.

"Security Documents": this Agreement, the Consents, all financing
statements, and any other documents granting, evidencing, or perfecting any
security interest or Lien with respect to or securing any of the Obligations.

"Site(s)": any of the sites where Equipment is or is to be located.

8
<PAGE>

"Software" and "Software Licenses": any software now or hereafter owned by,
or licensed to, Borrower or with respect to which Borrower has or may have
license or use rights.

"Subordinated Indebtedness": Indebtedness of Borrower for money borrowed
for the use of Borrower, payment of which is fully subordinated to the payment
of all Obligations of Borrower to Lender upon terms and provisions reasonably
acceptable to Lender.

"Subordination Agreement": one or more Subordination Agreements reasonably
acceptable to Lender.

"Subsidiary": as to any Person, any corporation or other entity that is an
Affiliate of such Person and of which shares of stock or equity interests having
ordinary voting power with respect to the election of one or more directors or
other managers of such corporation are at the time directly or indirectly owned
or controlled by such Person (regardless of any contingency which does or may
suspend or dilute the voting rights of such class).

"System": Borrower's complete telecommunications network or system
constructed and/or operated by Borrower, of which the Equipment forms a part, as
described on Schedule 2.02 hereto.

"UCC": the Uniform Commercial Code as the same may from time to time be in
effect in the State of Tennessee, or the Uniform Commercial Code of another
jurisdiction, to the extent it may be required to apply to any item or items of
Collateral.

"Vendor" means any manufacturer or supplier of Vendor Equipment or licensor
or supplier of Software, in each case other than Nortel.

"Vendor Equipment" means any equipment, upgrades, switches and licensed or
sub-licensed Software manufactured, or supplied to Borrower, by a Vendor.

"Vendor Purchase Agreement": any purchase agreement, together with any
amendments or supplements thereto, between a Vendor and Borrower or an assignor
of Borrower and all purchase orders and invoices issued pursuant thereto for the
sale of Vendor Equipment, all subject to the approval of Lender, not to be
unreasonably withheld or delayed.

1.02. Accounting Principles; Subsidiaries. Except as otherwise provided in
this Agreement, all computations and determinations as to accounting or
financial matters and all financial statements to be delivered pursuant to this
Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), consistently applied, and all
accounting or financial terms shall have the meanings ascribed to such terms by
GAAP. If at any time Borrower has any Subsidiaries, all accounting and financial
terms herein shall be deemed to include references to consolidated and
consolidating principles, and

9
<PAGE>

covenants, representations and agreements with respect to Borrower and its
properties and activities shall be deemed to refer to Borrower and its
consolidated Subsidiaries collectively.

1.03. UCC Terms. Except as otherwise provided or amplified (but not
limited) herein, terms used in this Agreement that are defined in the UCC shall
have the same meanings herein.

1.04. General Construction; Captions. All definitions and other terms used
in this Agreement shall be equally applicable to the singular and plural forms
thereof, and all references to any gender shall include all other genders. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and Section, subsection, schedule and
exhibit references are to this Agreement unless otherwise specified. The
captions and table of contents in this Agreement and the other Loan Documents
are for convenience only, and in no way limit or amplify the provisions hereof.

1.05. References to Documents and Laws. All defined terms and references
in this Agreement or the other Loan Documents with respect to any agreements,
notes, instruments, certificates or other documents shall be deemed to refer to
such documents and to any amendments, modifications, renewals, extensions,
replacements, restatements, substitutions and supplements of and to such
documents. All references to statutes and related regulations shall include any
amendments thereof and any successor statutes and regulations.

ARTICLE 2: LOANS
----------------

2.01. Commitment. Subject to the terms and conditions herein provided, and
so long as no Default has occurred and is continuing hereunder, Lender agrees to
lend to Borrower from time to time before the Financing Termination Date, an
aggregate principal amount not to exceed the amount set forth on Schedule 2.01
hereto as the maximum principal amount (the "Commitment"). All amounts advanced
hereunder shall be used solely for the purchase of Nortel Equipment and related
services from Nortel, and amounts not exceeding the amount (if any) specified on
Schedule 2.01 hereto may be used for legal fees, charges, expenses and closing
costs and other expenses incurred by Borrower or incurred by Lender and payable
by Borrower under Section 2.10 hereof, provided, however, that up to thirty
percent (30%) of the Commitment hereunder may be used for purchases of Vendor
Equipment and related services, provided, further, that in each case such amount
has been approved by Nortel prior to the date of the Advance therefore.

2.02. Note and Payment Terms.

(a) Promissory Note. The Loans shall be evidenced by one or more Notes
substantially in the form of Exhibit A hereto, with appropriate insertions.
The Note shall be executed by Borrower, payable to the order of Lender, and
shall evidence the obligation of Borrower to repay all principal amounts
advanced under or pursuant to this

10
<PAGE>

Agreement, together with interest and all other amounts due thereunder. The
Note shall be dated the Closing Date, have a stated maturity that is the
Maturity Date, and bear interest at the Interest Rate specified on Schedule
2.02 applicable to each Advance thereunder from the applicable Borrowing
Date until the Note or any amount thereunder is paid in full (whether on
the Maturity Date, by acceleration or otherwise). All schedules attached to
the Note shall be deemed a part thereof. Any such schedule may be amended
by Lender from time to time to reflect changes in the amounts includable
thereon, but the failure to attach or amend any schedule shall not diminish
the obligation of Borrower to repay all amounts due hereunder or on the
Note.

(b) Interest Payments. Interest shall continue to accrue on the
principal amount outstanding on the Note at the Interest Rate and shall be
payable, in arrears, on each Payment Date, with the principal payments
described below.

(c) Principal Payments. All principal amounts due with respect to the
Note shall be payable in installments in accordance with the Payment
Schedule set forth on Schedule 2.02 hereto, commencing on the Initial
Payment Date and on each Payment Date thereafter until the Maturity Date.
The principal payment amounts shall be recalculated by Lender if any
Advances are made hereunder after the Initial Payment Date, based on the
aggregate amount of all Advances made at any time. Borrower and Lender
understand that this payment schedule is intended to amortize fully the
principal amount of the Note and any other principal and interest amounts
outstanding will be added to the final payment on the Maturity Date. In any
event, the entire outstanding principal amount of the Note and all accrued
but unpaid interest and all other outstanding amounts due thereunder shall
be paid on the Maturity Date.

(d) Late Payments and Default Rate. Notwithstanding the foregoing, if
Borrower shall fail to pay within ten (10) days after the due date any
principal amount or interest or other amount payable under this Agreement
or under the Note, Borrower shall pay to Lender, to defray the
administrative costs of handling such late payments, an amount equal to
interest on the amount unpaid, to the extent permitted under applicable
law, at the Default Rate (instead of the Interest Rate), from the due date
until such overdue principal amount, interest or other unpaid amount is
paid in full (both before and after judgment) whether or not any notice of
default in the payment thereof has been delivered under Section 9.01
hereof. In addition, but without duplication, upon the occurrence and
during the continuance of an Event of Default, all outstanding amounts
hereunder shall bear interest at the Default Rate (instead of the Interest
Rate) until such amounts are paid in full or such Event of Default is
waived in writing by Lender.

(e) Excess Interest. Notwithstanding any provision of the Note, this
Agreement or any other Loan Document to the contrary, it is the intent of
Lender and Borrower that Lender or any subsequent holder of the Note shall
never be entitled to receive, collect, reserve or apply, as interest, any
amount in excess of the maximum rate

11
<PAGE>

of interest permitted to be charged by applicable Law, as amended or
enacted from time to time. In the event Lender, or any subsequent holder of
the Note, ever receives, collects, reserves or applies, as interest, any
such excess, such amount which would be excessive interest shall be deemed
a partial prepayment of principal and treated as such, or, if the principal
indebtedness and all other amounts due are paid in full, any remaining
excess funds shall immediately be applied to any other outstanding
indebtedness of Borrower due to Lender, and if none is outstanding, shall
be paid to Borrower. In determining whether or not the interest paid or
payable, under any specific contingency, exceeds the highest lawful rate,
Borrower and Lender shall, to the maximum extent permitted under applicable
law, (a) exclude voluntary prepayments and the effects thereof as it may
relate to any fees charged by Lender, and (b) amortize, prorate, allocate,
and spread, in equal parts, the total amount of interest throughout the
entire term of the indebtedness; provided that if the indebtedness is paid
and performed in full prior to the end of the full contemplated term
hereof, and if the interest received for the actual period of existence
hereof exceeds the maximum lawful rate, Lender or any subsequent holder of
any Note shall refund to Borrower the amount of such excess or credit the
amount of such excess against the principal portion of the indebtedness, as
of the date it was received, and, in such event, Lender shall not be
subject to any penalties provided by any laws for contracting for,
charging, reserving or receiving interest in excess of the maximum lawful
rate.

2.03. Procedures for Borrowing.

(a) Timing of Advances. Advances shall not be made more than once per
calendar month, and all Advances in any calendar month shall be made on the
same Borrowing Date. Each Advance (other than the last Advance) shall be in
an aggregate principal amount of not less than $25,000. No amounts may be
borrowed hereunder on or after the Financing Termination Date. Lender is
hereby authorized to retain from each Advance all amounts of Lender's
Expenses accrued and unpaid by Borrower, for which invoices have been sent
to Borrower at least two (2) Business Days before such Advance. In any
event, all outstanding Commitment Fee installments, legal fees, charges and
expenses not paid by Borrower prior to any Borrowing Date shall be paid
before any Advance is made or concurrently with such Advance.

(b) Borrowing Certificates. To request an Advance hereunder, Borrower
shall send to Lender, at least ten (10) Business Days prior to the
requested Borrowing Date, a completed Borrowing Certificate, along with
invoices and such other supporting documentation as Lender may reasonably
request. Lender is hereby authorized to add to any Borrowing Certificate
all amounts payable by Borrower to Lender in respect of legal fees, charges
and expenses arising or incurred by Lender, to the extent such fees,
charges and expenses have then been incurred or charged and may be paid
from proceeds of the Loan.

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<PAGE>

(c) Transmission of Advances. Advances shall be made by wire
transfer to the account(s) specified in the applicable Borrowing
Certificate, except that (i) proceeds of the Loans may be transmitted, at
Lender's option, directly to a Nortel or Vendor account for payment of any
unpaid Nortel or Vendor invoices, and (ii) Advances shall be made to
Borrower only to the extent that Borrower provides Lender with satisfactory
evidence that the amount of such Advance has been paid to Nortel or the
Vendor. No further authorization shall be necessary for any such direct
disbursements, and each such Advance shall satisfy pro tanto the
obligations of Lender under this Agreement.

(d) Borrowing Dates. Advances shall be made by Lender on the
Borrowing Date specified in the applicable Borrowing Certificate if all
conditions for such Advance have been satisfied, or on such later Business
Date as all conditions for such Advance shall have been satisfied, as
reasonably determined by Lender.

(e) Advances After Default. At its option, after the occurrence and
continuance of a Default, Lender may but shall not be obligated to make
advances of portions of the Loan proceeds to any Person (including without
limitation Nortel and any Vendor, suppliers, sub-contractors and
materialmen) to whom Lender in good faith determines payment is due with
respect to the Equipment, and any proceeds so disbursed by Lender shall be
deemed disbursed as of the date on which the Person to whom payment is made
receives the same. No further authorization from Borrower shall be
necessary to warrant such direct advances, and the execution of this Loan
Agreement by Borrower shall, and hereby does, constitute an irrevocable
authorization and power of attorney so to advance proceeds hereunder.

2.04. Prepayments.

(a) Voluntary Prepayments. Borrower may, at its option, at any time
and from time to time after the first anniversary of the first Advance
under any Note, prepay such Note in whole or in part, upon at least thirty
(30) Business Days prior written notice to Lender specifying the date and
amount of prepayment, in a minimum amount of $50,000, plus the premium
described below, and all accrued but unpaid interest thereon. Such notice
shall be irrevocable and the principal amount specified in such notice
shall be due and payable on the date specified together with accrued
interest on the amount prepaid. Any such prepayment shall be subject to a
prepayment premium equal to a percentage of the amount prepaid as follows:
three percent (3%) if the prepayment is made prior to the second
anniversary of the date of the first Advance, one and one half percent (1-
1/2%) if the prepayment is made after the second but prior to the third
anniversary of the date of the first Advance, and without a premium if the
prepayment is made thereafter. Amounts prepaid may not be reborrowed and
shall be applied to the amortization schedules as requested by Borrower and
otherwise as provided in Section 2.04(c). Mandatory Prepayments, excess
interest payments under Section 2.02(e) or prepayments made from insurance
proceeds pursuant to Section 6.03 or with any

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<PAGE>

condemnation proceeds shall not be subject to a prepayment premium.

(b) Mandatory Prepayments. Upon Lender's written demand, within five
(5) days of such demand, Borrower shall be required to prepay, without
premium, the Obligations hereunder as follows: (i) all Obligations if a
Change in Control occurs, or (ii) Obligations arising from Advances for
Equipment and/or Software financed for purchase under the Nortel Purchase
Agreement if that Agreement is terminated prior to the completion and
acceptance of such Equipment and related Software ("Mandatory
Prepayments").

(c) Application of Prepayments. Any prepayments shall be applied
first to interest, then to premium, then to expenses, and then to the
installments of principal in reverse chronological order.

2.05. Computation of Interest. Interest shall be calculated daily on the
basis of a 365-day year for the actual days elapsed in the period during which
it accrues.

2.06. Payments. All payments and prepayments to be made in respect of
principal, interest, prepayment premiums or other amounts due from Borrower
hereunder or under the Note shall be payable on or before 1:00 p.m., Nashville
time, on the day when due, without presentment, demand, protest or notice of any
kind, all of which are hereby expressly waived, and an action therefor shall
immediately accrue. Such payments shall be made to Lender at Lender's office at
501 Corporate Centre Drive, Franklin, Tennessee 37067, or such other location
specified in writing by Lender, in immediately available funds, without setoff,
recoupment, counterclaims or any other deduction of any nature.

2.07. Indemnity. Borrower hereby indemnifies Lender against any losses,
claims, penalties, expenses, actions, suits, obligations, liabilities and Liens
(and all costs and expenses, including reasonable attorneys' fees incurred in
connection therewith), that Lender has sustained or incurred or may sustain or
incur in connection with any of the Collateral, or the enforcement, performance
or administration of the Loan Documents, or as a consequence of any default by
Borrower in the performance or observance of any covenant or condition contained
in this Agreement or the Loan Documents, including without limitation, the
breach of any representation or warranty, any failure of Borrower to pay when
due (by acceleration or otherwise) any principal, interest, fee or any other
amount due hereunder or under the Note, and any failure of Borrower to comply
with all applicable Requirements of Law (collectively, "Claims") except to the
extent of any Claims caused solely by Lender's gross negligence or willful
misconduct. Borrower's obligations under this Section 2.07 shall be part of the
Obligations and shall be secured by the Collateral. Borrower agrees that upon
written notice by Lender of the assertion of any Claims, Borrower shall, at
Lender's option, either assume full responsibility for, or reimburse Lender for
the reasonable costs and expenses of, the defense thereof. Lender shall have no
liability for consequential or incidental damages of any nature. The provisions
of this Section 2.07 shall survive the termination of this Agreement and payment
of

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<PAGE>

the Obligations.

2.08. Use of Proceeds. The proceeds of the Advances hereunder shall be
used by Borrower only for the purposes and in the amounts described in Section
2.01 hereof, and no amounts repaid may be reborrowed (except for any voluntary
prepayments as permitted pursuant to Section 2.04(a).

2.09. Fees. Borrower shall pay Lender the fees described on Schedule 2.09
hereto in connection with this Agreement.

2.10. Lender's Expenses. Borrower agrees (a) to pay or reimburse Lender
for all its reasonable costs, fees, charges and expenses incurred or arising in
connection with the negotiation, review, preparation and execution of this
Agreement, the Loan Documents, any commitment or proposal letter, or any
amendment, supplement, waiver, modification to, or restructuring of this
Agreement, the Obligations or the other Loan Documents, including, without
limitation, reasonable legal fees and disbursements, expenses, document charges
and other charges and expenses of Lender, (b) to pay or reimburse Lender for all
its reasonable costs, fees, charges and expenses incurred in connection with the
administration of the Loans or the enforcement, protection or preservation of
any rights under or in connection with this Agreement or any other Loan
Documents, including, without limitation, reasonable legal fees and
disbursements, audit fees and charges, and all out-of-pocket expenses, (c) to
pay, indemnify, and to hold Lender harmless from, any and all recording and
filing fees and taxes and any and all liabilities with respect to, or resulting
from any delay in paying, stamp, excise and other taxes (excluding income and
franchise taxes and taxes of similar nature), if any, which may be payable or
determined to be payable in connection with the execution and delivery or
recordation or filing of, or consummation of any of the transactions
contemplated by, or any amendment, supplement or modification of, or any waiver
or consent under or in respect of, this Agreement and the other Loan Documents.
All of the amounts described in this Section are referred to collectively as the
"Lender's Expenses", shall be payable upon Lender's demand, and shall accrue
interest at the Interest Rate in effect when such demand is made from five (5)
days after the date of demand until paid in full. All Lender's Expenses, and
interest thereon, shall be part of the Obligations and shall be secured by the
Collateral. The agreements in this Section 2.10 shall survive repayment of the
Obligations. All Lender's Expenses that are outstanding on any Borrowing Date
shall be paid before or with such advance. If Borrower has not paid to Lender
the amount of all Lender's Expenses billed to Borrower at least five (5)
Business Days before such Borrowing Date, Lender shall be authorized to retain
from any Advance on such Borrowing Date the amount of such Lender's Expenses
that remain unpaid. Borrower's obligation to pay Lender's Expenses shall not be
limited by any limitation on the amount of the Commitment that may be designated
as available for such purposes, and any amounts so designated shall be used to
pay Lender's Expenses accrued at the time of any Advance before any of
Borrower's legal fees or similar expenses.

ARTICLE 3: COLLATERAL AND SECURITY AGREEMENT
--------------------------------------------

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<PAGE>

3.01. Grant of Security Interest. Borrower (as debtor) hereby assigns to
Lender as collateral, and grants to Lender (as secured party) a continuing
security interest in and to, all of Borrower's right, title and interest in and
to the following kinds and types of property, whether now owned or hereafter
acquired or arising, wherever located, together with all substitutions therefor
and all accessions, replacements and renewals thereof, and in all proceeds and
products thereof (collectively, the "Collateral"):

(a) All Nortel Equipment financed or refinanced with proceeds
of an Advance and all Vendor Equipment financed or refinanced with
proceeds of an Advance, and in each case any and all additions,
substitutions, and replacements to or of any of the foregoing,
together with all attachments, components, parts, improvements,
upgrades, and accessions installed thereon or affixed thereto,
including installation services provided by Nortel or any other
Vendor in connection therewith (collectively, "Equipment") and
Borrower's rights under each Nortel Purchase Agreement and each
Vendor Purchase Agreement relating to such Equipment;

(b) All general intangibles and intangible property (including
all contracts and contract rights) constituting part of, or provided
by or through Nortel or any Vendor in connection with, the Equipment
or associated with the System which are necessary for the proper
operation of the Equipment, including without limitation insurance
proceeds and amounts due under insurance policies, licenses, license
rights, rights in intellectual property, Software, Software
Licenses, computer programming (including source codes, object codes
and all other embodiments of computer programming or information),
refunds, warranties and indemnification rights, and all amounts owed
at any time to Borrower by Lender or Nortel or by a Vendor in
connection with a Vendor Purchase Agreement relating to Equipment
(collectively, "General Intangibles"); and

(c) All proceeds of any of the foregoing, including without
limitation (i) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to Borrower from time to time with
respect to any of the Collateral, (ii) any and all payments (in any
form whatsoever) made or due and payable to Borrower from time to
time in connection with any requisition, confiscation, condemnation,
seizure or forfeiture of all or any part of the Collateral by any
Governmental Authority (or any Person acting under color of
governmental authority), and (iii) any and all cash proceeds and
non-cash proceeds in the form of equipment, inventory, contracts,
accounts, general intangibles, chattel paper, documents,
instruments, securities, or other proceeds (collectively,
"Proceeds").

3.02. Priority of Security Interests. The security interests granted by
Borrower to

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<PAGE>

Lender are and shall be continuing and indefeasible first-priority
security interests in the Collateral, subject to no Liens except for Liens
permitted under Section 8.02 hereof.

3.03. Further Documentation; Pledge of Instruments. At any time and from
time to time, upon the written request of Lender, and at the sole expense of
Borrower, Borrower shall promptly execute, deliver and record any documents,
instruments, agreements and amendments, and take all such further action, as
Lender may reasonably deem desirable in obtaining the full benefits of this
Agreement and of the rights and powers herein granted, including, without
limitation, the filing of any financing statements or amendments under the UCC.
Borrower also hereby authorizes Lender to file any such financing statement or
amendment thereto, without the signature of Borrower, or with a copy or telecopy
of Borrower's signature, to the extent permitted by applicable law, or to
execute any financing statement or amendment thereof on behalf of Borrower as
Borrower's attorney-in-fact. If any amount payable under or in connection
with any of the Collateral shall be or become evidenced by any promissory note
or other instrument or any certificated securities, such note, instrument or
certificate shall be immediately pledged and delivered to Lender hereunder, duly
endorsed in a manner satisfactory to Lender.

3.04. Further Identification of Collateral. Borrower shall furnish to
Lender from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as Lender may reasonably request, all in reasonable detail.

3.05. Remedies. Lender shall have all the rights and remedies of a secured
party under the UCC, and shall be entitled to exercise any and all remedies
available under Article 9 hereof or otherwise available at law or in equity upon
the occurrence of an Event of Default.

3.06. Standard of Care. Lender shall be deemed to have exercised
reasonable care in the custody and preservation of any of the Collateral in its
possession if it takes such action for that purpose as Borrower requests in
writing, but Lender's failure to comply with any such request shall not of
itself be deemed a failure to exercise reasonable care, and no failure of Lender
to preserve or protect any rights with respect to such Collateral against prior
parties, or to do any act with respect to the preservation of such Collateral
not so requested by Borrower, shall be deemed a failure to exercise reasonable
care in the custody or preservation of such Collateral.

3.07. Advances to Protect Collateral. All insurance expense and all
expenses of protecting, storing, warehousing, insuring, handling, maintaining
and shipping the Collateral (including, without limitation, all rent payable by
Borrower to any landlord of any premises where any of the Collateral may be
located), and, any and all taxes shall be borne and paid by Borrower. Lender may
(but shall not be obligated to) make advances to preserve, protect or obtain any
of the Collateral, including advances to cure defaults under any lease
agreements for Sites or advances to pay taxes, insurance and the like, and all
such advances shall become part of the Obligations owing to Lender hereunder and
shall be payable to Lender on demand, with interest thereon from the date of
such advance until paid at the Default Rate in effect on the date of such
advance.

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<PAGE>

3.08. License to Use. Lender is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, tradenames, trademarks and advertising matter, or any
tangible or intangible property or rights of a similar nature, as it pertains to
the Collateral, in advertising for sale and selling any Collateral, and
Borrower's rights under all licenses and franchise agreements with respect to
the Collateral shall inure to Lender's benefit.

3.09. Subsidiary Guaranties. Payment of the Borrower's Obligations shall
also be unconditionally guaranteed by all existing Subsidiaries of the Borrower
listed on Schedule 1.01 (b), as well as all future Subsidiaries of the Borrower,
pursuant to the form of Guaranty Agreement attached as Exhibit G to this
Agreement.

ARTICLE 4: REPRESENTATIONS AND WARRANTIES
-----------------------------------------

Borrower hereby represents and warrants to Lender as follows:

4.01. Organization and Qualification. Borrower is duly organized, validly
existing and in good standing as a corporation under the laws of its state of
organization. Borrower is duly qualified to do business and in good standing in
each jurisdiction in which the failure to receive or retain such qualification
would have a Material Adverse Effect.

4.02. Authority and Authorization. Borrower has all requisite corporate
right, power, authority and legal right to execute and deliver and perform its
obligations under this Agreement, to make the borrowings provided for herein,
and to execute and deliver and to perform its obligations under the Note.
Borrower's execution, delivery and performance of the Basic Agreements have been
duly and validly authorized by all necessary corporate proceedings on the part
of Borrower.

4.03. Execution and Binding Effect. This Agreement, the Note and all other
Basic Agreements have been or will be duly and validly executed and delivered by
Borrower, and constitute or, when executed and delivered will constitute, the
legal, valid and binding obligations of Borrower enforceable in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, receivership, moratorium or other laws
affecting creditors' rights generally.

4.04. Governmental Authorizations. Except for the consents identified on
Schedule 4.04 hereto (the "Required Consents"), no authorization, consent,
approval, license, exemption or other action by, and no registration,
qualification, designation, declaration or filing with, any Governmental
Authority (other than the filing of financing statements and continuation
statements) is or will be necessary in connection with execution and delivery of
this Agreement, the Note or any other Loan Documents by Borrower, consummation
of the transactions herein or therein contemplated, performance of or compliance
by Borrower with the terms and conditions

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<PAGE>

hereof or thereof or the legality, validity and enforceability hereof or
thereof.

4.05. Regulatory Authorizations. Borrower holds all authorizations,
permits and licenses required by the FCC or the PUC or any Communications Law
for the construction and operation of the System, and all such Regulatory
Authorizations are in full force and effect, are subject to no further
administrative or judicial review and are therefore final. Lender will not by
reason of the execution, delivery and performance (other than the enforcement of
remedies) of any of the Loan Documents, be subject to the regulation or control
of either the FCC or the PUC. The Regulatory Authorizations are described on
Schedule 4.05.

4.06. Material Agreement; Absence of Conflicts. The execution and delivery
of this Agreement, the Note and the other Loan Documents, the consummation of
the transactions herein or therein contemplated and the performance of or
compliance with the terms and conditions hereof or thereof by Borrower will not
(a) materially violate any applicable Law; (b) conflict with or result in a
material breach of or a default under the Organizational Documents of Borrower
or any agreement or instrument to which Borrower is a party or by which Borrower
or its properties is bound; or (c) result in the creation or imposition of any
Lien upon any property (now owned or hereafter acquired) of Borrower except as
otherwise contemplated by this Agreement.

4.07. No Restrictions. Borrower is not a party or subject to any contract,
agreement, or restriction in its Organizational Documents that materially and
adversely affects its business or the use or ownership of any of its properties
or operation of its business. Borrower is not a party or subject to any contract
or agreement which restricts its right or ability to incur Indebtedness, other
than as set forth on Schedule 4.07, none of which prohibit Borrower's execution
of or compliance with this Agreement. Borrower has not agreed or consented to
cause or permit in the future (upon the happening of a contingency or otherwise)
any of the Collateral, whether now owned or hereafter acquired, to be subject to
a Lien that is not a Permitted Encumbrance.

4.08. Financial Statements. Borrower has furnished to Lender the most
recent annual and quarterly financial statements of Borrower, audited in the
case of annual financial statements, and certified by a Responsible Officer of
Borrower, including balance sheets and related statements of income and retained
earnings and changes in financial position, as described on Schedule 4.08
hereof. Such financial statements (including the notes thereto) present fairly
the financial condition of Borrower on a consolidated basis as of the end of
such fiscal period and the results of its operations and the changes in its
financial position for the fiscal period then ended, all in conformity with GAAP
applied on a basis consistent with that of the preceding fiscal period. Any
projections and pro forma financial statements delivered by Borrower to Lender
were prepared in good faith, based on reasonable assumptions, including without
limitation, the cost of capital.

4.09. Financial Accounting Practices. Borrower has made and kept books,
records and accounts which, in reasonable detail, accurately and fairly reflect
its respective transactions and

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<PAGE>

dispositions of its assets, and Borrower shall maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (a)
transactions are executed in accordance with management's general or specific
authorization, (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with GAAP and (ii) to maintain
accountability for assets, (c) access to assets is permitted only in accordance
with management's general or specific authorization and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

4.10. Accurate and Complete Disclosure. No representation or warranty made
by Borrower under this Agreement and no statement made by Borrower or by any
Owner in any financial statement, certificate, report, exhibit or document
furnished by Borrower or any Owner to Lender pursuant to or in connection with
this Agreement (including without limitation any filings with the Securities
Exchange Commission, the FCC or the PUC) is or was false or
misleading as of the date made in any material respect (including by omission of
material information necessary to make such representation, warranty or
statement not misleading). There are no facts that evidence or create a Material
Adverse Effect, or, so far as Borrower can now foresee, will evidence or create
a Material Adverse Effect, which has not been set forth in the financial
statements referred to in Section 4.08 hereof or otherwise disclosed in writing
to Lender prior to the First Borrowing Date.

4.11. No Event of Default; Compliance with Material Agreements. No event
has occurred and is continuing and no condition exists which constitutes a
Default or an Event of Default after giving effect to the Advance to be made on
the First Borrowing Date. As of the date hereof, Borrower is not in violation of
any term of its material agreements or instruments to which it is a party or by
which it or its properties is bound.

4.12. Litigation. Except as set forth in Schedule 4.12, there is no
pending action, suit or threatened proceeding by or before any Governmental
Authority against or affecting Borrower or any of its properties, rights or
licenses which if adversely decided would have a Material Adverse Effect.

4.13. Rights to Property; Intellectual Property. Borrower has good and
marketable title, subject only to the Permitted Encumbrances, to the Collateral
and to all personal and real property purported to be owned by it as reflected
in the most recent balance sheet referred to in Section 4.08 hereof (except as
sold or otherwise disposed of in the ordinary course of business as no longer
used or useful in the conduct of the business). Borrower owns or possesses the
right to use all patents, trademarks, service marks, trade names, copyrights,
know-how, franchises, software and software licenses which in the Borrower's
best judgement are necessary for the operation of its business, free from
burdensome restrictions.

4.14. Financial Condition. As of the date hereof, Borrower's financial
condition is accurately described in the most recent financial statements
provided to Lender by Borrower

20
<PAGE>

pursuant hereto.

4.15. Taxes. Borrower's federal tax identification number is set forth on
Schedule 1 hereto. All tax returns required to be filed by Borrower have been
properly prepared, executed and filed, and all taxes, assessments, fees and
other governmental charges upon Borrower or upon any of its respective
properties, incomes, sales or franchises which are shown to be due and payable
thereon have been paid, other than taxes or assessments the validity or amount
of which Borrower is contesting in good faith. The reserves and provisions for
taxes on the books of Borrower are adequate for all open years and for its
current fiscal period.

4.16. No Material Adverse Change. Since the date of the financial
statements referenced in Section 4.08, there has been no Material Adverse
Change.

4.17. No Regulatory Event. No Regulatory Event has occurred and is
continuing.

4.18. Trade Relations. There exists no actual or threatened termination,
cancellation or limitation of, or any modification or change in, the business
relationship between Borrower and any Carrier, any labor organizations, any
customer or any group thereof whose agreements with Borrower or use of the
System individually or in the aggregate are material to the business of
Borrower, or with any material Supplier, and there exists no present condition
or state of facts or circumstances which would have a Material Adverse Effect or
prevent Borrower from conducting its business after the consummation of the
transaction contemplated by this Agreement.

4.19. No Brokerage Fees. No brokerage or other fee, commission or
compensation is to be paid by Borrower to any Person in connection with the
loans to be made hereunder. Borrower hereby indemnifies Lender against any
claims brought against Lender for brokerage fees or commissions of any Person
based on an agreement with Borrower and agrees to pay all expenses incurred by
Lender in connection with the defense of any action or proceeding brought to
collect any such brokerage fees or commissions.

4.20. Margin Stock; Regulation U. Borrower is not engaged principally, or
as one of its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock. The making of the Advances and
the use of the proceeds thereof will not violate Regulations U or X of the Board
of Governors of the Federal Reserve System.

4.21. Investment Company; Public Utility Holding Company. Borrower is not
an "investment company" or a "company controlled by an investment company"
within the meaning of the Investment Company Act of 1940, as amended, or a
"holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended.

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<PAGE>

4.22. Personal Holding Company; Subchapter S. Borrower is not a "personal
holding company" as defined in Section 542 of the Code, and Borrower is not a
"Subchapter S" corporation within the meaning of the Code.

4.23. ERISA. (i) With respect to any Plan, there is no Reportable Event
currently under consideration by the PBGC which may reasonably result in any
material liability to the PBGC with respect to any Plan which is likely to cause
a Material Adverse Effect, (ii) no Plan has been terminated, (iii) no trustee
has been appointed by any United States District Court to administer any Plan
which is likely to cause a Material Adverse Effect, (iv) the PBGC has not
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any such Plan which is likely to cause a Material Adverse Effect, (v)
neither Borrower nor any Affiliate has withdrawn, completely or partially, from
any Plan which is likely to cause a Material Adverse Effect and (vi) neither
Borrower nor any Affiliate has incurred secondary liability for withdrawal
liability payments under any Plan which is likely to cause a Material Adverse
Effect.

4.24. Environmental Warranties. Borrower is in compliance in all material
respects with all Environmental Laws applicable to Borrower or its business or
to the real or personal property owned, leased or operated by Borrower. Borrower
has not received notice of, and is not aware of, any violations or alleged
violations, or any liability or asserted liability, under any such Environmental
Laws, with respect to Borrower or its business or its properties.

4.25. Security Interests. The provisions of Article 3 hereof are effective
to create in favor of Lender a legal, valid and enforceable Lien on or security
interest in all of the Collateral, and, when the recordings and filings
described on Schedule 4.25 hereto have been effected in the public offices
listed on said Schedule 4.25, this Agreement will create a perfected first-
priority security interest in all right, title, estate and interest of Borrower
in the Collateral, and subject to no other Liens except for Permitted
Encumbrances. All action necessary or desirable to protect and perfect such
security interest in each item of the Collateral will have been duly taken prior
to the First Borrowing Date. The recordings and filings shown on said Schedule
4.25 are all the actions necessary or advisable in order to establish, protect
and perfect the interest of Lender in the Collateral.

4.26. Place of Business. The chief executive offices of Borrower are
identified on Schedule 1 hereto. Borrower's principal place of business in the
state(s) where the Equipment is located is identified on Schedule 4.26 hereto.
Borrower's records concerning the Collateral are kept at one or both of these
addresses.

4.27. Location of Collateral. The Collateral is and will be kept at the
locations identified on Schedule 4.26 hereto or such other locations as may be
permitted under Section 8.10.

4.28. Clear Title To Collateral. Borrower is the sole owner of each item
of the Collateral, having good and marketable title thereto, free and clear of
any and all Liens, claims,

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<PAGE>

or rights of others, except for the security interest granted herein to Lender
and the other Permitted Encumbrances.

4.29. Assumed Names. Except as set forth on Schedule 4.29 hereto, Borrower
does not conduct business under any assumed names or trade names, and has not
conducted business under any other names, or any assumed names or trade names,
at any time prior to the date hereof.

4.30. Intentionally Omitted.

4.31. Nortel and Vendor Purchase Agreement. The Nortel Purchase Agreement
for Nortel Equipment already acquired has been duly executed and delivered by
Borrower and Nortel, is in full force and effect, and a true, correct and
complete copy thereof (including all annexes, attachments and amendments
thereto) has been delivered to Lender, and there are no other side letters,
waivers or other agreements affecting the terms thereof.

4.32. Subsidiaries of Borrower. A true and correct list of all direct and
indirect Subsidiaries of the Borrower, together with the jurisdiction of
formation of each Subsidiary, appears on Schedule 1.01(b) to this Agreement.

ARTICLE 5: CONDITIONS OF CLOSING
--------------------------------

On or before the Closing Date, the following conditions shall have been
satisfied unless listed on Schedule 6.02 hereto:

5.01 Borrower's Certificate. A certificate of Borrower signed by a duly
authorized Responsible Officer, certifying as to (i) true copies of
Organizational Documents of Borrower in effect on such date; (ii) true copies of
all corporate action taken by Borrower relative to this Agreement, the Note(s)
and the other Loan Documents; (iii) the names, true signatures and incumbency of
the Responsible Officers of Borrower authorized to execute and deliver this
Agreement, the Note and the other Loan Documents; (iv) a Certificate of Good
Standing (or equivalent certificate) for Borrower duly issued by the Secretary
of State of each state in which Borrower intends to do business; and (v) such
other matters as Lender shall request.

5.02 Opinions of Counsel. Lender shall have received the following
opinions, all dated as of the Closing Date and in form and substance
satisfactory to Lender:

(a) A written opinion of counsel to Borrower and of any Subsidiary
that will own or possess any Collateral, substantially in the form of
Exhibit C hereto;

(b) A written opinion of regulatory counsel for Borrower,
substantially in the form of Exhibit D hereto; and

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<PAGE>

5.03. Closing Documents. Lender shall have received the following
documents, all in form and substance satisfactory to Lender:

(a) Agreement. This Agreement, duly executed by Borrower;

(b) Note(s). One or more Note(s), as required, duly executed by
Borrower;

(c) Financing Statements. All UCC-1 financing statements necessary
to perfect the Liens granted hereby, each duly executed by Borrower, and
duly recorded in all the offices identified on Schedule 4.25 hereto;

(d) Guaranty Agreements. A Guaranty Agreement, duly executed by all
of the existing Subsidiaries of the Borrower, in the form attached as
Exhibit G to this Agreement.

(e) Purchase Agreement. Lender shall have received a copy of the
executed Nortel Purchase Agreement and a Vendor Purchase Agreement of any
Vendor with respect to which proceeds of an Advance shall be used to
acquire Equipment on or about the First Borrowing Date.

(f) Insurance. Policies and certificates of insurance required by
Section 7.07, accompanied by evidence of the payment of the premiums
therefor;

(g) Financial Statements. The financial statements described in
Section 4.08 hereof;

(h) Balance Sheet. A balance sheet of Borrower, dated as of the end
of the month preceding the Closing Date, certified by a Responsible Officer
as fairly presenting the financial condition of Borrower.

