<Page>
--------------------------------------------------------------------------------
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

<Table>
<C>        <S>
   /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001.

                                       OR

<Table>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

        FOR THE TRANSITION PERIOD FROM ______________ TO ______________

                         COMMISSION FILE NUMBER 0-24509

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

                            ALLEGIANCE TELECOM, INC.

             (Exact name of registrant as specified in its charter)

<Table>
<S>                                            <C>
               DELAWARE                                     75-2721491
     (State or other jurisdiction               (IRS Employer Identification No.)
   of incorporation or organization)

                           9201 NORTH CENTRAL EXPRESSWAY
                                DALLAS, TEXAS 75231
                (Address of principal executive offices) (Zip Code)

                                  (214) 261-7100
               (Registrant's telephone number, including area code)
</Table>

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

    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 / /

    As of November 9, 2001, the registrant has 115,244,413 shares of common
stock, par value $0.01 per share outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<Page>
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
                                FORM 10-Q INDEX

<Table>
<S>           <C>                                                           <C>
PART I. FINANCIAL INFORMATION

  Item 1.     Financial Statements
              Condensed Consolidated Balance Sheets
                as of September 30, 2001 and December 31, 2000............    2
              Condensed Consolidated Statements of Operations
                for the three and nine months ended September 30, 2001 and
                2000......................................................    3
              Condensed Consolidated Statements of Cash Flows
                for nine months ended September 30, 2001 and 2000.........    4
              Notes to Condensed Consolidated Financial Statements........    5

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

  Item 3.     Quantitative and Qualitative Disclosures about Market
                Risk......................................................   33

PART II. OTHER INFORMATION

  Item 1.     Legal Proceedings...........................................   35

  Item 2.     Changes in Securities and Use of Proceeds...................   35

  Item 3.     Defaults Upon Senior Securities.............................   35

  Item 4.     Submission of Matters to a Vote of Security Holders.........   35

  Item 5.     Other Information...........................................   35

  Item 6.     Exhibits and Reports on Form 8-K............................   36

              Signatures..................................................   37
</Table>

                                       1
<Page>
                         PART I. FINANCIAL INFORMATION

                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

                     CONDENSED CONSOLIDATED BALANCE SHEETS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
                                                              SEPTEMBER 30,    DECEMBER 31,
                                                                   2001            2000
                                                              --------------   -------------
                                                               (UNAUDITED)
<S>                                                           <C>              <C>
                                           ASSETS

Current assets:
  Cash and cash equivalents.................................   $   475,230      $  396,103
  Short-term investments....................................        62,351         261,856
  Short-term investments, restricted........................            --          12,952
  Accounts receivable, net..................................       127,046          93,803
  Prepaid expenses and other current assets.................        10,653           5,563
                                                               -----------      ----------
      Total current assets..................................       675,280         770,277
Property and equipment, net.................................     1,002,433         744,903
Deferred debt issuance costs, net...........................        20,113          23,710
Long-term investments, restricted...........................           954             829
Goodwill, net...............................................       119,490         100,184
Other assets................................................        45,260          28,936
                                                               -----------      ----------
      Total assets..........................................   $ 1,863,530      $1,668,839
                                                               ===========      ==========

                            LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable..........................................   $    65,099      $   80,814
  Accrued liabilities and other current liabilities.........        72,803          58,256
                                                               -----------      ----------
      Total current liabilities.............................       137,902         139,070
Long-term debt..............................................       983,214         566,312
Other long-term liabilities.................................        12,474           4,972
Commitments and contingencies
Stockholders' equity:
  Preferred stock--$.01 par value, 1,000,000 shares
    authorized, no shares issued or outstanding at
    September 30, 2001 and December 31, 2000................            --              --
  Common stock--114,882,591 and 110,392,114 shares issued
    and 114,555,096 and 110,064,619 outstanding at
    September 30, 2001 and December 31, 2000,
    respectively............................................         1,148           1,104
  Common stock in treasury, at cost, 327,495 shares at
    September 30, 2001 and December 31, 2000................           (45)            (45)
  Common stock warrants.....................................         1,877           1,877
  Additional paid-in capital................................     1,793,617       1,730,652
  Deferred compensation.....................................        (2,045)        (16,531)
  Deferred management ownership allocation charge...........            --            (175)
  Accumulated deficit.......................................    (1,064,612)       (758,397)
                                                               -----------      ----------
      Total stockholders' equity............................       729,940         958,485
                                                               -----------      ----------
      Total liabilities and stockholders' equity............   $ 1,863,530      $1,668,839
                                                               ===========      ==========
</Table>

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

                                       2
<Page>
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

                                  (UNAUDITED)

<Table>
<Caption>
                                            THREE MONTHS ENDED             NINE MONTHS ENDED
                                               SEPTEMBER 30,                 SEPTEMBER 30,
                                        ---------------------------   ---------------------------
                                            2001           2000           2001           2000
                                        ------------   ------------   ------------   ------------
<S>                                     <C>            <C>            <C>            <C>
Revenues..............................  $    135,137   $     80,031   $    365,070   $    190,198
Operating Expenses:
  Network.............................        65,714         41,875        177,743        103,545
  Selling, general and
    administrative....................        95,864         69,854        271,879        174,588
  Depreciation and amortization.......        71,143         37,152        182,279         83,857
  Management ownership allocation
    charge............................            --          1,301            175          5,893
  Non-cash deferred compensation......        (5,263)         2,010          2,829          6,030
                                        ------------   ------------   ------------   ------------
      Total operating expenses........       227,458        152,192        634,905        373,913
                                        ------------   ------------   ------------   ------------
      Loss from operations............       (92,321)       (72,161)      (269,835)      (183,715)
Other income (expense):
  Interest income.....................         4,508         15,131         14,737         45,026
  Interest expense....................       (18,724)       (16,302)       (51,117)       (52,643)
                                        ------------   ------------   ------------   ------------
      Total other income (expense)....       (14,216)        (1,171)       (36,380)        (7,617)
                                        ------------   ------------   ------------   ------------
Net loss..............................  $   (106,537)  $    (73,332)  $   (306,215)  $   (191,332)
                                        ============   ============   ============   ============
Net loss per share, basic and
  diluted.............................  $      (0.94)  $      (0.67)  $      (2.72)  $      (1.79)
                                        ============   ============   ============   ============
Weighted average number of shares
  outstanding, basic and diluted......   113,704,107    108,949,104    112,441,562    107,147,319
                                        ============   ============   ============   ============
</Table>