ARTICLE 6: CONDITIONS OF LENDING
--------------------------------

6.01. Conditions for Initial Advance. On or before the First Borrowing
Date, the following conditions shall have been met to Lender's satisfaction or
waived:

(a) Form UCC-1 Financing Statements. Lender shall have received
executed Ucc-1 Financing Statements satisfactory to it for all
jurisdictions reasonably determined by Lender to be appropriate, for filing
in those jurisdictions.

(b) Required Consents. Lender shall have received satisfactory
evidence of Borrower's obtaining the Required Consents.

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<PAGE>

6.02. Conditions for All Advances. The obligation of Lender to make any
Advance hereunder is subject to Borrower's performance of its obligations
hereunder on or before the date of such Advance, and to the satisfaction of the
following further conditions on or before the Borrowing Date for any Advance,
including the first Advance:

(a) Filings, Registrations and Recordings. Any financing statements
or other recordings required hereunder shall have been properly prepared
for filing, registration or recordation in each office in each jurisdiction
required in order to create in favor of Lender a perfected first-priority
Lien on the Collateral, subject to no other Lien; when filed Lender shall
receive acknowledgment copies of all such filings, registrations and
recordations stamped by the appropriate filing officer; and Lender shall
receive results of searches of such filing offices, and satisfactory
evidence that any other Liens (other than Permitted Encumbrances) on the
Collateral have been duly released, that all necessary filing fees,
recording fees, taxes and other expenses related to such filings,
registrations and recordings have been paid in full.

(b) Borrowing Certificate. Lender shall have received a duly
executed Borrowing Certificate in the form of Exhibit B, including a
detailed itemization of all costs of goods and services to be paid with the
proceeds of the Advance and accompanied by supporting documentation
satisfactory to Lender.

(c) Reporting Requirements. Borrower shall have provided Lender with
all relevant reports and information required under Article 7 hereof.

(d) No Regulatory Event. No Regulatory Event (in either Borrower's
or Lender's reasonable determination) shall have occurred and be continuing
or would exist upon the consummation of transactions to occur on such
Borrowing Date.

(e) No Default or Event of Default. No Default or Event of Default
shall have occurred and be continuing or would exist upon the consummation
of transactions to occur on such Borrowing Date.

(f) No Material Adverse Change. No Material Adverse Change shall
have occurred, or would occur after giving effect to such Advance, since
the date of the last financial statements delivered to Lender pursuant to
Section 4.08 or 7.01 hereof.

(g) Representations and Warranties. The representations and
warranties contained in Article 4 hereof shall be true on and as of the
date of each such Advance hereunder.

(h) Lender's Expenses. All closing costs, and other Lender's
Expenses shall have been paid in full (or shall be paid first from such
Advance as provided in Section 2.03 hereof).

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<PAGE>

(i) Details, Proceedings and Documents. All legal details and
proceedings in connection with the transactions contemplated by this
Agreement shall be reasonably satisfactory to Lender and Lender shall have
received all such counterpart originals or certified or other copies of
such documents and proceedings in connection with such transactions, in
form and substance reasonably satisfactory to Lender, as Lender may from
time to time request.

(j) Consents. Lender shall have received Consents duly executed by
all parties and in form satisfactory to Lender.

(k) Fees. Lender shall have received the fee(s) described in Section
2.09 hereof.

(l) Purchase Agreement. Lender shall have received a copy of an
executed Vendor Purchase Agreement with respect to which proceeds of an
Advance shall be used to acquire Equipment, and Lender shall have reviewed
and approved the Equipment to be acquired with proceeds of an Advance.

6.03. Affirmation of Representations and Warranties. Any Borrowing
Certificate or other request for any Advance hereunder shall constitute a
representation and warranty that (a) the representations and warranties
contained in Article 4 hereof are true and correct on and as of the date of such
request with the same effect as though made on and as of the date of such
request and (b) on the date of such request no Default or Event of Default has
occurred and is continuing or exists or will occur or exist after giving effect
to such Advance (for this purpose such Advance being deemed to have been made on
the date of such request). Failure of Lender to receive notice from Borrower to
the contrary before such Advance is made shall constitute a further
representation and warranty by Borrower that (x) the representations and
warranties of Borrower contained in the first sentence of this Section 6.03 are
true and correct on and as of the date of such Advance with the same effect as
though made on and as of the date of such Advance and (y) on the date of the
Advance no Default or Event of Default has occurred and is continuing or exists
or will occur or exist after giving effect to such Advance.

6.04. Deadline for Funding Conditions. Lender shall have no obligation to
make any Advances hereunder if all of the conditions set forth in Article 5 and
in Sections 6.01 and 6.02 hereof have not been fully satisfied or waived by
Lender, and the first Advance made hereunder, within the period of twelve (12)
calendar months following the Closing Date.

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<PAGE>

ARTICLE 7: AFFIRMATIVE COVENANTS
--------------------------------

Borrower hereby agrees that as long as the commitment hereunder remains in
effect, the Note remains outstanding or unpaid or any other amount is owing to
Lender hereunder or under any of the Loan Documents, Borrower shall keep and
perform fully each and all of the following covenants:

7.01. Reporting and Information Requirements.
--------------------------------------

(a) Annual Audit Reports. As soon as practicable, and in any event
within ninety (90) days after the close of each fiscal year of Borrower,
Borrower shall furnish or cause to be furnished to Lender audited
statements of income, statements of cash flow and retained earnings for
such fiscal year and Borrower's balance sheet as of the close of such
fiscal year, and notes to each, all in reasonable detail, and setting forth
in comparative form the corresponding figures for the preceding fiscal
year, with such statements and balance sheet to be certified without
qualification by independent certified public accountants of recognized
regional or national standing selected by Borrower and reasonably
satisfactory to Lender.

(b) Quarterly Reports. Within forty-five (45) days after the end of
each fiscal quarter, Borrower shall furnish to Lender unaudited
consolidated statements of income, statements of cash flow and retained
earnings for Borrower for such quarter and for the period from the
beginning of Borrower's then current fiscal year to the end of such
quarter, and an unaudited consolidated balance sheet of Borrower as of the
end of such quarter, all in reasonable detail and certified by a
Responsible Officer of Borrower as presenting fairly the financial position
of Borrower as of the end of such quarter and the results of its operations
and the changes in its financial position for such quarter, in conformity
with GAAP (except for accompanying notes thereto), subject to year-end
audit adjustments.

(c) Compliance Certificates. Within forty-five (45) days after the
end of each fiscal quarter, Borrower shall deliver to Lender a certificate
dated as of the end of such fiscal quarter, signed on behalf of Borrower by
a Responsible Officer of Borrower (i) stating that as of the date thereof
no Event of Default has occurred and is continuing or exists, or if an
Event of Default has occurred and is continuing or exists, specifying in
detail the nature and period of existence thereof and any action with
respect thereto taken or contemplated to be taken by Borrower; (ii) stating
that the signer has personally reviewed this Agreement and that such
certificate is based on an examination made by or under the supervision of
the signer sufficient to assure that such certificate is accurate; and
(iii) calculating and certifying Borrower's compliance with the financial
covenants set forth in Section 7.15 hereof.

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<PAGE>

(d) Accountants' Certificate. Each set of year-end audited
consolidated statements and balance sheet delivered pursuant to Section
7.01(a) hereof shall be accompanied by a certificate or report dated the
date of such statement and balance sheet by the accountants who certified
such statements and balance sheet stating in substance that they have
reviewed this Agreement and that in making the examination necessary for
their certification of such statements and balance sheet they did not
become aware of any Default, or if they did become so aware, such
certificate or report shall state the nature and period of existence
thereof.

(e) Press Releases. Promptly upon their becoming available to
Borrower, Borrower shall deliver to Lender copies of all press releases
issued by or concerning Borrower or the System.

(f) Further Information. Borrower will promptly furnish to Lender
such other information (including any report by independent auditors) in
such form as Lender may reasonably request.

7.02. Other Notices. Promptly upon a Responsible Officer of Borrower
becoming aware of any of the following, Borrower shall give Lender notice
thereof, together with a written statement of a Responsible Officer of Borrower
setting forth the details thereof and any action with respect thereto taken or
contemplated to be taken by Borrower:

(a) a Default or Event of Default;

(b) any Material Adverse Change;

(c) a material default or breach by Borrower under any other
contractual obligation to which it is a party or by which it or its
properties is bound, if the consequences of such breach or default are
material to the business, operations or financial condition of Borrower and
is likely to have a Material Adverse Effect;

(d) any event that Borrower reasonably determines would constitute a
Regulatory Event;

(e) the commencement, existence or threat of any proceeding by or
before any Governmental Authority against Borrower which, if adversely
decided, would have a Material Adverse Effect;

(f) Borrower's receipt of any notice of violation of, or liability
under, any Environmental Laws affecting Borrower or any of its properties;

(g) any Change in Control or any material change in the management of
Borrower; or

28
<PAGE>

(h) any change in the location or ownership of Collateral.

7.03. Notice of Pension-Related Events. Borrower shall promptly furnish
Lender with written notice upon the receipt by Borrower or the administrator of
any Plan of any notice, correspondence or other communication from the PBGC, the
IRS, the Secretary of Treasury, the Department of Labor, or any other Person, as
the case may be, relating to (i) any Reportable Event, (ii) any funding
deficiency with respect to any Plan, (iii) any liability, either primary or
secondary, with respect to complete or partial withdrawal from any Plan, (iv)
proceedings to terminate any Plan or (v) the appointment of a trustee for any
Plan. Such notice shall be accompanied by any pertinent documents including, but
not limited to, the relevant notice, correspondence or other communication and a
statement of a Responsible Officer of Borrower describing the event or the
action taken and the reasons therefor.

7.04. Inspection Rights. Borrower shall upon reasonable notice and during
regular business hours permit such persons as Lender may designate to visit and
inspect the Collateral or any other properties of Borrower, to examine its books
and records and take copies and extracts therefrom and discuss its respective
affairs with its officers, employees and independent engineers at such times and
as often as Lender may reasonably request. Borrower hereby authorizes such
officers, employees, and independent engineers to discuss with Lender the
affairs of Borrower.

7.05. Preservation of Corporate Existence and Qualification. Borrower
shall maintain its existence, good standing and rights in full force and effect
in its jurisdiction of organization. Borrower shall qualify to do business and
remain qualified and in good standing and shall obtain all necessary
authorizations to do business in each jurisdiction in which failure to receive
or retain such would have a Material Adverse Effect.

7.06. Continuation of Business. Borrower shall continue to engage solely
in the business described on Schedule 1 hereto, and shall acquire and maintain
in full force and effect all rights, privileges, franchises and licenses
necessary for the operation and maintenance of the System (including, without
limitation any license or authorization required by the FCC or any PUC).

7.07. Insurance.

(a) Borrower shall provide and maintain or cause to be maintained at
all times insurance in such forms and covering such risks and hazards and
in such amounts and with an insurance corporation with a Best rating of "A"
or above, licensed to do business in the states where the System and
Borrower are located, as may be satisfactory to Lender, as shown on
Schedule 7.07 hereto, and otherwise as may be required by the Security
Documents.

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<PAGE>

(b) Borrower shall cause (i) all liability insurance policies to name
Lender as an additional insured, (ii) all physical damage insurance
policies to contain a lender's or mortgagee's loss payable provision
acceptable to Lender with respect to the Collateral, (iii) all insurance
policies to provide that no assignment, cancellation, modification,
reduction in amount or adverse change in coverage thereof shall be
effective until at least thirty (30) days after receipt by Lender of
written notice thereof, (iv) all insurance policies to insure the interests
of Lender with respect to the Collateral regardless of any breach of or
violation by Borrower of any warranties, declarations or conditions
contained therein and (v) all insurance policies to provide that Lender
shall have no obligation or liability for premiums, commissions,
assessments or calls in connection with such insurance. Lender shall be
under no obligation to verify the adequacy or existence of any insurance
coverage. Borrower shall furnish Lender copies of, or acceptable
certificates with respect to, all such policies prior to the Closing Date,
and shall provide to Lender, at least thirty days prior to each policy
expiration date, evidence of the insurance being maintained by Borrower in
compliance with this Section 7.07(b). Certificates for insurance required
under subsection (i) above shall be in ACORD Form 27 (attached hereto at
Schedule 7.07), and all certificates shall be satisfactory in form and
substance to Lender.

(c) If the Collateral is partially or totally damaged or destroyed,
Borrower shall give prompt notice to Lender, and all insurance proceeds,
less the costs of collection thereof, shall be paid to or retained by
Lender. Settlements, adjustments or compromises of any claims for loss,
damage or destruction to the Collateral shall be made by Borrower and
Lender as long as no Event of Default has occurred and is continuing, and
otherwise shall be made solely by Lender. Borrower hereby authorizes and
directs any affected insurance company to pay such proceeds directly to
Lender, and to rely on Lender's statement as to whether an Event of Default
has occurred. Borrower shall pay all costs of collection of insurance
proceeds payable on account of such damage or destruction. If no Default or
Event of Default has occurred and is continuing on the date the Collateral
is partially or totally damaged or destroyed, Lender shall make available
to Borrower the proceeds of any physical damage insurance actually paid to
Lender in respect of such damage or destruction of the Collateral (after
deducting therefrom any sums retained by Lender in reimbursement for costs
of collection) to pay the cost of restoration, and Borrower shall proceed
promptly with the work of restoration of the Collateral and shall pursue
the work of restoration diligently to completion. If any Default or Event
of Default has occurred and is continuing either on the date of such damage
or destruction or on the date such insurance proceeds are paid, or if any
Default or Event of Default shall occur prior to completion of such work of
restoration, then Lender, at its option, may apply such insurance proceeds
in payment of any of the Obligations, in such order as Lender may elect in
its sole discretion. Any insurance proceeds remaining after completion of
work or restoration shall, at Lender's election, be applied in accordance
with Section 2.04(c) hereof (but without prepayment premium), or paid over
to

30
<PAGE>

Borrower. Upon completion of any restoration, Borrower shall deliver to
Lender a certificate stating that the restoration has been duly completed
and accounting for the use of any insurance proceeds in such restoration.

7.08. Payment of Taxes, Charges, Claims and Current Liabilities. Borrower
shall pay or discharge:

(a) on or prior to the date on which penalties thereto accrue, all
taxes, assessments and other government charges or levies imposed upon it
or any of its properties or income (including such as may arise under
Section 4062, Section 4063 or Section 4064 of ERISA, or any similar
provision of law);

(b) on or prior to the date when due, all lawful claims which are
overdue longer than thirty (30) days of materialmen, mechanics, carriers,
warehousemen, and other like persons which if unpaid could result in
creation of a Lien upon any such property (other than permitted
encumbrances);

(c) on or prior to the date when due, all other lawful claims which
are overdue for longer than thirty (30) days and which, if unpaid, might
result in the creation of a Lien upon any such property (other than
Permitted Encumbrances) or which, if unpaid, might give rise to a claim
entitled to priority over general creditors of Borrower in a case under
Title 11 (Bankruptcy) of the United States Code, as amended, or in any
insolvency proceeding or dissolution or winding-up involving Borrower; and

(d) all other current liabilities so that none is overdue more than
sixty (60) days.

Notwithstanding the foregoing, Borrower shall be entitled to contest or
appeal the requirements of any Law or Governmental Authority or the payment of
any tax, assessment, charge, levy or claim, or any judgment entered against
Borrower (collectively, in this Section 7.08, the "requirements"), as long as
(i) such requirements are being contested in good faith by appropriate
proceedings diligently conducted; (ii) Borrower has given Lender written notice
of such requirements and its intent to contest them, with supporting reasons for
such contest, before the addition of any interest or penalties that may accrue
on such requirements; (iii) Borrower maintains adequate cash reserves and makes
other appropriate provisions as may be required by GAAP to provide for any
liability arising from such requirements; (iv) the contesting of, or failure to
comply with, such requirements does not in any way jeopardize Borrower's ability
or authority to operate all or any part of the Collateral or the continuing
priority of Lender's security interests in the Collateral; (vi) the contesting
of, or failure to comply with, such requirements does not have a Material
Adverse Effect; and (vii) any foreclosure, attachment, execution, sale or
similar proceeding against Borrower or any of its properties in connection with
any such requirements is duly stayed by posting of a bond or security deposit or
by other action sufficient under applicable law to stay such foreclosure,
attachment, execution, sale or other

31
<PAGE>

proceedings.

7.09. Financial Accounting Practices. Borrower shall make and keep books,
records and accounts which, in reasonable detail, accurately and fairly reflect
its transactions and dispositions of its assets and maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(a) transactions are executed in accordance with management's general or
specific authorization, (b) transactions are recorded as necessary (i) to permit
preparation of financial statements in conformity with GAAP and (ii) to maintain
accountability for assets, (c) access to assets is permitted only in accordance
with management's general or specific authorization and (d) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.

7.10. Compliance with Laws. Borrower shall comply in all material respects
with all Laws applicable to Borrower, provided that Borrower shall not be deemed
to be in violation of this Section 7.10 as a result of any failure to comply
which would not result in any liability or exposure to Lender or any fines,
penalties, injunctive relief or other civil or criminal liabilities which, in
the aggregate, would materially affect the business, operations or financial
condition of Borrower or the ability of Borrower to perform its obligations
under this Agreement or the Note.

7.11. Use of Proceeds. Borrower shall use the proceeds of Advances
hereunder only as set forth in Section 2.01 hereof.

7.12. Government Authorizations; Regulatory Authorizations, Etc. Borrower
shall at all times obtain and maintain in force all Regulatory Authorizations
and all other authorizations, permits, consents, approvals, licenses, exemptions
and other actions by, and all registrations, qualifications, designations,
declarations and other filings with, any Governmental Authority necessary in
connection with the execution and delivery of this Agreement or the Note,
consummation of the transactions herein or therein contemplated, performance of
or compliance with the terms and conditions hereof or thereof or to ensure the
legality, validity and enforceability hereof or thereof.

7.13. Contracts and Franchises. Borrower shall comply with all agreements
or instruments to which it is a party or by which it or any of its properties
(now owned or hereafter acquired) may be subject or bound and shall maintain any
and all franchises it may have or hereafter acquire, provided that Borrower
shall not be deemed to be in violation of this Section 7.13 as a result of any
failure to comply with any agreement if such failure would not have Material
Adverse Effect.

7.14. Consents. Borrower shall obtain such Landlord's Consents,
Mortgagee's Consents and other third party consents as Lender shall reasonably
request to protect its Liens and its access to the Collateral.

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<PAGE>

7.15. Financial Covenants. Borrower shall comply with the financial
covenants set forth on Schedule 7.15 hereto.

7.16. Construction and Storage. The Collateral shall be installed and
equipped in full compliance with the Requirements of Law affecting the
Collateral except to the extent a failure to so comply would not have a Material
Adverse Effect on the construction or operation of the Collateral. All Equipment
financed with the proceeds of the Loan shall be safeguarded and stored until
installed in appropriate storage facilities owned or leased by Borrower. In the
event of any cessation of construction for more than fifteen (15) successive
calendar days, Borrower shall make adequate provision, reasonably acceptable to
Lender, for the protection of all materials stored on site against
deterioration, loss or damage.

7.17. Upgrade Equipment. Borrower shall update the software customarily
used in equipment of the same type as the Equipment within two releases of the
most current batch change supplement release. Borrower shall maintain the
Equipment in good working order in accordance with established maintenance
procedures such that the Equipment performs to published specifications and
shall upgrade its functionality to include batch change supplements releases
generally available to customers of Nortel or the applicable Vendor, as the case
may be, and batch change supplements upgrades included in the original purchase
price of the Purchase Agreement in the form in effect on the date of the Closing
Date, and in any event within two of the manufacturer's latest "Product
Computing Loads."

ARTICLE 8: NEGATIVE COVENANTS
-----------------------------

Borrower hereby agrees that so long as the Commitment hereunder remains in
effect or the Note remains outstanding and unpaid or any other amount is owing
to Lender hereunder or under any of the Loan Documents, Borrower shall not
directly or indirectly without prior written consent of Lender, do or permit to
exist any of the following:

8.01. Additional Indebtedness. Create, incur, assume or suffer to exist at
any one time any Indebtedness that would cause Borrower not to comply with the
ratios set forth in Schedule 7.15 hereto.

8.02. Restrictions on Liens and Sale of Collateral. Create or suffer to
exist any Lien on the Collateral, or any part thereof, whether superior or
subordinate to the Lien of the Security Documents, or assign, convey, sell or
otherwise dispose of or encumber its interest in the Collateral, or any part
thereof (including, without limitation, execution of any lease), nor permit any
such action to be taken, except for the following permitted dispositions and
encumbrances (the "Permitted Encumbrances"): (i) the Lien created hereby; (ii)
Liens for taxes not yet due, or which are being contested in good faith and by
appropriate proceedings in accordance with Section 7.08 hereof; (iii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business which are overdue for a period not
longer than thirty (30) days or which are being contested in good faith and by
appropriate

33
<PAGE>

proceedings in accordance with Section 7.08 hereof; (iv) pledges or liens in
connection with workers' compensation, unemployment insurance and other social
security legislation; (v) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; (vi) easements, rights-of-way,
restrictions and other similar encumbrances that are not substantial in amount,
and which do not in any case materially detract from the value of the property
subject thereto or interfere with the ordinary conduct of the business of
Borrower; (vii) judgment liens with respect to which execution has been stayed
within ten (10) days by appropriate judicial proceedings and the posting of
adequate security which may not be any of the Collateral; and (viii) specific
liens, if any, identified on Schedule 8.02 hereto. Any of the foregoing Liens
shall remain "Permitted Encumbrances" as long as they are being contested by
Borrower in compliance with Section 7.08 hereof.

8.03. Limitation on Contingent Obligations. Agree to, or assume,
guarantee, endorse or otherwise in any way be or become responsible or liable
for, directly or indirectly, any Contingent Obligation except for those created
or contemplated by the Loan Documents, and except for those that would not cause
Borrower to fail to meet its financial covenants set forth in Schedule 7.15
hereto.

8.04. Prohibition of Mergers, Acquisitions, Name, Office or Business
Changes, Etc.

(a) Enter into or become the subject of, any transaction of merger,
acquisition or consolidation or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of, in one transaction or a series of transactions, all
or any substantial part of Borrower's business or assets, whether now owned
or hereafter acquired.

(b) Change its name or corporate structure without giving Lender at
least ten (10) days advance written notice of such change, and ensuring
that any steps that Lender may deem necessary to continue the perfection
and priority of Lender's security interests in the Collateral shall have
been taken.

(c) Change the fiscal year end of Borrower from December 31, except
with the prior written consent of Lender, which consent shall not be
unreasonably withheld.

(d) Amend, restate or otherwise modify, or violate any terms of, its
Organizational Documents without ten (10) days advance written notice
thereof and in the event the Lender reasonably concludes that such
amendment, restatement, modification or violation would cause a Material
Adverse Effect and Lender so informs the Borrower within five (5) Business
Days of receipt of such notice

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<PAGE>

(e) Become or agree to become a general or limited partner in any
general or limited partnership, or a member in a limited liability company
or a joint venturer in any joint venture other than in the
telecommunications business.

(f) Acquire or purchase substantially all of the stock, partnership,
membership or other ownership interests in, or substantially all of the
business, assets, customers or operations of, any other entity other than
in the telecommunications business.

(g) Enter into any new business or make any material change in any of
Borrower's business objectives, purposes and operations from those
currently undertaken.

8.05. Limitation on Equity Payments. Make any Equity Payment, except that,
as long as no Default or Event of Default has occurred and is continuing, or
would be caused thereby, and if no other provision contained herein will be
violated by the disbursement of such Equity Payment, Borrower may make Equity
Payments described on Schedule 8.06 hereto. Before making any Equity Payment in
accordance with this Section 8.06, Borrower shall deliver to Lender a
certificate of a Responsible Officer of Borrower, setting forth in detail the
calculation supporting Borrower's compliance with the financial covenants,
stating that no Material Adverse Change has occurred since the date of the
latest financial statement delivered pursuant to Section 7.01(a), and stating
that no Default or Event of Default has occurred and is continuing or will be
caused by such Equity Payment.

8.06. Limitation on Investments, Advances and Loans. Organize, create,
acquire, capitalize or own any Subsidiaries without Lender's prior written
consent, or make or commit to make any advance, loan, guarantee of any
Indebtedness, extension of credit or capital contribution to, or hold or invest
in or purchase or otherwise acquire any stock, bonds, notes, debentures or other
securities of, or make any other investment in, any Person including, without
limitation, any officers of Borrower, any Affiliate of Borrower or any Owner, or
any officers of any Affiliate of Borrower other than in the telecommunications
business.

8.07. Capital Expenditures. Directly or indirectly make or commit to make
any expenditure in respect of the purchase or other acquisition (including
installment purchases or capital leases) of fixed or capital assets, except for
expenditures in accordance with its current operations and normal replacements
and maintenance which are properly charged to current operations and except for
expenditures that would not cause Borrower to fail to meet its financial
covenants set forth on Schedule 7.15 hereto.

8.08. Limitation on Leases. Enter into any agreement, or be or become
liable under any agreement, not in existence as of the date hereof and reflected
on Borrower's financial statements, for the lease, hire or use of any real or
personal property in excess of $100,000 in the aggregate, including, without
limitation, capital or operating leases, that would cause Borrower not to comply
with the ratios set forth in Schedule 7.15 hereto.

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<PAGE>

8.09. Termination of Nortel Purchase Agreement. Fail to satisfy its
purchase obligations under a Purchase Agreement or terminate any Purchase
Agreement prior to the completion of the installation of Equipment and related
Software at a particular Site.

8.10. Removal of Collateral. Remove or permit the removal of any material
part of the Collateral from the locations identified on Schedule 4.26, without
giving Lender thirty (30) days prior written notice of such move and ensuring
that any steps Lender may deem necessary to continue the perfection and priority
of Lender's security interest in the Collateral shall have been taken.

8.11. Assumed Names. Without notice to Lender to transact or engage in
business under any assumed name, fictitious name, tradestyle or "d/b/a" except
those identified on Schedule 4.29.

ARTICLE 9: EVENTS OF DEFAULT AND REMEDIES
-----------------------------------------

9.01. Events of Default. An Event of Default shall mean the occurrence or
existence of one or more of the following events or conditions (whatever the
reason for such Event of Default and whether voluntary, involuntary or effected
by operation of Law):

(a) Payment Default. If Borrower fails to pay any sum, whether of
principal or interest on the Note or any prepayment premiums, or any other
amount due hereunder or under the Note within five (5) calendar days after
such amount becomes due; or

(b) False Statement. If any statement, representation or warranty
made by Borrower or any Owner in any Loan Document or made in any financial
statement, certificate, report, exhibit or document furnished to Lender
pursuant to any Loan Document, proves to have been untrue, incomplete,
false or misleading in any material respect as of the time when made
(including by omission of material information necessary to make such
representation, warranty or statement not misleading) and such untruth,
falsity, misleading statement or omission shall not have been corrected or
remedied to the satisfaction of Lender within ten (10) calendar days after
the earlier of Borrower's (or Owner's) knowledge thereof or receipt of
written notice thereof from Lender; or

(c) Covenant Defaults. If Borrower defaults in the performance or
observance of any covenant or agreement in this Agreement, and such default
continues for a period of ten (10) calendar days after the earlier of
Borrower's knowledge thereof or receipt of written notice from Lender
thereof, except for violations of Section 7.08(d), which shall become an
Event of Default at the end of the sixty (60) day period stated therein and

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except for specific Defaults listed elsewhere in this Section 9.01, as to
which no notice or cure period shall apply unless specified; or

(d) Undischarged Judgments. If one or more judgments for the payment
of money has been entered against Borrower in an amount in excess of
$300,000, and such judgment or judgments have remained undischarged and
unstayed for a period of thirty (30) calendar days, unless the validity
thereof is contested in compliance with Section 7.08 hereof; or

(e) Attachments, etc. If a writ or warrant of attachment,
garnishment, execution, distraint or similar process has been issued
against Borrower or any of its properties which has remained undischarged
and unstayed for a period of thirty (30) consecutive days and is not being
contested in compliance with Section 7.08 hereof; or

(f) Default Under Third Party Agreements. If a default, or event or
condition which with notice or lapse of time or both would become a
default, occurs and the creditor accelerates in respect of any other
obligation of Borrower for borrowed money (including lease obligations) in
the amount of $300,000 in the aggregate, or under any two or more such
other obligations of any amount; or

(g) Dissolution; Discontinuance of Business, Etc. If Borrower
discontinues its usual business, dissolves, winds up or liquidates itself
or its business; or

(h) Involuntary Bankruptcy or Receivership Proceedings. If a
receiver, custodian, liquidator, or trustee of Borrower, or of any of its
property is appointed by the order or decree of any court or agency or
supervisory authority having jurisdiction; or an order is entered
adjudicating Borrower as bankrupt or insolvent; or any of the property of
Borrower is sequestered by court order; or a petition is filed against
Borrower under any state or federal bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution, liquidation, or
receivership law of any jurisdiction, whether now or hereafter in effect;
or

(i) Voluntary Bankruptcy. If Borrower takes affirmative steps to
prepare to file, or files, a petition in voluntary bankruptcy or to seek
relief under any provision of any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution, or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consents to the filing
of any petition against it under any such law; or

(j) Assignments for Benefit of Creditors, Etc. If Borrower makes an
assignment for the benefit of creditors, or admits in writing its inability
to pay its debts generally as they become due, or consents to the
appointment of a receiver, trustee, or liquidator of itself or of all or
any part of its properties; or

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(k) Non-compliance with Governmental Requirements. If Borrower fails
to comply with any requirement of any Governmental Authority within ten
(10) calendar days after notice in writing of such requirement shall have
been given to Borrower by such Governmental Authority, or such longer
period of time permitted Borrower by such Governmental Authority; or

(l) Regulatory Authorizations. If any Regulatory Authorization in
connection with this Agreement or any other Loan Document or any such
Regulatory Authorization now or hereafter necessary or advisable to make
this Agreement or the other Loan Documents legal, valid, enforceable and
admissible in evidence or to permit Borrower to conduct its business is not
obtained or has ceased to be in full force and effect or has been modified
or amended or has been held to be illegal or invalid or is revoked or
terminated, and is not being contested by Borrower in compliance with
Section 7.08 hereof and Lender has reasonably determined in good faith
(which determination shall be conclusive) that such event or occurrence may
have a Material Adverse Effect or a material adverse effect on Lender's
rights under this Agreement or any other Loan Documents; or

(m) Consents. If Borrower fails to provide any Consent required
hereunder and Lender determines in its sole discretion that such failure
results in a material impairment of Lender's security for the Loans; or

(n) ERISA Defaults. If, with respect to any Plan, (i) there has
occurred a Reportable Event being considered by the PBGC which may
reasonably result in any material liability to the PBGC with respect to any
Plan, (ii) a Plan has been terminated, (iii) a trustee has been appointed
by a United States District Court to administer a Plan, (iv) a PBGC or any
other person has instituted proceedings to terminate a Plan or to appoint a
trustee to administer any such Plan, (v) either Borrower or any Affiliate
has withdrawn, completely or partially, from any Plan (vi) either Borrower
or any Affiliate has incurred secondary liability for withdrawal liability
payments under any Plan or (vii) a Plan has failed to meet the minimum
funding standards established under the Code or ERISA and any of the above
(i) through (iii) is likely to cause a Material Adverse Change; or

(o) Defaults Under Other Loan Documents. If any default,
misrepresentation or breach should occur under any Security Document or
other Loan Document and is not cured or waived within the time permitted
therein, or any such Loan Documents should cease to be in full force and
effect, or any party thereto should assert any unenforceability of, or deny
liability on, or admit inability to perform under, any such Loan Document.

9.02. Consequences of an Event of Default. If any Event of Default shall
occur and be continuing or shall exist, Lender shall be under no further
obligation to make Advances hereunder, at Lender's option, any remaining
commitment hereunder shall immediately terminate, with no further notice, and
Lender may, by notice to Borrower, declare the unpaid

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<PAGE>

principal amount of the Note, interest accrued thereon and all other amounts
owing by Borrower hereunder or under the Note to be immediately due and payable
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived, and an action therefor shall immediately accrue.
Such consequences shall occur automatically upon the occurrence of an Event of
Default under Section 9.01 (h), (i), (j) or (k), without any notice or demand.
Upon the occurrence of an Event of Default, Lender may, in its sole discretion,
exercise any and all remedies available to it under this Article 9 or under any
of the Loan Documents or under applicable law without further notice or period
of grace or opportunity to cure.

9.03. Exercise of Rights. Subject to any requirements for FCC or other
governmental approval upon the occurrence of any Event of Default, the rights,
powers and privileges provided in this Section and all other remedies available
to Lender under this Agreement or by statute or by rule of law may be exercised
by Lender at any time from time to time whether or not the Obligations shall be
due and payable, and whether or not Lender shall have instituted any foreclosure
or other action for the enforcement of this Agreement or the Note. No failure to
exercise nor any delay in exercising on the part of Lender, any right, remedy,
power or privilege hereunder or under any of the other Loan Documents shall
operate as a waiver thereof, nor shall any single or partial exercise of any
right, power or privilege hereunder or thereunder preclude any other or future
exercise thereof or the exercise of any other right, remedy, power or privilege.

9.04. Rights of Secured Party; Possession or Sale of Collateral. Without
limiting the generality of the foregoing, Lender shall have all the rights and
remedies of a secured party under the UCC, and Lender may, without demand and
without advertisement or notice, all of which Borrower waives, at any time or
times, sell and deliver any or all Collateral held by or for it at public or
private sale, for cash, upon credit or otherwise, at such prices and upon such
terms as Lender deems advisable, in its sole discretion, and/or collect, or
enforce the collection of, the Collateral. Lender may be the purchaser at any
such sale. Upon the occurrence of an Event of Default and upon Lender's request,
Borrower shall assemble, at its own expense, any or all Equipment and other
Collateral at a convenient place acceptable to Lender and shall pay to Lender or
reimburse Lender for, on demand, all costs of collection of all amounts due, and
enforcement of all rights hereunder, including reasonable attorneys' fees and
legal expenses, and expenses of any repairs to any realty or other property to
which any of such Collateral may be affixed. Upon an Event of Default Lender
may, to the full extent permitted by applicable law, without notice,
advertisement, hearing or process of law of any kind, enter upon any premises
where any of the Collateral may be located and take possession of and remove
such Collateral.

9.05. Notices, Etc. Waived. Except as expressly provided in this Article
9, Borrower hereby expressly waives, to the full extent permitted by applicable
law, presentment, demand, protest, any and all notices of any kind,
advertisements, hearing or process of law in connection with the exercise by
Lender of any of its rights and remedies upon the occurrence of an Event of
Default. If any notification of intended disposition of any of the Collateral is
required by law,

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<PAGE>

such notification shall be deemed reasonably and properly given if given in
accordance with Section 10.06 hereto at least ten (10) days before such
disposition.

9.06. Additional Remedies. Lender's remedies upon the occurrence and
during the continuance of an Event of Default shall include, in addition to, and
not in lieu of, such remedies as are available at law or in equity or provided
for in any of the Loan Documents, the following:

(a) Foreclosure; Receivership. Lender shall be entitled to file one
or more suits at law or in equity to collect the Obligations and/or to
foreclose on Lender's Liens on and security interests created by this
Agreement or the Security Documents. Lender may apply or require Borrower
to apply for any necessary transfers, assignments, orders, consents or
licenses in connection with the operation or abandonment of the Collateral
or any part thereof, and Lender shall also be entitled as a matter of right
and without notice and without requiring bond (notice and bond being hereby
waived), without regard to the solvency or insolvency of Borrower at the
time of application and without regard to the value of the Collateral at
that time, to have a receiver appointed by a court of competent
jurisdiction in order to manage, protect, and preserve the Collateral and
to continue the operation of the business of Borrower, and to collect all
revenues and profits thereof and apply the same to the payment of all
expenses and other charges of such receivership until the sale or other
final disposition of the Collateral. Borrower hereby consents to the
appointment of such receiver.

(b) Right to Cure. If Borrower fails in any material respect to
perform or comply with any of its agreements contained herein or in any of
the other Loan Documents, Lender may take whatever actions it may deem
appropriate to perform or comply or otherwise cause performance or
compliance with such agreement, all at the risk, cost and expense of
Borrower.

(c) Setoff. If the unpaid principal amount of the Note, interest
accrued thereon or any other amount owing by Borrower hereunder or under
the Note shall have become due and payable (by acceleration or otherwise),
Lender shall have the right, in addition to all other rights and remedies
available to it, without notice to Borrower, to setoff against and to
appropriate and apply to such due and payable amounts any debt owing
to, and any other funds held in any manner for the account of, Borrower by
Lender. Such right shall exist whether or not Lender shall have given
notice or made any demand hereunder or under the Note, whether or not such
debt owing to or funds held for the account of Borrower is or are matured
or unmatured, and regardless of the existence or adequacy of any
collateral, guaranty or any other security, right or remedy available to
Lender. Borrower hereby consents to and confirms the foregoing arrangements
and confirms Lender's rights of setoff.

9.07. Application of Proceeds. Any proceeds of any of the Collateral,
received by Lender through sale or disposition of the Collateral or otherwise,
may be applied by Lender

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<PAGE>

toward the payment of the Obligations, including expenses in connection with the
Collateral (including reasonable fees and legal expenses) in such order of
application as Lender may from time to time elect.

9.08. Discontinuance of Proceedings. If Lender should proceed to enforce
any right or remedy under this Agreement or any other Loan Document, and then
discontinue or abandon such proceeding for any reason, all rights, powers and
remedies of Lender hereunder shall continue as if no such proceeding had been
taken.