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

                                       3
<Page>
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                                NINE MONTHS ENDED
                                                                  SEPTEMBER 30,
                                                              ---------------------
                                                                2001        2000
                                                              ---------   ---------
<S>                                                           <C>         <C>
Cash Flows from Operating Activities:
  Net loss..................................................  $(306,215)  $(191,332)
  Adjustments to reconcile net loss to cash used in
  operating activities--
    Depreciation and amortization...........................    182,279      83,857
    Provision for uncollectible accounts receivable.........     25,009      16,212
    Accretion of investments................................     (4,429)     (2,379)
    Accretion of Series B and 12 7/8% Notes.................     32,023      28,569
    Amortization of deferred debt issuance costs............      3,597       9,114
    Amortization of management ownership allocation charge
     and deferred compensation..............................      3,004      11,923
  Changes in assets and liabilities--
    Increase in accounts receivable.........................    (55,418)    (67,794)
    Increase in prepaid expenses and other current assets...     (3,915)     (2,172)
    (Increase) decrease in other assets.....................     (7,498)        469
    Increase (decrease) in accounts payable.................    (20,380)     45,242
    Increase in accrued liabilities and other current
     liabilities............................................     11,372      30,426
                                                              ---------   ---------
      Net cash used in operating activities.................   (140,571)    (37,865)

Cash Flows from Investing Activities:
  Purchases of property and equipment.......................   (318,990)   (332,703)
  Capitalized interest......................................    (13,535)    (10,637)
  Purchases of subsidiaries, net of cash acquired...........    (16,887)    (41,745)
  Purchases of investments..................................   (283,925)    (96,559)
  Proceeds from sale of investments.........................    500,686      68,570
                                                              ---------   ---------
      Net cash used in investing activities.................   (132,651)   (413,074)

Cash Flows from Financing Activities:
  Deferred debt issuance costs..............................         --     (12,334)
  Proceeds from issuance of common stock, net...............      6,014     727,288
  Proceeds from credit facilities...........................    350,000          --
  Payments on capital lease obligations.....................     (3,834)     (2,133)
  Other.....................................................        169         (91)
                                                              ---------   ---------
      Net cash provided by financing activities.............    352,349     712,730
                                                              ---------   ---------
Net increase in cash and cash equivalents...................     79,127     261,791
Cash and cash equivalents, beginning of period..............    396,103     502,234
                                                              ---------   ---------
Cash and cash equivalents, end of period....................  $ 475,230   $ 764,025
                                                              =========   =========
Supplemental disclosures of cash flow information:
  Cash paid for interest....................................  $  19,803   $  17,066

Supplemental disclosure of noncash investing and financing
  activities:
  Assets acquired under capital lease obligations...........  $  36,885   $   8,081
  Fair value of assets acquired in business acquisitions....     47,046      24,163
  Liabilities assumed in business acquisitions..............      3,345      11,837
  Common stock issued for business acquisitions (3,870,518
    and 393,482 shares, respectively).......................     68,356      25,033
Options issued for business acquisitions (0 and 114,375
  shares)...................................................         --       2,421
</Table>

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

                                       4
<Page>
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
     THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
           (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                                  (UNAUDITED)

1. GENERAL

    Allegiance Telecom, Inc., an integrated communications provider, was
incorporated on April 22, 1997, as a Delaware corporation, for the purpose of
providing voice, data and Internet services in major metropolitan areas across
the United States. Allegiance Telecom, Inc. and its subsidiaries are referred to
herein as the "Company."

    The Company's business plan is focused on offering services in 36 of the
largest metropolitan areas in the United States. As of September 30, 2001, the
Company is operational in 34 markets: Atlanta, Austin, Baltimore, Boston,
Chicago, Cleveland, Dallas, Denver, Detroit, Fort Lauderdale, Fort Worth,
Houston, Long Island, Los Angeles, Miami, Minneapolis/St. Paul, New York City,
Northern New Jersey, Oakland, Ontario/Riverside, Orange County, Philadelphia,
Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco,
San Jose, Seattle, Tampa, Washington, D.C. and White Plains.

    The Company's success will be affected by the challenges, expenses and
delays encountered in connection with the formation of any new business, and the
competitive environment in which the Company operates. The Company's performance
will further be affected by its ability to assess and access potential markets,
implement interconnection and colocation with the facilities of incumbent local
exchange carriers, lease adequate trunking capacity from and otherwise develop
efficient and effective working relationships with incumbent local exchange
carriers and other carriers, obtain peering agreements with Internet service
providers, collect interexchange access and reciprocal compensation charges,
purchase and install switches in additional markets, implement efficient
operations support systems and other back office systems, develop and retain a
sufficient customer base and attract, retain and motivate qualified personnel.
The Company's networks and the provisioning of telecommunications services are
subject to significant regulation at the federal, state and local levels. Delays
in receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
the Company. Although management believes that the Company will be able to
successfully mitigate these risks, there is no assurance that the Company will
be able to do so or that the Company will ever operate profitably.

    Expenses are expected to exceed revenues in each market in which the Company
offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take several years,
and positive cash flows from operations are not expected in the near future.

2. BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with accounting principles generally
accepted in the United States for interim financial information and are in the
form prescribed by the Securities and Exchange Commission in instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The interim
unaudited financial statements should be read in conjunction with the Company's
audited financial statements as of and for the year ended December 31, 2000. In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the

                                       5
<Page>
2. BASIS OF PRESENTATION (CONTINUED)
three and nine months ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001.

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

3. BUSINESS COMBINATIONS

ACCOUNTING PRONOUNCEMENTS

    In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations." This statement
addresses financial accounting and reporting for business combinations. Adoption
of this statement is required for all business combinations consummated after
June 30, 2001. All prior business combinations of the Company have been
accounted for under the purchase method of accounting. Therefore, management
does not believe the adoption of this statement will have a material impact on
the Company's business acquisition model.

    In June 2001, the Financial Accounting Standards Board also issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." This statement will (1) require that goodwill balances no longer be
amortized but rather assessed for impairment at least annually and (2) expand
the classifications of other intangible assets, as well as the expected useful
lives of these assets. Adoption of this statement is required as of January 1,
2002, as well as for all purchase business combinations initiated after
June 30, 2001. Management is currently assessing the provisions of this
statement and does not believe that such provisions, other than the
non-amortization of goodwill and reclassification of certain intangibles to
goodwill, will have a material impact on the financial position of the Company.

BUSINESS ACQUISITIONS

    During the three months ending September 30, 2001, the Company acquired all
of the outstanding stock of Coast to Coast Telecommunications, Inc. The purchase
price at the date of acquisition was $27,014, consisting of $1,519 in cash and
1,327,709 shares of the Company's common stock. Included in the purchase price
is $9,083, payable in shares of the Company's common stock, which has been held
by the Company until settlement of certain pre-acquisition vendor liabilities
assumed by the Company. A portion of these shares may be paid to the selling
shareholder to the extent that these vendor liabilities are reduced pursuant to
the settlement of disputes with the vendors. The excess of the purchase price
over the fair value of the net assets acquired has been recorded as goodwill of
$13,888. In accordance with Statement of Financial Accounting Standards
No. 142, the goodwill associated with this acquisition is not being amortized.

    The merger agreement with Coast to Coast Telecommunications, Inc. provides
for additional contingent consideration payable in shares of the Company's
common stock effective six months following the closing date. The contingent
consideration will be paid subject to the resolution of certain claims. Based on
information available at September 30, 2001, the contingent consideration is
expected to be approximately $700 (consisting of approximately 52,934 shares of
the Company's common stock). If such contingent consideration becomes due and
payable beyond a reasonable doubt, such additional purchase price will result in
the recording of a corresponding amount of goodwill.

    During the three months ending March 31, 2001, the Company acquired all of
the outstanding stock of Adgrafix Corporation and certain assets of
HarvardNet, Inc. The aggregate purchase price at the date of these acquisitions
was $53,588, consisting of $4,132 in cash and 2,366,793 shares of the

                                       6
<Page>
3. BUSINESS COMBINATIONS (CONTINUED)
Company's common stock. The excess of the purchase price over the fair value of
the net assets acquired has been recorded as goodwill of $21,008.

    The merger agreement with Adgrafix Corporation provides for additional
contingent consideration payable in cash and shares of the Company's common
stock effective six months following the closing date. The contingent
consideration is based on the satisfaction of certain conditions, including the
maintenance of certain minimum recurring revenues. Based on information
available at September 30, 2001, the contingent consideration is expected to be
approximately $4,981 (consisting of $249 cash and approximately 231,235 shares
of the Company's common stock). If such contingent consideration becomes due and
payable beyond a reasonable doubt, such additional purchase price will result in
the recording of a corresponding amount of goodwill.

    Each of the acquisitions discussed above were accounted for using the
purchase method of accounting; accordingly, the net assets and results of
operations of the acquired companies have been included in the Company's
consolidated financial statements since the acquisition dates. The purchase
price of the acquisitions was allocated to assets acquired, including identified
intangible assets, and liabilities assumed, based on their respective estimated
fair values at the time of the acquisition. The Company's purchase price
allocation of the acquisitions made in 2001 is preliminary, subject to
post-acquisition due diligence of the acquired entities, and may be adjusted as
additional information is obtained.

    During the nine months ending September 30, 2001, the Company distributed
contingent consideration totaling $15,731, consisting of $13,244 in cash, of
which $1,873 was included in accrued liabilities at December 31, 2000, and
176,016 shares of the Company's common stock as provided in the merger
agreements with the following businesses acquired during 2000: InterAccess Co.,
Virtualis Systems, Inc., Jump.Net, Inc. and CTSnet, Inc. There is no additional
consideration payable under the merger agreements with InterAccess Co.,
Virtualis Systems, Inc. and CTSnet, Inc. The merger agreement with
Jump.Net, Inc. provides for additional contingent consideration of approximately
$1,022 (consisting of $457 cash and approximately 24,923 shares of the Company's
common stock) based on the satisfaction of certain conditions. If such
contingent consideration becomes due and payable beyond a reasonable doubt, such
additional purchase price will result in the recording of a corresponding amount
of goodwill.

    In connection with its integration plan for the acquired businesses, the
Company has recorded additional goodwill to establish reserves for certain
integration-related costs, including the termination of acquired redundant
network elements, closure of acquired duplicate facilities, and severance of
certain employees. If the Company does not utilize the full extent of the
established reserves for their intended purposes, the reserves are reversed to
goodwill in accordance with generally accepted accounting principles.

4. PROPERTY AND EQUIPMENT

    Property and equipment includes network equipment, land, leasehold
improvements, software, office equipment, furniture and fixtures and
construction-in-progress. These assets are stated at cost, which includes direct
costs and capitalized interest, and are depreciated over their respective useful
lives using the straight-line method. During the three months ended
September 30, 2001 and 2000, $4,068 and $3,605, respectively, of interest
expense was capitalized related to network construction-in-progress. During the
nine months ended September 30, 2001 and 2000, $13,535 and $10,637,
respectively, of interest expense was capitalized related to network
construction-in-progress. Repair and maintenance costs are expensed as incurred.

                                       7
<Page>
4. PROPERTY AND EQUIPMENT (CONTINUED)
    Property and equipment at September 30, 2001 and December 31, 2000,
consisted of the following:

<Table>
<Caption>
                                          SEPTEMBER 30,    DECEMBER 31,    USEFUL LIVES
                                               2001            2000         (IN YEARS)
                                          --------------   -------------   ------------
<S>                                       <C>              <C>             <C>
Network equipment.......................    $  776,083       $ 569,410            2-10
Land....................................         9,126              --              --
Leasehold improvements..................       127,275          98,788            7-10
Software................................        95,908          63,435               3
Office equipment and other..............        33,284          24,528             2-5
Furniture and fixtures..................        17,193          13,879               7
                                            ----------       ---------
Property and equipment, in service......     1,058,869         770,040
Less: Accumulated depreciation..........      (294,910)       (162,279)
                                            ----------       ---------
  Property and equipment, in service,
    net.................................       763,959         607,761
Construction-in-progress................       238,474         137,142
                                            ----------       ---------
  Property and equipment, net...........    $1,002,433       $ 744,903
                                            ==========       =========
</Table>

5. OTHER ASSETS

    Other assets consisted of the following:

<Table>
<Caption>
                                                  SEPTEMBER 30,     DECEMBER 31,
                                                       2001             2000
                                                  --------------   --------------
<S>                                               <C>              <C>
Acquired intangibles............................     $ 46,148         $28,171
Long-term deposits..............................        4,038           3,917
Inventory.......................................        3,413              --
Other...........................................        6,382           2,231
                                                     --------         -------
Total other assets..............................       59,981          34,319
Less: Accumulated amortization..................      (14,721)         (5,383)
                                                     --------         -------
  Other assets, net.............................     $ 45,260         $28,936
                                                     ========         =======
</Table>

    Acquired intangibles consist of acquired workforces and customer lists
obtained in connection with business acquisitions. These assets are being
amortized over their estimated useful lives of three years using the
straight-line method. During the second quarter of 2001, the Company adjusted
the value of the acquired workforce intangible in connection with the
termination of certain employees under the Company's integration plans. SFAS No.
142 will have an impact on the accounting treatment of certain existing
intangible assets. See note 3.