9.09. Power of Attorney. For the purpose of carrying out the provisions
and exercising the rights, powers and privileges granted by the Loan Documents,
including, without limitation, this Article 9, Borrower hereby irrevocably
constitutes and appoints Lender its true and lawful attorney-in-fact to execute,
acknowledge and deliver any instruments and do and perform any acts such as are
referred to in the Loan Documents, including, without limitation, this Article
9, in the name and on behalf of Borrower, from time to time in Lender's
reasonable discretion after the occurrence and during the continuance of an
Event of Default, in accordance with the Loan Documents and any statute or rule
of law. This power of attorney is a power coupled with an interest and cannot be
revoked. Borrower hereby ratifies all that said attorney-in-fact shall lawfully
do or cause to be done by virtue and in accordance with the terms hereof.

Without limiting the generality of the foregoing, Lender may after the
occurrence and during the continuance of an Event of Default do the following
without notice to or assent by Borrower to accomplish the purposes of this
Agreement:

(a) upon failure of Borrower to timely pay or discharge taxes or Liens
levied or placed on or threatened against the Collateral, effect any
repairs or any insurance called for by the terms of this Loan Agreement or
any other Loan Document, and pay all or any part of the premiums therefor
and the costs thereof;

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<PAGE>

(b) (i) direct any party liable for any payment on any Collateral to
make payment of any and all monies due and to become due thereunder
directly to Lender or as Lender shall direct; (ii) in the name of
Borrower or its own name or otherwise, take possession of and endorse
and collect any checks, drafts, notes, acceptances, or other
instruments for the payment of monies due under, or otherwise receive
payment of and receipt for any and all monies, claims and other
amounts due and to become due at any time in respect of or arising out
of any Collateral; (iii) sign and endorse any invoices, freight or
express bills, bills of lading, storage or warehouse receipts, drafts
against debtors, assignments, verifications and notices in connection
with the Collateral; (iv) commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction
to collect all or any of the Collateral and to enforce any other right
in respect of any Collateral; (v) defend any suit, action or
proceeding brought against Borrower with respect to any Collateral;
(vi) settle, compromise or adjust any suit, action or proceeding
described above upon commercially reasonable terms under the
circumstances and, in connection therewith, give such discharges or
releases as Lender may reasonably deem appropriate; and (vii)
generally sell, use, operate, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral as fully
and completely as though Lender were the absolute owner thereof for
all purposes, and, at Lender's option and Borrower's expense, at any
time or from time to time after the occurrence and during the
continuance of an Event of Default, all other acts and things that
Lender reasonably deems necessary to protect, preserve or realize upon
the Collateral and Lender's security interest therein, in order to
effect the intent of this Agreement and the other Loan Documents all
as fully and effectively as Borrower might do.

9.10. Regulatory Matters. Notwithstanding any provision to the contrary
contained herein, Lender will not exercise any right or remedy under this
Agreement that requires prior FCC or PUC approval without first obtaining such
approval. If counsel to Lender reasonably determines that the consent of the FCC
or PUC is required in connection with any of the actions that may be taken by
Lender in the exercise of its rights hereunder or under any of the other Loan
Documents, then Borrower, at its sole cost and expense, agrees to use its best
efforts to secure such consent and to cooperate with Lender in any action
commenced by Lender to secure such consent. Upon the occurrence and during the
continuation of an Event of Default, Borrower shall promptly execute and/or
cause the execution of all applications, certificates, instruments and other
documents and papers that may be required in order to obtain any necessary
governmental consent, approval or authorization, and if Borrower fails or
refuses to execute such documents, the clerk of the court with jurisdiction may
execute such documents on behalf of Borrower.

ARTICLE 10: GENERAL CONDITIONS/MISCELLANEOUS
--------------------------------------------

The following conditions shall be applicable throughout the term of this
Agreement:

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<PAGE>

10.01. Modifications and Waivers. This Agreement, the other Loan
Documents, or any provision thereof may not be changed, waived or terminated
orally, but only by an instrument in writing signed by the party against whom
enforcement of the change, waiver or termination is sought. No action or course
of dealing on the part of Lender, its officers, employees, consultants, or
agents, nor any failure or delay by Lender with respect to exercising any right,
power, or privilege of Lender under the Note, this Agreement, or any other Loan
Document shall operate as a waiver thereof, except as otherwise provided in this
Agreement. Any waiver shall be effective only to the extent and for the instance
specifically identified in such writing, and shall not be deemed to imply any
future waivers or other waivers. No amendment to the Loan Documents shall be
effective without written agreement signed by both Borrower and Lender.

10.02. Advances Not Implied Waivers. No waiver of the requirements
contained in any Loan Document shall be effective unless in writing duly signed
by Lender. No Advance hereunder shall constitute a waiver of any of the
conditions of Lender's obligation to make further Advances nor, in the event
Borrower is unable to satisfy any such condition, shall any waiver of such
condition have the effect of precluding Lender from thereafter declaring such
inability to be an Event of Default as herein provided. Any Advance made by
Lender and any sums expended by Lender pursuant to the Loan Documents shall be
deemed to have been made pursuant to this Agreement, notwithstanding the
existence of an uncured Default or Event of Default. No Advance at a time when
an Event of Default exists shall constitute a waiver of any right or remedy of
Lender existing by reason of such Event of Default, including, without
limitation, the right to accelerate the maturity of the Indebtedness evidenced
by the Note or to foreclose the Lien on the Collateral or to refuse to make
further advances hereunder.

10.03. Deviation from Covenants. The procedure to be followed by Borrower
to obtain the consent of Lender to any deviation from the covenants contained in
this Agreement or any other Loan Document shall be as follows:

(a) Borrower shall send a written notice to Lender setting forth (i)
the covenant(s) relevant to the matter, (ii) the requested deviation from
the covenant(s) involved, and (iii) the reason for the requested deviation
from the covenant(s); and

(b) Lender, within a reasonable time, will send a written notice to
Borrower, permitting or refusing the request, but in no event will any
deviation from the covenants of this Agreement or any other Loan Document
be effective without the express prior written consent of Lender. Lender's
failure to provide such written notice shall be deemed a refusal of such
request.

10.04. Holidays. Except as otherwise provided herein, whenever any payment
or action to be made or taken hereunder or under the Note shall be stated to be
due on a day which is not a Business Day, such payment or action shall be made
or taken on the next following Business Day and such extension of time shall be
included in computing interest or fees, if any, in connection

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with such payment or action.

10.05. Records. From time to time, Lender may send Borrower statements of
the unpaid principal amount of the Note, the unpaid interest accrued thereon,
the Interest Rate or rates applicable to such unpaid principal amount, the
duration of such applicability, and the amount remaining available on any Loan,
and each statement shall be deemed correct and conclusively binding on Borrower
(absent manifest error) unless Borrower notifies Lender of an error in the
statement in writing within thirty (30) days of the date of any such statement
is provided to Borrower.

10.06. Notices. All notices, requests, demands, directions and other
communications (collectively, "notices") required under the provisions of this
Agreement or any other Loan Document shall be in writing (including
communication by facsimile transmission) unless otherwise expressly permitted
hereunder and shall be sent by hand, by registered or certified mail return
receipt requested, by overnight courier service maintaining records of receipt,
or by facsimile transmission with confirmation in writing mailed first-class, in
all cases with charges prepaid, and any such properly given notice shall be
effective upon the earlier of receipt or (i) when delivered by hand, or (ii) the
third Business Day after being mailed, or (iii) the following Business Day if
sent by overnight courier service, or (iv) when sent by facsimile, answer back
received. All notices shall be addressed as follows:

If to Borrower, to the Notice Address set forth on Schedule 1, with
copies, if any, as set forth on Schedule 1.

If to Lender: NTFC Capital Corporation
501 Corporate Centre Drive
Franklin, Tennessee 37067
Attention: Manager, Credit
Telecopy: (615) 771-6143

With a copy to: NTFC Capital Corporation
501 Corporate Centre Drive
Franklin, Tennessee 37067
Attention: Legal Department
Telecopy: (615) 771-6187

All notices shall be sent to the applicable party at the address stated
above or in accordance with the last unrevoked written direction from such party
to the other party hereto, given in accordance with the terms hereof.

10.07. FCC and PUC Approval. The exercise of any rights or remedies
hereunder or under any other Loan Document by Lender that may require FCC or PUC
approval shall be subject to obtaining such approval. Pending the receipt of any
PUC or FCC approval, Borrower

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<PAGE>

shall not do anything to delay, hinder, interfere with or obstruct the exercise
of Lender's rights or remedies hereunder or the obtaining of such approvals.

10.08. Lender Sole Beneficiary. All conditions of the obligation of Lender
to make any Advances hereunder are imposed solely and exclusively for the
benefit of Lender and its assigns and no other Person shall have standing to
require satisfaction of such conditions in accordance with their terms or be
entitled to assume that Lender will refuse to make any Advances in the absence
of strict compliance with any or all such conditions, and no Person shall under
any circumstances be deemed to be a beneficiary of such conditions, any or all
of which may be freely waived in whole or in part by Lender at any time if in
its sole discretion it deems it advisable to do so. Inspections and approvals of
the System, and the workmanship and materials used therein impose no
responsibility or liability of any nature whatsoever on Lender, and no Person
shall, under any circumstances, be entitled to rely upon such inspections and
approvals by Lender for any reason. Lender's sole obligation hereunder is to
make the Advances if and to the extent required by this Agreement or the Notes.

10.09. Lender's Review of Information. Borrower acknowledges and agrees
that any review or analysis by Lender of financial information, operating
information, marketing data or other information provided to Lender by or on
behalf of Borrower at any time is and shall be conducted solely for Lender's
benefit and internal use and that Lender is under no duty or obligation to make
the results of such review or analysis available to Borrower. Borrower is not
relying, and will not rely, on Lender for financial or business advice.

10.10. No Joint Venture. Nothing in any of the Loan Documents or in this
Agreement shall be deemed to constitute any kind of partnership, joint venture
or fiduciary relationship between Lender and Borrower or between Lender and any
Owners.

10.11. Severability. The provisions of this Agreement are intended to be
severable. If any provision of this Agreement or the other Loan Documents shall
be held invalid or unenforceable in whole or in part in any jurisdiction such
provision shall, as to such jurisdiction, be ineffective to the extent of such
invalidity or unenforceability without in any manner affecting the validity or
enforceability thereof in any other jurisdiction or the remaining provisions
hereof or thereof in any jurisdiction.

10.12. Rights Cumulative. All rights, powers and remedies herein given to
Lender are cumulative and not alternative, and are in addition to all statutes
or rules of law.

10.13. Duration; Survival. All representations and warranties of Borrower
contained herein or made in connection herewith shall survive the making of and
shall not be waived by the execution and delivery of this Agreement and the
other Loan Documents, any investigation by Lender, or the making of any Advances
hereunder. All covenants and agreements of Borrower contained herein shall
continue in full force and effect from and after the date hereof so long as it
may borrow hereunder and until payment in full of the Notes, interest thereon,
all fees and all

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<PAGE>

other Obligations of Borrower. Without limitation, it is understood that all
obligations of Borrower to make payments to or indemnify Lender shall survive
the payment in full of the Notes and of all other Obligations.

10.14. Governing Law. This Agreement and the Notes and each of the other
Loan Documents shall be governed by and construed and enforced in accordance
with the internal laws of the State of Tennessee except to the extent that the
laws of jurisdictions where the Collateral is located may be required to apply
to the Collateral.

10.15. Counterparts. This Agreement may be executed in any number of
counterparts (by facsimile transmission or otherwise) and by the different
parties hereto on separate counterparts, each of which, when so executed, shall
be deemed an original, but all such counterparts shall constitute but one and
the same instrument.

10.16. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of Lender and Borrower and their respective successors and
assigns; provided, however, that Borrower may not assign or transfer any of its
rights or obligations hereunder or under the other Loan Documents (in whole or
in part) without the prior written consent of Lender. Lender may assign,
transfer or pledge any of its respective rights or obligations hereunder or
under the other Loan Documents without notice to or the prior written consent of
Borrower. Upon receipt of written notice from Lender of such assignment,
Borrower shall promptly acknowledge receipt thereof in writing. If Borrower is
given written notice of any assignment, it shall perform its obligations with
respect to this Agreement for the ratable benefit of the applicable assignee(s),
and, if so directed, shall pay all amounts due or to become due hereunder
directly to the applicable assignee(s) or to any other party designated by such
assignee(s). Borrower shall not assert against any such assignee any set-off,
defense or counterclaim that Borrower may have against Lender or any person
other than such assignee. Borrower shall also execute and deliver to Lender such
documentation as any such assignee may reasonably require, including but not
limited to amended promissory notes and acknowledgment of or consent to the
assignment which may require Borrower to make certain representations or
reaffirmations as to some of the basic terms and covenants contained herein.
Lender shall not be relieved of its obligations hereunder as a result of any
such sale, assignment, transfer, grant or pledge, unless such assignee
specifically assumes all or part of Lender's future obligations hereunder in a
writing, a copy of which shall be delivered to Borrower, in which event after
the date of such assignment, Borrower's obligations to any such assignee shall
be proportionately as set forth herein with respect to Lender, and Borrower
shall not look to Lender to perform any of such assignee's obligations hereunder
which arise after the date thereof. Any assignee shall be entitled to rely on
Borrower's agreements as stated herein, as applicable, and shall be considered a
third party beneficiary thereof. Except to the extent otherwise required by the
context of this Agreement, the word "Lender" where used in this Agreement shall
mean and include any holder of any Note originally issued to Lender hereunder,
and any such holder of any Note shall be bound by and have the benefits of this
Agreement the same as if such holder had been a signatory hereto.

46
<PAGE>

10.17. Participation. Lender shall have the right to enter into one or
more participation agreements, syndication agreements or similar agreements with
one or more participating lenders or other parties approved by Lender on such
terms and conditions as Lender shall deem advisable. Borrower shall furnish a
sufficient number of copies of reports and certificates to Lender so that Lender
and each participating lender shall receive a copy of each such document.

10.18. Time of Essence. Time is of the essence of this Agreement and the
Note and the other Loan Documents.

10.19. Disclosures and Confidentiality.

(a) Borrower agrees that it will obtain Lender's written consent
before using or generating any press release, advertisement, publicity
materials or other publication in which the name or logo of Lender or any
of its Affiliates is used or may be reasonably inferred, and will not
distribute any such materials in the absence of such prior written
approval.

(b) Borrower agrees that it will not, directly or indirectly,
disclose to any third party the terms of this Agreement or the other Loan
Documents or prior or future correspondence relating thereto, or the
transactions contemplated hereby, or any other information regarding Lender
or its Affiliates learned by Borrower during the course of negotiation
thereof. The term "third party" shall exclude only Borrower, its Affiliates
and their respective attorney(s) and certified public accountant(s). This
Section 10.19(b) shall not restrict the disclosure of information if such
disclosure is required by law, by order of any court or by the order, rule
or regulation of any administrative agency, including without limitation
any requirements of the FCC, any PUC, or any state or federal securities
commissions (the "Commissions"); provided, however, that, except for
disclosures required by the FCC, PUC or Commissions, Borrower shall provide
Lender with advance notice of any such required disclosure of information
so that Lender may seek an appropriate protective order and/or waive
compliance with this Section. Borrower shall not oppose any action taken by
Lender to obtain an appropriate protective order or other reliable
assurance that the information will be accorded confidential treatment. The
obligations set forth in this Section 10.19(b) shall survive the
termination of this Agreement.

(c) The disclosure of information by either Lender or Borrower will
not be restricted under this Agreement if such information (i) has been or
becomes published or is now, or in the future, in the public domain through
(A) no fault of the parties, (B) disclosure other than unauthorized
disclosure by the party to whom the information is disclosed, or (C)
disclosure to third parties by the disclosing party without similar
restriction; (ii) is properly (other than proposal letters, commitment
letters or other correspondence between Lender and Borrower) within the
legitimate possession of the receiving party prior to disclosure hereunder;
(iii) subsequent to disclosure hereunder, is

47
<PAGE>

lawfully received from a third party having rights therein without
restriction of the third party's or receiving party's rights to disseminate
the information and without notice of any restriction against its further
disclosure; (iv) is disclosed with the written approval of the other party;
(v) is or becomes publicly available free of any obligation to keep it
confidential.

(d) Borrower authorizes Lender to discuss with and furnish to any
Affiliate of Lender, to any government or self-regulatory agency with
jurisdiction over Lender, to any other Governmental Authority or to any
assignee, successor, participant, successor, or prospective assignee,
successor or participant, all financial statements, audit reports and other
information pertaining to Borrower and/or its Subsidiaries whether such
information was provided by Borrower or prepared or obtained by Lender or
third parties. Neither Lender nor any of its employees, officers, directors
or agents make any representation or warranty to any existing or
prospective assignee, successor or participant regarding any audit reports
or other analyses of Borrower that Lender may distribute, whether such
information was provided by Borrower or prepared or obtained by Lender or
third parties, nor shall Lender or any of its employees, officers,
directors or agents be liable to any Person receiving a copy of such
reports or analyses for any inaccuracy or omission contained in such
reports or analyses or relating thereto.

(e) Every reference in this Agreement to disclosures of Borrower to
Lender (except the financial statements), to the extent that such
references refer or are intended to refer to disclosures at or prior to the
execution of this Agreement, shall be deemed strictly to refer only to
written disclosures delivered to Lender concurrently with the execution of
this Agreement and referred to specifically in the Loan Documents. The
parties intend that such disclosures are to be limited to those presented
in an orderly manner at the time of executing this Agreement and are not to
be deemed to include expressly or impliedly any disclosures that previously
may have been delivered from time to time to Lender, except to the extent
that such previous disclosures are again presented to Lender in writing
concurrently with the execution of this Agreement.

10.20. Jurisdiction and Venue. BORROWER HEREBY IRREVOCABLY CONSENTS TO THE
JURISDICTION OF THE COURTS LOCATED IN DAVIDSON COUNTY, TENNESSEE, INCLUDING
WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE
AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR
ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR
THE OBLIGATIONS, AND AGREES NOT TO CONTEST VENUE OR JURISDICTION IN ANY SUCH
COURTS. In any such litigation, Borrower waives personal service of any summons,
complaint or other process, and agrees that the service thereof may be made by
certified or registered mail direct to Borrower at its address set forth in
Section 10.06 hereof. Within thirty (30) days after such mailing, Borrower shall
appear and answer to such summons, complaint or other process. Should Borrower
fail to appear or answer within the said

48
<PAGE>

30-day period, then such party shall be deemed in default and judgment may be
entered against Borrower for the amount or other relief as demanded in any
summons, complaint or other process so served. In the alternative, in its sole
discretion, Lender may effect service upon Borrower in any other form or manner
permitted by law. The choice of forum set forth herein shall not be deemed to
preclude the enforcement of any judgment obtained in such forum or the taking of
any action under this Agreement to enforce the same in any appropriate
jurisdiction.

10.21. Jury Waiver. BORROWER AND LENDER HEREBY KNOWINGLY AND WILLINGLY
WAIVE THEIR RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING
THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, THE OBLIGATIONS, OR ANY RELATIONSHIP
BETWEEN LENDER AND BORROWER. BORROWER WARRANTS AND REPRESENTS THAT IT HAS
REVIEWED THE FOREGOING WAIVERS WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND
VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN
CONSENT TO A TRIAL BY THE COURT.

10.22. Limitation on Liability. LENDER SHALL HAVE NO LIABILITY UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS FOR SPECIAL,
EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY SORT
IN ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS AGREEMENT, THE
OTHER LOAN DOCUMENTS, OR THE OBLIGATIONS, AND, EXCEPT TO THE EXTENT PROHIBITED
BY LAW, EACH PARTY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
ACTION ANY SPECIAL, EXEMPLARY, PUNITIVE, INCIDENTAL, INDIRECT OR CONSEQUENTIAL
DAMAGES OF ANY SORT OTHER THAN ACTUAL DAMAGES.

10.23. Borrower Waivers. To the full extent permitted by law, Borrower
hereby waives (i) presentment, demand and protest and notice of presentment,
protest, default, non payment, maturity, release, compromise, settlement,
extension or renewal of any or all commercial paper, accounts, contract rights,
documents, instruments, chattel paper and guaranties at any time held by Lender
on which Borrower may in any way be liable and hereby ratifies and confirms
whatever Lender may do in this regard; (ii) notice prior to taking possession or
control of the Collateral or any bond or security which might be required by any
court prior to allowing Lender to exercise any of Lender's remedies, including
the issuance of an immediate writ of possession, except as expressly required in
any of the Loan Documents; (iii) any marshalling of assets, or any right to
compel Lender to resort first to any Collateral or other Persons before pursuing
Borrower for payment of the Obligations and any defenses based on suretyship or
impairment of Collateral; (iv) the benefit of all valuation, appraisement and
exemption laws; (v) any right to require Lender to terminate its security
interest in the Collateral or in any other property of Borrower until
termination of this Agreement and the execution by Borrower and by any person
whose loans to Borrower are used in whole or in part to satisfy the Obligations,
of an

49
<PAGE>

agreement indemnifying Lender from any loss or damage Lender may incur as
the result of dishonored or unsatisfied items of any account debtor applied to
the Obligations; and (vi) notice of acceptance hereof. Borrower acknowledges
that the foregoing waivers are a material inducement to Lender's entering into
this Agreement and that Lender is relying upon the foregoing waivers in its
future dealings with Borrower.

10.24. Schedules. The Schedules and Exhibits attached to this Agreement
are an integral part hereof, and are hereby made a part of this Agreement.

10.25. Agreement to Govern. In case of any conflict between the terms of
this Agreement and any of the other Loan Documents, the terms of this Agreement
shall govern.

10.26. Entire Agreement. This Agreement, the other Loan Documents and
other documents, agreements and certificates executed by the parties
contemporaneously herewith or subsequent hereto constitute the entire agreement
of the parties and supersede all prior understandings and agreements, written or
oral, between the parties hereto relating to the subject matter hereof. Borrower
is not entering into this Agreement in reliance on statements or representations
made by any Person other than as set forth herein.

10.27. Construction. The parties acknowledge that each party and/or its
legal counsel have reviewed and made revisions to this Agreement. The rule of
construction requiring the resolution of any ambiguities in this Agreement
against the drafting party shall not apply to the construction of this Agreement
or any schedules or exhibits to this Agreement.

[END OF GENERAL TERMS AND CONDITIONS. NEXT PAGE IS SCHEDULE 1.]

[SIGNATURES ARE ON COVER PAGE.]

50
<PAGE>

SCHEDULE 1 TO
-------------
LOAN AND SECURITY AGREEMENT
---------------------------

BORROWER INFORMATION
--------------------

Borrower: FOCAL COMMUNICATIONS CORPORATION, a Delaware corporation

Borrower's federal employer/tax identification number: 36-4167094
----------
Borrower's chief executive offices (including county):

200 North LaSalle Street,
Chicago, Illinois 60601

Borrower's Notice Address:

200 North LaSalle Street,
Chicago, Illinois 60601
Attention: General Counsel

with copies to:
Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago, Illinois 60606
Attention: Michael Devine

Borrower's Initials:____

Lender's Initials: ____

58
<PAGE>

SCHEDULE 1.01(a) TO
-------------------
LOAN AND SECURITY AGREEMENT
---------------------------

SUBSIDIARY EXECUTION PAGE(S)
----------------------------

By executing this Schedule attached to and forming a part of the Loan and
Security Agreement dated as of December ____, 1998 (the "Agreement"), by and
among NTFC CAPITAL CORPORATION, FOCAL COMMUNICATIONS CORPORATION (the
"Borrower"), each direct or indirect Subsidiary of the Borrower listed below
represents and warrants that it is a Subsidiary of the Borrower, joins as a
party to the Loan Agreement for the purpose of granting a security interest in
the Collateral to the extent of its interest therein.

Each of the undersigned further acknowledges and agrees that: (i) future
Subsidiaries of the Borrower may be required to grant security interest(s) under
the Agreement without the consent of any other Subsidiary by the execution of a
form of the Annex to this Schedule of Subsidiary Execution Page(s); (ii) the
Lender is willing to extend certain credit to the Borrower, subject to the terms
and conditions set forth in the Agreement, including the condition that the
undersigned will provide the Guaranties they have provided and by granting the
security interest(s) granted hereby; (iii) without this condition, Lender would
not be willing to extend credit to the Borrower; and (iv) the undersigned are
related entities, and the undersigned expect to increase their respective
businesses, and to benefit directly and indirectly, through the use of the
Collateral owned or to be acquired by it and the other Subsidiaries with the
proceeds of the Advances to be made pursuant to the Agreement.

This Schedule of Subsidiary Execution Page(s) to the Agreement is attached
to and forms a part of the Agreement, and shall be construed in accordance with
and governed by the laws of the jurisdiction specified in Schedule 2.02 to the
Agreement under the caption "Governing Law" except to the extent the internal
laws of another jurisdiction are required to be applied in connection with the
exercise of rights pertaining to Collateral in that jurisdiction. Capitalized
terms used in this Schedule without definition shall have the meanings set forth
in the Agreement to which this Schedule is attached and forms a part.

This Schedule may be executed in any number of counterparts (by facsimile
transmission or otherwise) and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same document.

Borrower's Initials:____

Lender's Initials: ____

59
<PAGE>

IN WITNESS WHEREOF, the below Subsidiaries have executed this Schedule by
their duly authorized representatives all as of the effective date of the
Agreement stated in the Preamble to it:

<TABLE>
<CAPTION>
SUBSIDIARIES:
- -------------
<S> <C>
1. Focal Communications of Pennsylvania /s/ Joseph A. Beatty
-----------------------------------
Name: Joseph A. Beatty
Title: Executive Vice President and
Chief Financial Officer

2. Focal Communications of California /s/ Joseph A. Beatty
-----------------------------------
Name: Joseph A. Beatty
Title: Executive Vice President and
Chief Financial Officer

3. Focal Communications of the Mid-Atlantic /s/ Joseph A. Beatty
-----------------------------------
Name: Joseph A. Beatty
Title: Executive Vice President and
Chief Financial Officer

4. Focal Communications of Washington /s/ Joseph A. Beatty
-----------------------------------
Name: Joseph A. Beatty
Title: Executive Vice President and
Chief Financial Officer

5. Focal Communications of Michigan /s/ Joseph A. Beatty
-----------------------------------
Name: Joseph A. Beatty
Title: Executive Vice President and
Chief Financial Officer

</TABLE>

Borrower's Initials:____

Lender's Initials: ____

60
<PAGE>

ANNEX A TO SCHEDULE 1.01(a) TO
------------------------------
LOAN AND SECURITY AGREEMENT
---------------------------

ANNEX TO SUBSIDIARY EXECUTION PAGE(S)
-------------------------------------

By executing this Annex to the Schedule of Subsidiary Execution Page(s)
attached to and forming a part of the Loan and Security Agreement dated as of
December ____, 1998 (the "Agreement"), by and between NTFC CAPITAL CORPORATION
and FOCAL COMMUNICATIONS CORPORATION, each direct or indirect Subsidiary of the
Borrower listed below represents and warrants that it is a Subsidiary of the
Borrower, joins as a party to the Agreement for the purpose of granting a
security interest in the Collateral to the extent of its interest therein.

Each of the undersigned further acknowledges and agrees that: (i) future
Subsidiaries of the Borrower may be required to grant security interest(s) under
the Agreement without the consent of any other Subsidiary by the execution of a
form of this Annex; (ii) the Lender is willing to extend certain credit to the
Borrower, subject to the terms and conditions set forth in the Agreement,
including the condition that the undersigned will provide the Guaranties they
have provided and by granting the security interest(s) granted hereby; (iii)
without this condition, Lender would not be willing to extend credit to the
Borrower; and (iv) the undersigned are related entities, and the undersigned
expect to increase their respective businesses, and to benefit directly and
indirectly, through the use of the Collateral owned or to be acquired by it and
the other Subsidiaries with the proceeds of the Advances to be made pursuant to
the Agreement.

This Annex to Schedule of Subsidiary Execution Page(s) is attached to and
forms a part of the Agreement, and shall be construed in accordance with and
governed by the laws of the jurisdiction specified in Schedule 2.02 to the
Agreement under the caption "Governing Law" except to the extent the internal
laws of another jurisdiction are required to be applied in connection with the
exercise of rights pertaining to Collateral in that jurisdiction. Capitalized
terms used in this Schedule without definition shall have the meanings set forth
in the Agreement to which this Schedule is attached and forms a part.

This Annex may be executed in any number of counterparts (by facsimile
transmission or otherwise) and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same document.

Borrower's Initials:____

Lender's Initials: ____

61
<PAGE>

IN WITNESS WHEREOF, the undersigned has executed this Annex to Subsidiary
Execution Page(s) by its duly authorized officer or representative this ___ day
of _______________, _____:

Subsidiary:
- ----------

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

BY:_______________________________

TITLE:____________________________

Borrower's Initials:____

Lender's Initials: ____

62
<PAGE>

SCHEDULE 1.01(b) TO
-------------------
LOAN AND SECURITY AGREEMENT
---------------------------

SUBSIDIARY INFORMATION
----------------------

[SEE ATTACHED]

Borrower's Initials:____

Lender's Initials: ____

63
<PAGE>

SCHEDULE 2.01 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

MAXIMUM LOAN AMOUNTS
--------------------

Maximum principal amount of all Loans: Up to Twenty-Five Million (US) Dollars
($25,000,000)

Borrower's Initials:____

Lender's Initials: ____

64
<PAGE>

SCHEDULE 2.02 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

PAYMENT TERMS AND GOVERNING LAW
-------------------------------

"Closing Date": December 30, 1998

"Financing Termination Date": December 31, 1999.

"Governing Law": The internal laws of the State of Tennessee shall govern
the construction and enforcement of the Loan Documents except to the extent that
the laws of jurisdictions where the Collateral is located may be required to
apply to the Collateral.

"Initial Payment Date": The first Business Day of the month beginning at
least 30 days after the each applicable Borrowing Date.

"Interest Rate": For each Advance, a fixed rate equal to the five (5) year
Swap rate as shown on the Telerate screen page 19901 on the Borrowing Date of
the Advance, plus 395 basis points. Interest shall accrue monthly based on a 365
day year. The Interest Rate is subject to adjustment as follows: When the
Borrower has met the conditions set forth below for two consecutive fiscal
quarters, the 395 basis point margin stated above will be reduced to the
applicable margin as set forth in the table below, and the new margin will apply
so long as the required Cash Flow Coverage continues to exist. Should the
Borrower fail to maintain the required Cash Flow Coverage that permitted the
reduced margin for one fiscal quarter, then the margin shall return to the
appropriate margin until a reduction is again permitted hereunder.

Condition Margin
--------- ------

Cash Flow Coverage (greater than or equal) 1:1 350 Basis Points
Cash Flow Coverage (greater than or equal) 1.5:1 325 Basis Points
Cash Flow Coverage (greater than or equal) 2:1 300 Basis Points
Cash Flow Coverage (greater than or equal) 2.5:1 275 Basis Points

For purposes of this provision, Cash Flow Coverage is defined as (EBITDA +
Interest Income)/Scheduled Principal Payments + Required Interest Payments
on all outstanding Debt)

"Maturity Date": The Sixtieth (60th) Payment Date, on which date all then-
outstanding principal, interest, premium, expenses, fees, penalties and other
amounts due under the Note shall be finally due and payable.

"Payment Date": The Initial Payment Date and the First (1st) Business Day
of each month thereafter.

Borrower's Initials:____

Lender's Initials: ____

65
<PAGE>

"Payment Schedule": For each Note, Borrower shall repay the Indebtedness
represented thereby according to an amortization table prepared by Lender which
requires even payments of principal and interest monthly in arrears on each
Payment Date until the Maturity Date.

"PUC": PUC includes any public utility commission or similar state or
territorial regulatory body having jurisdiction over the Borrower or any
Subsidiary thereof

"System": Borrower's Competitive Local Exchange Carrier networks and all
Equipment therein in each location in which Borrower conducts business at any
time during the Term of this Agreement.

"Term": From the Closing Date through the Maturity Date.

Borrower's Initials:____

Lender's Initials: ____

66
<PAGE>

SCHEDULE 2.09 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

FEES
----

Commitment Deposit: A Commitment Deposit of $90,000 has been deposited with
Lender, and is non-refundable.

Commitment Fee: A Commitment Fee of one percent (1%) of the Total
Commitment has been earned by Lender and shall be due and payable in
installments equal to one percent (1%) of each Advance on each Borrowing
Date. The Commitment Deposit shall be applied toward the Commitment Fee
until it is exhausted. The Commitment Fee shall be non-refundable.

Borrower's Initials:____

Lender's Initials: ____

67
<PAGE>

SCHEDULE 4.04 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

REQUIRED CONSENTS
-----------------

[NONE]

Borrower's Initials:____

Lender's Initials: ____

68
<PAGE>

SCHEDULE 4.05 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

REGULATORY AUTHORIZATIONS
-------------------------

[NONE]

Borrower's Initials:____

Lender's Initials: ____

69
<PAGE>

SCHEDULE 4.07 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

RESTRICTIONS ON LOANS
---------------------

[NONE]

Borrower's Initials:____

Lender's Initials: ____

70
<PAGE>

SCHEDULE 4.08 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

FINANCIAL STATEMENTS
--------------------

[Separately Provided]

Borrower's Initials:____

Lender's Initials: ____

71
<PAGE>

SCHEDULE 4.12 TO
-----------------
LOAN AND SECURITY AGREEMENT
---------------------------

PENDING LITIGATION
------------------

[To be completed by Borrower and approved by Lender]

Borrower's Initials:____

Lender's Initials: ____

72
<PAGE>

SCHEDULE 4.25 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

UCC FILING OFFICES
------------------

Illinois Secretary of State, UCC Division
Howlett Bldg., Room 030
2nd and Edwards St.
Springfield, IL 62756

Pennsylvania Department of State
UCC Division
308 North Office Bldg.
Harrisburg, PA 17120

Philadelphia County
Office of the Prothonotary
Broad & Mkt.
Philadelphia, PA 19107

Michigan Department of State
UCC Division
P.O. Box 30197
Lansing, MI 48909-7697

Secretary of State, UCC Division
1500 11th Street
Sacramento, CA 95814-1738

Recorder of Deeds, D.C.
515 "D" St., NW, Room 310
Washington, D.C. 20001

Department of Licensing, UCC Section
P.O. Box 9660
Olympia, Washington 98507-9660

Borrower's Initials:____

Lender's Initials: ____

73
<PAGE>

SCHEDULE 4.26 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

PRINCIPAL OFFICES AND LOCATION OF COLLATERAL
--------------------------------------------
<TABLE>
<CAPTION>

Name Address County
- ---------------------- ----------------------------- -------------
<S> <C> <C>

Focal Communications 701 Market St. Philadelphia
of Pennsylvania Philadelphia, PA 19106

Focal Communications 1200 W. 7th St., Suite L2-250 Los Angeles
of California Los Angeles, CA 90017

650 Townsend, Suite 200 San Francisco
San Francisco, CA 94103

Focal Communications Decatur Building King
of Washington 1511 6th Avenue
Seattle, WA 98101

Focal Communications 1120 Vermont Ave.
of Mid-Atlantic Washington, D.C. 20005

Focal Communications 23800 West Ten Mile Road Oakland
of Michigan The Vanguard Center
Southfield, MI 48034
</TABLE>

Borrower's Initials:____

Lender's Initials: ____

74
<PAGE>

SCHEDULE 4.29 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

ASSUMED NAMES
-------------

[NONE]

Borrower's Initials:____

Lender's Initials: ____

75
<PAGE>

SCHEDULE 4.31 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

NORTEL PURCHASE AGREEMENT
-------------------------

Networks Products Purchase Agreement Number JRD0197FCC dated January 21,
1997, executed by and between Northern Telecom Inc. and Borrower as may be
amended, modified or supplemented from time to time.

Borrower's Initials:____

Lender's Initials: ____

76
<PAGE>

SCHEDULE 6.02 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

POST-CLOSING ITEMS
------------------

The following closing conditions shall be satisfied as indicated:

1. The Opinion of Regulatory Counsel shall be delivered within fourteen
(14) days of Closing.

2. Landlord Consents required hereunder shall be obtained on a reasonable
best efforts basis and delivered as promptly as reasonably possible, but in any
event within the later of thirty (30) days of Closing or the date of location of
Equipment having a value exceeding $100,000 at a Site by Borrower or a
Subsidiary thereof.

3. Any other Required Consents or Consents required for Closing or
initial funding hereunder not supplied at Closing shall be delivered as promptly
as reasonably possible, but in any event within thirty (30) days of Closing
unless the Lender extends the time therefor in writing.

Borrower's Initials:____

Lender's Initials: ____

77
<PAGE>

SCHEDULE 7.07 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

INSURANCE
---------

[See attached certificate(s)]

78
<PAGE>

SCHEDULE 7.15 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

FINANCIAL COVENANTS
-------------------

1. Total Secured Debt to Total Capitalization. At the time of each advance and
at the end of each fiscal quarter, Borrower shall maintain a ratio of Total
Secured Debt to Total Capitalization of not more than *** to ***. For purposes
of this ratio, the following definitions apply:

Total Capitalization: All equity as shown on the balance sheet of Borrower
plus all funded Indebtedness of Borrower.
Total Secured Debt: Indebtedness of Borrower secured by a lien on assets of
the Borrower, excluding Indebtedness secured by accounts receivable.