    Inventory consists of equipment purchased and being staged for deployment in
the Company's network. These inventories will be classified as property and
equipment when the equipment is deployed.

                                       8
<Page>
6. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES

    Accrued liabilities and other current liabilities consisted of the
following:

<Table>
<Caption>
                                                      SEPTEMBER 30,    DECEMBER 31,
                                                           2001            2000
                                                      --------------   -------------
<S>                                                   <C>              <C>
Accrued employee compensation and benefits..........      $18,591         $ 5,915
Accrued network expenses............................       12,260          12,410
Business acquisition costs..........................        4,367           4,024
Accrued taxes.......................................        6,384           5,797
Accrued interest expense............................       12,463           5,216
Deferred revenue....................................        6,137          13,488
Other...............................................       12,601          11,406
                                                          -------         -------
  Accrued liabilities and other current
    liabilities.....................................      $72,803         $58,256
                                                          =======         =======
</Table>

7. LONG-TERM DEBT

    Long-term debt consisted of the following:

<Table>
<Caption>
                                                      SEPTEMBER 30,    DECEMBER 31,
                                                           2001            2000
                                                      --------------   -------------
<S>                                                   <C>              <C>
Series B 11 3/4% Notes, face amount $445,000 due
  February 15, 2008; effective interest rate of
  12.21%; at accreted value.........................     $374,551        $342,758
12 7/8% Senior Notes, face amount $205,000 due
  May 15, 2008; effective interest rate of 13.24%;
  at accreted value.................................      201,770         201,539
Credit Facilities due December 31, 2006; average
  interest rate of 6.28%............................      350,000              --
Capital lease obligations, net of current portion...       56,893          22,015
                                                         --------        --------
  Long-term debt....................................     $983,214        $566,312
                                                         ========        ========
</Table>

CREDIT FACILITIES

    In February 2000, the Company closed on $500 million of senior secured
credit facilities (Credit Facilities). The Credit Facilities consist of a
$350 million seven-year revolving credit facility and a $150 million two-year
delayed draw term loan facility. The Credit Facilities are available, subject to
satisfaction of certain terms and conditions, to provide financing for network
build-out, including the cost to develop, acquire and integrate the necessary
operations support and back office systems, as well as for additional dark fiber
purchases and central office collocations. Interest on amounts drawn is variable
based on the Company's leverage ratio, which is approximately the London
Interbank Offered Rate (LIBOR) plus 3.25%. The initial commitment fee on the
unused portion of the Credit Facilities is 1.5% per annum, paid quarterly.

    As of September 30, 2001, there were $200,000 and $150,000 of borrowings
outstanding under the seven-year revolving credit facility and the two-year
delayed draw term loan facility, respectively, all of which are classified as
long-term debt.

    The Credit Facilities carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, create liens,
engage in sale-leaseback transactions, pay dividends or make distributions in
respect of their capital stock, redeem capital stock, make investments or
certain

                                       9
<Page>
7. LONG-TERM DEBT (CONTINUED)
other restricted payments, sell assets, issue or sell stock of certain
subsidiaries, engage in transactions with stockholders or affiliates, effect a
consolidation or merger and require the Company to maintain certain operating
and financial performance measures. The Company was in compliance with all such
restrictive covenants at September 30, 2001.

8. CAPITALIZATION

    During the three months ended September 30, 2001, 169,400 shares of common
stock were issued under the Company's stock-based compensation plans for
proceeds of $1,367. During the nine months ended September 30, 2001, 619,961
shares of common stock were issued under the Company's stock-based compensation
plans for proceeds of $6,014.

9. COMMITMENTS AND CONTINGENCIES

    The Company has entered into various operating lease agreements, with
expirations through 2015, for office space, equipment and network facilities.
Future minimum lease obligations related to the Company's operating leases as of
September 30, 2001 are as follows:

<Table>
<S>                                                           <C>
2001........................................................  $  7,154
2002........................................................    28,805
2003........................................................    29,594
2004........................................................    28,374
2005 and thereafter.........................................   130,350
</Table>

    Total rent expense for the three months ended September 30, 2001 and 2000,
was $7,067 and $4,619, and for the nine months ended September 30, 2001 and 2000
was $22,915 and $11,834, respectively.

    In April 2000, the Company executed a procurement agreement with Lucent
Technologies, Inc. for a broad range of advanced telecommunications equipment,
software and services. This agreement contains a three-year $350 million
purchase commitment. In July 2001, this agreement was amended to extend the term
to six years. Under the amended agreement, the Company must complete purchases
totaling $100 million by December 31, 2000, an aggregate of $160 million of
purchases by September 30, 2001, an aggregate of $210 million by December 31,
2002, an aggregate of $257 million by December 31, 2003, an aggregate of
$304 million by December 31, 2004, and the full $350 million of aggregate
purchases on or before December 31, 2005. The Company exceeded the required
purchase milestone at December 31, 2000 and September 30, 2001. As of
September 30, 2001, the Company has completed cumulative purchases totaling
$163,893. If the Company does not meet the required intermediate purchase
milestones, the Company will be required to provide cash settlement in an amount
equal to the shortfall. Such shortfall payments may be applied to future
purchases during the next succeeding year. If the Company does not purchase
$350 million of products and services from Lucent and its affiliates by
December 31, 2005, the Company will be required to provide cash settlement in an
amount equal to the shortfall.

                                       10
<Page>
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

OVERVIEW

    Allegiance Telecom, Inc. is a leading competitive provider of integrated
telecommunications in major metropolitan areas across the United States. We
offer an integrated set of telecommunications services including local, long
distance, data and web hosting services. Our principal competitors are incumbent
local exchange carriers, such as the regional Bell operating companies, as well
as other integrated communications providers.

    Our business plan covers 36 of the largest metropolitan areas in the United
States. Our network rollout has proceeded on schedule, with 34 markets
operational as of September 30, 2001, consisting of Atlanta, Austin, Baltimore,
Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Fort Lauderdale, Fort
Worth, Houston, Long Island, Los Angeles, Miami, Minneapolis/St. Paul, New York
City, Northern New Jersey, Oakland, Ontario/Riverside, Orange County,
Philadelphia, Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego,
San Francisco, San Jose, Seattle, Tampa, Washington, D.C. and White Plains. In
addition, Pittsburgh became operational on November 12, 2001. We are on track to
add the one remaining market by the end of 2001. We believe we have successfully
raised the projected capital required to build our networks and operate in each
of these markets to the point at which projected operating cash flow from the
market is sufficient to fund its projected operating costs and capital
expenditures.