2. Cash Flow Coverage Ratio. Borrower shall maintain a minimum Cash Flow
Coverage Ratio (measured at the end of each fiscal quarter for the past four
fiscal quarters) of at least ***, beginning in the last fiscal quarter of fiscal
year 2001. For purposes of this ratio, the following definitions apply:

Cash Flow Coverage Ratio: At the end of any fiscal period, the ratio of
Borrower's Cash Flow (as defined in the agreement) plus interest income
for such fiscal period to Borrower's Debt Service for such fiscal
period.

Debt Service: For any fiscal period of Borrower, the sum of all principal
and interest payments that Borrower is required to make during such
period on account of all its Indebtedness including, without limitation,
(a) amounts due during such period on account of capitalized leases, (b)
the then current portion of any long term Indebtedness, including any
Subordinated indebtedness, (c) amounts due on short term Indebtedness,
and (d) amounts due under the NTFC Agreement and the Note.

3. Minimum Revenues: Borrower shall maintain minimum revenues in an amount
equal to or greater than 85% of the levels set forth below:

Fiscal Year Ended Projected Revenues
----------------- ------------------
December 31, 1999 $ ***
December 31, 2000 $ ***
December 31, 2001 $ ***
December 31, 2002 $ ***
December 31, 2003 $ ***
December 31, 2004 $ ***

4. Minimum EBITDA. Borrower shall maintain minimum EBITDA in an amount equal
to or greater than the levels set forth below:

Borrower's Initials:____

Lender's Initials: ____

- ---------------
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.

79
<PAGE>

Fiscal Year Ended Projected EBITDA
----------------- ----------------

December 31, 1999 $ ***
December 31, 2000 $ ***
December 31, 2001 $ ***
December 31, 2002 $ ***
December 31, 2003 $ ***
December 31, 2004 $ ***

So long as Borrower maintains a cash balance of at least $***, the Minimum
EBITDA covenant for 1999 will not apply. In its place, Borrower will be required
to maintain a minimum gross margin of ***% of revenues for 1999. Gross margin is
defined as revenues less settlement expenses.

Borrower's Initials:____

Lender's Initials: ____

- ---------------
***Confidential information omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission.

80
<PAGE>

SCHEDULE 8.02 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

PERMITTED SPECIFIC ENCUMBRANCES
-------------------------------

[NONE]

Borrower's Initials: ___
Lender's Initials: ___

74
<PAGE>

SCHEDULE 8.06 TO
----------------
LOAN AND SECURITY AGREEMENT
---------------------------

PERMITTED EQUITY PAYMENTS
-------------------------

Borrower may make Equity Payments which, in the aggregate, will not cause
Borrower to fail to meet its financial covenants set forth in Schedule 7.15 to
the Agreement and which do not involve the payment, exchange, repurchase or
redemption of more than five percent (5%) of the then outstanding capital stock
of Borrower, in the aggregate.

Borrower's Initials: ___
Lender's Initials: ___

75
<PAGE>

PROMISSORY NOTE

US$25,000,000.00 December 30, 1998

FOR VALUE RECEIVED, FOCAL COMMUNICATIONS CORPORATION, a Delaware
corporation with its principal place of business at 200 North LaSalle Street,
Chicago, Illinois 60601 ("Borrower") promises and agrees to pay to the order of
NTFC CAPITAL CORPORATION, a Delaware corporation, its successors, assigns or any
subsequent holder of this Note (the "Lender") at its offices located at 501
Corporate Centre Drive, Franklin, Tennessee 37067, or at such other place as may
be designated in writing by Lender, in lawful money of the United States of
America in immediately available funds the lesser of Twenty-five Million Dollars
and 00/100 ($US$25,000,000.00), or all amounts advanced hereunder pursuant to
Section 2.02 of the Loan Agreement (defined below), as noted on any and all
amortization schedules attached hereto, together with interest thereon and other
amounts due as provided below. The amortization schedules attached hereto are
for convenience only, and the failure of the Lender to attach an amortization
schedule, or any error or incorrect notation by the Lender on any amortization
schedule, shall not diminish the obligations of the Borrower under this Note.
This Note shall mature on the later of (i) January 1, 2004, (ii) the sixtieth
(60th) Payment Date, or (iii) the first Business Day of the sixty-first (61st)
month after the first Advance hereunder (the "Maturity Date").

This Note is issued pursuant to that certain Loan and Security Agreement
dated December ___, 1998, by and between Borrower and Lender (as it may be
modified, amended or restated from time to time, the "Loan Agreement"). Any term
not otherwise defined in this Note shall have the same meaning as in the Loan
Agreement. Reference is made to the Loan Agreement, which, among other things,
permits the acceleration of the maturity hereof upon the occurrence of certain
events and for prepayments in certain circumstances and upon certain terms and
conditions. This Note is secured by, among other things, the Collateral
described in the Loan Agreement and the Security Documents.

Each Advance hereunder shall bear interest from the date of such Advance
until such amount is due and payable (whether on any Payment Date, at the
Maturity Date, by acceleration, or otherwise) based on a rate equal to the five
(5) year "Swap Rate" as shown on the Telerate screen page 19901 on the date of
such Advance hereunder, plus 395 basis points (the "Interest Rate"). Interest
shall be paid monthly with principal, and shall accrue based on a 365 day year.
The Interest Rate is subject to adjustment as follows: When the Borrower has met
the conditions set forth below for two consecutive fiscal quarters, the 395
basis point margin stated above will be reduced to the applicable margin as set
forth in the table below, and the new margin will apply so long as the required
Cash Flow Coverage continues to exist. Should the Borrower fail to maintain the
required Cash Flow Coverage that permitted the reduced margin for one fiscal
quarter, then the margin shall return to the appropriate margin until a
reduction is again permitted hereunder.
<PAGE>

Condition Margin
--------- ------

Cash Flow Coverage greater than or equal to 1:1 350 Basis Points
Cash Flow Coverage greater than or equal to 1.5:1 325 Basis Points
Cash Flow Coverage greater than or equal to 2:1 300 Basis Points
Cash Flow Coverage greater than or equal to 2.5:1 275 Basis Points

For purposes of this provision, Cash Flow Coverage is defined as (EBITDA +
Interest Income)/Scheduled Principal Payments + Required Interest Payments
on all outstanding Debt)

Commencing with the Initial Payment Date (defined below), principal amounts
outstanding hereunder on each Advance and interest thereon at the applicable
Interest Rate shall be amortized and paid in sixty (60) monthly equal
installment payments, commencing on the first Business Day of the first Calendar
Month to commence at least thirty (30) days after the date of such Advance (the
"Initial Payment Date") and on the first Business Day of each calendar month
thereafter (each, a "Payment Date"), in accordance with a separate amortization
schedule attached hereto. In the event of any additional Advances hereunder an
additional amortization schedule will be attached for each additional Advance,
reflecting the principal amount of such Advance and the applicable Interest
Rate. All such amortization schedules shall provide for equal monthly
amortization of principal and interest through the Maturity Date. If any
principal, interest, or other charge or expense remains outstanding on the
Maturity Date, such amount shall be added to the payment due on the Maturity
Date.

Notwithstanding the foregoing, if Borrower shall fail to pay within ten
(10) days after the due date any principal amount or interest or other amount
payable under this Note, Borrower shall pay to Lender, to defray the
administrative costs of handling such late payments, an amount equal to interest
on the amount unpaid, to the extent permitted under applicable law, at a rate
equal to the lesser of three percent (3%) higher than the then applicable
interest rate or the maximum permissible interest rate under applicable law (the
"Default Rate") (instead of the Interest Rate), from the due date until such
overdue principal amount, interest or other unpaid amount is paid in full (both
before and after judgment) whether or not any notice of default in the payment
thereof has been delivered under the Loan Agreement. In addition, but without
duplication, upon the occurrence and during the continuance of an Event of
Default, all outstanding amounts hereunder shall bear interest at the Default
Rate (instead of the Interest Rate) until such amounts are paid in full or such
Event of Default is waived in writing by Lender.

Notwithstanding any provision of this Note or the Loan Agreement to the
contrary, it is the intent of the Lender and the Borrower that the Lender or any
subsequent holder of this Note shall never be entitled to receive, collect,
reserve or apply, as interest, any amount in excess of the maximum rate of
interest permitted to be charged by applicable law, as amended or enacted, from
time to time. In the event Lender, or any subsequent holder of this Note, ever
receives, collects, reserves or applies, as interest, any such excess, such
amount which would be excessive interest shall be deemed a partial prepayment of
principal and treated as such (except that no prepayment premium will be payable
thereon), or, if the principal indebtedness and all other amounts due are paid
in full, any remaining excess funds shall immediately be paid to the Borrower.
In determining whether or not the interest paid or payable, under any specific
contingency, exceeds the highest lawful rate, the Borrower and the Lender shall,
to the maximum extent permitted under applicable law, (a) exclude voluntary
prepayments and the effects thereof as it may relate to any fees charged by the
Lender, and (b) amortize, prorate, allocate, and spread,

2
<PAGE>

in equal parts, the total amount of interest throughout the entire term of the
indebtedness; provided that if the indebtedness is paid and performed in full
prior to the end of the full contemplated term hereof, and if the interest
received for the actual period of existence hereof exceeds the maximum lawful
rate, the Lender or any subsequent holder of the Note shall refund to the
Borrower the amount of such excess or credit the amount of such excess against
the principal portion of the indebtedness, as of the date it was received, and,
in such event, the Lender shall not be subject to any penalties provided by any
laws for contracting for, charging, reserving or receiving interest in excess of
the maximum lawful rate.

All amounts received for payment under this Note shall at the option of
Lender be applied first to any unpaid expenses due Lender under this Note or
under any other documents evidencing or securing the obligations of Borrower to
Lender, then to any unpaid late charges, then to any unpaid interest accrued at
the Default Rate, then to all other accrued but unpaid interest due under this
Note and finally to the reduction of outstanding principal due under this Note.

Upon the occurrence of any one or more of the Events of Default specified
in the Loan Agreement (each, an "Event of Default"), all amounts then remaining
unpaid on this Note shall be, or may be declared to be, immediately due and
payable as provided in the Loan Agreement, without further notice, at the option
of the Lender. Lender may waive any Event of Default before or after the same
has been declared and restore this Note to full force and effect without
impairing any rights hereunder, such right of waiver being a continuing one, but
one waiver shall not imply any additional or subsequent waiver. Time is of the
essence of this Note.

Demand, presentment, notice and protest are expressly waived, except for
notices to Borrower otherwise expressly required in the Loan Agreement. Borrower
and any and all endorsers, guarantors and other parties liable on this Note, and
any and all general partners of Borrower or any endorsers, guarantors or other
parties liable on this Note (collectively, the "Obligors") jointly and severally
waive presentment for payment, protest, notice of protest, notice of nonpayment
of this Note, demand and all legal diligence in enforcing collection, and hereby
expressly consent to (i) any and all delays, extensions, renewals or other
modifications of this Note or any waivers of any term hereof, (ii) any release
or discharge by Lender of any of the Obligors, (iii) any release, substitution
or exchange of any security for the payment hereof, (iv) any failure to act on
the part of Lender, and (vi) any indulgence shown by Lender from time to time
(without notice or further assent from any of the Obligors) and hereby agree
that no such action, failure to act or failure to exercise any right or remedy
by Lender shall in any way affect or impair the obligations of any of the
Obligors.

BORROWER HEREBY IRREVOCABLY CONSENTS TO THE JURISDICTION OF THE COURTS
LOCATED IN DAVIDSON COUNTY, TENNESSEE, INCLUDING WITHOUT LIMITATION FEDERAL
COURTS SITTING IN THE MIDDLE DISTRICT OF TENNESSEE AND THE CHANCERY COURT FOR
DAVIDSON COUNTY, TENNESSEE, FOR ANY SUIT BROUGHT OR ACTION COMMENCED IN
CONNECTION WITH THIS NOTE, ANY DOCUMENTS EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, INCLUDING WITHOUT LIMITATION THE LOAN AGREEMENT, OR ANY RELATIONSHIP
BETWEEN LENDER AND BORROWER, AND AGREES NOT TO CONTEST OR CHALLENGE VENUE IN ANY
SUCH COURTS.

Borrower irrevocably consents to the service of process of any such courts
in any such action or proceeding by the mailing of copies thereof by registered
or certified mail, postage prepaid, return receipt

3
<PAGE>

such mailing. However, nothing herein shall affect the right of Lender or
Borrower to serve process in any other manner permitted by law or to commence
legal proceedings or otherwise proceed against Lender or Borrower in any other
jurisdiction.

BORROWER HEREBY KNOWINGLY, WILLINGLY AND IRREVOCABLY WAIVES ITS RIGHTS TO
DEMAND A JURY TRIAL IN ANY ACTION OR PROCEEDING INVOLVING THIS NOTE, ANY
DOCUMENTS EXECUTED OR DELIVERED IN CONNECTION HEREWITH INCLUDING WITHOUT
LIMITATION THE LOAN AGREEMENT OR ANY RELATIONSHIP BETWEEN BORROWER AND LENDER.
BORROWER AGREES THAT LENDER MAY FILE AN ORIGINAL COUNTERPART OR COPY OF THIS
PARAGRAPH WITH ANY COURT AS WRITTEN EVIDENCE OF BORROWER'S EXPRESS WAIVER OF ITS
RIGHT TO TRIAL BY JURY.

IN ANY ACTION TO ENFORCE THIS NOTE, BORROWER HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL
RIGHTS UNDER THE LAWS OF ANY STATE TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY,
PUNITIVE, CONSEQUENTIAL OR OTHER DAMAGES OTHER THAN ACTUAL DIRECT DAMAGES.

In the event this Note is placed in the hands of one or more attorneys for
collection or enforcement or protection of the holder's rights described herein
or in the Loan Agreement or the other Loan Documents, the Borrower agrees to pay
all reasonable attorneys' fees and all court and other out-of-pocket costs
incurred by the holder hereof (as of which shall be due on demand and shall bear
interest at the rate then payable hereunder from five (5) days after such demand
is made until paid).

This Note is governed by and shall be construed in accordance with the
internal laws of the State of Tennessee. If any provision of this Note should
for any reason be invalid or unenforceable, the remaining provisions hereof
shall remain in full force and effect.

This Note may not be changed, extended or terminated except in writing. No
waiver of any term or provision hereof shall be valid unless in writing signed
by Lender.

Executed as of December 30, 1998.

FOCAL COMMUNICATIONS CORPORATION

By: /s/ Joseph A. Beatty
--------------------
Title: Exec VP/CFO
-----------------

4
<PAGE>

EXHIBIT B
---------

FORM OF
BORROWING CERTIFICATE

Pursuant to Section 2.03(b) of the Loan and Security Agreement dated as of
December 30, 1998, between FOCAL COMMUNICATIONS CORPORATION, a Delaware
corporation (the "Borrower"), and NTFC CAPITAL CORPORATION (the "Lender"), (as
amended, modified or supplemented from time to time, the "Loan Agreement"), the
undersigned Responsible Officer of the Borrower hereby certifies as set forth
below. Capitalized terms used herein which are defined in the Loan Agreement
shall have their defined meanings when used herein (unless otherwise indicated).

1. The Borrower hereby represents and warrants that its representations
and warranties contained in Article 4 of the Loan Agreement are true and correct
on and as of the date of this Certificate.

2. Immediately prior to and immediately after the making of the Advance
requested hereunder, no Default or Event of Default has or will have occurred
and will be continuing under the Loan Agreement.

3. All other applicable conditions of Article 6 of the Loan Agreement
have been satisfied; all applicable covenants contained in Article 7 of the Loan
Agreement have been met; and no violations of Article 8 have occurred and remain
uncured.

4. The Borrowing Date on which the Advance is requested is
_______________________________, 199_______.

5. The total amount of the Advance requested hereunder is
$_______________________, to be disbursed and allocated as follows:

(a) $__________________________, to be paid directly to NTI for the
purchase by the Borrower of Equipment provided in accordance with the
Purchase Agreement (evidenced by the copies of unpaid NTI invoices attached
to this Certificate);

(b) $__________________________, to be paid to the Borrower as
reimbursement for amounts paid to NTI under the Purchase Agreement by
Borrower, as evidenced by the attached invoices and copies of Borrower's
cancelled checks in payment thereof;

(c) $__________________________, to be paid either to other Suppliers
for the purchase by the Borrower of Equipment and Services provided by
other Suppliers or for other direct construction costs (evidenced by the
copies of unpaid invoices attached to this Certificate);

(d) $___________________________, to be paid to the Borrower as
reimbursement for amounts paid to other Suppliers by Borrower, as evidenced
by the attached invoices and copies of Borrower's cancelled checks in
payment thereof;

(e) $___________________________, to be paid to the Lender, as
reimbursement for Lender's Expenses; and

(f) $___________________________, to be paid to Borrower to pay
Borrower's legal fees and closing costs, as evidenced by the attached
invoices and statements.

1
<PAGE>

6. The amount of the Advance described in 5(a) above (if any) is equal to
the amount due and owing on the date hereof under the Purchase Agreement.

7. The Advance requested on the date hereof is for a proper purpose as
set forth in Section 2.02 of the Loan Agreement.
============

8. Wire instructions for Advances to be disbursed to Borrower are as
follows:

Account Number:____________________________________________________
Account Name:______________________________________________________
Bank:______________________________________________________________
ABA routing number:________________________________________________

IN WITNESS WHEREOF, the undersigned has duly executed this Borrowing
Certificate in the name of the Borrower as of the ______ day of _______________,
199___.

FOCAL COMMUNICATIONS CORPORATION

By:_______________________________________________

Title:____________________________________________

2
<PAGE>

Sonnenschein Nath & Rosenthal

8000 SEARS TOWER

CHICAGO, ILLINOIS 60606-6404 (312) 876-8000
FACSIMILE
(312) 876-7934

Victoria A. Gilbert
(312) 876-8203

December 30, 1998

NTFC Capital Corporation
501 Corporate Centre Drive
Suite 600
Franklin, TN 37067

Re: Loans to Focal Communications Corporation

Gentlemen:

We have acted as counsel to Focal Communications Corporation, a Delaware
corporation (the "Borrower"), in connection with that certain Loan and Security
Agreement dated December 30, 1998, between NTFC Capital Corporation ("Lender")
and Borrower (the "Loan Agreement"; capitalized terms used herein without
definition shall have the meanings given such terms in the Loan Agreement. In
that capacity, we have examined, among other things, the following agreements,
instruments and documents (hereinafter referred to as the "Documents"):

a. the Loan Agreement;

b. $25,000,000 Note dated December 30, 1998 made by Borrower payable to
Lender;

c. Guaranty Agreement; and

d. the Uniform Commercial Code Financing Statements in the forms attached
hereto as group Exhibit A ("UCCs") executed in connection with the foregoing.

In addition to the foregoing, we have examined (a) the original or
certified, conformed or photostatic copies of the Borrower's (i) Certificate of
Incorporation, as amended to date; (ii) qualifications to do business and
certificates of good standing in all states in which the Borrower is qualified
to do business; (iii) By-Laws, as amended to date; (iv) records of corporate
proceedings relating to the Documents; and (v) such other documents, records and
legal matters as we have deemed necessary or relevant for purposes of issuing
the opinions hereinafter expressed.

CHICAGO KANSAS CITY LONDON LOS ANGELES NEW YORK
SAN FRANCISCO ST. LOUIS WASHINGTON, D.C.
<PAGE>

Sonnenschein Nath & Rosenthal

NTFC Capital Corporation
December 30, 1998
Page 2

In all such examinations, we have assumed the genuineness of all signatures
(other than those of the Borrower), the accuracy and completeness of all
documents and records we have reviewed, the authenticity of documents submitted
to us as originals and the conformity to the originals of all documents
submitted to us as certified, conformed or photostatic copies.

The lawyers in this firm representing the Borrower in connection with this
transaction are licensed only to practice law in Illinois. We note that the
Documents are governed by the laws of the state of Tennessee. With your
permission, we have assumed for purposes of our opinions with regard to
enforceability contained herein, that Tennessee law is identical to Illinois
law. We have examined such questions of law under the laws of the State of
Illinois, the corporate laws of the State of Delaware and the federal laws
and regulations of the United States of America as we have considered necessary
or appropriate in order to render the opinions set forth below. In addition,
we express no opinion herein concerning any statutes, ordinances, administrative
decisions, rules or regulations of any county, town, county municipality or
special political subdivision (whether created or enabled through legislative
action at the federal, state or regional level).

We have further assumed that:

(i) All natural persons involved in the transaction contemplated by
the Loan Agreement (the "Transaction") have sufficient legal
capacity to enter into and perform their respective obligations
under the Documents or to carry out their roles in the
Transaction:

(ii) The Lender and each Subsidiary is duly organized, existing and
in good standing under the laws of its jurisdiction of
organization and has power (corporate and otherwise) to enter
into the Documents;

(iii) All authorizations and actions and all consents or approvals by
any person or party necessary for each of the Lender and the
Subsidiaries to enter into, execute or deliver the Documents
have been taken or obtained;

(iv) The Documents have been duly executed and delivered by the
Lender and each of the Subsidiaries and are the valid, binding
and enforceable obligations of the Lender; and

(V) The Borrower and each of the Subsidiaries holds the requisite
title and rights to any of their respective property involved
in the Transaction

<PAGE>

Sonnenschein Nath & Rosenthal

NTFC Capital Corporation
December 30, 1998
Page 3

In rendering this opinion as to questions of fact material to this opinion
we have relied to the extent we have deemed such reliance appropriate, without
investigation, on certificates and other communications from public officials
and from officers of the Borrower and the Subsidiaries and on representations of
the Borrower and the Subsidiaries set forth in the Documents.

Wherever we indicate that our opinion with respect to the existence or
absence of facts is based on our knowledge, our opinion is based solely on the
current actual knowledge of the attorneys in this firm who are representing
the Borrower in connection with the Transaction, and we have conducted no
special investigation of factual matters in connection with this opinion.

The opinions set forth in paragraphs 4, 5, and 6 below are subject to the
following additional assumptions and qualifications:

(a) the effect of bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance or other similar laws and any judicial
decisions, heretofore or hereafter enacted or decided, relating to or affecting
the rights of creditors generally, now or hereafter enacted;

(b) limitations imposed by general principals of equity upon the
availability or enforceability of any of the rights, remedies, waivers,
convenants or other provisions of the Documents, and upon the availability of
specific performance and other equitable remedies generally (regardless of
whether sought in proceedings at law or in equity);

(c) we have assumed that the Lender has given "value" to the Borrower as
defined in Section 1-201(44) of the Uniform Commercial Code as effect in the
State of Illinois;

(d) we call to your attention that the security interest of the Lender
in proceeds is limited to the extent set forth in Section 9-306 of the Illinois
Uniform Commercial Code and to a property of a type subject to the Illinois
Uniform Commercial Code;

(e) we express no opinion regarding the security interest of the Lender
in any item of the Collateral (i) not subject to Article 9 of the Illinois
Uniform Commercial Code including items of a type listed in Section 9-104 of
the Illinois Uniform Commercial Code, (ii) any interest in or claim in or under
any insurance policy, or (iii) proceeds of the foregoing items;

(f) we express no opinion with respect to the priority of any security
interest granted to the Lender by the Borrower or any Subsidiary;

<PAGE>

Sonnenschein Nath & Rosenthal

NTFC Capital Corporation
December 30, 1998
Page 4

(g) we call to your attention that the perfection of the security interest
of the Lender will be terminated as to any of the Collateral acquired by the
Borrower or a Subsidiary more than four months after such party changes its
name, identity or corporate structure so as to make the UCCs seriously
misleading unless new appropriate financing statements indicating the new name,
identity or corporate structure of the Borrower are properly filed before the
expiration of such four months. The Illinois Uniform Commercial Code requires
the filing of continuation statements within the period of six months prior to
the expiration of five years from the date of the filing of the original UCCs
or the filing of any continuation statement in order to maintain the
effectiveness of the original UCCs;

(h) we express no opinion with respect to chattel paper in a case where a
purchaser who gives new value acquires possession thereof;

(i) certain remedial provisions of the Documents may be unenforceable in
whole or in part, but the inclusion of such provisions does not affect the
validity of the Documents and the Documents contain adequate provisions for
enforcing payment of the obligations of the Borrower and the Subsidiaries under
the Documents;

(j) we express no opinion regarding (i) any interest in or claim in or
under any insurance policy, (ii) any interest in goods which are covered by a
certificate of title, (iii) any interest which constitutes real estate or
fixtures or (iv) proceeds of the foregoing; and

(k) we express no opinion regarding the security interests in any goods
which are an accession to, or commingled or processed with other goods to the
extent that the security interests are limited by Section 9-314 or 9-315 of the
Uniform Commercial Code in effect in Illinois.

Based on the foregoing and subject to the limitations, qualifications,
exceptions and assumptions set forth herein, it is our opinion that:

1. The Borrower is a corporation duly organized, validly existing and
in good standing under the laws of its state of incorporation, has full
power and authority to own and lease its properties and to carry on its
business as presently conducted and as presently proposed to be conducted.

2. The Borrower has the full right, power and authority to execute and
deliver the Documents and to perform its obligations thereunder. The
execution, delivery and performance of the Documents by the borrower will
not conflict with, or result in a breach of, the Borrower's Certificate of
Incorporation or By-Laws. The execution, delivery and performance of the
Documents by the Borrower will not result in a
<PAGE>

Sonnenschein Nath & Rosenthal

NTFC Capital Corporation
December 30, 1998
Page 5

breach or other violation of any of the terms, conditions or provisions of
any law or any of the terms, conditions or provisions of any material
agreement, instrument or document to which the Borrower is a party or by
which the Borrower or its properties is bound and of which we are aware.

3. The execution and delivery of each Document and the performance of
the transactions contemplated thereby have been duly authorized and
approved by all requisite action on the part of the Borrower.

4. Each of the Documents to which the Borrower is a party has been
duly executed and delivered by a duly authorized officer of the Borrower.
Each of the Documents constitutes the legal, valid and binding obligation
of the Borrower and each Subsidiary a party thereto enforceable in
accordance with its terms.

5. The provisions of the Loan Agreement are sufficient to create in
favor of the Lender a security interest in all right, title and interest of
the Borrower and the Subsidiaries in those items and types of collateral
described in the Loan Agreement in which a security interest may be created
under Article 9 of the Illinois Uniform Commercial Code.

6. By the filing of the UCCs in the jurisdictions indicated thereon,
the security interest granted to the Lender under the terms of the Loan
Agreement shall be perfected in those items and types of Collateral located
(or deemed located) in Illinois and described in the Loan Agreement in
which a security interest may be perfected by the filing of a financing
statement under the Uniform Commercial Code as in effect in the State of
Illinois ("Illinois UCC") and, assuming the Uniform Commercial Code
applicable in other jurisdictions where the UCCs are to be filed is
identical to the Illinois UCC, the security interest purported to be
granted to Lender under the Loan Agreement shall be perfected in those
items and types of Collateral described in the Loan Agreement in which a
security interest may be perfected by the filing of a financing statement.

7. To the best of our knowledge, except as set forth in Schedule 4.12
of the Loan Agreement, no judgments are outstanding against the Borrower,
nor, except as otherwise disclosed in the Loan Agreement, is there now
pending or threatened, any litigation, contested claim or governmental
proceeding by or against the Borrower or affecting the Borrower or any of
their respective properties which if decided adversely to Borrower would
have a material adverse effect on the Borrower's ability to perform its
obligations under the Documents. To the best of our knowledge, the Borrower
is not in default with respect to any order, writ, injunction of decree of
any

<PAGE>

Sonnenschein Nath & Rosenthal

NTFC Capital Corporation
December 30, 1998
Page 6

court, governmental or regulatory authority or in default under any law,
order, regulation or demand of any governmental agency or instrumentality,
a default under which would have a material adverse effect on the Borrower
or its financial condition or properties.

This opinion is given as of the date hereof and we assume no obligation to
advise you of changes that may hereafter be brought to our attention. This
opinion is being provided to you in connection with the Loan Agreement and may
not be relied upon by you for any other purpose. Except as may be required by
law or by order of any court or governmental body, this opinion may not be
relied upon, by, or furnished, quoted, copied, distributed, delivered or
disclosed to, anyone other than the Lender, any participants in the Loan
Agreement, and their respective attorneys or legal representatives, nor is it to
be filed with any governmental agency or any other person without our prior
written consent.

Very truly yours,

SONNENSCHEIN NATH & ROSENTHAL

By: /s/ Victoria A. Gilbert

Victoria A. Gilbert

<PAGE>
- --------------------------------------------------------------------------------
1. DEBTOR (LAST NAME FIRST - IF AN INDIVIDUAL)
Focal Communications Corporation
- --------------------------------------------------------------------------------
1A. SOCIAL SECURITY OR FEDERAL TAX NO.
36-4167094
- --------------------------------------------------------------------------------
1B. MAILING ADDRESS
200 North LaSalle Street, Suite 800
- --------------------------------------------------------------------------------
1C. CITY, STATE
Chicago, IL
- --------------------------------------------------------------------------------
1D. ZIP CODE
60601
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY)(LAST NAME FIRST--IF AN INDIVIDUAL)

- --------------------------------------------------------------------------------
2A. SOCIAL SECURITY OR FEDERAL TAX NO.

- --------------------------------------------------------------------------------
2B. MAILING ADDRESS

- --------------------------------------------------------------------------------
2C. CITY, STATE

- --------------------------------------------------------------------------------
2D. ZIP CODE

- --------------------------------------------------------------------------------
3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY)

- --------------------------------------------------------------------------------
3A. FEDERAL TAX NUMBER

- --------------------------------------------------------------------------------
4. SECURED PARTY

NAME NTFC Capital Corporation

MAILING ADDRESS 501 Corporate Centre Drive, Suite 600

CITY Franklin STATE TN ZIP CODE 37067
- --------------------------------------------------------------------------------
4A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO.
62-1105522
- --------------------------------------------------------------------------------
5. ASSIGNEE OF SECURED PARTY (IF ANY)

NAME

MAILING ADDRESS

CITY STATE ZIP CODE
- --------------------------------------------------------------------------------
5A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO.

- --------------------------------------------------------------------------------
6. This FINANCING STATEMENT covers the following types or items of
property (include description of real property on which located and owner of
record when required by instruction 4).

See Exhibit A attached

- --------------------------------------------------------------------------------
7. CHECK IF APPLICABLE [X]
- --------------------------------------------------------------------------------
7A. PRODUCTS OF COLLATERAL ARE ALSO COVERED [ ]
- --------------------------------------------------------------------------------
7B. DEBTOR(S) SIGNATURE NOT REQUIRED IN ACCORDANCE WITH INSTRUCTION 5(A) ITEM:

[ ] (1) [ ] (2) [ ] (3) [ ] (4)
- --------------------------------------------------------------------------------
8. CHECK IF APPLICABLE [X]
- --------------------------------------------------------------------------------
[X] DEBTOR IS A "TRANSMITTING UTILITY" IN ACCORDANCE WITH UCC (S) 9105 (i) (n)

- --------------------------------------------------------------------------------
9. /s/ Joseph A Beatty Date: 12/30/98
SIGNATURE(S) OF DEBTOR(S)
- --------------------------------------------------------------------------------
Focal Communications Corporation
TYPE OR PRINT NAMES OF DEBTOR(S)
- --------------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES)

- --------------------------------------------------------------------------------
NTFC Capital Corporation
TYPE OR PRINT NAME(S) OF SECURED PARTY(IES)
- --------------------------------------------------------------------------------
10. THIS SPACE FOR USE OF FILING OFFICER
(DATE, TIME, FILE NUMBER, FILING OFFICER)
CODE

1 6
2 7
3 8
4 9
5 0
- --------------------------------------------------------------------------------
11. Return copy to:

NAME Robert D. Tuke

ADDRESS Tuke Yopp & Sweeney

CITY 414 Union Street, Suite 1100

STATE Nashville, Tennessee

ZIP CODE 37219
- --------------------------------------------------------------------------------
FORM UCC-1
Approved by the Secretary of State
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY
<PAGE>

PARTIES
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
Focal Communications Corporation
200 North LaSalle Street, Suite 800
Chicago, Il 60601

36-4167094 1
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:

1a
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:

1b
- --------------------------------------------------------------------------------
Secured Party(ies) name(s) (last name first if individual) and address for
security interest information:
NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, TN 37067

62-1105522 2
- --------------------------------------------------------------------------------
Assignee(s) of Secured Party(ies) name(s) (last name first if individual) and
address for security interest information;

2a
- --------------------------------------------------------------------------------
Special Types of Parties (check if applicable):
[_] The terms "Debtor" and "Secured Party" mean "Lessee" and "Lessor",
respectively.

[_] The terms "Debtor" and "Secured Party" mean "Consignee" and "Consignor,"
respectively

[x] Debtor is a Transmitting Utility.

3
- --------------------------------------------------------------------------------
SECURED PARTY SIGNATURE(S)
- --------------------------------------------------------------------------------
This statement is filed with only the Secured Party's signature to perfect
security interest in collateral (check applicable box(es))-

a. [_] acquired after a change of name, identity or corporate structure of the
debtor.

b. [_] as to which the filing has lapsed.

c. already subject to a security interest in another county in Pennsylvania-
[_] when the collateral was moved to this county.
[_] when the Debtor's residence or place of business was moved to this
county.

d. already subject to a security interest in another jurisdiction-
[_] when the collateral was moved to Pennsylvania.
[_] when the Debtor's location was moved to Pennsylvania.

e. [_] which is proceeds of the collateral described in block 9, in which a
security interest was previously perfected (also describe proceeds in
block 9, if purchased with cash proceeds and not adequately described on
the original financing statement).

Secured Party Signature(s)
(required only if box(es) is checked above):

NTFC Capital Corporation
- ---------------------------
- ---------------------------
- --------------------------- 4
- --------------------------------------------------------------------------------
FINANCING STATEMENT
Uniform Commercial Code Form UCC-1
IMPORTANT - Please read instructions before completing
- --------------------------------------------------------------------------------
Filing No. (stamped by filing officer): Date, Time, Filing office (stamped by
filing officer):

5
- --------------------------------------------------------------------------------
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code, and is to be filed with the (check applicable box):
[x] Secretary of the Commonwealth
[_] Prothonotary of _________________________ county.
[_] real estate records of __________________ county.
6
- --------------------------------------------------------------------------------
Number of Additional Sheets (if any): 7
- --------------------------------------------------------------------------------
Optional Special Identification (Max. 10 characters): 8
- --------------------------------------------------------------------------------
COLLATERAL
- --------------------------------------------------------------------------------
Identify collateral by item and/or type:
See Exhibit A attached

[_] (check only if desired) Products of the collateral are also covered. 9
- --------------------------------------------------------------------------------
Identify related real estate, if applicable: The collateral is, or includes
(check appropriate box(es))-
a. [_] crops growing or to be grown on -
b. [_] goods which are or are to become fixtures on -
c. [_] minerals or the like (including oil and gas) as extracted on -
d. [_] accounts resulting from the sale of minerals or the like (including oil
and gas) at the wellhead or minehead on -

the following real estate:
Street Address:
Described at: Book___of (check one) [_] Deeds [_] Mortages, at Page(s)_____
for _________________ County. Uniform Parcel Identifer ____________________
[_] Described on Additional Sheet.
Name of record owner (required only if no Debtor has an interest of record):
10
- --------------------------------------------------------------------------------
DEBTOR SIGNATURE(S)
- --------------------------------------------------------------------------------
Debtor Signature(s):

1 Focal Communications Corporation
- --------------------------------------------------------------------------------
1a /s/ Joseph A. Beatty
- --------------------------------------------------------------------------------
1b 11
- --------------------------------------------------------------------------------
RETURN RECEIPT TO:

Robert D. Tuke
Tuke Yopp & Sweeney
414 Union Street, Suite 1100
Nashville, Tennessee 37219
12
- --------------------------------------------------------------------------------

<PAGE>

UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1

DISTRICT OF COLUMBIA

INSTRUCTIONS

1. Remove Secured Party and Debtor copies and send other 3 copies to the filing
officer. Enclose filing fee.

2. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10". Only
one copy of such additional sheets need be presented to the filing officer with
a set of three copies of the financing statement. Long schedules of collateral,
indentures, etc., may be on any size paper that is convenient for the secured
party.

3. If collateral is crops or goods which are or are to become fixtures, describe
generally the real estate and give name of record owner.

4. When a copy of the security agreement is used as a financing statement, it is
requested that it be accompanied by a completed but unsigned set of these forms,
without extra fee.