    We were formed in 1997 by a management team of industry veterans to take
advantage of the opportunity for facilities-based local communications
competition created by the Telecommunications Act of 1996. Since we formed our
company, we have focused on building a reliable nationwide network based on
proven technologies, a strong nationwide direct sales force and efficient
information processing systems to support our operations. We believe that by
doing so we have positioned ourselves to compete effectively with the incumbent
carriers, most of whom do not address our customers with direct sales efforts,
are burdened by legacy operations support systems and do not offer an integrated
set of services on a nationwide basis.

    We use multiple technologies and a mixture of leased and owned facilities at
the edge of the communications network so that we can most effectively serve our
customer base where it is physically located. We install state-of-the-art voice
and data aggregation and switching equipment in the central offices or "hubs" of
the existing local incumbent carrier's networks. These central offices connect
directly to customers through the "local loop," which consists of the existing
copper wire and fiber running from the central offices to each customer
location. The local loop is owned by the incumbent carriers but can be leased by
competitive carriers under the terms of the Telecommunications Act of 1996. Our
local loop presence provides us with a flexible platform for delivering
traditional voice and data access services to our end-user customers. We connect
our central office locations to our main switching center in each market by
either leasing additional network elements from the incumbent carriers and other
providers on a short-term basis or by using dedicated fiber on a long-term
basis. We have increasingly focused on dedicated fiber because of the growth of
our customer base and traffic volume and the increased availability of this
fiber throughout the major metropolitan areas in the United States.

    As we have developed our local networks to service end-user customers, we
have also attempted to capitalize on our expertise and investment at the edge of
the network by maximizing the use of our network assets. In building a
nationwide network to serve end-user customers, we have fixed costs in many
assets that are underutilized during those times of day when our small- to
medium-sized business customers are not placing or receiving as many voice and
data calls. We have taken advantage of this underutilization by providing
network solutions to other service providers, primarily the leading national
providers. These national network providers also have end-user customers but do
not have the facilities and expertise to directly access these customers through
the local loop. Many of these

                                       11
<Page>
providers focus on the residential Internet access market. The traffic patterns
in that market generally complement those of our end-user business customers,
making this business an incremental revenue opportunity that leverages our fixed
network costs.

    The other way we try to serve our customers and leverage our primary focus
on the small- to medium-sized business end users is by providing innovative
applications of existing technologies. An example is our Integrated Access
Service which delivers high-speed, "always on" Internet access and allows
multiple voice, data and Internet combinations over a single access line. In
addition, we have developed electronic commerce products designed to help these
customers market their products and services online, improve communication and
collaboration and increase productivity. While these types of products and
solutions are readily available to larger business customers that can afford to
devote the resources necessary to develop and customize them internally, we
believe that smaller business customers are demanding easy to use electronic
commerce solutions that allow them, with minimal design and development costs,
to market products online and increase their own productivity.

    We and many financial analysts evaluate the growth of our business by
focusing on various operational data in addition to financial data. Within each
of our metropolitan markets, we have located our equipment in the central
offices of the established telephone companies. This arrangement is commonly
referred to as a colocation. The number of colocations that we have indicates
the number of different local geographic areas that we can serve within each of
our markets through our own network. Once we are colocated in a central office,
we can then begin offering service to all of the customers that have local loop
connections to that central office. "Lines installed" represents the lines sold
that are now being used by us to provide our services. Although the number of
lines we service for each customer varies significantly, our primary focus is on
the small- to medium-sized business customer. Over 90% of our customers have 20
lines or less. We plan to continue to focus on the small-to medium-sized
business customer and expect that the number of lines per customer will remain
at 20 or less for the vast majority of our customers. The table below provides
selected key operational data for the quarters ended, each on a cumulative
basis:

<Table>
<Caption>
                                                     SEPTEMBER 30,    SEPTEMBER 30,
                                                          2001             2000
                                                     --------------   --------------
<S>                                                  <C>              <C>
Markets served.....................................            34              25
Number of switches deployed........................            30              24
Central office colocations.........................           772             552
Lines installed....................................     1,005,900         499,700
Sales force employees..............................         1,571           1,231
Total employees....................................         3,948           2,936
</Table>

RESULTS OF OPERATIONS--THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED
  WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000

    During the third quarter of 2001 and 2000, we generated revenues of
approximately $135.1 million and $80.0 million, respectively. For the nine
months ended September 30, 2001 and 2000, we generated revenues of approximately
$365.1 million and $190.2 million, respectively. The increase in revenue is
attributable to an increase in number of customers and the number of lines
installed. For the quarters ended September 30, 2001 and 2000, we sold 182,000
lines and 135,500 lines, and installed 136,200 lines and 91,900 lines,
respectively. "Lines sold" by us represents the number of lines for which
customers have placed orders with us to provide services. The services we
provide over our own switches generate higher margins than services provided by
other carriers that are resold by us. Over 91% of our installed lines were
provided over our own switches, representing approximately 94% of our revenues
as of September 30, 2001, and we expect this level of facilities-based service
to remain constant over time. Gross margin has increased from approximately
47.7% for the quarter ended September 30, 2000 to approximately 51.4% for the
quarter ended September 30, 2001. Gross margin is calculated as revenues

                                       12
<Page>
less network expenses, divided by revenues. We expect our gross margins to
continue to improve as our revenues increase and as we realize cost efficiencies
in our network expenses.

    Local voice service revenues for the three months ended September 30, 2001
and 2000 were $85.4 million and $59.7 million, and for the nine months ended
September 30, 2001 and 2000 were $238.7 million and $143.0 million respectively.
Local voice service revenues as a percent of total revenues has decreased from
approximately 75% for the quarter ended September 30, 2000 to approximately 63%
for the quarter ended September 30, 2001. Local voice service revenues consisted
of:

    - the monthly recurring charge for basic local voice service;

    - usage-based charges for local and toll calls in certain markets;

    - charges for services such as call waiting and call forwarding;

    - certain non-recurring charges, such as set-up charges for additional lines
      for an existing customer; and

    - interconnection revenues from switched access charges to long distance
      carriers and reciprocal compensation charges to other local carriers.

    Components of our local voice service revenues are subject to various
federal and state regulations and to disputes and uncertainties. We expect local
voice service revenues to continue to decrease as a percent of total revenues,
as a result of the resolution of certain of these regulatory disputes and
uncertainties. Specifically, we expect and have modified our business plans to
anticipate a decrease in switched access revenues and reciprocal compensation
revenues. See the discussion under "Risk Factors," which contains a detailed
discussion of the risks and uncertainties associated with our local voice
revenues.

    Long distance service revenues for the third quarter of 2001 and 2000 were
$7.8 million and $3.3 million, and for the nine months ended September 30, 2001
and 2000 were $19.6 million and $7.1 million, respectively. Long distance
service revenues as a percent of total revenues has increased from approximately
4% for the quarter ended September 30, 2000 to approximately 6% for the quarter
ended September 30, 2001. We reduced our pricing of long distance services
during 2000 to respond to competitive pressures and we anticipate long distance
pricing to continue at historically low levels given the current competitive
environment. Although these reduced prices decrease our margins, we anticipate
that more of our local service customers will purchase long distance service
from us at our current pricing levels and through our continuing effort to
promote the benefits of purchasing local, long distance and data services from a
single provider.

    Data revenues, including revenues generated from Internet access, Web
hosting and high-speed data services, for the quarters ended September 30, 2001
and 2000 were $41.9 million and $17.0 million, and for the nine months ended
September 30, 2001 and 2000 were $106.8 million and $40.1 million, respectively.
Data revenues as a percent of total revenues has increased from approximately
21% for the quarter ended September 30, 2000 to approximately 31% for the
quarter ended September 30, 2001. We expect data revenues to continue to
increase as a percent of total revenues (a) as we expand our data services
offerings to existing local and long distance voice customers, (b) as we
increase our offerings of packaged services that combine voice and data services
which we market as the Allegiance Telecom Total Communications Options and
(c) as more small and medium-sized businesses turn to the Internet to enhance
their productivity. We also believe that the continuing evolution of
communications networks will promote the integration of voice and data services
over the same facilities, thereby further increasing the availability of data
offerings.

    The rate of growth in our data revenues, however, is subject to some
uncertainties and short-term negative trends. We believe that the demand for
high-end web hosting services has decreased somewhat

                                       13
<Page>
in response to a general economic slowdown. Moreover, an over capacity of data
center space has decreased prices for these high-end services. These high-end
services include dedicated hosting services where we provide the customer with a
dedicated computer server in our data centers and colocation services where we
provide data center space and services for a customer which locates its own
computer server on our premises. We do not believe that these trends are having
a material impact on shared hosting services where customers share a computer
server with several other customers. We believe these shared services are sold
less on the basis of price and more on the basis of customer service and ease of
use of the underlying software platform which enables the customer to configure
and manage its web site.

    Similarly, the services we offer to network service providers who provide
dial-up Internet access services is also experiencing the effects of over
capacity and decreased demand. During 2000, we signed a long-term contract to
provide data services to Genuity Solutions, Inc., a network services provider
and operator of a nationwide Internet network. This contract established Genuity
as our largest customer. Although we believe our relationship with Genuity
remains strong, many other network service providers who provide dial-up
Internet access services have either gone out of business or materially reduced
their offerings and their demand for the services of companies like Allegiance
which provide the local services necessary to connect dial-up customers to the
Internet.

    Notwithstanding these trends and uncertainties, we believe the demand by
end-user small and medium sized business customers for dedicated access to the
Internet and for an efficient way to establish and maintain a web presence
through shared hosting remains strong. Indeed, our Integrated Access Service
which delivers high-speed, "always on" Internet access and allows multiple
voice, data and Internet combinations over a single access line remains our
fastest growing product offering. Our challenge in this area is building the
provisioning processes and resources necessary to meet this demand. At the end
of the third quarter of 2001 we had approximately 39,000 lines in backlog for
this type of service and we are increasing our efforts to process these orders
more quickly.

    With an increasing demand for dedicated Internet access and shared hosting
services, we have had discussions, and will continue to have discussions in the
foreseeable future, concerning potential acquisitions of Internet service
providers, Web hosting and data services providers, and other providers of
telecommunications and Internet services. We believe that investment capital for
many of these providers is either unavailable or very difficult to obtain and,
as a result, has created some attractive opportunities for us to acquire
customers through acquisitions. Our ability to take advantage of these
opportunities, however, is dependent on the market value of the company's common
stock and access to capital. During the third quarter of 2001, we acquired the
stock of Coast to Coast Telecommunications, Inc., a provider of local and
long-distance telecommunications services. During the first quarter of 2001, we
acquired the stock of Adgrafix Corporation and certain assets of
HarvardNet, Inc., both Internet-based, web-hosting applications specialists. We
have utilized the purchase method of accounting for these acquisitions.
Accordingly, we have recognized the revenues earned since the closing of each of
these acquisitions in our condensed consolidated statement of operations for the
three and nine months ended September 30, 2001.

    The September 11, 2001 terrorist attacks have negatively impacted, and are
expected to continue to negatively impact, the U.S. economy generally and in
particular, the businesses in the New York metropolitan area. These events also
had a negative impact on Allegiance's third quarter financial and operating
results and may negatively impact future periods. With everyone's attention,
including small to meduim sized businesses, focused on these events, many of our
potential customers temporarily delayed purchasing decisions to switch local
service providers. In addition, during the third quarter, some of our new
customers requested a delay in the installation of our service or cancelled
their service orders, particularly in the New York area, due to a desire to
avoid any adjustment to their phone service during this time of crisis. We must
coordinate with other telecommunications carriers, including the local incumbent
phone company, and with third party equipment vendors in order for us

                                       14
<Page>
to provide local service to our customers. If these other telecommunications
carriers or vendors experience disruption to their business, such as disruptions
caused by these terrorist attacks, our ability to provide service to our
end-users may be affected. In the third quarter, as we and our suppliers,
primarily Verizon Communications, the incumbent carrier serving the New York
area, turned all efforts to the restoration of service to customers who were
affected by these events, our installation of lines was delayed and some
customers cancelled service as a result.

    We believe that the September 11th events also had a negative impact on our
October 2001 financial and operating performance because, although gross sales
of service rebounded from September levels, installations continued to be
burdened by the delays caused by the September events. In the New York area, we
saw both our backlog of orders pending as well as our cancellations increase due
to these delays.

    For the quarters ended September 30, 2001 and 2000, network expenses were
$65.7 million and $41.9 million, respectively. For the nine months ended
September 30, 2001 and 2000, network expenses were $177.7 million and
$103.5 million, respectively. The increase in network expenses is consistent
with the deployment of our networks and initiation and growth of our services.
Network expenses include:

    - the cost of leasing local loop lines which connect our customers to our
      network;

    - the cost of leasing high-capacity digital lines that interconnect our
      network with the networks of the incumbent local exchange carriers;

    - the cost of leasing high-capacity digital lines that connect our switching
      equipment to our transmission equipment located in the central offices of
      the incumbent local exchange carrier;

    - the cost of expanding our network to additional colocation sites within a
      market;

    - the cost of completing local and long distance calls originated by our
      customers;

    - the cost of leasing space in incumbent local exchange carrier central
      offices for colocating our transmission equipment; and

    - the cost of leasing our nationwide Internet network.