5. At the time of original filing, filing officer should return third copy as an
acknowledgement. At a later time, secured party may date and sign Termination
Legend and use third copy as a Termination Statement.

cut here
- --------------------------------------------------------------------------------
This FINANCING STATEMENT is filed presented to a filing officer for filing
pursuant to the Uniform Commercial Code
- --------------------------------------------------------------------------------
1 Debtor(s) (Last Name First) and address(es)
Focal Communications Corporation
200 North LaSalle Street, Suite 800
Chicago, IL 60601

36-4167094
- --------------------------------------------------------------------------------
2 Secured Party(ies) and address(es)
NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, Tn 37067

62-1105522
- --------------------------------------------------------------------------------
3 Maturity date (if any):
For Filing Officer (Date, Time, Number, and Filing Office)

- --------------------------------------------------------------------------------
4 This financing statement covers the following types (or items) or property:
See Exhibit A attached

- --------------------------------------------------------------------------------
5 Assignee(s) of Secured Party and Address(es)

- --------------------------------------------------------------------------------
Check [x] if covered:
[x] Proceeds of Collateral are also covered
[_] Products of Collateral are also covered.
No. of additional sheets presented:
- --------------------------------------------------------------------------------

Filed with : Recorder of Deeds of the District of Columbia
................................................................................
- --------------------------------------------------------------------------------

Focal Communications Corporation NTFC Capital Corporation
................................ .........................................
/s/Joseph A. Beatty
By:............................. By:......................................
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)

FILING OFFICER COPY - ALPHABETICAL

STANDARD FORM --- UNIFORM COMMERCIAL CODE --- FORM UCC-1
- --------------------------------------------------------------------------------
cut here

<PAGE>

This UCC-1 FINANCING STATEMENT is presented for filing pursuant to the
WASHINGTON UNIFORM COMMERCIAL CODE, chapter 62A.9 RCW, to perfect a security
interest in the below named collateral.
PLEASE TYPE FORM Filing fee: $12.00.
- --------------------------------------------------------------------------------
1. DEBTOR(S) 36-4167094
[_] PERSONAL (last, first, middle name and address)
[X] BUSINESS (legal business name and address)
FOCAL COMMUNICATIONS CORPORATION
200 NORTH LASALLE STREET, SUITE 800
CHICAGO, IL 60601

TRADE NAME, DBA, AKA:
- --------------------------------------------------------------------------------
2. FOR OFFICE USE ONLY - DO NOT WRITE IN THIS BOX

- --------------------------------------------------------------------------------
3. SECURED PARTY(IES) (name and address) 62-1105522
NTFC CAPITAL CORPORATION
501 CORPORATE CENTRE DRIVE, SUITE 600
FRANKLIN, TN 37067

- --------------------------------------------------------------------------------
4. ASSIGNEE(S) of SECURED PARTY(IES) if applicable
(name and address)

- --------------------------------------------------------------------------------
5. SECURED PARTY CONTACT PERSON: ROBERT D. TUKE Phone: (615) 313-3320
- --------------------------------------------------------------------------------
6. CHECK ONLY IF APPLICABLE: (For definitions of TRANSMITTING UTILITY AND
PRODUCTS OF COLLATERAL, see instructions.)
[X] Debtor is a Transmitting Utility
[_] Products of collateral are also covered
- --------------------------------------------------------------------------------
7. THIS FINANCING STATEMENT covers the following collateral: (Attach
additional 8-1/2" x 11" sheet(s) if needed.)
SEE EXHIBIT A ATTACHED

- --------------------------------------------------------------------------------
8. RETURN ACKNOWLEDGMENT COPY TO: (name and address)

ROBERT D. TUKE
TUKE YOPP & SWEENEY
414 UNION STREET, SUITE 1100
NASHVILLE, TENNESSEE 37219

- --------------------------------------------------------------------------------
9. FILE WITH:
UNIFORM COMMERCIAL CODE
DEPARTMENT OF LICENSING
P.O. BOX 9660
OLYMPIA, WA 98507-9660
(206) 753-2523

MAKE CHECKS PAYABLE TO THE
DEPARTMENT OF LICENSING

- --------------------------------------------------------------------------------
10. FOR OFFICE USE ONLY IMAGES TO
BE FILMED [__]
- --------------------------------------------------------------------------------
11. If collateral is described below, this statement may be signed by the
Secured Party instead of the debtor. Please check the appropriate box,
complete the adjacent lines and box 13, if collateral is:

a. [_] already subject to a security in another jurisdiction when it was
brought into this state or when the debtor's location was changed to
this state. (complete adjacent lines 1 and 2)

b. [_] proceeds of the original collateral described above in which a
security interest was perfected. (complete adjacent lines 1 and 2)

c. [_] listed on a filing which has lapsed. (complete adjacent lines
1 and 2)

d. [_] acquired after a change of name, identity, or corporate structure of
the debtor(s). (complete adjacent lines 1, 2 and 3)

1.
-----------------------------------------
ORIGINAL FILING NUMBER

2.
-----------------------------------------
FILING OFFICE WHERE FILED

3.
-----------------------------------------
FORMER NAME OR DEBTOR(S)

- --------------------------------------------------------------------------------
12. DEBTOR NAME(S) AND SIGNATURE(S):

FOCAL COMMUNICATIONS CORPORATION
------------------------------------------------------
TYPE NAME(S) OF DEBTOR(S) AS IT APPEARS IN BOX 1

/s/ Joseph A. Beatlz
------------------------------------------------------
SIGNATURE(S) OF DEBTOR(S)

------------------------------------------------------
SIGNATURE(S) OF DEBTOR(S)

- --------------------------------------------------------------------------------
13. SECURED PARTY NAME(S) AND SIGNATURE(S) ARE REQUIRED IF BOX 11 HAS BEEN
COMPLETED.

NTFC CAPITAL CORPORATION
----------------------------------------------------------------
TYPE NAME(S) OF SECURED PARTY(ES) AS IT APPEARS IN BOX 3 OR 4.

----------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(ES)

- --------------------------------------------------------------------------------
FORM APPROVED FOR USE IN THE STATE OF WASHINGTON (R/7/93)
WASHINGTON UCC-1
COPY 1 - FILING OFFICER - INDEX LASER PRINT

<PAGE>

- --------------------------------------------------------------------------------
This FINANCING STATEMENT is presented for filing (Please Type All Information)
pursuant to the Michigan Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First, if individual) & Address(es) Soc. Security/Tax ID#
FOCAL COMMUNICATIONS CORPORATION
36-4167094

- -------------------------------------------------------- ---------------------
Address
200 NORTH LASALLE STREET, SUITE 800
- -------------------------------------------------------- -----------------
City State Zip Code
CHICAGO IL 60601
- -------------------------------------------------------- -----------------
Debtor(s) (Last Name First, if individual) & Address(es)
-----------------

- -------------------------------------------------------- -----------------
Address

- -------------------------------------------------------- -----------------
City State Zip Code

- --------------------------------------------------------------------------------
FOR FILING OFFICER

(Date, Time, Number, and Filing Officer)
- ----------------------------------------------------
DO NOT WRITE IN THIS SPACE

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

2. If filing without debtor signature.
Item a, b, c, or d must be marked [X].
a. [ ] Collateral was already subject to the security interest in another state
when it was brought into Michigan, or when the Debtor's location changed to
Michigan;
b. [ ] Collateral is proceeds of the original collateral in which a security
interest was perfected;
c. [ ] A previous filing covering the collateral has lapsed.
(Prev. Filing # ).
d. [ ] The filing covers collateral acquired after a change of name identity,
or corporate structure of Debtor (MCLA 440.9402(2) & (7))
FROM:
--------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(Prev. Filing # ).

- -------------------------------------------------------------------------------
3. Secured Party(ies) and Address(es) Secured Party #

-----------------
NTFC CAPITAL CORPORATION
501 CORPORATION CENTRE DRIVE, SUITE 600
FRANKLIN, TN 37067

62-1105522
- -------------------------------------------------------------------------------
4. MAIL ACKNOWLEDGEMENT COPY TO:

ROBERT D. TUKE
TUKE YOPP & SWEENEY
414 UNION STREET, SUITE 1100
NASHVILLE, TENNESSEE 37219

- -------------------------------------------------------------------------------
5. No. of Add's Sheets 6. State Account No.

- -------------------------------------------------------------------------------
7. (Mark [X] if applicable):

[ ] Products of collateral are also covered.

[X} The debtor is a transmitting utility as defined in MCLA 440.9105 (1)(o).
- -------------------------------------------------------------------------------
8. Assignee(es) (if any) and Address(es) Secured Party #

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

- -------------------------------------------------------------------------------
9. This financing statement covers the following types (or items) or property:
SEE EXHIBIT A ATTACHED

- -------------------------------------------------------------------------------
FOCAL COMMUNICATIONS CORPORATION NTFC CAPITAL CORPORATION

X /s/ Joseph A. Beatty X
- -------------------------------------- --------------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies) or
Assignee(s) of Record

X X
- -------------------------------------- --------------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies) or
Assignee(s) of Record

IF YOU WISH THE ACKNOWLEDGEMENT COPY TO BE MAILED TO AN ADDRESS OTHER THAN THE
SECURED PARTY SHOWN IN ITEM 3, PROVIDE COMPLETE MAILING INFORMATION IN ITEM 4.

SECRETARY OF STATE COPY
<PAGE>

STATE OF ILLINOIS
UNIFORM COMMERCIAL CODE - FINANCING STATEMENT - FORM UCC-1

INSTRUCTIONS
1. Remove Secured Party and Debtor copies and send other 3 copies with
interleaved carbon paper to the filing officer. Enclose filing fee

2. If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10".
Only one copy of such additional sheets need be presented to the filing
officer with a set of three copies of the financing statements. Long
schedules of collateral, indentures, etc., may be on any size paper that is
convenient for the secured party.

cut here
- --------------------------------------------------------------------------------
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial Code.
- --------------------------------------------------------------------------------
Debtor(s) (Last Name First) and address(es) Secured Party(ies) and address(es)
Focal Communications NTFC Capital Corporation
Corporation 501 Corporate Centre Drive,
200 North LaSalle Street, Suite 600
Suite 800 Franklin, TN 37067
Chicago, IL 60601

36-4167094 62-1105522
- --------------------------------------------------------------------------------
For Filing Officer
(Date, Time, Number, and Filing Office)

- --------------------------------------------------------------------------------
1. This financing statement covers the following types (or items) of property:
See Exhibit A attached

2 [ ] Products of Collateral are also covered. [X] Proceeds of Collateral are
also covered.
- --------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY

- -----------------------------------
Addition sheets presented.
- ------
X Filed with Office of Secretary of State of Illinois
- ------
X Debtor is a transmitting utility as defined in UCC (S)9-105.
- ------

FILING OFFICER-ALPHABETICAL

This form of financing statement is approved by the Secretary of State.
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1 - REV. 1-75
- --------------------------------------------------------------------------------
Focal Communications Corporation

By: /s/ Joseph A. Beatty
-----------------------------------------------
Signature of (Debtor)
(Secured Party)*

* Signature of Debtor Required in Most Cases:
Signature of Secured Party in Cases Covered by UCC (S)9-402 (2)
- --------------------------------------------------------------------------------
cut here
<PAGE>

PARTIES
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:
Focal Communications Corporation of Pennsylvania
701 Market Street
Philadelphia, PA 19106

36-4187401 1
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:

1a
- --------------------------------------------------------------------------------
Debtor name (last name first if individual) and mailing address:

[_] The terms "Debtor" and "Secured Party" mean "Consignee" and "Consignor,"
respectively.

[X] Debtor is a Transmitting Utility.
3
- --------------------------------------------------------------------------------
SECURED PARTY SIGNATURE(S)
- --------------------------------------------------------------------------------

This statement is filed with only the Secured Party's signature to perfect a
security interest in collateral (check applicable box(es))-

a. [_] acquired after a change of name, identity or corporate structure of the
debtor.

b. [_] as to which the filing has lapsed.

d. already subject to a security interest in another jurisdiction-
[_] when the collateral was moved to Pennsylvania.
[_] when the Debtor's location was moved to Pennsylvania.

Secured Party Signature(s)
(required only if box(es) is checked above):

NTFC Capital Corporation
- --------------------------------------------------------------------------------

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

- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
STANDARD FORM - FORM UCC-1 (7-89)
Approved by Secretary of Commonwealth of Pennsylvania

FINANCING STATEMENT
Uniform Commercial Code Form UCC-1
IMPORTANT - Please read instructions before completing
- --------------------------------------------------------------------------------
Filing No. (stamped by filing officer): Date, Time, Filing Office (stamped
by filing officer):

5
- --------------------------------------------------------------------------------

This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code, and is to be filed with the (check applicable box):

[X] Secretary of the Commonwealth

[_] Prothonotary of County.
------------------------------------------------------

[_] real estate records of County.
-----------------------------------------------
6
- --------------------------------------------------------------------------------
Number of Additional Sheets (if any): 7
- --------------------------------------------------------------------------------
Optional Special Identification (Max. 10 characters): 8
- --------------------------------------------------------------------------------
COLLATERAL
- --------------------------------------------------------------------------------
Identify collateral by item and/or type:
See Exhibit A attached

a. [_] crops growing or to be grown on -

b. [_] goods which are or are to become fixtures on -

c. [_] minerals or the like (including oil and gas) as extracted on -

d. [_] accounts resulting from the sale of minerals or the like (including oil
and gas) at the wellhead or minehead on -

the following real estate:

Street Address:

Described at: Book of (check one) [_] Deeds [_] Mortgages, at Page(s)
------ ------
for County. Uniform Parcel Identifier
------------------------ ---------------------
[_] Described on Additional Sheet.
Name of record owner (required only if no Debtor has an interest of record):
10
- --------------------------------------------------------------------------------
DEBTOR SIGNATURE(S)
- --------------------------------------------------------------------------------
Debtor Signature(s):

1 Focal Communications Corporation of Pennsylvania
- --------------------------------------------------------------------------------

1a Joseph A. Beatty
- --------------------------------------------------------------------------------

1b 11
- --------------------------------------------------------------------------------
RETURN RECEIPT TO:

Robert D. Tuke
Tuke Yopp & Sweeney
414 Union Street, Suite 1100
Nashville, Tennessee 37219

12
- --------------------------------------------------------------------------------
FILING OFFICE ORIGINAL
NOTE - This page will not be returned by the Department of State.

<PAGE>

- --------------------------------------------------------------------------------
1. DEBTOR (LAST NAME FIRST - IF AN INDIVIDUAL)
Focal Communications Corporation of California
- --------------------------------------------------------------------------------
1A. SOCIAL SECURITY OR FEDERAL TAX NO.
36-4128832
- --------------------------------------------------------------------------------
1B. MAILING ADDRESS
650 Townsend, Suite 2119A
- --------------------------------------------------------------------------------
1C. CITY, STATE
San Francisco, CA
- --------------------------------------------------------------------------------
1D. ZIP CODE
94103
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY)(LAST NAME FIRST--IF AN INDIVIDUAL)

- --------------------------------------------------------------------------------
2A. SOCIAL SECURITY OR FEDERAL TAX NO.

- --------------------------------------------------------------------------------
2B. MAILING ADDRESS

- --------------------------------------------------------------------------------
2C. CITY, STATE

- --------------------------------------------------------------------------------
2D. ZIP CODE

- --------------------------------------------------------------------------------
3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY)

- --------------------------------------------------------------------------------
3A. FEDERAL TAX NUMBER

- --------------------------------------------------------------------------------
4. SECURED PARTY

NAME NTFC Capital Corporation

MAILING ADDRESS 501 Corporate Centre Drive, Suite 600

NAME

MAILING ADDRESS

CITY STATE ZIP CODE
- --------------------------------------------------------------------------------
5A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO.

See Exhibit A attached

- --------------------------------------------------------------------------------
9. /s/ Joseph A Beatty Date: 12/30/98
SIGNATURE(S) OF DEBTOR(S)
- --------------------------------------------------------------------------------
Focal Communications Corporation of California
TYPE OR PRINT NAMES OF DEBTOR(S)
- --------------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES)

1 6
2 7
3 8
4 9
5 0
- --------------------------------------------------------------------------------
11. Return copy to:

NAME Robert D. Tuke

ADDRESS Tuke Yopp & Sweeney

CITY 414 Union Street, Suite 1100

STATE Nashville, Tennessee

<PAGE>
- --------------------------------------------------------------------------------
1. DEBTOR (LAST NAME FIRST - IF AN INDIVIDUAL)
Focal Communications Corporation of California
- --------------------------------------------------------------------------------
1A. SOCIAL SECURITY OR FEDERAL TAX NO.
36-4128832
- --------------------------------------------------------------------------------
1B. MAILING ADDRESS
1200 West 7th Street #L2-250
- --------------------------------------------------------------------------------
1C. CITY, STATE
Los Angeles, CA
- --------------------------------------------------------------------------------
1D. ZIP CODE
90017
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR (IF ANY)(LAST NAME FIRST--IF AN INDIVIDUAL)

- --------------------------------------------------------------------------------
2A. SOCIAL SECURITY OR FEDERAL TAX NO.

- --------------------------------------------------------------------------------
2B. MAILING ADDRESS

- --------------------------------------------------------------------------------
2C. CITY, STATE

- --------------------------------------------------------------------------------
2D. ZIP CODE

- --------------------------------------------------------------------------------
3. DEBTOR'S TRADE NAMES OR STYLES (IF ANY)

- --------------------------------------------------------------------------------
3A. FEDERAL TAX NUMBER

- --------------------------------------------------------------------------------
4. SECURED PARTY

NAME NTFC Capital Corporation

MAILING ADDRESS 501 Corporate Centre Drive, Suite 600

NAME

MAILING ADDRESS

CITY STATE ZIP CODE
- --------------------------------------------------------------------------------
5A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR BANK TRANSIT AND A.B.A. NO.

See Exhibit A attached

- --------------------------------------------------------------------------------
9. /s/ Joseph A Beatty Date: 12/30/98
SIGNATURE(S) OF DEBTOR(S)
- --------------------------------------------------------------------------------
Focal Communications Corporation of California
TYPE OR PRINT NAMES OF DEBTOR(S)
- --------------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES)

1 6
2 7
3 8
4 9
5 0
- --------------------------------------------------------------------------------
11. Return copy to:

NAME Robert D. Tuke

ADDRESS Tuke Yopp & Sweeney

CITY 414 Union Street, Suite 1100

STATE Nashville, Tennessee

<PAGE>

UNIFORM COMMERCIAL CODE -- FINANCING STATEMENT -- FORM UCC-1

DISTRICT OF COLUMBIA

INSTRUCTIONS

1. Remove Secured Party and Debtor copies and send other 3 copies to the filing
officer. Enclose filing fee.

3. If collateral is crops or goods which are or are to become fixtures, describe
generally the real estate and give name of record owner.

4. When a copy of the security agreement is used as a financing statement, it is
requested that it be accompanied by a completed but unsigned set of these forms,
without extra fee.

cut here
- --------------------------------------------------------------------------------
This FINANCING STATEMENT is filed presented to a filing officer for filing
pursuant to the Uniform Commercial Code
- --------------------------------------------------------------------------------
1 Debtor(s) (Last Name First) and address(es)
Focal Communications Corporation of the Mid-Atlantic
1120 Vermont Avenue, Terrace Level
Washington, DC 20005

36-4197370
- --------------------------------------------------------------------------------
2 Secured Party(ies) and address(es)
NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, Tn 37067

62-1105522
- --------------------------------------------------------------------------------
3 Maturity date (if any):
For Filing Officer (Date, Time, Number, and Filing Office)

- --------------------------------------------------------------------------------
4 This financing statement covers the following types (or items) or property:
See Exhibit A attached

- --------------------------------------------------------------------------------
5 Assignee(s) of Secured Party and Address(es)

NTFC Capital Corporation
................................ .........................................
/s/ Joseph A. Beatty
By:............................. By:......................................
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)

FILING OFFICER COPY - ALPHABETICAL

STANDARD FORM --- UNIFORM COMMERCIAL CODE --- FORM UCC-1
- --------------------------------------------------------------------------------
cut here

<PAGE>

- --------------------------------------------------------------------------------
This FINANCING STATEMENT is presented for filing
pursuant to the Michigan Uniform Commercial Code. (Please Type All Information)
- --------------------------------------------------------------------------------
Debitor(s) (Last Name First, if individual) & Address(es) Soc. Security #
/ Tax ID #
FOCAL COMMUNICATIONS CORPORATION OF MICHIGAN
36-4203095
-----------------

- ------------------------------------------------------------ -----------------
Address
23800 West Ten Mile Road, The Vanguard Center
- ------------------------------------------------------------ -----------------
City State Zip Code
Southfield MI 48034
- ------------------------------------------------------------ -----------------
Debtor(s) (Last Name First, if individual) & Address(es)
-----------------

- ------------------------------------------------------------ -----------------
Address

- ------------------------------------------------------------ -----------------
City State Zip Code

- --------------------------------------------------------------------------------
FOR FILING OFFICER

(Date, Time, Number, and Filing Officer)
- ----------------------------------------------------
DO NOT WRITE IN THIS SPACE

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

2. If filing without debtor signature,
item a, b, c, or d must be marked [X].
a. [ ] Collateral was already subject to the security interest in another state
when it was brought into Michigan, or when the Debtor's location changed to
Michigan;
b. [ ] Collateral is proceeds of the original collateral in which a security
interest was perfected;
c. [ ] A previous filing covering the collateral has lapsed.
(Prev. Filing # );
d. [ ] The filing covers collateral acquired after a change of name identity,
or corporate structure of Debtor (MCLA 440.9402(2) & (7))
FROM:
--------------------------------------------------------------------------

- -------------------------------------------------------------------------------
(Prev. Filing # ).

- -------------------------------------------------------------------------------
3. Secured Party(ies) and Address(es) Secured Party #

-----------------
NTFC CAPITAL CORPORATION
501 CORPORATE CENTRE DRIVE, SUITE 600
FRANKLIN, TN 37067

62-1105522
- -------------------------------------------------------------------------------
4. MAIL ACKNOWLEDGEMENT COPY TO:

ROBERT D. TUKE
TUKE YOPP & SWEENEY
414 UNION STREET, SUITE 1100
NASHVILLE, TENNESSEE 37219

- -------------------------------------------------------------------------------
5. No. of Add'l Sheets 6. State Account No.

- -------------------------------------------------------------------------------
7. (Mark [X] if applicable):

[ ] Products of collateral are also covered.

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

- -------------------------------------------------------------------------------
9. This financing statement covers the following types (or items) of property:
SEE EXHIBIT A ATTACHED

- -------------------------------------------------------------------------------
FOCAL COMMUNICATIONS CORPORATION NTFC CAPITAL CORPORATION
OF MICHIGAN

X /s/ Joseph A. Beatty X
- -------------------------------------- ----------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
or Assignee(s) of Record

X X
- -------------------------------------- ----------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
or Assignee(s) of Record

IF YOU WISH THE ACKNOWLEDGEMENT COPY TO BE MAILED TO AN ADDRESS OTHER THAN THE
SECURED PARTY SHOWN IN ITEM 3, PROVIDE COMPLETE MAILING INFORMATION IN ITEM 4.

SECRETARY OF STATE COPY

<PAGE>

The UCC-1 FINANCING STATEMENT is presented for filing pursuant to the WASHINGTON
UNIFORM COMMERCIAL CODE, chapter 62A.9 RCW, to perfect a security interest in
the below named collateral. PLEASE TYPE FORM Filing fee: $12.00.
- --------------------------------------------------------------------------------
1. DEBTOR(S) 36-4202514
[ ] PERSONAL (last, first, middle name and address)
[X] BUSINESS (legal business name and address)
FOCAL COMMUNICATIONS CORPORATION
OF WASHINGTON
1511 6TH AVENUE, 2ND FLOOR
SEATTLE, WA 98101

TRADE NAME, DBA, AKA:
- --------------------------------------------------------------------------------
2. FOR OFFICE USE ONLY - DO NOT WRITE IN THIS BOX

- --------------------------------------------------------------------------------
3. SECURED PARTY(IES) (name and address) 62-1105522

[ NTFC CAPITAL CORPORATION ]
501 CORPORATE CENTRE DRIVE, SUITE 600
FRANKLIN, TN 37067

[ ]
- --------------------------------------------------------------------------------
4. ASSIGNEE(S) of SECURED PARTY(IES) if applicable
(name and address)

- --------------------------------------------------------------------------------
5. SECURED PARTY CONTACT PERSON: ROBERT D. TUKE Phone: (615) 313-3320
----------------------- ---------------
- --------------------------------------------------------------------------------
6. CHECK ONLY IF APPLICABLE: (For definitions of TRANSMITTING UTILITY AND
PRODUCTS OF COLLATERAL, see instructions.)
[X] Debtor is a Transmitting Utility [ ] Products of collateral are
also covered
- --------------------------------------------------------------------------------
7. THIS FINANCING STATEMENT covers the following collateral: (Attach additional
8-1/2" x 11" sheet(s) if needed.)
SEE EXHIBIT A ATTACHED

- --------------------------------------------------------------------------------
8. RETURN ACKNOWLEDGEMENT COPY TO: (name and address)

[ ROBERT D. TUKE ]
TUKE YOPP & SWEENEY
414 UNION STREET, SUITE 1100
NASHVILLE, TENNESSEE 37219

[ ]
- --------------------------------------------------------------------------------
9. FILE WITH:

UNIFORM COMMERCIAL CODE
DEPARTMENT OF LICENSING
P.O. BOX 9660
OLYMPIA, WA 98507-9660
(206) 753-2523

MAKE CHECKS PAYABLE TO THE
DEPARTMENT OF LICENSING
- --------------------------------------------------------------------------------
10. FOR OFFICE USE ONLY IMAGES TO [ ]
BE FILMED
- --------------------------------------------------------------------------------
11. If collateral is described below, this statement may be signed by the
Secured Party instead of the Debtors. Please check the appropriate box,
complete the adjacent lines and box 13, if collateral is:

a. [ ] already subject to a security interest in another jurisdiction when
it was brought into this state or when the debtor's location was
changed to this state. (complete adjacent lines 1 and 2)

b. [ ] proceeds of the original collateral described above in which a
security interest was perfected. (complete adjacent lines 1 and 2)

c. [ ] listed on a filing which has lapsed. (complete adjacent lines 1 and
2)

d. [ ] acquired after a change of name, identity, or corporate structure of
the debtor(s). (Complete adjacent lines 1, 2 and 3)

1.
-----------------------------------------
ORIGINAL FILING NUMBER

2.
-----------------------------------------
FILING OFFICE WHERE FILED

3.
-----------------------------------------
FORMER NAME OR DEBTOR(S)

- --------------------------------------------------------------------------------
12. DEBTOR NAME(S) AND SIGNATURE(S):

FOCAL COMMUNICATIONS CORPORATION OF WASHINGTON
------------------------------------------------------
TYPE NAME(S) OF DEBTOR(S) AS IT APPEARS IN BOX 1

/s/ Joseph A. Beatlz
------------------------------------------------------
SIGNATURE(S) OF DEBTOR(S)

------------------------------------------------------
SIGNATURE(S) OF DEBTOR(S)

- --------------------------------------------------------------------------------
13. SECURED PARTY NAME(S) AND SIGNATURE(S) ARE REQUIRED IF BOX 11 HAS BEEN
COMPLETED.

NTFC CAPITAL CORPORATION
----------------------------------------------------------------
TYPE NAME(S) OF SECURED PARTY(IES) AS IT APPEARS IN BOX 3 OR 4.

----------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES)

<PAGE>

EXHIBIT G
---------

UNCONDITIONAL GUARANTY

THIS UNCONDITIONAL GUARANTY ("Guaranty") is executed this ___ day of
_______________, 19__ by ______________________________________________, a
___________________ corporation ("Guarantor"), in favor of NTFC CAPITAL
CORPORATION, a Delaware corporation with its principal offices in Nashville,
Tennessee ("Lender").

BACKGROUND:

A. Guarantor desires to induce Lender to extend credit to FOCAL
COMMUNICATIONS CORPORATION, a Delaware corporation ("Borrower").

B. Lender is willing to extend certain credit to Borrower, subject to the
terms and conditions set forth in the Loan and Security Agreement executed by
and between Lender and Borrower dated as of December 30, 1998 (as amended,
modified, supplemented or replaced from time to time, the "Loan Agreement") and
related instruments, agreements and documents executed by and between Borrower
and Lender (as amended, modified, supplemented or replaced from time to time,
the "Loan Documents").

C. One of the conditions of the Loan Agreement is that Guarantor must
unconditionally guarantee the obligations of Borrower to Lender. Without this
Guaranty, Lender would not be willing to extend credit to Borrower.

D. Guarantor and Borrower are related entities, and Guarantor expects to
increase its business through the use of the System to be constructed by
Borrower with the proceeds of the loans to be made pursuant to the Loan
Agreement. Guarantor will receive significant direct and indirect benefit from
Lender's extension of credit to Borrower.

NOW, THEREFORE, in order to induce Lender to extend credit to Borrower and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Guarantor hereby agrees as follows:

ARTICLE I: DEFINITIONS

1.01 Definitions in Loan Agreement. Capitalized terms used in this Guaranty
without definition shall have the same meaning as in the Loan Agreement, unless
the context requires otherwise.

1.02 Certain Definitions. In addition to other words and terms defined in
the preamble hereof or elsewhere in this Agreement, or on the Schedules hereto,
the following words and terms shall have the following meanings unless the
context otherwise clearly requires:

"Borrower": Focal Communications Corporation, a Delaware corporation,
and its successors and assigns, and includes, without limitation: (i) the
Borrower as debtor-in-possession or any trustee in any bankruptcy
proceeding, (ii) any trustee, receiver, custodian, conservator, or other
similar appointee over Borrower or over any of Borrower's Property pursuant
to any court proceeding of any kind, and (iii) any successor Person.

"Collateral": all of the properties, rights and assets securing the
Indebtedness at any time, including without limitation the "Collateral" as
defined in the Loan Agreement.

<PAGE>

"Guarantor": As defined in the Preamble and its successors and
assigns, and shall include without limitation: (i) the Guarantor as debtor-
in-possession or any trustee in any bankruptcy proceeding, (ii) any
trustee, receiver, custodian, conservator or other similar appointee over
Guarantor or over Guarantor's Property pursuant to any court proceeding of
any kind, and (iii) any successor Person.

"Indebtedness": any and all indebtedness and obligations of any kind
and character whatsoever of Borrower to Lender under and in connnection
with the Loan Agreement and any and all extensions, renewals and
replacements of such indebtedness, whether such indebtedness is:

(i) for principal, interest, fees, costs, expenses or
otherwise;

(ii) presently existing or hereafter incurred or arising;

(iii) from time to time reduced and thereafter increased or
entirely extinguished and thereafter reincurred;

(iv) foreseen or unforeseen, direct or indirect, absolute or
contingent, primary or secondary, secured or unsecured, matured or
unmatured, of the same class or type or of different classes or types;

(v) created by or arising under contract, tort, guaranty,
overdraft, recovery of avoided payments or otherwise;

(vi) contracted for by Borrower alone or jointly and severally
with another or others;

(vii) incurred by Borrower prior to, during, or after any filing
by Borrower or against Borrower of any petition or request for
liquidation, reorganization, arrangement, adjudication as a bankrupt,
relief as a debtor, or other relief under bankruptcy, insolvency, or
similar laws now or hereafter in affect in the United States of
America or any state or territory thereof or any foreign jurisdiction,
and notwithstanding Borrower's legal status as a debtor or a debtor-
in-possession or Borrower's discharge in any such proceeding;

(viii) created or incurred with or without notice to Guarantor;
and/or

(ix) created by an original obligation of Borrower to Lender or
arises under Lender's purchase of an obligation of Borrower.

The Indebtedness includes without limitation all indebtedness and
obligations evidenced by or arising under that certain Promissory Note of
even date herewith executed by Borrower in favor of Lender, in the
principal amount of $25,000,0000.00, and any and all extensions, renewals,
amendments, modifications, replacements, substitutions and changes in form
thereof and therefor (the "Note"), the Loan Agreement, and/or the other
Loan Documents, and any fees, expenses, or costs including attorneys' fees
incurred by Lender in attempting to collect any of such indebtedness,
whether from Borrower, Guarantor, any other guarantor, any other Person
liable for the Indebtedness or any Collateral, or in protecting any of
Lender's rights with respect to such indebtedness, Borrower, Guarantor, any
other guarantor, any other Person liable for the Indebtedness or any
Collateral.

"Property": any and all tangible and intangible, real and personal
property and property rights of Guarantor.

1.03 Accounting Principles; Subsidiaries. Except as otherwise provided in
this Guaranty, all

<PAGE>

computations and determinations as to accounting or financial matters and all
financial statements shall be made and prepared in accordance with GAAP
(including principles of consolidation where appropriate), consistently applied,
and all accounting or financial terms shall have the meanings ascribed to such
terms by GAAP. If at any time Guarantor has any Subsidiaries, all accounting and
financial terms herein shall be deemed to include references to consolidated and
consolidating principles, and covenants, representations and agreements with
respect to Guarantor and its properties and activities shall be deemed to refer
to Guarantor and its consolidated Subsidiaries collectively.

1.03 UCC Terms. Except as otherwise provided or amplified (but not
limited) herein, terms used in this Guaranty that are defined in the UCC shall
have the same meanings herein.

1.04 General Construction; Captions. All definitions and other terms used
in this Guaranty shall be equally applicable to the singular and plural forms
thereof, and all references to any gender shall include all other genders. The
words "hereof", "herein" and "hereunder" and words of similar import when used
in this Agreement shall refer to this Guaranty as a whole and not to any
particular provision of this Guaranty, and Section, subsection, schedule and
exhibit references are to this Guaranty unless otherwise specified. The captions
and table of contents in this Guaranty are for convenience only, and in no way
limit or amplify the provisions hereof.

1.05 References to Documents and Laws. All defined terms and references in
this Guaranty with respect to any agreements, notes, instruments, certificates
or other documents shall be deemed to refer to such documents and to any
amendments, modifications, renewals, extensions, replacements, restatements,
substitutions and supplements of and to such documents. All references to
statutes and related regulations shall include any amendments thereof and any
successor statutes and regulations.

ARTICLE II: GUARANTY

2.01 Guaranty of Payment. Guarantor hereby unconditionally and irrevocably
guarantees to Lender the timely payment and performance of the Indebtedness.

2.02 Guaranty Unconditional. Guarantor's guaranty of the Indebtedness is
absolute and unconditional. Without limiting the foregoing, the validity of this
Guaranty and Guarantor's obligations hereunder shall not be impaired by any
event whatsoever, including without limitation any of the following, whether or
not with notice to or consent of Guarantor:

(a) the invalidity, irregularity, illegality or unenforceability of,
or any defect in, any instrument, document, agreement or contract
evidencing, comprising, securing, guarantying or otherwise relating to or
executed or delivered in connection with the Indebtedness;

(b) any present or future law, order or regulation of any government
or of any governmental agency purporting to reduce, amend, vary the payment
terms or otherwise affect the Indebtedness, the Borrower, any other
guarantor, any other Person liable for the Indebtedness or any Collateral
or any other obligation of the Borrower or any other Person liable for the
Indebtedness;

(c) any claim of immunity, defense, set-off or counterclaim (other
than full and final payment of the Indebtedness) on behalf of the Borrower,
any Other Guarantor or any other Person liable for the Indebtedness;

(d) any change in the time, place or manner of payment or
performance, or any release, waiver, indulgence, compromise, settlement,
increase, decrease, extension, renewal, acceleration, impairment or
termination (voluntary or otherwise) with respect to any or all of the
Indebtedness;

3
<PAGE>

(e) any release, addition, exchange, waiver, indulgence, compromise,
or settlement with respect to the Borrower, any other guarantor, any other
Person liable for the Indebtedness, or any Collateral, or any failure to
take, perfect or protect any lien or interest intended as Collateral;

(f) any modification, amendment, restatement or replacement (in whole
or in part) of any documents, agreements or instruments evidencing,
comprising, securing, guarantying or otherwise relating to, executed or
delivered in connection with the Indebtedness or of any covenants,
obligations or terms set forth in such documents, agreements or
instruments;

(g) any failure by Lender to exercise diligence in the collection of
the Indebtedness or perfect any interests in the Collateral, or any action,
omission or delay on the part of Lender or any other Person to assert or
enforce any claim, demand, right, power or remedy referred to, conferred in
or arising under this Guaranty or any of the other instruments, agreements,
contracts or documents evidencing, comprising, securing, guarantying or
otherwise relating to, executed or delivered in connection with the
Indebtedness, or any failure by Lender to file suit against Borrower for
any reason, including, without limitation Borrower's insolvency or intent
to leave the state;

(h) the failure of any other Person to guarantee or grant a lien or
security interest as collateral for any or all of the Indebtedness;

(i) the voluntary or involuntary liquidation of, sale or other
disposition of all or substantially all the assets of, cessation of
business of, marshalling of assets and liabilities of, receivership of,
financial decline of, insolvency of, bankruptcy of, assignment for the
benefit of creditors of, reorganization of, arrangement of, composition
with creditors or readjustment of, or other similar proceedings affecting,
the Borrower or any of its subsidiaries or its assets or any allegation or
contest of the validity of the Indebtedness or this Guaranty, or the
disaffirmance or attempted disaffirmance of the Indebtedness or this
Guaranty, in any such proceedings;

(j) the merger, consolidation or dissolution of Borrower or a change
in Borrower's form, business, operations or management;

(k) the termination of any relationship between Guarantor and
Borrower or Borrower's business, including, without limitation, any
relationship of employment, ownership, management or commerce, unless this
Guaranty has been terminated pursuant to Section 2.11 hereof;

(l) the default or failure of the Guarantor fully to perform any of
its obligations set forth in this Guaranty;

(m) Lender's failure to notify Guarantor of the breach of any
provisions under this Guaranty, the occurrence of any event of default or
breach of any of the Indebtedness, acceleration of any of the Indebtedness,
the foreclosure or sale of any Collateral, any other action by or on behalf
of Lender with respect to the Indebtedness, or any of the events or
circumstances listed in this Section 2.02; and/or

(n) to the extent permitted by law, any other event, action or
circumstance that would, in the absence of this paragraph, result in the
release or discharge of the Guarantor from the performance or observance of
any obligation, covenant or agreement contained in this Guaranty.

4
<PAGE>

2.03 Guaranty Irrevocable. Guarantor's guaranty of the Indebtedness is
irrevocable. This Guaranty cannot be cancelled by Guarantor and shall remain in
full force and effect until full and final payment and discharge of the
Indebtedness.

2.04 Primary Liability of Guarantor. This Guaranty constitutes a guarantee
of payment and performance and not of collection. Accordingly, Lender may
enforce this Guaranty against Guarantor without first making demand on Borrower
or any other Person, or taking action against any Collateral, or instituting
collection proceedings upon the Indebtedness. Guarantor's liability for the
Indebtedness is hereby declared to be primary, and not secondary, and each
document presently or hereafter executed by Borrower to evidence or secure an
obligation to Lender is incorporated herein by reference and shall be fully
enforceable against Guarantor. Guarantor's liability for the Indebtedness is
joint and several with any Other Guarantor or Person liable for the
Indebtedness, and Guarantor shall not be entitled to satisfy this Guaranty by
contributing ratably with any other guarantor or otherwise paying less than the
entire unpaid indebtedness. If any event occurs that would allow Lender to
accelerate all or any part of the Indebtedness, but such acceleration as to
Borrower is prevented by law or otherwise, Guarantor agrees that for purposes of
this Guaranty the Indebtedness shall be deemed accelerated, and Guarantor shall
make payment on demand to Lender as required hereunder.

2.05 Bankruptcy and Insolvency. Without limitation, the Guarantor's
obligations hereunder shall not be limited by: (a) the filing of a petition in
bankruptcy by or against the Borrower or the appointment of a trustee, receiver,
custodian, conservator, or other similar appointment over Borrower or any of
Borrower's assets under any jurisdiction, or (b) any order, ruling, or action
taken by any Person in any such proceeding or estate. In any such event or
circumstance, Lender may in its discretion deal with Borrower, or the debtor-in-
possession or any such trustee, receiver, custodian, conservator, or similar
person as if any such person were Borrower, to modify any of the terms of the
Indebtedness or to enter into cash collateral orders or post-petition financing
arrangements. Any such liability shall be included as part of the Indebtedness.
The Indebtedness guaranteed hereby shall also include any interest and fees
(including legal fees) that would have accrued on or in connection with the
Indebtedness even though the commencement of any bankruptcy case, insolvency
proceeding or similar action involving the Borrower might suspend or terminate
the accrual of such interest and fees as to the Borrower.

2.06 Recovery of Avoided Payments. If any amount applied by Lender to the
Indebtedness is subsequently challenged by a bankruptcy trustee or debtor-in-
possession as an avoidable transfer on the grounds that the payment constituted
a preferential payment or a fraudulent conveyance under state law or the
Bankruptcy Code or any successor statute thereto or on any other grounds, Lender
may, at its option and in its sole discretion, elect whether and to what extent
to contest such challenge. If Lender contests the avoidance action, all costs of
the proceeding, including Lender's attorneys' fees, will become part of the
Indebtedness. If any of the contested amounts are successfully avoided (whether
through settlement or otherwise), the avoided amount will become reinstated as
part of the Indebtedness hereunder. If Lender elects not to contest the
avoidance action, Lender may tender the amount subject to the avoidance action
to the bankruptcy court, trustee or debtor-in-possession and the amount so
advanced shall become part of the Indebtedness hereunder. Guarantor's obligation
to reimburse Lender for amounts due under this Section shall survive the
purported cancellation hereof.

2.07 Waivers by Guarantor. Guarantor hereby knowingly, willingly, and
irrevocably waives the following rights, defenses and benefits of law or equity
with respect to this Guaranty and the Indebtedness:

(a) the issuance of instruments evidencing the Indebtedness,
acceptance of this Guaranty, presentment, protest, demand, notice and proof
of reliance on this Guaranty, and the filing of claims with a court in the
event of bankruptcy of Borrower, any other guarantor or any other Person
liable for the Indebtedness;

5
<PAGE>

(a) any right to require Lender to marshal assets or proceed
first against Borrower, the Collateral, any other guarantor or any
other Person liable for the Indebtedness;

(b) any claim or defense of impairment of collateral or impairment of
recourse or any requirement of diligence on the part of Lender in
collecting the Indebtedness or in taking, perfecting, protecting or
proceeding against the Collateral;

(c) any right of notice or consent, including without limitation
notice of or consent to: (i) any release, addition, exchange, sale, waiver,
indulgence, compromise, settlement, increase, decrease, extension, renewal,
acceleration, impairment, or termination of or with respect to the
Indebtedness, any Collateral, any other guarantor or any other Person
liable for the Indebtedness; (ii) any of the other events or circumstances
set forth in Section 2.02 of this Guaranty; (iii) any action taken,
omission or determination not to act by Lender, Borrower, any Other
Guarantor or any other Person liable for the Indebtedness with respect to
the Indebtedness; (iv) dishonor, default and all other notices that may be
required of Lender in connection with the Indebtedness;

(d) any right (if any) to require Lender to advise Guarantor of any
information known to Lender regarding the Indebtedness or the financial or
other condition of Borrower;

(e) any right (if any) to assert as a condition to Guarantor's
performance under this Guaranty any event, circumstance, action or failure
to act on the part of Lender, Borrower, any other guarantor or any other
Person liable for the Indebtedness, including without limitation any of
those events and circumstances set forth in Section 2.02 of this Guaranty;
and

2.09 Statute of Limitations. Guarantor acknowledges that the statute of
limitation applicable to this Guaranty shall begin to run only upon Lender's
accrual of a cause of action against Guarantor hereunder caused by Guarantor's
refusal to honor a demand for performance hereunder made by Lender in writing;
provided, however, if, subsequent to the demand upon Guarantor, Lender reaches
an agreement with Borrower on any terms causing Lender to forbear in the
enforcement of its demand upon Guarantor, the statute of limitation shall be
reinstated for its full duration, and shall not again begin to run until Lender
subsequently again makes demand upon Guarantor.

2.10 Subordination. Guarantor agrees that any presently existing or
hereafter arising loan or extension of credit made by Guarantor to Borrower and
any other presently existing or hereafter arising obligation of Borrower to
Guarantor shall be subordinate to the Indebtedness as to both payment and
collection. Accordingly, Guarantor agrees not to accept any payment whatsoever
from Borrower or to allow any payment by Borrower on Guarantor's behalf until
this Guaranty has been satisfied in full and terminated and released by Lender.
Guarantor hereby grants Lender a security interest in all amounts owed to
Guarantor by Borrower and all instruments, chattel paper and other property
constituting obligations of Borrower to Guarantor. All such property in which a
security interest may be perfected by possession shall be delivered to Lender
immediately upon Guarantor's receipt thereof. Guarantor agrees that in the event
of a bankruptcy or other insolvency proceeding involving Borrower, Guarantor
will timely file a claim for the amount of the subordinated debt, in form
approved by Lender. Guarantor agrees to pursue said claim with diligence and to
comply with any instructions from Lender pertaining to the pursuit of the claim.
The proceeds of such claim shall be delivered to Lender to the extent Guarantor
owes Lender any amounts under this Guaranty.

2.11 Termination. This Guaranty can only be terminated by Lender's delivery
to Guarantor of a written instrument expressly terminating this Guaranty. Lender
shall provide such a written termination in the event the Guarantor ceases to be
a Subsidiary of the Borrower and no Event of Default under the Loan

6
<PAGE>

Agreement exists before or would exist after the termination of this Guaranty.

ARTICLE III: REPRESENTATIONS, WARRANTIES AND COVENANTS

Guarantor hereby represents and warrants to Lender that as of the date
hereof:

3.01 Recitals. The recitals set forth at the beginning of this Guaranty
are true.

3.02 In Furtherance of Business Purposes. The extension of credit to
Borrower by Lender is a direct financial benefit to Guarantor and the execution
of this Guaranty is made in furtherance of the business purposes of the
Guarantor.

3.03 Independent Investigation. Guarantor delivers this Guaranty based
solely on Guarantor's own independent investigation and in no part upon any
representation or statement of Lender or its agents with respect to any matter
whatsoever. Guarantor is in a position to and hereby assumes full responsibility
for obtaining any additional information concerning the Indebtedness or the
financial or other condition of Borrower.

3.04 Not a Replacement or Substitute Guaranty. This Guaranty is not a
substitute or replacement for any other guaranty executed by Guarantor or any
other Person.

3.05 Corporate Existence. Guarantor is a corporation duly organized,
legally existing, and in good standing under the laws of the State of
_______________________ and it is duly qualified as a foreign corporation in all
jurisdictions in which the property owned or the business transacted by it makes
such qualification necessary. Guarantor will not commence doing business in any
state unless and until it shall have qualified to do business in such state.

3.06 Corporate Power and Authorization. Guarantor is duly authorized and
empowered to execute, deliver, and perform under this Guaranty; the Guarantor's
board of directors (and, if necessary, its shareholders) have authorized the
Guarantor to execute and perform under this Guaranty; and all other corporate
and/or shareholder action on Guarantor's part required for the due execution,
delivery, and performance of this Guaranty has been duly and effectively taken.

3.07 Legal and Binding Agreement. The execution, delivery and performance
of this Guaranty will not violate any provisions of the charter or bylaws of
Guarantor or any judicial or administrative order or governmental law or
regulation, and this Guaranty is valid and binding in every respect according to
its terms, subject to no defense, counterclaim, set-off or objection of any
kind, except, as to enforcement only, the effect of applicable bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance and other similar
laws relating to or affecting the rights of creditors generally. Lender has
neither taken nor failed to take any action that subjects it to any liability to
Guarantor.

3.08 No Consent Required. Guarantor's execution and performance of this
Guaranty do not require the consent of or the giving of notice to any other
Person, including without limitation the PUC or FCC.

3.09 No Burdensome Agreements. The execution and performance of this
Guaranty will not cause a default under any other contract or agreement to which
Guarantor or any of Guarantor's properties are subject, nor result in the
creation or imposition of any lien upon any of Guarantor's properties.

3.10 Litigation. Except as set forth on Schedule A hereto, Guarantor is not
presently a defendant in any pending counterclaim, litigation, arbitration or
administrative proceeding or the subject of any investigation; there is no
counterclaim, litigation, arbitration, administrative proceeding or
investigation

7
<PAGE>

threatened against Guarantor; and Guarantor is not subject to any outstanding
court or administrative order. Guarantor covenants to give Lender prompt written
notice of any counterclaim, litigation, administrative proceeding or
investigation that may hereafter be instituted or threatened against Guarantor,
whether or not Guarantor's liability under such proceeding would be covered by
insurance.

3.11 Solvency. Guarantor is solvent as of the date of execution of this
Guaranty and is generally paying its debts as they become due. The fair value of
Guarantor's assets substantially exceeds the sum total of Guarantor's
liabilities. Guarantor has not, since the date of Guarantor's most recent
financial statement delivered to Lender, experienced a material adverse change
in its financial condition or sold or otherwise conveyed or assigned any
material asset to any Person except pursuant to an arms-length transaction with
a Person unrelated to or unaffiliated with Guarantor or Borrower for full and
adequate consideration. For so long as any portion of the Indebtedness remains
unpaid, Guarantor shall not make any sale, conveyance or assignment of any
material assets to (i) any Person related to or affiliated with Guarantor or
Borrower who is not also a Guarantor or Borrower or (ii) any independent third
party except pursuant to an arms-length transaction in which Guarantor receives
cash or other payment immediately upon such transfer in an amount reasonably
equivalent to the value of the asset transferred.

3.12 Capital. Guarantor now has and plans at all times hereafter to have
capital sufficient to carry on its business and transactions and all businesses
and transactions in which it is about to engage.

3.13 No Unpaid Taxes. Guarantor is not presently delinquent in the payment
of any taxes imposed by any governmental authority or in the filing of any tax
return or other required report for itself, Guarantor's business or Guarantor's
Properties. Guarantor is not involved in a dispute with any taxing authority
over tax amounts due. Guarantor covenants that all future taxes assessed against
Guarantor, Guarantor's business and Guarantor's Properties shall be timely paid
and that all tax returns and reports required of Guarantor shall be timely
filed.

3.14 Compliance with Law. Guarantor's properties are maintained and
Guarantor's business activities are conducted in accordance with all applicable
laws and regulations, including without limitation all telecommunications,
licensing, environmental and zoning laws, and Guarantor covenants to maintain
its properties and conduct its business activities in compliance with all such
laws and regulations.

3.15 Filings. To the date hereof, Guarantor has filed all reports, tariffs,
notices and statements required to be filed with the PUC, FCC and any other
applicable governmental regulatory agencies, if any.

3.16 No Default. Guarantor is not in violation of its articles of
incorporation or bylaws or in default in any respect that affects its business,
properties, operations, or condition, financial or otherwise, under any
indenture, mortgage, deed of trust, credit agreement, note, agreement, or other
contract to which Guarantor is a party or by which it or its Properties are
bound.

3.17 Title, Etc. Guarantor has and covenants to maintain good title to its
Properties, free and clear of all liens except those referenced or reflected in
the financial statements delivered to Lender. Guarantor possesses all
trademarks, copyrights, trade names, patents, licenses, permits and rights
therein, adequate in all material respects for the conduct of its business as
now conducted and presently proposed to be conducted, without conflict with the
rights or claimed rights of others.

ARTICLE IV: MISCELLANEOUS PROVISIONS

4.01 No Fiduciary Relationship; No Third Party Beneficiaries. Nothing
contained herein or in any related document shall be deemed to create any
partnership, joint venture or other fiduciary relationship between Lender and
Borrower or Guarantor for any purpose. This Guaranty and any

8
<PAGE>

documents securing the Indebtedness have been executed for the sole benefit of
Lender as an inducement to cause it to extend credit to Borrower, and neither
Guarantor nor any other third party is authorized to rely upon Lender's rights
hereunder or to rely upon an assumption that Lender has or will exercise its
rights under any document.

4.02 Survival. All warranties, representations, and covenants made by the
Guarantor herein shall be deemed to have been relied upon by the Lender and the
holder(s) from time to time of the Indebtedness and shall survive the delivery
to the Lender of this Guaranty regardless of any investigation made by the
Lender or the holder(s) from time to time of the Indebtedness.

4.03 Entire Agreement; No Oral Representations Limiting Enforcement. This
Guaranty represents the entire agreement between the parties concerning the
liability of Guarantor for the Indebtedness, superseding any and all other
agreements, promises or representations existing prior to or made simultaneously
with this Guaranty. Any oral statements regarding Guarantor's liability for the
Indebtedness are merged herein. Without limiting the foregoing, Guarantor
acknowledges that Lender has made no oral statements to Guarantor that could be
construed as a waiver of Lender's right to enforce this Guaranty by all
available legal means.

4.04 Assignment. This Guaranty shall be binding upon the heirs, successors
and assigns of Guarantor, except that Guarantor shall not assign any rights or
delegate any obligations arising hereunder without the prior written consent of
Lender. Any attempted assignment or delegation by Guarantor without the required
prior consent shall be void. The Lender may assign and transfer this Guaranty in
whole or in part to any assignee of all or part of the Indebtedness. The
Lender's successors and assigns shall have the right to rely upon this Guaranty
with respect to the Indebtedness and any additional transactions with Borrower,
its successors and assigns, in reliance hereon, in the same manner and with the
same force and effect as if such successor or assign were specifically named as
Lender herein.

4.05 Notices. All notices, requests, demands, directions and other
communications (collectively "notices") required under the provisions of this
Guaranty shall be in writing (including communication by facsimile transmission)
unless otherwise expressly permitted hereunder and shall be sent by hand, by
registered or certified mail return receipt requested, by overnight courier
service maintaining records of receipt, or by facsimile transmission with
confirmation in writing mailed first-class, in all cases with charges prepaid,
and any such properly given notice shall be effective upon the earlier of
receipt or (i) when delivered by hand, or (ii) the third Business Day after
being mailed, or (iii) the following Business Day if sent by overnight courier
service, or (iv) when sent by facsimile, answer back received. All notices shall
be addressed as follows:

If to Guarantor: _______________________________
_______________________________
_______________________________

With a copy to: _______________________________
_______________________________
_______________________________

If to Lender: NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, Tennessee 37067
Attention: Legal Department
Telecopy: (615) 771-6187

With a copy to: NTFC Capital Corporation
501 Corporate Center Drive, Suite 600

9
<PAGE>

Franklin, Tennessee 37067
Attention: Manager, Credit

All notices shall be sent to the applicable party at the address stated above or
in accordance with the last unrevoked written direction from such party to the
other party hereto.

4.06 Cumulative Remedies. The remedies provided Lender in this Guaranty
are not exclusive of any other remedies that may be available to Lender under
any other document or at law or equity.

4.07 Severability. Should any provision of this Guaranty be invalid or
unenforceable for any reason, the remaining provisions hereof shall remain in
full effect.

4.08 Applicable Law. The validity, construction and enforcement of this
Guaranty and all other documents executed with respect to the Indebtedness shall
be determined according to the internal laws of Tennessee.

4.09 Jurisdiction; Venue; Service of Process. GUARANTOR HEREBY IRREVOCABLY
CONSENTS TO THE JURISDICTION OF THE COURTS LOCATED IN DAVIDSON COUNTY,
TENNESSEE, INCLUDING WITHOUT LIMITATION FEDERAL COURTS SITTING IN THE MIDDLE
DISTRICT OF TENNESSEE AND THE CHANCERY COURT FOR DAVIDSON COUNTY, TENNESSEE, FOR
ANY SUIT BROUGHT OR ACTION COMMENCED IN CONNECTION WITH THIS GUARANTY, ANY OF
THE INDEBTEDNESS, ANY COLLATERAL, ANY OTHER GUARANTOR, OR ANY RELATIONSHIP
BETWEEN LENDER AND GUARANTOR, AND AGREES NOT TO CONTEST OR CHALLENGE VENUE IN
ANY SUCH COURTS. Guarantor irrevocably consents to the service of process of
any such courts in any such action or proceeding by registered or certified
mail, postage prepaid, return receipt requested, to Guarantor at the address
listed in this Guaranty or to such other address as Guarantor may have furnished
to Lender in writing, and agrees that such service shall become effective thirty
(30) days after such mailing. However, nothing herein shall affect the right of
Lender or Guarantor to serve process in any other manner permitted by law or to
commence legal proceedings or otherwise proceed against Lender or Guarantor in
any other jurisdiction.

4.10 Jury Waiver. EACH OF GUARANTOR AND LENDER HEREBY KNOWINGLY,
WILLINGLY AND IRREVOCABLY WAIVES ITS RIGHTS TO DEMAND A JURY TRIAL IN ANY ACTION
OR PROCEEDING INVOLVING THIS GUARANTY, ANY OF THE INDEBTEDNESS, ANY COLLATERAL,
ANY OTHER GUARANTOR OR ANY RELATIONSHIP BETWEEN THE LENDER AND GUARANTOR.
GUARANTOR WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS
WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL
RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

4.11 Waiver of Damages. Except to the extent prohibited by law, in any
action or proceeding involving this Guaranty, any of the Indebtedness, any
Collateral, any other guarantor or any relationship between the Lender and
Guarantor, Guarantor hereby irrevocably and unconditionally waives any and all
rights under the laws of any state to claim or recover any special, exemplary,
punitive, consequential or other damages other than actual direct damages.

4.12 Costs and Expenses. Guarantor agrees to pay all costs and expenses,
including, without limitation, attorneys' fees and compensation for time spent
by Lender's employees, that Lender may incur in enforcing the terms of this
Guaranty against Guarantor, in protecting Lender's rights hereunder, or in
amending or modifying any of the terms hereof.

10
<PAGE>

4.13 Indulgence Not Waiver. Lender's indulgence in the existence of a
default with respect to the Indebtedness or under this Guaranty or any other
departure from the terms of this Guaranty shall not
prejudice any of Lender's rights, including without limitation Lender's rights
to make demand and recover from Guarantor. No waiver, amendment, release or
modification of this Guaranty shall be established by conduct, custom or course
of dealing.

4.14 Amendment and Waiver in Writing. No provision of this Guaranty can be
amended or waived, except by a statement in writing signed by the party against
which enforcement of the amendment or waiver is sought.

4.15 Counterparts. This Guaranty may be executed in any number of
counterparts (by facsimile transmission or otherwise), each of which, when so
executed, shall be deemed an original, but all such counterparts shall
constitute but one and the same instrument.

Executed the date first written above.

GUARANTOR:
----------
Focal Communications of Colorado

By: Joseph A. Beatty
Title: Executive Vice President & Chief
Financial Officer

Accepted as of _________________________, 199__

NTFC CAPITAL CORPORATION

By:____________________________________________

Title:__________________________________________

11
<PAGE>

EXHIBIT D
---------

FORM OF OPINION OF REGULATORY COUNSEL FOR BORROWER
[FCC opinions]

[Closing Date]

NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, TN 37067

Re: Amended and Restated Loan and Security Agreement by and between NTFC
Capital Corporation and _____________________

Ladies and Gentlemen:

We have acted as special regulatory counsel for __________________, a
corporation organized under the laws of the State of __________________
("Borrower"), in connection with the execution and delivery of the Amended and
Restated Loan and Security Agreement dated as of _____________________ between
NTFC Capital Corporation ("Lender") and Borrower (the "Loan Agreement") and
the execution and delivery pursuant thereto of the Note and other agreements
executed by the Borrower. This opinion is being delivered to you pursuant to
Section 5.02 of the Loan Agreement. Capitalized terms used herein which are not
otherwise defined shall have the meanings assigned to them in the Loan
Agreement.

We have assumed (i) the genuineness of all signatures, the authenticity of
documents submitted to us as originals, and the conforming to authentic original
documents of all documents submitted to us as certified, conformed or
photostatic copies, and (ii) the correctness of public files, records and
certificates of, or furnished by, governmental or regulatory agencies or
authorities.

We are licensed to practice in the state of ___________. We express no
opinion as to any laws other than the laws of the State of _____________ and
federal law.

This opinion is based upon an examination of the rules, regulations,
documents, certificates, public files and records of the Federal Communications
Commission ("FCC"), and of the Loan Agreement and the other Loan Documents (the
"Transaction Agreements").

We understand and assume that the Transaction Agreements have been executed
and delivered as of the date hereof substantially in the form delivered to us on
March __, 1997.

In rendering the opinions herein, we have considered duly the
Communications Act of 1934, as amended, and the rules and regulations
promulgated thereunder (collectively, the "Act"), as they relate to the
regulation of the Borrower as a provider of telecommunication and telephone
services.

Based upon the foregoing and subject to the limitations set forth herein,
we are of the opinion that:

1. No consent, approval, authorization or order of the FCC is required to
be obtained, and no notice to or filing with the FCC is required to be made, in
connection with the execution, delivery or enforceability of the Transaction
Agreements and the consummation of the transactions contemplated
<PAGE>

therein except to the extent, if any, described on Exhibit A hereto.

2. The Borrower and its operations [are subject to regulation under the
Act, and are in full compliance therewith] [are not subject to regulation under
the Act].

3. As described on Exhibit B hereto, the Borrower has obtained all
permits, licenses, authorizations and approvals from the FCC, and has made all
filings with the FCC, as may be necessary for (i) the purchase, installation,
construction or operation of the Equipment, or (ii) the operation of the
Borrower's business in accordance with its business plan, or (iii) the
execution, delivery, performance and enforcement of the Transaction Documents
(collectively, the "Regulatory Authorizations").

4. All such Regulatory Authorizations have been duly made and validly
issued, are in full force and effect, and are not subject to any further
administrative review, objection or appeal. There are no notices of violation,
orders to show cause, or complaints issued by or before the FCC or by anyone
else against Borrower, its Affiliates or the Equipment that could adversely
affect any such Regulatory Authorizations.

5. There is no action, suit, proceeding or arbitration involving the type
of telecommunications business conducted by the Borrower that is pending before
the FCC in which there is a reasonable possibility of an adverse decision that
could reasonably be expected to materially and adversely affect the Borrower's
operation of its business as contemplated in its Business Plan.

6. The Lender will not, solely by reason of the execution and delivery of
the Transaction Agreements or the consummation of the transactions contemplated
therein, be subject to the jurisdiction of the FCC except to the extent, if any
(as described on Exhibit A hereto) required in the event that the Lender seeks
to enforce its rights as a secured party to sell or otherwise dispose of, or to
operate or cease operation of, the Collateral.

This opinion is rendered only for the benefit of the Lender and its
successors and assigns, and may not be relied upon by other parties without our
prior written consent.

Very truly yours,
<PAGE>

EXHIBIT A TO REGULATORY OPINION

REQUIRED APPROVALS FOR TRANSACTION AGREEMENTS
---------------------------------------------
<PAGE>

EXHIBIT B TO REGULATORY OPINION

PERMITS/AUTHORIZATIONS FOR BUSINESS
-----------------------------------
<PAGE>

EXHIBIT E
---------

FORM OF
LANDLORD'S WAIVER AND CONSENT

THIS LANDLORD'S WAIVER AND CONSENT ("Consent"), made and entered into this
__ day of _____________, 199__, by ____________________, ("Landlord") in favor
of NTFC CAPITAL CORPORATION, a Delaware corporation ("Lender").

BACKGROUND:

A. Landlord is the owner of certain real property located in ______
County, __________, being more particularly described on Exhibit A attached
hereto (the "Premises").

B. The Premises have been leased to _________________ ("Lessee") by Lease
Agreement dated __________ (the "Lease") a memorandum of which is attached
hereto as Exhibit B and is of record at Book ______, Page ____, in the Office
of the [Recorder of Deeds] for ______________County, ____________.

C. Lender will be extending loans and other financial accommodations to
Lessee for the purpose of financing Lessee's acquisition, construction,
installation, maintenance and operation of a fiberoptic transmission
communications system (the "System"), part of which may be located on the
Premises.

D. As a condition to extending such loans and other financial
accommodations, Lender has required, among other things, that Lessee grant to
Lender security interests in the System and in certain of Lessee's property,
including, without limitation, machinery, equipment, fixtures and inventory,
whether now owned or hereafter acquired ("Collateral"), a portion of which
Collateral is and may hereafter be located on or about the Premises, and that
Lessee execute a leasehold mortgage or collateral assignment of lease, conveying
to Lender Lessee's leasehold interest in the Premises as collateral for the
loans to be made by Lender to Lessee.

NOW, THEREFORE, in order to induce Lender to continue to extend financial
accommodations to Lessee, which will aid Lessee in meeting its obligations to
Landlord, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord hereby agrees with Lender
as follows:

1. Landlord hereby consents to Lessee's granting to Lender a lien on
Lessee's leasehold interest in the Premises (including any purchase option,
access rights, utility easements and rights of way) and executing a leasehold
mortgage, leasehold deed of trust, or collateral assignment in favor of Lender
(the "Leasehold Mortgage").

2. Landlord consents to Lessee's granting Lender a security interest in
the Collateral. Lender's security interests and liens in the Collateral shall be
superior to any title or interest which the Landlord may at any time have
therein, and, during the term of this Agreement, Landlord will not assert
against any of the Collateral any title or any statutory, common law,
contractual or possessory lien, including, without limitation, rights of levy or
distraint for rent, all of which Landlord hereby subordinates in favor of
Lender.

3. Landlord hereby agrees that none of the Collateral is subject to the
Lease and hereby disclaims any and all right, title, interest or claim in or to
the Collateral and any cash or non-cash proceeds of the Collateral (except with
respect to the subordinated landlord lien referred to in Section 2 above). The
Collateral may be affixed to or used in conjunction with the Premises, but shall
remain the

1
<PAGE>

Lessee's personal property, subject to Lender's lien, at all times. Landlord
agrees not to impound or remove any of the Collateral from the Premises as long
as this Consent is in effect, except as set forth herein.

4. Landlord agrees that Lender may enter upon the Premises at any time or
times, during normal business hours, with reasonable advance notice to Landlord,
to inspect or to remove the Collateral therefrom, without charge, except for
reimbursement for any physical damage to the Premises caused by such removal.
Landlord will not hinder Lender's actions in enforcing its liens and remedies
with respect to the Collateral. Landlord agrees that Lender may conduct public
or private sales of the Collateral at the Premises and that interested parties
will be permitted access to the Premises during normal business hours, with
reasonable advance notice to Landlord, for the purpose of inspecting the
Collateral prior to any such sale.

5. Landlord agrees that as long as Landlord receives in a timely fashion
all rental payments as and when due, and as long as the obligations of the
Lessee to maintain the Premises are being fulfilled (whether by Lessee or, at
Lender's option, by Lender or any designee of Lender), Landlord will not
terminate the Lease or take any action to impound or remove the Collateral or to
require Lessee, Lender or Lender's designee to surrender possession of the
Premises until termination of the Lease.

6. In the event that Lessee defaults in its obligations under the Lease,
Landlord hereby agrees to give Lender written notice of default under the Lease,
at the same time and in the same manner as such notice is given to Lessee and
further agrees that Lender may, but shall not be obligated to, cure such
defaults, at its option, within the applicable notice and cure periods and/or
assume the Lease in the place of Lessee.

7. Lender shall have no obligations under the Lease unless and until
Lender delivers to Landlord written notice of assumption, if Lender elects to
assume the Lease. Upon delivery of such a written notice of assumption to
Landlord, then Lender (or its designee) shall be entitled to all rights and
benefits of the Lease, and shall be obligated for all of Lessee's obligations
thereunder. Landlord agrees that, in the event that a default occurs under the
Leasehold Mortgage and Lender, or any agent or designee of Lender, takes
possession of the Premises or forecloses and sells Lessee's leasehold interest
in the Premises, Lender, and its designees, successors, assigns or transferees
shall be permitted to use the Premises for any purpose permitted under the
Lease, as long as such party does not use or occupy the Premises in violation of
the laws, ordinances or regulations of any government or agency having
jurisdiction or in violation of Lessor's insurance contract(s). Landlord's
acceptance of Lender (or its designee) as substitute tenant shall not release
Lessee from any liability.

8. If the Lease is terminated and Lender does not elect to assume the
Lease, Landlord agrees to allow the Collateral to remain on the Premises for a
reasonable time not less than ninety (90) days, during which time Lender may, at
its discretion, remove, sell or otherwise dispose of such Lender's Collateral as
Lender may elect, as long as Landlord receives the rental payments due under the
Lease, and as long as Lessee's obligations to maintain the Premises are being
fulfilled.

9. Landlord agrees that in the event of termination of the Lease by
reason of any default by Lessee, or upon Lessee's rejection of the Lease in any
bankruptcy or insolvency proceeding, at Lender's option, Landlord will enter
into a new lease of the Premises with Lender or its designee(s), for the
remainder of the term, effective as of the date of such termination, at the rent
and upon the terms, provisions, covenants and agreements as contained in the
Lease and subject only to the same conditions of title as the Lease is subject
to on the date of the execution hereof, and to the rights, if any, of any
parties then in possession of any part of the Premises.

10. Landlord agrees and acknowledges that, in the event of a default under
the Leasehold Mortgage, Lender may exercise any of the remedies contained
therein and may assume or transfer to a third party the Lessee's interest in the
Lease (including any purchase option, access rights, utility

2
<PAGE>

easements and rights of way) pursuant to the terms of the Leasehold Mortgage.
Any transfer of the Lease shall be subject to Landlord's rights under the Lease.

11. Landlord states that the Lease is presently in full force and effect,
that all rentals have been paid up to date, and that the Lease is not in
default.

12. This Consent shall remain in full force and effect until all
obligations of Lessee to Lender have been paid and satisfied in full and Lender
has terminated its financing agreements with Lessee.

13. The provisions of this Consent may not be modified or terminated
orally, and shall be binding upon the successors and assigns of the Landlord,
and upon any successor owner or transferee of the Premises and shall inure to
the benefit of the Lender and its successors and assigns. Notwithstanding any
other provision of this Consent or the Lease to the contrary, all of Lender's
right, title and interest in and to the Lease and any obligations thereunder may
be assigned and transferred to an affiliate or successor of Lender without
notice to Landlord, and to other parties with notice to Landlord.

14. All notices shall be in writing and shall be mailed by first class
registered or certified mail, postage prepaid, as follows:

(a) If to Lender:

NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, Tennessee 37067
Attention: Vice President, Marketing

(b) If to Landlord:

________________

Attention: _____

15. This Landlord's Consent may be recorded in any appropriate locations.

16. This document shall in all respects be governed by and construed in
accordance with the laws of the State in which the Premises are located.

3
<PAGE>

IN WITNESS WHEREOF, Landlord has executed this Landlord's Waiver and
Consent on the date first above written.

Landlord:

______________________________

By:___________________________

Title:________________________

[OR]

[LIMITED PARTNERSHIP] _____________________________

By:___________________________
Its: General Partner

By:_______________________

Title:____________________

[OR]

[INDIVIDUAL] __________________________
Landlord

4
<PAGE>

[form of notary acknowledgement] [sample: variable by state and type of entity]

[Corporation]

STATE OF ________)
COUNTY OF _________)

Before me,______, a Notary Public of said County and State, personally
appeared ______________ with whom I am personally acquainted (or proved to me on
the basis of satisfactory evidence), and who, upon oath, acknowledged
himself/herself to be __________ (or other officer authorized to execute the
instrument) of __________, the within named bargainor, a corporation, and that
he/she as such _________ executed the foregoing instrument for the purposes
therein contained, by signing the name of the corporation by himself/herself as
______________.

Witness my hand and seal, at Office in __________, this _______ day of
______, 19__.

______________________
Notary Public

My Commission Expires:_________________

This Document Prepared By:

______________________________

After Recording Return To:

______________________________

5
<PAGE>

EXHIBIT A TO LANDLORD'S
WAIVER AND CONSENT

Property Description

6
<PAGE>

EXHIBIT A

Property Description

4
<PAGE>

EXHIBIT B

Mortgage

5
<PAGE>

EXHIBIT F

FORM OF

MORTGAGEE'S CONSENT

THIS MORTGAGEE'S WAIVER AND CONSENT ("Consent"), made and entered into this
__ day of ________, 1998, by _________________, ("Mortgagee") in favor of NTFC
CAPITAL CORPORATION, a Delaware corporation ("Lender").

BACKGROUND

A. Mortgagee holds liens on certain real property, being more particularly
described on Exhibit A attached hereto (the "Premises"), owned by ______________
("Landlord"), pursuant to the mortgage described on Exhibit B hereto (the
"Mortgage").

B. Landlord leased a portion of the Premises to FOCAL COMMUNICATIONS
CORPORATION (the "Borrower") pursuant to a lease dated as of ________, 199_
executed between Landlord and the Borrower (as amended from time to time, the
"Lease").

C. Lender has extended and/or will be extending loans and other financial
accommodations to the Borrower for the purpose of financing the Borrower's
purchase and installation of the equipment, cabling and other materials
constituting a fiberoptic telecommunications system (the "System"), part of
which will be located on a portion of the Premises.

D. As a condition to maintaining and/or extending such loans and other
financial accommodations, Lender has required, among other things, that the
Borrower grant to Lender security interests in the System, including all
equipment, machinery, fixtures and inventory of the Borrower, whether now owned
or hereafter acquired (the "Collateral"), a portion of which Collateral is and
may hereafter be located on or about the Premises, and Borrower's rights under
the Lease.

NOW, THEREFORE, in order to induce Lender to continue to extend financial
accommodations to Borrower, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Mortgagee hereby
agrees with Lender as follows:

1. Mortgagee agrees that Lender's security interests and liens in the
Collateral shall be superior to any title or interest which the Mortgagee may at
any time have therein, and, during the term of this Agreement, Mortgagee will
not assert against any of the Collateral any title or any statutory, common law,
contractual or possessory lien, including, without limitation, rights of levy or
distraint for rent, all of which Mortgagee hereby subordinates in favor of
Lender.

2. Mortgagee hereby agrees that none of the Collateral is subject to the
Mortgage and hereby disclaims any and all right, title, interest or claim in or
to the Collateral and any cash or non-cash proceeds of the Collateral. The
Collateral may be affixed to or used in conjunction with the Premises, but shall
remain the Borrower's personal property, subject to Lender's lien, at all times.
Mortgagee agrees not to remove any of the Collateral from the Premises without
giving Lender prior written notice.

3. Mortgagee agrees that, if Mortgagee should foreclose upon or take
possession of the Premises, Mortgagee will so notify Lender, and, so long as
Mortgagee receives the rental payments due

<PAGE>

under the Lease, Lender may enter upon the Premises at any time or times within
ninety (90) days after Mortgagee's taking possession, to remove the Collateral
therefrom, without charge, except for reimbursement for any physical damage to
the Premises caused by such removal. Mortgagee will not hinder Lender's actions
in enforcing its liens and remedies with respect to the Collateral.

4. Mortgagee agrees that, if Mortgagee should foreclose upon or take
possession of the Premises, and as long as Mortgagee receives in a timely
fashion all rental payments under the Lease as and when due, and as long as the
obligations of the Borrower to maintain the Premises are being fulfilled
(whether by Borrower or, at its option, Lender or any designee of Lender),
Mortgagee will not terminate the Lease or disturb the quiet enjoyment of the
Borrower, Lender or Lender's designee thereunder, or take any action to require
Borrower, Lender or Lender's designee to surrender possession of the Premises or
the Collateral until termination of the Lease.

5. This Consent shall remain in full force and effect until all obligations
of Borrower to Lender have been paid and satisfied in full and Lender has
terminated its financing agreements with Borrower.

6. The provisions of this Consent may not be modified or terminated orally,
and shall be binding upon the successors and assigns of the Mortgagee, and upon
any successor owner or transferee of the Premises and shall inure to the benefit
of the Lender and its successors and assigns.

7. All notices shall be in writing and shall be mailed by first class
registered or certified mail, postage prepaid, as follows:

(a) If to Lender, to

NTFC Capital Corporation
501 Corporate Centre Drive, Suite 600
Franklin, Tennessee 37067
Attention: Legal Department

(b) If to Mortgagee, to

_____________________

8. This Mortgagee's Consent may be filed and recorded in the appropriate
locations.

9. This document shall in all respects be governed by and construed in
accordance with the laws of the State in which the Premises are located.

2
<PAGE>

IN WITNESS WHEREOF, Mortgagee has executed this Mortgagee's Consent on the
date first above written.

MORTGAGEE:

__________

By:____________

Title:_________

[form of corporate acknowledgment]
[sample: variable by state and type of entity]

STATE OF ________)
COUNTY OF _________)

Before me,___________, a Notary Public of said County and State, personally
appeared ___________, with whom I am personally acquainted (or proved to me on
the basis of satisfactory evidence), and who, upon oath, acknowledged
himself/herself to be __________ (or other officer authorized to execute the
instrument) of __________, the within named bargainor, a corporation, and that
he/she as such __________ executed the foregoing instrument for the purposes
therein contained, by signing the name of the corporation by himself/herself as
__________.