    The costs to lease local loop lines and high-capacity digital lines from the
incumbent local exchange carriers vary by carrier and are regulated by state
authorities under the Telecommunications Act of 1996. We believe that in many
instances there are multiple carriers in addition to the incumbent local
exchange carriers from whom we can lease high-capacity lines and that we can
generally lease those lines at lower prices than are charged by the incumbent
local exchange carriers. We expect that the costs associated with these leases
will increase with customer volume and will be a significant part of our ongoing
cost of services.

    When we open new markets, we incur significant general and administrative
expenses and network expenses before we begin to generate revenue from
operations. Many of the network expenses, such as for transport facilities and
colocation rent and power charges, are fixed costs that we do not recover until
we build up a sufficient volume of traffic from customers. Consequently, as we
continue to open new markets through 2001, we will continue to generate
operating losses.

    In constructing switching and transmission equipment for a new market, we
capitalize as a component of property and equipment only the non-recurring
charges associated with our initial network facilities and the monthly recurring
costs of those network facilities until the switching equipment begins to carry
revenue-producing traffic. Typically, the recurring charges for one to three
months are capitalized. We generally expense the monthly recurring costs
resulting from the growth of existing colocation sites, and the costs related to
expansion of the network to additional colocation sites in operational markets
as we incur these charges.

                                       15
<Page>
    We incur "reciprocal compensation" costs in providing both voice and data
services and expect reciprocal compensation costs to be a major portion of our
cost of services. We must enter into an interconnection agreement with the
incumbent local exchange carrier in each market to make widespread calling
available to our customers. These agreements typically set the cost per minute
to be charged by each party for the calls that are exchanged between the two
carriers' networks. Generally, a carrier must compensate another carrier when a
local call by the first carrier's customer terminates on the other carrier's
network. These reciprocal compensation costs will grow as our customers'
outbound calling volume grows.

    The cost of securing long distance service capacity is a variable cost that
increases in direct relationship to increases in our customer base and increases
in long distance calling volumes. We believe that these costs, measured as a
percentage of long distance revenues, will be relatively consistent from period
to period. However, we do expect period-over-period growth in the absolute cost
of such capacity, and that the cost of long distance capacity will be a
significant portion of our cost of long distance services.

    We install voice and data aggregation and switching equipment in the central
offices of local incumbent exchange carriers' networks. We incur rent and
utility charges in leasing this space. These costs will increase as we expand to
additional colocation sites and increase the capacity of our existing
colocations.

    We have developed a national Internet data network by connecting our markets
with leased high-capacity digital lines. The costs of these lines will increase
as we increase capacity to address customer demand, open new markets and connect
additional markets to our Internet network.

    Selling, general and administrative expenses increased to $95.9 million for
the quarter ended September 30, 2001 from $69.9 million for the quarter ended
September 30, 2000, primarily due to the growth of our business. On a
year-to-date basis, selling, general and administrative expenses increased to
$271.9 million for the nine months ended September 30, 2001 from $174.6 million
for the nine months ended September 30, 2000. Selling, general and
administrative expenses include salaries and related personnel costs,
administration and administration related facilities costs, sales and marketing
costs, customer care and billing costs, and professional fees. The number of
employees increased to 3,948 as of September 30, 2001, from 2,936 as of
September 30, 2000. As of September 30, 2001, the sales force, including sales
managers and sales administrators, had grown to 1,571 from 1,231 as of
September 30, 2000. As we continue to grow in terms of number of markets,
customers and employees, we expect that ongoing selling, general and
administrative expenses will increase.

    We amortized $0 million and $0.2 million of the deferred management
ownership allocation charge, a non-cash charge to income, for the three and nine
months ended September 30, 2001, respectively. The same charge for the three and
nine months ended September 30, 2000 was $1.3 million and $5.9 million,
respectively. Our original private equity fund investors and original management
team investors owned 95.0% and 5.0%, respectively, of the ownership interests of
Allegiance Telecom, LLC, an entity that owned substantially all of our
outstanding capital stock prior to our initial public offering of common stock.
As a result of that offering, the assets of Allegiance Telecom, LLC, which
consisted almost entirely of such capital stock, were distributed to the
original fund investors and management investors in accordance with the
Allegiance Telecom, LLC limited liability company agreement. This agreement
provided that the equity allocation between the fund investors and management
investors would be 66.7% and 33.3%, respectively, based upon the valuation
implied by the initial public offering. We recorded the increase in the assets
of Allegiance Telecom, LLC allocated to the management investors as a
$193.5 million increase in additional paid-in capital. This transaction was
recorded during the third quarter of 1998. Of this charge, we recorded
$122.5 million as a non-cash, non-recurring charge to operating expense and
$71.0 million as a deferred

                                       16
<Page>
management ownership allocation charge. This deferred charge was fully amortized
as of March 31, 2001.

    For the quarters ended September 30, 2001 and 2000, amortization of deferred
compensation expense was $(5.3) million and $2.0 million, respectively, and for
the nine months ended September 30, 2001 and 2000, amortization of deferred
compensation expense was $2.8 million and $6.0 million, respectively. Such
deferred compensation was recorded in connection with membership units of
Allegiance Telecom, LLC sold to certain management employees and options granted
to certain employees under our 1997 stock option plan and 1998 stock incentive
plan. Due to recent market trends, during the three months ended September 30,
2001, we reversed a total of $7.0 million previously charged to deferred
compensation expense related to employee stock options subject to variable
accounting.

    During the third quarter 2001 and 2000, we recorded depreciation expense of
$53.1 million and $29.6 million, respectively. For the nine months ended
September 30, 2001 and 2000, depreciation expense was $132.6 million and
$68.9 million, respectively. Such increase was consistent with the deployment of
our networks and initiation of services in 34 markets by September 30, 2001.

    In connection with the acquisitions completed to date, we assigned an
aggregate of $46.1 million of the purchase price to customer lists and
workforces. We also recorded an aggregate of $187.7 million of goodwill. Each of
these intangible assets and the goodwill acquired prior to June 30, 2001 is
being amortized over an estimated useful life of three years. For the quarters
ending September 30, 2001 and 2000, we recorded $14.6 million and $6.3 million
of amortization for goodwill and $3.4 million and $1.3 million of amortization
of customer lists and workforces, respectively. For the nine months ending
September 30, 2001 and 2000, we recorded $40.3 million and $12.6 million of
amortization for goodwill and $9.4 million and $2.4 million of amortization of
customer lists and workforces, respectively. Beginning January 1, 2002, we will
no longer record amortization of goodwill in accordance with recently issued
accounting pronouncements. Our purchase price allocation for the acquisitions
made in 2001 is subject to post acquisition due diligence of the acquired
entities and may be adjusted as additional information is obtained.