Witness my hand and seal, at Office in __________, this __ day of ______
19__.

_____________
Notary Public

My Commission Expires:___________________

<PAGE>
EXHIBIT 10.33

FOCAL COMMUNICATIONS CORPORATION
200 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60601

October 1, 1998

FirstName LastName
Address1
City, State PostalCode

RE: FOCAL COMMUNICATIONS CORPORATION AMENDED AND
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RESTATED NONQUALIFIED STOCK OPTION AGREEMENT
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Dear FirstName:

The Company is pleased to advise you that its Board of Directors (the
"Board") has granted to you stock options ("Options") under the Focal
Communications Corporation 1997 Nonqualified Stock Option Plan, as amended from
time to time (the "Plan"), subject to the following terms and conditions:

1. DEFINITIONS. For the purposes of this Agreement, the following
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terms shall have the meanings set forth below:

"Change in Control" shall mean the occurrence of any of the following
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events:

(a) The Company is merged or consolidated or reorganized with or into
another corporation or other legal person, and as a result of such merger,
consolidation or reorganization less than a majority of the combined voting
power of the then-outstanding securities of such corporation or person
immediately after such transaction are held in the aggregate by the holders
of securities entitled to vote generally in the election of Directors
immediately prior to such transaction;

(b) The Company sells or otherwise transfers all or substantially all
of its assets to any other corporation or other legal person, and less than
a majority of the combined voting power of the then-outstanding securities
of such corporation or person immediately after such sale or transfer is
held in the aggregate by the holders of Common Stock immediately prior to
such sale or transfer;

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(c) There is a report filed on Schedule 13D or Schedule 14D-1 (or any
successor schedule, form or report), as promulgated in each case pursuant
to the Exchange Act, disclosing that any person (as the term "person" is
used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has
become the beneficial owner (as the term "beneficial owner" is defined in
Rule 13d-3 promulgated under the Exchange Act or any successor rule or
regulation promulgated thereunder) of securities representing 50% or more
of the Voting Power; or

(d) If during any period of two consecutive years, individuals who at
the beginning of any such period constitute the Directors and any new
Directors whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
Directors then still in office who either were Directors at the beginning
of the period or whose election was previously so approved cease for any
reason to constitute a majority of the Directors.

Notwithstanding the provisions of subparagraph (c) above, a "Change in Control"
shall not be deemed to have occurred for the purposes of this Agreement (i)
solely because MDCP either files or becomes obligated to file a report on
Schedule 13D (or any successor schedule or report), as promulgated pursuant to
the Exchange Act, disclosing beneficial ownership by it of securities
representing 50% or more of the Voting Power, (ii) solely because the Company or
any Company-sponsored employee stock ownership plan or other employee benefit
plan of the Company either files or becomes obligated to file a report or proxy
statement under or in response to Schedule 13D, Schedule 14D-1, Form 8-K or
Schedule 14A (or any successor schedule, form or report or item therein), as
promulgated in each case pursuant to the Exchange Act, disclosing beneficial
ownership by it of securities representing 50% or more of the Voting Power or
otherwise, or because the Company reports that a change in control of the
Company has or may have occurred or will or may occur in the future by reason of
such beneficial ownership or (iii) solely because of a change in control of any
subsidiary (as the term "subsidiary" is defined in Section 424(f) of the Code)
of the Company.

"Code" shall mean the Internal Revenue Code of 1986, as amended, and
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any successor statute.

"Common Stock" shall mean the Company's Class A Common Stock, par
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value $.01 per share, or in the event that the outstanding Common Stock is
hereafter changed into or exchanged for different stock or securities of the
Company, such other stock or securities.

"Company" shall mean Focal Communications Corporation, a Delaware
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corporation, and (except to the extent the context requires otherwise) any
subsidiary corporation of Focal Communications Corporation, as the term
"subsidiary" is defined in Section 424(f) of the Code.

"Director" shall mean a member of the Board.
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"Disability" shall mean your inability, due to illness, accident,
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injury, physical or mental incapacity or other disability, to carry out
effectively your duties and obligations to the Company or to participate
effectively and actively in the management of the Company for a period
anticipated to last at least 6 months, as determined by the Board in its good
faith discretion.

"Exchange Act" shall mean the Securities Exchange Act of 1934, as
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amended, and any successor statute.

"Fair Market Value" of the Common Stock shall be the average, over a
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period of 21 days consisting of the day as of which Fair Market Value is being
determined and the 20 consecutive business days prior to such day, of the
average of the closing prices of the sales of the Common Stock on all securities
exchanges on which the Common Stock may at that time be listed, or, if there
have been no sales on any such exchange on any day, the average of the highest
bid and lowest asked prices on all such exchanges at the end of such day, or, if
on any day the Common Stock is not so listed, the average of the representative
bid and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time,
or, if on any day the Common Stock is not quoted in the NASDAQ System, the
average of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau
Incorporated or any similar successor organization. If at any time the Common
Stock is not listed on any securities exchange or quoted in the NASDAQ System or
the over-the-counter market, the Fair Market Value shall be the fair value of
the Common Stock determined in good faith by the Board.

"Grant Date" shall mean the date of this Option grant letter first
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written above.

"Initial Public Offering" shall mean the initial underwritten offering
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of equity securities of the Company to the general public pursuant to a
registration statement filed with, and declared effective by, the Securities and
Exchange Commission pursuant to the Securities Act, provided that neither of the
following shall constitute an Initial Public Offering: (i) any issuance of
Common Stock as consideration or financing for a merger or acquisition or (ii)
any issuance of Common Stock, or rights to acquire Common Stock, to employees of
the Company as part of an incentive or compensation plan.

"MDCP" shall mean Madison Dearborn Capital Partners, L.P., a Delaware
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limited partnership.

"Option Shares" shall mean the shares of Common Stock issuable upon
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the exercise of the Options and, until the consummation of the Initial Public
Offering shall occur, any and all shares of Common Stock that may be issued in
respect of such shares of Common Stock pursuant to a stock dividend, stock
split, reorganization, recapitalization, merger, consolidation, conversion or
other transaction or event effecting a change in the capital structure of the
Company or otherwise affecting the Common Stock. Until the consummation of the
Initial Public Offering shall occur, (i) all such shares of Common Stock shall
continue to be Option Shares in the hands of any holder thereof other than you
(except the Company and any purchaser of such shares of Common Stock pursuant to
the repurchase provisions of paragraph 12 below or the provisions of paragraphs
14(b),

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14(c) and 16 below), and (ii) each such holder shall automatically succeed to
your rights and obligations hereunder as a holder of Option Shares.

"Registration Agreement" shall mean that certain Registration
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Agreement dated as of November 27, 1996, by and among the Company and certain
investors, as amended from time to time.

"Sale of the Company" shall mean a Change in Control pursuant to
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subparagraph (a) or (b) of the definition of Change in Control above that occurs
prior to the consummation of the Initial Public Offering.

"Securities Act" shall mean the Securities Act of 1933, as amended,
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and any successor statute.

"Successor Entity" shall mean a successor to the Company by merger,
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consolidation or other business combination or a purchaser of all or
substantially all of the Company's assets or a majority of the Company's
outstanding voting securities, as the case may be.

"Voting Power" shall mean, at any time, the votes relating to the
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then-outstanding securities entitled to vote generally in the election of
Directors.

2. THE OPTIONS.
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(a) Exercise Price and Type of Options. The Company is granting to
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you Options. Each of your Options is for the purchase of 1/500th of a share of
Common Stock at a price per share of $1,500.00 (the "Exercise Price"), payable
upon exercise as set forth in paragraph 2(b) below. Your Options are not
intended to be "incentive stock options" within the meaning of Section 422 of
the Code.

(b) Payment of Option Price. Subject to the provisions of paragraphs
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3 and 4 below, your Options may be exercised in whole or in part upon payment of
an amount (the "Option Price") equal to the product of (i) the Exercise Price
multiplied by (ii) the number of Option Shares (including any fractional share)
to be acquired; provided, however, that following the consummation of the
Initial Public Offering, (i) the Exercise Price shall be multiplied by the
number of whole Option Shares to be acquired, and (ii) any fractional share
shall be settled in cash in accordance with the provisions of clause (b) of the
last sentence of paragraph 5 below. The Option Price shall be payable (i) in
cash (including check, bank draft, money order or, following the consummation of
the Initial Public Offering, from the proceeds of sale through a broker on a
date satisfactory to the Company of some or all of the Option Shares to which
the exercise relates), (ii) by transfer to the Company of shares of Common Stock
that, at the time of exercise, have been held by you for at least six months
and, by themselves or together with cash, have a Fair Market Value equal to the
Option Price, or (iii) in the discretion of the Board, by delivery of a
promissory note in accordance with policies approved by the Board.

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3. EXERCISABILITY/VESTING.
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(a) Vesting Schedule. Your Options may be exercised only to the
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extent that they shall have become vested. Except as otherwise provided in
paragraphs 3(b)(i) and 3(c) below, your options shall vest and become
exercisable with respect to the following percentages of your Option Shares
(rounded to the nearest whole share) on the following vesting dates, provided
that you are then employed by (or are then serving as a director of) the Company
and shall have been continuously employed by (or shall have continuously served
as a director of) the Company from the Grant Date through such vesting date:

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Cumulative Percentage of Options
Vesting Date Vested on such Vesting Date
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12-month anniversary of the Grant Date 25%
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18-month anniversary of the Grant Date 37.5%
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24-month anniversary of the Grant Date 50%
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30-month anniversary of the Grant Date 62.5%
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36-month anniversary of the Grant Date 75%
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42-month anniversary of the Grant Date 87.5%
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48-month anniversary of the Grant Date 100%
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(b) Treatment of Options upon a Change in Control. Upon the occurrence
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of a Change in Control:

(i) Partial Acceleration of Vesting. Your Options shall automatically
become immediately vested and exercisable to the extent that they would
have otherwise become vested and exercisable 12 months from and after the
date of the Change in Control pursuant to paragraph 3(a) above, had you
been continuously employed by (or continuously served as a director of) the
Company during such twelve-month period (and any Options then remaining
unvested and unexercisable shall continue to vest and become exercisable on
the anniversaries of the Grant Date set forth in paragraph 3(a), less 12
months in the case of each such anniversary, so that the vesting schedule
set forth in paragraph 3(a) shall have been effectively accelerated by 12
months, subject to your continuous employment by (or continuous service as
a director of) the Company as provided in paragraph 3(a)); and

(ii) Conversion of Options. Except as otherwise provided in paragraph
16(a) with respect to an Approved Sale (as defined in Section 16(a)), if
the outstanding shares of Common Stock are converted into or exchanged for
a different number or kind of shares or other securities or other
consideration, your Options shall be exchanged for or otherwise

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converted into economically and otherwise substantively equivalent (as
determined by the Board in its good faith discretion in accordance with the
Plan) options to purchase shares of stock or other equity securities of any
Successor Entity.

(c) Acceleration of Vesting upon Discharge in Anticipation of or
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Following a Change in Control. If your employment is terminated by the Company
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in connection with or anticipation of a Change in Control, or if your employment
is terminated by the Company or a Successor Entity at any time during the two-
year period commencing on the date of a Change in Control, your Options shall
automatically become fully vested and immediately exercisable upon such
termination of your employment. For the purposes of this paragraph 3(c), your
employment shall be deemed to have been terminated by the Company or a Successor
Entity, if your employment is actually terminated by the Company or a Successor
Entity or is terminated by you as a result of (i) a material reduction in your
total compensation without your consent (it being understood that a change in
the form or measure of compensation, including but not limited to a change from
salary-based compensation to commission-based compensation or a rearrangement of
your compensation package to include a different combination of salary, bonus,
commission, options or other equity incentives, etc., shall not in and of itself
constitute such a reduction) or (ii) a relocation of your place of employment to
a site that is at least 50 miles from your then-current place of employment
without your consent.

4. EXPIRATION OF OPTIONS.
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(a) Normal Expiration. In no event shall any portion of your Options
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be exercisable after the tenth anniversary of the Grant Date.

(b) Early Expiration upon Termination of Employment. Except as
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otherwise provided in paragraph 3(c) above, any portion of your Options that
shall not have become vested and exercisable in accordance with the provisions
of paragraph 3(a) or 3(b)(i) above shall automatically expire and be forfeited
immediately upon the termination of your employment with the Company for any
reason. Subject to the provisions of paragraph 4(a) above, any unexercised
portion of your Options that shall have become vested and exercisable in
accordance with the provisions of paragraph 3 above on or prior to the date of
termination of your employment shall remain exercisable for a period of 60 days
from and after the date of termination of your employment.

5. PROCEDURE FOR EXERCISE OF OPTIONS. To the extent that your
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Options shall have vested and become exercisable in accordance with the
provisions of paragraph 3 above, they may be exercised in whole or in part from
time to time, subject to the provisions of paragraph 4 above, by delivering to
the Company (to the attention of the Secretary of the Company) (a) written
notice of exercise, specifying (i) the number of Options being exercised and
(ii) the number of Option Shares (including any fractional share, if the
exercise shall occur prior to the consummation of the Initial Public Offering)
being acquired, (b) payment of the Option Price in accordance with the
provisions of paragraph 2(b) above, and (c) if the exercise shall occur prior to
the consummation of the Initial Public Offering, your written acknowledgment
that you have read and been afforded an opportunity to ask questions of the
Company's management regarding all financial and other

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information provided to you regarding the Company. As a condition to any
exercise of your options prior to the consummation of an Initial Public
Offering, (a) you shall permit the Company to deliver to you all financial and
other information regarding the Company that the Company shall believe necessary
to enable you to make an informed investment decision, and (b) you shall make
all customary investment representations that the Company shall require.
Following the consummation of the Initial Public Offering, (a) the Company shall
not be obligated to issue any fractional Option Share, and (b) any fractional
Option Share shall be settled in cash, based on the Fair Market Value of the
Common Stock on the date of exercise.

6. COMPLIANCE WITH SECURITIES LAWS. You represent that, when you
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exercise any of your Options, you shall be purchasing Option Shares for your own
account and not on behalf of others. You understand and acknowledge that federal
and state securities laws govern and restrict your right to offer, sell or
otherwise dispose of any Option Shares unless your offer, sale or other
disposition thereof is registered under the Securities Act and state securities
laws or, in the opinion of the Company's counsel, such offer, sale or other
disposition is exempt from registration or qualification thereunder. You agree
that you shall not offer, sell or otherwise dispose of any Option Shares in any
manner that would (a) require the Company to file any registration statement
with the Securities and Exchange Commission (or any similar filing under state
law) or to amend or supplement any such filing or (b) violate or cause the
Company to violate the Securities Act, the rules and regulations promulgated
thereunder or any other state or federal law. You further understand that the
certificates for any Option Shares you purchase shall bear such legends as the
Company deems necessary or desirable in connection with the Securities Act or
other rules, regulations or laws, and you agree that, at the time of such
purchase, you shall execute such documents necessary for the Company to perfect
exemptions from registration under federal and state securities laws as the
Company may deem necessary or advisable.

7. NON-TRANSFERABILITY OF OPTIONS. Your Options are personal to you
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and are not transferable by you other than by will or the laws of descent and
distribution. During your lifetime only you (or your guardian or legal
representative) may exercise your Options. In the event of your death, your
Options may be exercised only (a) by the executor or administrator of your
estate or the person or persons to whom your rights under the Options shall pass
by will or the laws of descent and distribution and (b) to the extent that you
were entitled hereunder at the date of your death.

8. CONFORMITY WITH PLAN. Your Options are intended to conform in all
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respects with, and are subject to all applicable provisions of, the Plan (a copy
of which is attached hereto and incorporated herein by reference).
Inconsistencies between this Agreement and the Plan shall be resolved in
accordance with the terms of the Plan. By executing and returning the enclosed
copy of this Agreement, you acknowledge your receipt of this Agreement and the
Plan and agree to be bound by all of the terms of this Agreement and the Plan.

9. RIGHTS OF PARTICIPANTS. Nothing in this Agreement shall interfere
----------------------
with or limit in any way the right of the Company to terminate your employment
at any time and for any

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reason or confer upon you any right to continue in the employ of the Company for
any period of time or to continue your present (or any other) rate of
compensation, and in the event of your termination of employment at any time and
for any reason, any portion of your Options that are not then vested and
exercisable in accordance with the provisions of paragraph 3 above shall expire
and be forfeited in accordance with the provisions of paragraph 4(b) above.
Nothing in this Agreement shall confer upon you any right to be selected again
as a Plan participant, and nothing in the Plan or this Agreement shall provide
for any adjustment to the number of Option Shares subject to your Options upon
the occurrence of subsequent events except as provided in paragraph 11 below.

10. WITHHOLDING OF TAXES. If the Company shall be required to
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withhold any federal, state, local or foreign tax in connection with any
exercise of your Options, you shall pay the tax or make provisions that are
satisfactory to the Company for the payment thereof. Following the consummation
of the Initial Public Offering, you may elect to satisfy all or any part of any
such withholding obligation by surrendering to the Company a portion of the
Option Shares that are issued or transferred to you upon the exercise of your
Options, and the Option Shares so surrendered by you shall be credited against
any such withholding obligation at the Fair Market Value thereof on the date of
exercise.

11. ADJUSTMENTS. In the event of a reorganization, recapitalization,
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stock dividend or stock split, or combination or other change in the shares of
Common Stock, the Board may make such adjustments in the number and type of
shares authorized by the Plan, the number and type of shares covered by your
Options and the Exercise Price specified herein as the Board may determine to be
appropriate and equitable in order to prevent the dilution or enlargement of
rights under your Option. The issuance by the Company of shares of stock of any
class, or options or securities exercisable or convertible into shares of stock
of any class, for cash or property or labor or services, upon direct sale, or
upon the exercise of rights or warrants to subscribe therefor, or upon the
exercise or conversion of other securities, shall not affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock then subject to any Options.

12. RIGHT TO REPURCHASE OPTION SHARES UPON TERMINATION OF EMPLOYMENT
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PRIOR TO CONSUMMATION OF INITIAL PUBLIC OFFERING. Prior to the consummation of
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the Initial Public Offering:

(a) Repurchase of Option Shares. If your employment with the Company
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shall terminate for any reason (the date on which such termination shall
occur being referred to as the "Termination Date"), then the Company (or
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its assignee pursuant to paragraph 12(c)) shall have the option to
repurchase all or any portion of your Option Shares issued or issuable upon
exercise of your Options, whether held by you or by one or more of your
transferees, at the price determined in accordance with the provisions of
paragraph 13 (the "Repurchase Option").
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(b) Repurchase by Company. The Company may elect to purchase all or
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any portion of the Option Shares by delivery of written notice (the
"Repurchase Notice") to you or any other holder(s) of the Option Shares
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within the 20 days prior to and including, or within the 120 days
following, the Termination Date. The Repurchase Notice shall set forth the
number of Option Shares to be acquired from you and such other holder(s),
the aggregate consideration to be paid for such shares and the time and
place for the closing of the transaction. The number of Option Shares to be
repurchased by the Company shall first be satisfied to the extent possible
from the Option Shares held by you at the time of delivery of the
Repurchase Notice. If the number of Option Shares then held by you is less
than the total number of Option Shares the Company has elected to
repurchase, the Company shall repurchase the remaining Option Shares
elected to be repurchased from the other holder(s) thereof, pro rata
according to the number of Option Shares held by each such holder at the
time of delivery of the Repurchase Notice (determined as closely as
practicable to the nearest whole share).

(c) Assignment of Repurchase Option. By action of the Board, the
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Company may assign all or any portion of its repurchase rights under this
paragraph 12 to any holder of Common Stock (an "Other Stockholder") or any
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executive officer of the Company or any of its subsidiaries.
Notwithstanding the foregoing sentence, the Company may not assign its
right under paragraph 13(b) to pay a portion of the purchase price for any
Option Shares repurchased hereunder in the form of a promissory note or to
offset such purchase price against obligations or indebtedness owed by you
to the Company.

(d) Closing of Repurchase of Option Shares. The repurchase of Option
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Shares pursuant to this paragraph 12 shall be closed at the Company's
executive offices not less than 20 days after the giving of the Repurchase
Notice but not more than 20 days after the expiration of the 140-day period
referred to in paragraph 12(b). At the closing, the purchaser or
purchasers shall pay the purchase price in the manner specified in
paragraph 13(b), and you and any other holder(s) of Option Shares being
repurchased shall deliver the certificate or certificates representing such
shares to the purchaser or purchasers or their nominees, accompanied by
duly executed stock powers. (If any Option Shares issuable upon exercise
of your Options shall be repurchased hereunder, such Options shall be
deemed to have been exercised simultaneously with such repurchase.) Any
purchaser of Option Shares pursuant to this paragraph 12 shall be entitled
to receive customary representations and warranties from you and any other
selling holder(s) of Option Shares regarding the sale of such shares
(including representations and warranties regarding good title to such
shares, free and clear of any liens or encumbrances) and to require the
signatures of all sellers to be guaranteed by a national bank or reputable
securities broker.

Upon the consummation of the Initial Public Offering, the provisions of this
paragraph 12 shall automatically become null and void and of no further force or
effect.

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13. PURCHASE PRICE FOR OPTION SHARES.
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(a) Purchase Price. The purchase price to be paid for the Option
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Shares repurchased by the Company and Other Stockholders pursuant to paragraph
12 shall be equal to (i) in the case of Option Shares issued upon exercise of
your Options prior to such repurchase, the Fair Market Value of such Option
Shares as of the Termination Date, or (ii) in the case of Option Shares issuable
upon exercise of your Options (which shall be deemed to have been exercised
simultaneously with such repurchase), the Fair Market Value of such Option
Shares as of the Termination Date minus the Option Price for such Option Shares.

(b) Manner of Payment. If the Company elects to repurchase all or
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any portion of the Option Shares, including Option Shares held by one or more
transferees, the Company shall pay for such shares by delivery of a cashier's or
certified check or wire transfer of immediately available funds in an amount
equal to the purchase price of the Option Shares to be repurchased; provided,
however, in the event that the Board determines in its good faith discretion
that the Company is not in a position to pay in immediately available funds any
or all of such repurchase price, the Company may pay a portion of the repurchase
price for such Option Shares (which portion shall not exceed the Fair Market
Value of such Option Shares (as of the date on which such Option Shares were
originally issued to you) minus the Option Price for such Option Shares) in the
form of a subordinated promissory note of the Company. Such subordinated
promissory note shall bear interest at the rate paid on the Company's senior
debt obligations (or if the Company has no such senior debt, at the prime rate
announced or published by Citibank, N.A. from time to time), shall have all
principal and accrued interest due and payable on the fifth anniversary of the
date of issuance and shall be subordinated on terms and conditions satisfactory
to the holder(s) of the Company's indebtedness for borrowed money. In addition,
the Company may pay the purchase price for such Option Shares by offsetting
amounts outstanding under any indebtedness or obligations owed by you to the
Company. If the Company assigns any part of its Repurchase Option, each such
assignee shall pay for that portion of such Option Shares with a cashier's or
certified check or wire transfer of immediately available funds in an amount
equal to the purchase price for such Option Shares to be purchased by the
assignee.

(c) Termination of Purchase Price Provisions. Upon the consummation
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of the Initial Public Offering, the provisions of this paragraph 13 shall
automatically become null and void and of no further force or effect.

14. RESTRICTIONS ON TRANSFER OF OPTION SHARES PRIOR TO CONSUMMATION
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OF INITIAL PUBLIC OFFERING. Prior to the consummation of the Initial Public
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Offering:

(a) Transfer of Option Shares. You shall not sell, assign, transfer,
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pledge or otherwise dispose of or encumber any interest in any Option
Shares (a "Transfer") except pursuant to the provisions of paragraphs 12,
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14(b) or 16 ("Exempt Transfers").
----------------

(b) Certain Permitted Transfers. The restrictions contained in this
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paragraph 14 shall not apply with respect to transfers of Option Shares (i)
pursuant to applicable laws of

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descent and distribution or (ii) among your family group; provided,
however, that the restrictions contained in this paragraph shall continue
to be applicable to the Option Shares after any such transfer, and the
transferees of such Option Shares shall agree in writing to be bound by the
provisions of this Agreement. For the purposes of this paragraph 14(b),
your "family group" means (i) persons related to you by blood, marriage or
adoption, (ii) any trust solely for the benefit of you and/or the persons
described in clause (i) of this sentence, and (iii) any limited
partnership, limited liability partnership, limited liability company or
similar entity, all of the equity interests of which are held by you and/or
the persons described in clause (i) and/or clause (ii) of this sentence.

(c) Termination of Restrictions. The restrictions on the transfer of
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Option Shares set forth in this paragraph 14 shall continue with respect to
each Option Share until the date on which such Option Share has been
transferred in an Exempt Transfer other than an Exempt Transfer
contemplated by paragraph 14(b).

Upon the consummation of the Initial Public Offering, the provisions of this
paragraph 14 shall automatically become null and void and of no further force or
effect.

15. ADDITIONAL RESTRICTIONS ON TRANSFER.
-----------------------------------

(a) Restrictive Legend. Unless and until the Option Shares shall be
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sold pursuant to a transaction registered under the Securities Act or pursuant
to a transaction that complies with Rule 144 under the Securities Act,
certificates representing Option Shares shall bear the following legend:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED
ON ______, ____, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER
AGREEMENTS SET FORTH IN AN OPTION AGREEMENT BETWEEN THE COMPANY AND
ONE OF ITS EMPLOYEES, DATED AS OF [____________________________,
________] A COPY OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE
COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."

(b) Opinion of Counsel. You may not sell, assign, transfer, pledge
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or otherwise dispose of or encumber any Option Shares (except pursuant to an
effective registration statement under the Securities Act or, 90 days after the
consummation of the Initial Public Offering, in compliance with Rule 701(c)(3)
under the Securities Act) without first delivering to the Company

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an opinion of counsel reasonably acceptable in form and substance to the Company
that registration under the Securities Act or any applicable state securities
law is not required in connection with such transfer.

(c) Holdback. You agree not to effect any public sale or
--------
distribution of any equity securities of the Company, or any securities
convertible into or exchangeable or exercisable for any equity securities of the
Company, during the seven days preceding, and the 180 days following, the
effectiveness of any underwritten Demand Registration (as defined in the
Registration Agreement) or any underwritten Piggyback Registration (as defined
in the Registration Agreement), except as part of any such underwritten
registration if otherwise permitted.

16. SALE OF THE COMPANY PRIOR TO CONSUMMATION OF INITIAL PUBLIC
-----------------------------------------------------------
OFFERING. Prior to the consummation of the Initial Public Offering:
- --------

(a) Consent to Sale of the Company. If a Sale of the Company is
------------------------------
approved by the Company and the holders of at least 67% of the
Institutional Investor Stock (as defined in the Stock Purchase Agreement
dated as of November 27, 1996, by and among the Company, MDCP, Frontenac
VI, L.P., Battery Ventures III, L.P., Brian F. Addy, John R. Barnicle,
Joseph Beatty and Robert C. Taylor, Jr.) then outstanding (the "Approved
--------
Sale"), you shall consent to and raise no objections against the Approved
----
Sale of the Company, and if the Approved Sale of the Company is structured
as a sale of stock, you shall agree to sell all of your Option Shares then
outstanding, and all of your Options then remaining unexercised hereunder
(regardless of whether such Options are then vested and exercisable), on
such terms and conditions as shall be approved by the Board and the holders
of at least 67% of the Institutional Investor Stock then outstanding,
provided that such terms and conditions (including price) shall be no less
favorable than those on which shares of Institutional Investor Stock are
being sold in the Approved Sale. Any of your unexercised Options to be
purchased in the Approved Sale shall be purchased at a price equal to (i)
the price at which shares of Institutional Investor Stock are being
purchased in the Approved Sale minus (ii) the Option Price. You shall take
all necessary and desirable actions in connection with the consummation of
the Approved Sale of the Company.

(b) Purchaser Representative. If the Company or the holders of the
------------------------
Company's securities enter into any negotiation or transaction for which
Rule 506 (or any successor rule then in effect) under the Securities Act
may be available with respect to such negotiation or transaction (including
a merger, consolidation or other reorganization), you shall at the request
of the Company appoint a "purchaser representative" (as such term is
defined in Rule 501 under the Securities Act) reasonably acceptable to the
Company. If you appoint the purchaser representative designated by the
Company, the Company shall pay the fees of such purchaser representative.
If you decline to appoint the purchaser representative designated by the
Company, you shall appoint another purchaser representative reasonably
acceptable to the Company, and you shall be responsible for the fees of the
purchaser representative so appointed.

-12-
<PAGE>

The provisions of this paragraph 16 shall automatically become null and void and
of no further force or effect upon the earlier of (i) the consummation of a Sale
of the Company or (ii) the consummation of the Initial Public Offering.

17. REMEDIES. The parties hereto (and prior to the consummation of
--------
the Initial Public Offering, the Other Stockholders as third-party
beneficiaries) shall be entitled to enforce their rights under this Agreement
specifically, to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights existing in their favor. The
parties hereto acknowledge and agree that money damages would not be an adequate
remedy for any breach of the provisions of this Agreement and that any party
hereto (and prior to the consummation of the Initial Public Offering, any Other
Stockholder as a third-party beneficiary) may apply to any court of law or
equity of competent jurisdiction for specific performance or injunctive relief
(without posting bond or other security) in order to enforce or prevent any
violation of the provisions of this Agreement. All rights of the Other
Stockholders as third-party beneficiaries under this Agreement shall
automatically terminate upon the consummation of the Initial Public Offering.

18. AMENDMENT. Any amendment to the Plan shall be deemed an
---------
amendment to this Agreement to the extent that any such amendment is applicable
to this Agreement; provided, however, that (a) prior to the consummation of the
Initial Public Offering, no such amendment shall adversely affect your rights
under this Agreement without the prior written consent of a majority (based on
the total number of Option Shares subject to Options held) of the holders of
then outstanding Options granted under the Plan whose rights are similarly
adversely affected, and (b) following the consummation of the Initial Public
Offering, no such amendment shall adversely affect your rights under this
Agreement without your prior written consent. Prior to the consummation of the
Initial Public Offering, this Agreement may not otherwise be amended in any way
that would adversely affect your rights hereunder without the prior written
consent of a majority (based on the total number of Option Shares subject to
Options held) of the holders of then outstanding Options granted under the Plan
whose Option agreements are to be similarly amended, and following the
consummation of the Initial Public Offering, this Agreement may not otherwise be
amended in any way that would adversely affect your rights hereunder without
your prior written; provided, however, that prior to the consummation of the
Initial Public Offering, no provision of paragraph 12, 13, 14, 15, 16, 17 or 18
of this Agreement may be amended or waived without the prior written consent of
at least 67% of the Institutional Investor Stock then outstanding, if such
amendment or waiver would have a detrimental effect on the Other Stockholders.

19. SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
----------------------
herein, all covenants and agreements contained in this Agreement by or on behalf
of any of the parties hereto shall bind and inure to the benefit of the
respective successors and permitted assigns of the parties hereto whether so
expressed or not.

20. SEVERABILITY. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall

-13-
<PAGE>

be ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or any other provision of this
Agreement.

21. COUNTERPARTS. This Agreement may be executed simultaneously in
------------
two or more counterparts (including by facsimile), each of which shall
constitute an original, and all of which taken together shall constitute one and
the same Agreement.

22. DESCRIPTIVE HEADINGS. The descriptive paragraph headings in this
--------------------
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.

23. GOVERNING LAW. The corporate law of Delaware shall govern all
-------------
questions concerning the relative rights of the Company and its stockholders.
All other questions concerning the construction, validity and interpretation of
this Agreement shall be governed by the internal law, and not the law of
conflicts, of Illinois.

24. NOTICES. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally,
one business day after being sent by reputable overnight courier (charges
prepaid) or four business days after being mailed by certified or registered
mail (postage prepaid and return receipt requested), to the recipient. Such
notices, demands and other communications shall be sent to the addresses
indicated below:

(a) If to you:
<<FirstName>> <<LastName>>
<<Address1>>
<<City>>, <<State>> <<PostalCode>>

(b) If to the Company:

Focal Communications Corporation
200 North LaSalle Street
Chicago, Illinois 60601
Attention: President

(c) If to the Other Stockholders, to the address listed in the
Company's records; or to such other address (or to the attention of such other
person) as the receiving party may hereafter specify by prior written notice to
the sending party.

25. THIRD-PARTY BENEFICIARIES. You and the Company hereby
-------------------------
acknowledge that, until the consummation of the Initial Public Offering, the
Other Stockholders are third-party beneficiaries under this Agreement.

-14-
<PAGE>

26. ENTIRE AGREEMENT. This Agreement constitutes the entire
----------------
understanding between you and the Company and supersedes all prior oral and
written agreements with respect to the subject matter hereof.

* * * *

Please execute the enclosed copy of this Agreement in the space
provided below and return it to the Secretary of the Company at the executive
offices of the Company to confirm your receipt of copies of, and your
understanding and acceptance of the terms and conditions of, this Agreement and
the Plan.

Very truly yours,

FOCAL COMMUNICATIONS CORPORATION

By____________________________________________
Its President and Chief Executive Officer

Enclosures: 1. Extra copy of this Agreement
2. Copy of the Plan

The undersigned hereby acknowledges receipt of copies of, and his or
her understanding and acceptance of the terms and conditions of, this Agreement
and the Plan.

Dated as of: ______________, 1998

___________________________________________
(Signature)

___________________________________________
Name (printed or typed)

-15-

<PAGE>

Exhibit 10.36

AGREEMENT FOR SALE OF REAL PROPERTY

This Agreement for Sale of Real Property (the "Agreement") is made this 13 day
of August, 1998 by and between United Air Lines, Inc., a Delaware corporation
with its mailing address at P. 0. Box 66100, Chicago, Illinois 60666
(hereinafter, "United") and Focal Communications Corporation, a Delaware
corporation (hereinafter, "Purchaser").

RECITALS

A. United is the owner of the Property (as hereinafter defined), commonly
referred to as 1305 East Algonquin Road, Elk Grove Township, Illinois 60007;

B. Purchaser desires to purchase, and United is willing to sell, the Property
upon and subject to the terms, provisions and conditions hereinafter set
forth;

NOW THEREFORE, in consideration of the foregoing Recitals and the
parti respective representations, warranties, conditions, agreements,
covenants, obligations and undertakings, and for other good and valuable
consideration, United agrees to sell the Property to Purchaser, and Purchaser
agrees to purchase the Property from United, in accordance with this Agreement,
as follows.

Purchase and Sale Provisions; Purchase Price

1.1 Sale of Proper1y. United will sell to Purchaser and Purchaser will purchase
from United, for the purchase price and on the terms and conditions set
forth in this Agreement (A) that certain real property, consisting of
approximately 13.14 acres of land commonly referred to as 1305 East
Algonquin Road, Elk Grove Township, Illinois 60007; which is legally
described and generally depicted on Exhibit A annexed hereto (the "Real
Property"); (B) together with all buildings and improvements situated
thereon, presently consisting of a two-story glass and concrete building
containing approximately 52,000 square feet of space and a parking lot that
accommodates approximately 520 standard spaces (the "Improvements"); plus
(C) all water rights, mineral rights, development rights and air rights
owned by United, if any, and all appurtenances to the Real Property and
Improvements presently owned by United, if any, and (D) all personal
property situated in or on the Real Property, if any, which personal
property is described in the Bill for Sale, annexed to this Agreement as
Exhibit B. United does not represent that it owns any water rights, mineral
rights, air rights, or development rights in respect to the Property.

<PAGE>

1.2 Purchase Price. Purchaser will pay to United as the total purchase price and
consideration for the Property the sum of $2,350,000.00 (the "Purchase
Price"), payable as follows:

A. Deposit. Concurrently with Purchaser's execution of this Agreement,
Purchaser will deliver the sum of $25,000 (the "Deposit") to Escrow Holder
(as provided in Section 3 below), in immediately available funds, for
deposit into an interest-bearing account (the "Escrow", as defined in
Section 2 below), to be held and disbursed as earnest money, subject to the
terms of this Agreement. In the event that Purchaser fails to deliver the
Deposit to Escrow Holder within five (5) business days of the execution of
this Agreement by Purchaser, then United may terminate this Agreement by
written notice to Purchaser and Escrow Holder, and thereupon the Agreement
will immediately terminate and be of no further force or effect.

B. Balance at Closing. At Closing, as defined in Section 8 of this
Agreement, Purchaser will pay to United an amount equal to the (i)
difference between the Purchase Price and the Deposit, (ii) plus or minus
prorations and other adjustments, but only to the extent that prorations
and adjustments are expressly authorized under this Agreement. The balance
payment at Closing will be made by cash or by certified cashier's check,
or by a wire transfer of immediately available federal funds.

2. Escrow; Closing Conditions

2.1 Escrow. No later than five (5) business days after the execution of this
Agreement by Purchaser and United, Purchaser and United will (A) open an escrow
(the "Escrow") with Chicago Title Insurance Company (the "Escrow Holder") and
(B) deliver to Escrow Holder a fully executed copy of this Agreement together
with an authorization to act in accordance with the terms of this Agreement. The
aforesaid authorization, together with Escrow Holder's standard provisions, will
become part of this Agreement, whether or not annexed hereto; provided, however,
that in the event of any conflict of inconsistency between such standard
provisions on the one hand and this Agreement on the other hand, the
inconsistency shall be resolved by giving precedence to this Agreement and this
Agreement will control. All charges associated with the Escrow, including the
Escrow Holder's fees, will be shared equally by Purchaser and United. Purchaser
will be entitled to all interest earned by the Deposit (subject, however, to the
provisions of Section 7 hereof), which interest, if any, will be disbursed to
Purchaser or credited to the Purchase Price at Closing

2.2 Title and Title Insurance
Page 2
<PAGE>

A. Title Report; Approval of Title by Purchaser. United will employ reasonable
and diligent efforts to cause a preliminary report for the Property (the
"Title Report"), issued by Chicago Title Insurance Company ("Title
Insurer"), together with copies of all title documents referred in the
Title Report, to be delivered to Purchaser not later than thirty (30) days
following the execution of this Agreement by Purchaser and United.
Thereafter, Purchaser will have ten (10) business days from its receipt of
the Title Report to approve or disapprove in a writing directed to the
United any and all matters affecting title to the Property, other than the
Permitted Title Exceptions, as defined below; it being understood and
agreed that the failure of Purchaser to approve or disapprove any matter
affecting title by written notice to United within the aforesaid ten
(10)-day period will be deemed approval of such matter. Should Purchaser
disapprove any matter of title, United shall determine, within ten (10)
business days after United receives Purchaser's timely notice of
disapproval, whether United is willing or able, in United's reasonable
discretion, to cause such disapproved items to be eliminated prior to or at
Closing. If United determines (in United's reasonable discretion), within
such ten (10) business day period, that it is unwilling or unable to cause
certain disapproved items to be eliminated prior to or at Closing, United
shall give written notice to Purchaser and Escrow Holder identifying such
matters, and thereupon, if Purchaser is unwilling to withdraw or waive
Purchaser's disapproval of those matters, and provided that the matters
disapproved by Purchaser do not constitute Permitted Exceptions or other
matters that Purchaser, by the terms of this Agreement, does not have the
right to disapprove, Purchaser may terminate this Agreement consistently
with the terms and provisions hereof.

"Permitted Title Exceptions" will mean each and every one of the following: (i)
the standard printed exceptions set-forth on the policy of title insurers; (ii)
general and special taxes not then delinquent; (iii) any act(s) of Purchaser or
any party under Purchaser's control or direction, and right(s) of persons
claiming by, through or under Purchaser; (iv) an exception related to United's
continued use of a portion of the Property, in accordance with the rights
reserved by United pursuant to Section 5 hereof; (v) the existence of any areas
constituting "wetlands" or "special flood hazard" areas, if any; (vi) the terms
and provisions of any annexation of United's property (including the Property)
by the Village of Mount Prospect, including voluntary annexation pursuant to an
agreement between United and the Village of Mount Prospect, and (vii) any other
matter which the Purchaser shall approve in writing.

It is understood that failure of Purchaser to confirm in a writing directed
<PAGE>

to the United its unwillingness to withdraw or waive previously disapproved
matters shall be deemed Purchaser's waiver or reversal (as the case may be) of
its prior disapprovals.

B. Title Commitment. Not later than thirty (30) days from the latest date on
which Purchaser was entitled to, but did not, register its disapproval or
rejection of the Title Report, as described in the preceding subsection
(A), United will deliver (or cause the Title Insurer to deliver) to
Purchaser, at United's cost and expense, a Title Commitment that conforms
in all material respects to the Title Report. The commitment will be for an
ALTA Owner's Title Insurance Policy for the Real Property, issued by the
Title Insurer in the amount of the Purchase Price, covering title to the
Real Property on or after the date hereof, showing United as owner of the
Real Property, subject only to the Permitted Title Exceptions.

C. Survey. United will employ diligent efforts to cause to be delivered to
Purchaser, at United's cost and expense, not later than thirty (30) days after
the execution of this Agreement by United and Purchaser, a current survey of the
Real Property, dated no earlier than July 15, 1998, prepared by a surveyor
licensed by the State of Illinois, which may be an Urban ALTA/ACSM Land Title
Survey meeting Minimum Standard Details Requirements and Accuracy Standards
adopted most recently by ALTA (hereinafter, the "Survey"). The Survey will
reflect and confirm the correct legal description of the Property, the location
of all Improvements, fences, easements, and rights of way. The Survey will show
no encroachments onto the Real Property from any adjacent property, no
encroachments by or from the Real Property onto any adjacent property, and no
violation of or encroachments upon any recorded building lines, restrictions or
easements affecting the Real Property. If the Survey discloses any such
encroachments or violation or any exception or matter indicating possible rights
of third parties other than the Permitted Title Exceptions, United will have not
more than fifteen (15) business days to cause the Title Insurer to issue its
endorsement insuring against damage caused by such encroachments or violations
or unpermitted exceptions, and provide evidence of the insurance to Purchaser;
provided, however, that in the case of any encroachments of the Real Property on
adjacent property owned by United, United will have the option to waive or
authorize the encroachment(s), if any. Purchaser shall be deemed to have
approved the Survey unless Purchaser disapproves any matter therein by written
notice to United within ten (10) business days.

D. Title and Title Insurance. At Closing, United will convey title to the

<PAGE>

Real Property pursuant to a quit claim deed (the "Deed"), expressly subject to
the Permitted Exceptions. United will convey title to any personal property by a
Bill of Sale attached hereto as Exhibit B. At Closing, the title insurer will
issue through Escrow an ALTA Form B Owner's Title Insurance Company, subject
only to the Permitted Title Exceptions.

3. Prorations and Closing Costs

3.1 Prorations in General. Utility charges, fuels, and all other items of
accrued or prepaid expenses customarily prorated on the transfer of commercial
property in Cook County, Illinois shall be prorated on an accrual basis as of
the Closing Date, on the basis of most recent ascertainable amounts of, or other
reliable information in respect to, each such items of expense, and the net
credit to Purchaser or United will be paid in cash or as a credit against the
Purchase Price payable at Closing. Any items prorated on an estimated basis at
Closing shall be reprorated by the parties when and as the actual amount of such
item or expense becomes known, and any adjustment due to reproration shall be
effectuated no later than ten (10) days following final determination of the
amount in question.

3.2 Prorations of Real Estate Taxes. All real estate taxes and assessments
(general and special) will be prorated on a per diem basis and based on a
365-day year, as of the date of Closing, based on 100% of the most current
tax bill available for the Property. Taxes prorated on an estimated basis
on the Closing Date will be reprorated by the parties when the actual
amount of the tax(es) becomes known, and any adjustment due to reproration
will be effectuated not later than thirty (30) days following the final
determination of the tax and demand by the party to whom the credit or
adjustment is due. The parties' respective rights and obligations with
respect to reproration will survive Closing.

3.3 Title Costs. United will pay the premium for the owner's portion of the
title policy; the costs of procuring the Survey, and all state, county and
municipal transfer taxes. Purchaser shall pay the premium to the extended
coverage of the title policy and any endorsement requested by Purchaser,
and (C) the charges for recording the Deed.

3.4 Escrow. All charges associated with the Escrow, including the Escrow
Holder's fees, will be shared equally by United and Purchaser.

3.5 Professional Fees. Each party will be responsible for payment of the fees
and expenses of its respective legal counsel and any professional
adviser(s) that it may retain in connection with this Agreement and the
transactions contemplated hereby.

<PAGE>

3.6 Delinquencies and Encumbrances. All expenses and charges insured in
connection with the discharge of delinquent taxes, if any, or any liens and
encumbrances on the Property (other than those created by or attributable
to Purchaser) will be paid by United.

3.7 Deed. Purchaser will pay any charges for recording the Deed to effect the
transfer of the Real Property.

3.8 Other Expenses. Any other Closing costs or charges shall be paid by the
party that customarily pays such costs or charges in Cook County, Illinois.

4. Condition of Property; Purchaser's Acknowledgments.

4.1 Properly to Be Sold "As Is." Purchaser shall accept the Property, if at
all, in its present condition and "as is." Purchaser acknowledges and
agrees that neither United, nor any of its agents have made, and United
hereby disclaims, any representations or warranties, express or implied,
concerning the physical, mechanical, geological, seismological or
environmental condition of the Property; the quality, nature or adequacy of
any utilities serving the Property; the present or future suitability of
the Property for Purchaser's business and intended uses(s), or any other
matter relating to the Property or its use, including, without limitation,
any implied warranties of merchantability or fitness for a particular use.
Purchaser additionally represents and warrants to United that Purchaser (A)
intends to rely solely on its independent inspection and investigation of
the Property; (B) United will not be obligated to make any alterations,
additions, improvements or repairs to the Property on account of this
Agreement, and that (C) subject to Purchaser's rights to investigate and
evaluate the Property pursuant to Section 4 of this Agreement, no patent or
latent physical condition of the Property, whether or not known or
discovered, shall affect, in whole or in part, either party's rights and
obligations under this Agreement.

4.2 Properly Reports. Purchaser acknowledges having received copies of the
following reports assessments and studies concerning the Property Phase I
Environmental Assessment and Focused Phase II dated 2/28/96 (collectively,
"Property Reports"). Purchaser understands and acknowledges that the
Property Reports were prepared by consultants or experts believed by United
to be qualified to provide the analysis therein contained, provided,
however, that United does not warrant the Property Reports' accuracy.
completeness, comprehensiveness, or scientific validity, and United does
not represent or warrant that the Property Reports are suitable for
Purchaser's purposes.

4.3 Right of Entry; Feasibility Period. On or before the expiration of the
period
<PAGE>

commencing with the full execution of this Agreement and expiring on
Closing (the "Feasibility Period"). Purchaser, its employees, agents and
consultants will have the right to enter upon the Property, at Purchaser's
sole cost and expense, in order to inspect and investigate the Property and
to conduct any and all surveys, tests and studies that Purchaser deems
necessary or convenient, provided that Purchaser will restore any damage
done to the Property as result of any such tests, surveys or studies. Prior
to any entry upon the Property, Purchaser shall designate in writing to
United one or more representatives of Purchaser who shall accompany any of
such persons each time they enter upon the Property. Such entry or review
shall be made only after reasonable advance written notice to United by
Purchaser and at times reasonably acceptable to United with due regard for
United's ongoing use of the Property, or any facilities adjacent thereto.
Purchaser shall indemnify and defend United against and hold United and the
Property free and harmless from any and all claims, demands, liabilities,
costs, expenses, penalties, damages, losses and liens, including without
limitation, reasonable attorneys' fees, arising out of any such entry by
Purchaser or its representatives, employees, agents, contractors or
designees. The indemnity provided for herein shall survive the termination
of this Agreement and/or the close of the Escrow. In the event that, at any
time during the Feasibility Period, Purchaser, based on its investigation
and inspection determines that the Property is not acceptable, Purchaser
may terminate this Agreement by written notice to United, and thereupon,
both parties' obligation (other than United's obligation to return to
Purchaser the Deposit) shall terminate and be of no further force and
effect.

4.4 Purchaser's Investigation and Inspection. Purchaser represents, covenants
and warrants to United that Purchaser intends to rely solely on its
independent inspection and investigation of the Property in order to
determine whether the Property is in good order, repair, satisfactory
condition, and suited for Purchaser's intended use and purposes therefor.
Without limiting the generality of the foregoing, Purchaser represents and
covenants that, prior to the Closing, Purchaser will have (A) made its own
independent investigation of the Property and all other aspects of this
transaction, and will have relied entirely on such investigation and on the
advice of its independent consultant(s) (if any); (B) commissioned, engaged
and procured such tests, studies, investigations and consultants as they in
their respective reasonable, good faith judgment, deems appropriate or
advisable in connection with the Property and this transaction, and (C)
have reviewed all instruments, records and documents which Purchaser in its
reasonable, good faith judgment, deems appropriate or advisable to review
in connection with the Property, this Agreement and the transaction
contemplated hereby. All such inspections, tests and studies conducted by
Purchaser will be at Purchaser's sole cost, expense and risk. Purchaser's
failue to notify United in writing prior to the expiration of the
Feasibility Period of any substantial defects
<PAGE>

in the Property identified by Purchaser's investigations shall constitute and be
deemed Purchaser's election to proceed to the Closing.

After any termination of this Agreement for whatever reason, Purchaser agrees
promptly to deliver and assign to United (to the extent that they are assignable
by Purchaser), without warranty and at no cost to United, copies of all reports.
notes, assessments, studies (including technical data) prepared or obtained by
Purchaser, its agents, contractors or consultants in connection with the
Property, including all land plans, maps, engineering studies, soil studies,
geological studies, environmental studies, test results, data and other
engineering information in Purchaser's possession or under Purchaser's control,
all of which shall become the property of the United.

4.5 Third Party Claims. Purchaser has been advised and understands that United
previously received an offer to purchase the Property from the Lincoln
Technical Institute ("Lincoln"). While United believes that no agreement
exists between United and Lincoln and that United is free to enter into
this Agreement and consummate the transactions called for hereunder,
Purchaser understands that claims may be asserted by Lincoln, its brokers,
affiliates or other entities. Accordingly, in the event that Lincoln,
Sheldon Gross Realty, Inc., and/or any of their respective principals or
affiliates ("Lincoln Parties") files a lawsuit or causes a lis pendens to
be placed upon the Property, (i) United will not be deemed in default of
this Agreement; (ii) United will have the right to terminate this Agreement
upon a thirty (30) days' written notice to the Purchaser, and (iii) in the
event that this Agreement is terminated, with the exception of United's
obligation to return to Purchaser any Deposit received by United pursuant
to this Agreement, neither party will have any further obligations
hereunder.

Without limiting or prejudice to United's rights under the preceding
paragraph, United agrees that, in the event that Purchaser, without fault
on its part, is named or subsequently joined as a party defendant in any
such litigation or proceeding brought by the Lincoln Parties or any one of
them, United shall indemnify and defend Purchaser in the litigation, but
only so long and to the extent that it may do so without retaining separate
counsel for Purchaser. Purchaser acknowledges and agrees that, in the event
that, for any reason whatsoever, Purchaser's representation by separate
counsel is required or desired, the cost thereof shall be the sole and
exclusive obligation of Purchaser.

5. United Reserved Rights

5.1 Reserved Space and Reserved Term. United reserves, and Purchaser hereby
recognizes, acknowledges to United, the right to occupy and use a portion
of the Property comprised of approximately 5,000 square feet and more

<PAGE>

particularly described and delineated on Exhibit C hereto (the "Reserved
Space"), without charge, for a term commencing on Closing and continuing for
twenty-four (24) months therefrom ("Reserved Term"). Purchaser acknowledges that
Exhibit C may also list, identify and describe those items of personal property
that United will continue to maintain within the Reserved Space during the
Reserved Term, which personal property will not be included in any sale,
conveyance or other transfer of rights to Purchaser, but will remain the
property of United, and shall be removed by United at the expiration of the
Reserved Term.

5.2 Access and Permitted Use. During the Reserved Term, United shall have
unrestricted access to the Reserved Space and the right to use and occupy
same for and the personal property therein located for the conduct of
activities supporting or related to United's business as an airline
(including training and instruction); provided that United will cooperate
with Purchaser's reasonable security procedures. Both parties will employ
all reasonable and due care to avoid injury to persons and/or damage to
each other's property.

5.3 Waiver of Subrogation, Release of Claims

Purchaser and United agree to have all fire and extended coverage and material
damage insurance carried with respect to the Property, the property or any
portion of either endorsed with a clause which waives all rights of subrogation
that the insurer of one party might have against the other party. In the event
that the waiver of subrogation is available only upon payment of additional
premium, the party requesting the waiver of subrogation (not the party for whose
benefit the waiver of subrogation is requested) will bear the additional cost.
In the event that a party is unable to secure the issuance of the waiver of
subrogation, the party will immediately cause the other party to be named as an
additional insured on its fire and extended coverage policy.

Purchaser and United each hereby waive and release each other from each and
every claim for recovery for any loss or damage to the Property or the Reserved
Space, or Purchaser and United the contents of either, to the extent that such
loss or damage is covered by valid and collectible fire and extended coverage
insurance policies carried with respect to the Property or any portion thereof,
without regard to whether such loss or damage was occasioned by the negligence
of the other, its agents or employees.

5.4 Indemnification

A. Indemnification by United. Subject to the provisions for waiver of
subrogation rights and the releases associated therewith, United agrees to
<PAGE>

indemnify and hold Purchaser harmless from any and all claims with respect to
bodily injury or property damage arising from United's occupancy of the Reserved
Space during the Reserved Term, but only to the extent caused by United's
negligence or the negligence of any of its agents or employees.

B. Indemnification by Purchaser. Subject to the provisions for waiver of
subrogation rights and the releases associated therewith, Purchaser agrees
to indemnify and hold United harmless from any and all claims with
respect to bodily injury or property damage arising in the course of
United's occupancy of the Reserved Space during the Reserved Term, but only
to the extent caused by Purchaser's negligence or the negligence of any of
its agents or employees.

Purchaser and United may, but shall not be required to, execute a lease to
govern United's continued occupancy of the Reserved Space.

6. United's Conditions to Closing. The obligations of United to consummate
the Closing will be subject to and conditioned upon (A) Purchaser's
execution of all Closing documents required in connection with the Closing;
and (B) Purchaser's satisfaction of the conditions and requirements
specified in Sections 1.2 and 4.2 of this Agreement, including specifically
payment in full of the Purchase Price.

7. Purchaser's Conditions to Closing. The obligations of Purchaser to
consummate the Closing will be subject to and conditioned upon approval by
the Purchaser's Board of Directors of all reports arising out of any
inspections, tests, studies or investigations undertaken by Purchaser or
supplied to Purchaser, including, but not limited to environmental reports.

8. Closing. Closing with respect to this Agreement and the of the sale of
Property shall mean (A) payment of the Purchase Price; execution and
delivery of the Deed and Bill of Sale to the Property, and (B) shall occur
within three (3) business days following the satisfaction or waiver of the
conditions set forth in Sections 5 and 6 of this Agreement, and in any
event, on or before August 30, 1998, unless said date is extended by the
mutual written agreement of the parties. Unless otherwise agreed to by the
parties, Closing will take place occur at the offices of the Title Insurer.
Purchaser specifically acknowledges that its obligation to close shall not
be waived, affected or diminished as a result of any change or proposed
change in any governmental law, ordinance, statute, rule or regulation
(including a change with an adverse impact on the transactions contemplated
by this Agreement).

In the event that United has satisfied all conditions to Closing, and
Purchaser declines, fails, refuses or is unable to close. United (in
addition to and without limiting any other

<PAGE>

rights available to United under this Agreement and applicable law), will be
permitted to retain the Deposit, together with all interest earned thereon, as
liquidated damages and not as a penalty.

8.1 United's Deliveries

A. The Deed;
B. The Bill of Sale;
C. An ALTA Statement in form required by the Title Insurer.

8.2 Purchaser's Deliveries.

A. An ALTA Statement in form required by the Title Insurer;
B. The Purchase Price minus the Deposit

8.3 Concurrent Deliveries. United and Purchaser will jointly deposit in the
Escrow or deliver to each other at Closing an agreed proration statement,
and certificates complying with the provisions of State of Illinois, County
of Cook and local laws applicable to the determinations of transfer taxes.

9. Representations and Warranties of United

9.1 United is a corporation duly organized and in good standing under the laws
of the State of Delaware and is duly qualified to do business in and in
good standing under the laws of the State of Illinois. United has full
capacity, right, power and authority to execute, deliver and perform this
Agreement and all documents to be executed by United pursuant hereto, and
all required action and approvals therefor have been duly taken and
obtained. The individuals signing this Agreement and all other documents
executed or to be executed pursuant hereto on behalf of United are and
shall be duly authorized to sign the same on United's behalf and to bind
United thereto. This Agreement and all documents to be executed pursuant
hereto by United are and shall be binding upon and enforceable against
United in accordance with their respective terms, and the transactions
provided for in this Agreement, will not result in a breach of or
constitute a default or permit acceleration of maturity under any
indenture, mortgage, deed of trust, loan agreement or other agreement to
which United or the Property is subject or by which United or the Property
is bound.

9.2 United owns a marketable title to the Property.

9.3 To United's actual knowledge and belief, all documents provided to
Purchaser by United in connection with this transaction are accurate and
complete and United has no reason to believe that such documents are
misleading.

<PAGE>

9.4 To United's actual knowledge and belief, (A) United has not been served or
threatened in connection with any litigation or other proceedings
respecting the Property or its use; (B) there are no pending or threatened
actions or proceedings by any municipal, county, state or federal
governmental authorities to enforce, terminate or suspend the effectiveness
of any license, permit or other governmental approval applicable to the
Property, and (C) except as expressly provided in this Agreement, the
Property is not in violation of any applicable law.

9.5 To the best of United's actual knowledge and belief, (A) there are no
unresolved disputes with any architect, designer, contractor or
subcontractor involved in the design, construction, retrofitting, repair or
maintenance of the Property concerning any defect in design, construction
or maintenance of the Property or any improvements thereto; (B) Hazardous
Substances (which shall mean hazardous substances or contaminants, as these
may be defined, regulated and proscribed under any applicable law, federal,
state or local) may be contained in or under the Property, as described in
the Property Reports; and (C) United has provided to Purchaser (and/or will
prior to Closing provide to Purchaser) any technical studies or reports
concerning the Property that may become available to United in addition to
the Property Reports; provided, however, that United does not represent or
warrant that any such studies or reports exist, are in United's possession,
or are suitable for Purchaser's purposes in connection with this Agreement.

9.6 No Implied Warranties. Except as expressly provided in this Agreement,
United makes no representation or warranty with respect to the Property or
any portion thereof, or otherwise in connection with the transaction
contemplated by this Agreement.

10. Representations and Warranties of Purchaser

10.1 Purchaser represents and warrants that it has sufficient equity funds or
available credit to satisfy payment of the Purchase Price at Closing.

10.2 Purchaser acknowledges that the Property may be annexed by the Village of
Mount Prospect, in the event that United and the Village of Mount Prospect
enter into an agreement for voluntary annexation of the parcel of land
owned by United, which includes the Property. United agrees to notify
Purchaser of all material development in connection with the negotiation of
said annexation.

10.3 Purchaser hereby represents and warrants to United that at the date of
execution hereof and at and as of the closing, Purchaser is a corporation
(A) validly

<PAGE>

existing and in good standing under the laws of the state of its
incorporation and the State of Illinois, and (B) duly authorized, qualified
and licensed under any and all laws, ordinances, rules, regulations and
requirements of all governmental authorities to do all things required of
it under or in connection with this Agreement. This Agreement and all
agreements, instruments and documents herein provided to be executed or to
be caused to be executed by Purchaser are duly executed and binding on
Purchaser.

11. Possession. Subject to United's Reserved Rights, as set forth in Section 5
hereof, possession of the Property will be delivered to Purchaser on
Closing, concurrently with the delivery to Purchaser of (A) the Deed to the
Real Property, and (B) of the Bill of Sale with respect to the personal
property, if any.

12. Destruction or Damage

12.1 Casualty Over $50,000. In the event of an insured or uninsured casualty to
the Property prior to Closing having an estimated cost of repair which
equals or exceeds $50,000, Purchaser shall have the right to terminate this
Agreement by written notice to United within ten (10) business days after
Purchaser learns of such casualty and the estimated cost of repair thereof.
In the event Purchaser terminates this Agreement because of such casualty,
the Escrow will terminate. If Purchaser does not provide the aforesaid
notice, then this Agreement will remain in full force and effect; provided
that, at United's election, (A) the Purchase Price will be reduced by the
estimated cost of the repairs, as mutually agreed to by the parties, or (B)
at Closing, United will assign to Purchaser any insurance proceeds payable
with respect to such casualty and the right to make the insurance
adjustment with the insurance company, in which event the Purchase Price
will be reduced only by the amount of the applicable insurance deductible.

12.2 Casualty Under $50,000. In the event of an insured or uninsured casualty to
the Property prior to Closing having an estimated cost of repair which is
less than $50,000, this Agreement shall remain in full force and effect and
there shall be no reduction in the Purchase Price of the Property except
that, at United's election, (A) the Purchase Price will be reduced by the
estimated cost of the repairs, as mutually agreed to by the parties, or (B)
at Closing, United will assign to Purchaser any insurance proceeds payable
with respect to such casualty and the right to make the insurance
adjustment with the insurance company, in which event the Purchase Price
will be reduced only by the amount of the applicable insurance deductible.

12.3 Cost of Repair. For purposes of this Section 12, the phrase "estimated cost
of repair" shall mean an estimate obtained from a reputable independent
consultant
<PAGE>

selected by United and reasonably approved by Purchasers, which approval
Purchaser agrees not to unreasonably withhold or delay.

12.4 Insurance. United, at its expense, will maintain a fire and extended
coverage insurance policy insuring the Property until Closing.

13. Condemnation. For the purposes of this Agreement, a taking by eminent
domain of a portion of the Property shall be deemed to affect a "material
part" if the taking exceeds ten percent (10%) of the land area of the Real
Property. It is hereby understood that in the event of a taking of a
"material part" of the Property, then Purchaser shall not be obligated to
proceed to the Closing hereunder. In the event of such a condemnation of
less than a "material part," Purchaser and United shall, nonetheless,
proceed to Closing without abatement of the Purchase Price, but United
shall assign to Purchaser all United's right to recover from the
condemning authority.

14. Brokers. United hereby represents and warrants to Purchaser that United
has not dealt with any broker or finder in respect to the transaction
contemplated hereby except for whose commissions shall be paid by United;
United hereby agrees to indemnify Purchaser for any claim for brokerage
commission or finder's fee asserted by a person, firm or corporation
claiming to have been engaged by United. Purchaser hereby represents and
warrants to United that Purchaser has not dealt with any broker or finder
in respect to the transaction contemplated hereby except for Mercantile
Realty Partners, L.L.C. and Grubb & Ellis and Purchaser hereby agrees to
indemnify United for any claim for brokerage commission or finder's fee
asserted by a person, firm or corporation other than such brokers
identified above claiming to have been engaged by Purchaser.

15. Defaults.

15.1 Default by United. If there is any default by United under this Agreement
prior to Closing, Purchaser may, at Purchaser's option, either (A) declare
this Agreement null and void and of no force and effect, and each party
shall thereupon be released from all obligations hereunder, or (B) bring
an action against United for direct damages. These shall be the sole
remedies of the Purchaser for any default by United at or prior to
Closing, and Purchaser shall not be entitled to, and hereby waives, all
rights to seek specific performance of this Agreement, or to file any
notice of lis pendens, attachment, lien or encumbrance, or to take any
other action that would impair United's ability to sell, transfer, or
otherwise freely deal with the Property.

15.2 Default by Purchaser. Upon breach by Purchaser of any covenant or
representation contained herein, United may, by notice to Purchaser, elect
to terminate this Agreement and retain the Deposit and liquidated damages
for such breach.
<PAGE>

16. Release and Indemnification by Purchaser. If following Purchaser's
inspection of the Property, the parties proceed to Closing with respect to
the sale of the Property, Purchaser, for itself and for those claiming
through it, including its successors in interest, does hereby agree to
forever release, discharge, hold harmless, acquit, indemnify and defend
United, its parent company, subsidiaries, affiliates, successors in
interest, granted and assigns, and their respective officers, directors and
employees (collectively, "Released and Indemnified Parties") from and
against all losses, claims, demands, controversies, causes of action,
liens, damages, judgments, fines, penalties, costs and expenses, including
attorneys' fees (other as provided in Section 17.11 hereof), and from any
and all liability or claimed liability, that any of the Covered Parties may
incur or suffer as a result of or in connection with any (A) occurrence in,
on or at the Property after the date of Closing; and (B) any condition of
the Property as of the date of Closing.

Notwithstanding the foregoing, Purchaser's obligations and undertakings of
defense, hold harmless and indemnification under this Section 16 shall not
extend to any claim of a third party, including an enforcement action
brought by a governmental entity and irrespective of when initiated, to the
extent that such claim or proceeding, if any, is premised on or alleges a
noncompliance or violation of law, bodily injury or property damage
occurring or sustained prior to Closing and based on a Pre-Closing
Condition as defined below. A Pre-Closing Condition shall mean any
condition in, on, or within the Property which, on the date of Closing (i)
is defective, unsafe, or dangerous to life or limb; (ii) violates any
applicable law, including any environmental law relating to Hazardous
Substances, contamination or pollution of the environment, or (iii)
constitutes a Hazardous Substance within the meaning of any applicable law.

17. Miscellaneous

17.1 Entire Agreement; Amendments; Counterparts. This Agreement and Exhibits A
and B, whether or not annexed hereto contain all the agreements,
conditions, representations, warranties and understandings made between the
parties with respect to the subject matter hereof, and supersede any and
all prior agreements, proposals, solicitations, correspondence and other
agreements or understandings, written or oral. This Agreement may not be
changed, altered or modified in any respect except by an agreement in
writing signed by the duly authorized representative of both parties.

17.2 Construction; Headings. This Agreement will be construed on the basis that
both parties contributed substantially to its formation and preparation; no
inference or presumption shall be accorded in favor of or against either
party, and any uncertainty or ambiguity shall not be interpreted against
any one party. The headings contained in this Agreement are provided for
convenient reference

<PAGE>

only, and are not intended to define, alter or limit the scope of any
provision of this Agreement.

17.3 Partial Invalidity. In the event that any provision of this Agreement will
be deemed invalid, unenforceable or illegal, all remaining provisions of
this Agreement will remain in full force and effect, provided, however,
that if, in such event, the purpose of this Agreement is defeated,
significantly compromised or frustrated, the parties shall use their
respective good faith efforts to negotiate the reformation or modification
of this Agreement, as appropriate, in order to carry out their intent. In
the event that the parties are unable to agree on a mutually acceptable
reformation or modification after ten (10) business days of good faith
negotiations, either party may terminate this Agreement by a written notice
to the other party.

17.4 No Implied Waiver. The failure or delay on the part of either party to
enforce or exercise any of the rights set forth in this Agreement shall not
constitute a waiver of such party's right to demand strict compliance with
the terms of this Agreement, and the waiver by either party of any default
or breach by the other party of any provision of this Agreement shall not
operate as, or be deemed to operate as, a waiver of any subsequent or other
default or breach.

17.5 No Third Party Beneficiaries. Nothing in this Agreement is intended to
confer any rights to, or impose any obligations on, any person not a party
hereto or the parties' respective duly authorized successors and assigns.
Nothing in this Agreement is intended to relieve, discharge or limit the
obligation or liability of any person to the parties or either one of them.

17.6 No Consequential Damages. It is acknowledged and agreed, that neither party
shall be liable to the other party, and each party expressly waives,
releases and relinquishes any and all claims against the other party for
any indirect, special incidental or consequential damages, including,
without limitation, lost revenues, lost revenue opportunities, lost profits
or losses of prospective economic advantage, resulting from United's
performance or failure to perform under this Agreement.

17.7 Rights Personal to Parties; No Assignment. It is acknowledged and expressly
agreed that the rights conferred hereunder are personal to the parties
hereto, and may not be assigned or transferred, in whole or in part, to a
third party hereto (including any subsidiary, affiliate or parent
corporation of either party), without the prior written consent of the
other party, which consent may be withheld in each party's absolute
discretion, and any attempted assignment or other transfer of this
Agreement, in whole or in part, shall be null and void and of no force and
effect; provided, however, that all rights specified hereunder shall be
binding on

<PAGE>

and shall inure to the benefit of the parties' respective successors,
including trustees and receivers.

17.8 Governing Law. This Agreement and any action in tort arising in connection
with this Agreement shall be governed, construed, interpreted and enforced
in accordance with the laws of the State of Illinois, without regard to
any choice of law principles.

17.9 Time of the Essence. The parties acknowledge and agree that time is of the
essence in the performance of each and every covenants, obligation,
requirement and condition of this Agreement.

17.10 Notices. Each notice or other communication given pursuant to this
Agreement shall be in writing, and shall be delivered in person to the
party to whom it is addressed, or sent by (A) United States registered or
certified mail, return receipt requested; (B) a nationally recognized
overnight courier service, or (C) by facsimile transmission. Mailed
notices shall be postage prepaid, and all notices shall be addressed as
follows.

To United:

If sent by U.S. mail:

United Air Lines, Inc.
P. 0. Box 66100
Chicago, Illinois 60666

Attention: Vice President
Properties and Facilities

With a copy to: General Counsel and Secretary

If sent by overnight courier or delivered by messenger:

United Air Lines, Inc.
1200 East Algonquin Road
Elk Grove Township, Illinois 60007

To Purchaser:

If sent by U.S. mail:

Focal Communications Corporation
1200 North LaSalle Street, #800
Chicago, Illinois 60601
Attention: Director of Real Estate

With a copy to:

Focal Communications Corporation
1200 North LaSalle Street, #800
Chicago, Illinois 60601
Attention: Executive Vice President

If sent by overnight courier or delivered by messenger:

Focal Communications Corporation
1200 North LaSalle Street, #800
Chicago, Illinois 60601
Attention: Director of Real Estate

With a copy to:

Focal Communications Corporation
1200 North LaSalle Street, #800
Chicago, Illinois 60601
Attention: Executive Vice President

<PAGE>

All notices shall be effective upon receipt, or upon attempted delivery where
delivery is refused or mail is unclaimed. The addresses and addressees
designated in this Section 16.10 may be changed by written notice given to the
other party.

17.11 Attorneys' Fees. Each party shall bear and be responsible for, without
right of reimbursement from the other party, all attorney's fees and other
costs incurred in connection with the preparation, negotiation, execution,
and performance of this Agreement. In addition, in the event of any
controversy, claim or dispute to this Agreement, the Deed, Bill of Sale or
the Property, or in the event that any action or proceeding shall be brought
by either party in order to enforce the provision of this Agreement, or to
collect damages as a result of the breach of any of the provisions of this
Agreement, the prevailing party shall be entitled to recover from the
nonprevailing party all reasonable costs incurred in connection therewith,
including attorneys' fees.

17.12 Interpretation. In this Agreement, unless otherwise expressly indicated
or except where the context clearly requires otherwise:

A. The terms "hereto," "herein", "hereof," "hereunder" or any terms of
similar meaning or import will be deemed to refer to this Agreement; the
term "hereafter" will mean after, and the term "heretofore" will mean
before the date of execution and delivery of this Agreement.

B. Any reference to this Agreement will be read and interpreted to mean and
include all supplements, exhibits, schedules and other attachments hereto.

C. Terms importing the singular will be deemed also mean and refer to the
plural and vice versa, and the use of any gender will be deemed to include
all genders (words of the masculine gender will mean and include
correlative words of the feminine and neuter genders), all as the context
may require.

D. The phrase "and/or" will mean that any one of the referenced alternatives
or combinations thereof will suffice or may be applicable.

E. The words "include" or "including" will not be construed as words of
limitation, but will be construed as if followed by the phrase "but not
limited to."

F. Terms "persons" will include corporations, partnerships, trusts, firms,

<PAGE>

associations, trusts and other legal entities, including public bodies, as well
as natural persons;

G. Verbs used in the present tense will include the future tense, as the
context may require.

H. Whenever, under the terms of this Agreement, the time for the performance
of a covenant or condition, including a payment, falls on a Saturday,
Sunday or an officially recognized holiday, such time for performance
will be extended to the next business day. Otherwise, all references to
"days" that are not otherwise qualified or described will mean calendar
days.

I. All references to the knowledge or actual knowledge of United shall mean
the knowledge of the following United employees: Larry Clark, Vice
President-Properties and Facilities; Charles Henschel, Regional
Manager-Airport Affairs, and Eva Stevens, Senior Counsel.

17.13 Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, and all of which together shall
constitute one and the same instrument.

17.14 No Offer. Submission of this Agreement to Purchaser for examination or
signature is not effective as an agreement to sell the Property or
otherwise until execution by and delivery to Purchaser and United of an
original of this Agreement.

WHEREFORE, IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective, duly authorized representatives.

<PAGE>

UNITED:

UNITED AIR LINES, INC.

By:
-------------------------

Name:
-----------------------

Title:
----------------------

Date:
-----------------------

PURCHASER:

FOCAL COMMUNICATIONS CORPORATION

By:
-------------------------

Name:
-----------------------

Title:
----------------------

Date:
-----------------------

<PAGE>

Exhibit B

All personal Property currently located on the Property, except for any personal
property located in the Reserved Space.

<PAGE>

Exhibit C

[MAP]

<PAGE>

Exhibit 21.1

FOCAL COMMUNICATIONS CORPORATION

List of Subsidiaries

. FOCAL COMMUNICATIONS CORPORATION OF CALIFORNIA

. FOCAL COMMUNICATIONS CORPORATION OF COLORADO

. FOCAL COMMUNICATIONS CORPORATION OF FLORIDA

. FOCAL COMMUNICATIONS CORPORATION OF GEORGIA

. FOCAL COMMUNICATIONS CORPORATION OF ILLINOIS

. FOCAL COMMUNICATIONS CORPORATION OF MASSACHUSETTS

. FOCAL COMMUNICATIONS CORPORATION OF MICHIGAN

. FOCAL COMMUNICATIONS CORPORATION OF MID-ATLANTIC

. FOCAL COMMUNICATIONS CORPORATION OF MISSOURI

. FOCAL COMMUNICATIONS CORPORATION OF NEW JERSEY

. FOCAL COMMUNICATIONS CORPORATION OF NEW YORK

. FOCAL COMMUNICATIONS CORPORATION OF OHIO

. FOCAL COMMUNICATIONS CORPORATION OF PENNSYLVANIA

. FOCAL COMMUNICATIONS CORPORATION OF TEXAS

. FOCAL COMMUNICATIONS CORPORATION OF VIRGINIA

. FOCAL COMMUNICATIONS CORPORATION OF WASHINGTON

. FOCAL COMMUNICATIONS CORPORATION OF WISCONSIN

. FOCAL TELECOMMUNICATIONS CORPORATION

. FOCAL FINANCIAL SERVICES, INC.

. FOCAL INTERNATIONAL CORP.