    We evaluate whether an impairment of enterprise goodwill may exist by
comparing our net book value to our market capitalization. Market capitalization
is calculated as the product of (i) the number of common shares issued and
outstanding at the end of the quarter and (ii) the market price of the common
stock at the end of the quarter. If our market capitalization exceeds our net
book value, impairment does not exist. If our market capitalization is less than
our net book value, we evaluate whether the condition is other than temporary,
based on our share price and related volatility over recent historical periods,
our share price activity after the quarter end and other available evidence. At
September 30, 2001, we had approximately 114.6 million common shares outstanding
and a net book value of $729.9 million. At September 30, 2001, a common stock
price below $6.37 per share would result in our net book value exceeding our
market capitalization. At September 28, 2001, our common stock price was $3.01
per share. No impairment loss was recognized because we believe the condition to
be a temporary decline in the price of our stock. Prior to September 30, 2001,
our market capitalization had virtually never been below our book value. Future
calculations of whether an impairment may exist will be affected by any future
issuances or purchases of common stock, by any goodwill recorded in connection
with future acquisitions, by any other changes to our net book value, and by the
future common stock price.

    In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This statement will (1) require that goodwill balances no longer be amortized
but rather are assessed for impairment at least annually and (2) expand the
classifications of other intangible assets, as well as the expected useful lives
of these assets. We are required to adopt this statement as of January 1, 2002,
as well as for all purchase

                                       17
<Page>
business combinations initiated after June 30, 2001. We are currently assessing
the provisions of this statement and do not believe that such provisions, other
than the non-amortization of goodwill and reclassification of certain
intangibles to goodwill, will have a material impact on our financial position.

    For the three months ended September 30, 2001 and 2000, and for the nine
months ended September 30, 2001 and 2000, interest expense was $18.7 million,
$16.3 million, $51.1 million and $52.6 million, respectively. Interest expense
reflects the accretion of the 11 3/4% notes and related amortization of the
original issue discount, the amortization of the original issue discount on the
12 7/8% notes, and the interest charges and amortization of deferred debt
issuance costs related to our $500 million senior secured credit facilities.
Unamortized deferred debt issuance costs of $5.9 million related to the
$225 million revolving credit facility were charged to interest expense during
first quarter 2000, upon termination of the $225 million revolving credit
facility and completion of the $500 million senior secured credit facilities.
The amount of interest capitalized for the three and nine months ended
September 30, 2001 was $4.1 million and $13.5 million, respectively. For the
same periods in 2000, the amounts were $3.6 million and $10.6 million,
respectively. Interest income for the three and nine months ended September 30,
2001 was $4.5 million and $14.7 million, respectively. Interest income for the
three and nine months ended September 30, 2000 was $15.1 million and
$45.0 million, respectively. Interest income results from the investment of
short-term investments, cash and cash equivalents and from U.S. government
securities, which we purchased and placed in a pledge account to secure the
semiannual payments of interest through May 2001 on the 12 7/8% notes. Interest
income during 2000 is greater than for the comparable periods in 2001 because we
had additional cash invested in interest-bearing instruments as a result of our
February 2000 equity offering. Additionally, during the nine months ended
September 30, 2001, we recorded impairment losses against interest income
related to interest-bearing investment securities deemed to have a permanent
decline in fair value.

    Our net loss for the three and nine months ended September 30, 2001 and the
three and nine months ended September 30, 2000, after amortization of the
non-cash management ownership allocation charge and amortization of deferred
compensation, was $106.5 million, $306.2 million, $73.3 million and
$191.3 million, respectively.

                                       18
<Page>
    Many securities analysts use the measure of earnings before deducting
interest, taxes, depreciation and amortization, also commonly referred to as
"EBITDA" as a way of measuring the performance of a company. EBITDA is not
derived pursuant to generally accepted accounting principles, and therefore
should not be construed as an alternative to operating income (loss), as an
alternative to cash flows from operating activities, or as a measure of
liquidity. We had adjusted EBITDA losses of approximately $26.4 million and
$31.7 million for three months ended September 30, 2001 and 2000, respectively.
For the nine months ended September 30, 2001 and 2000, we had adjusted EBITDA
losses of $84.6 million and $87.9 million, respectively. In calculating adjusted
EBITDA, we also exclude the non-cash charges to operations for the management
ownership allocation charge and deferred compensation expense totaling $(5.3)
million and $2.8 million for the three and nine months ended September 30, 2001
and $3.3 million and $11.9 million for the three and nine months ended
September 30, 2000, respectively.

    We expect to continue to experience operating losses and negative adjusted
EBITDA as a result of our development and market expansion activities. We
typically do not expect to achieve positive adjusted EBITDA in any market until
at least its third year of operation.

LIQUIDITY AND CAPITAL RESOURCES

    Our financing plan is predicated on the pre-funding of each market's
expansion to positive free cash flow. By using this approach, we avoid being in
the position of seeking additional capital to fund a market after we have
already made a significant capital investment in that market. We believe that by
raising all required capital prior to making any commitments in a market, we can
raise capital on more favorable terms and conditions.

    We do not begin to develop a new market until we have raised the capital
that we project to be necessary to build and operate our network in the market
to the point at which operating cash flow from the market is sufficient to fund
its ongoing operating costs and capital expenditures. We believe that all of our
36 target markets are now fully funded in this manner. We also believe that our
existing cash on hand, together with an additional $150 million available under
our senior secured credit facilities, are sufficient to fully fund our
operations, planned capital investments and debt service requirements during the
next twelve months and until such time as we have positive cash flow from
operations on a consolidated basis to fund these items.

    We may decide to seek additional capital in the future to expand our
business. Sources of additional financing may include vendor financing, bank
financing and/or the private or public sale of our equity or debt securities. We
cannot assure you, however, that such financing will be available at all or on
terms acceptable to us, or that our estimate of additional funds required is
accurate. The actual amount and timing of future capital requirements may differ
materially from our estimates as a result of, among other things:

    - the cost of the development of our networks in each of our markets;

    - a change in or inaccuracy of our development plans or projections that
      leads to an alteration in the schedule or targets of our roll-out plan;

    - the extent of price and service competition for telecommunications
      services in our markets;

    - the demand for our services;

    - regulatory and technological developments, including additional market
      developments and new opportunities in our industry;

    - an inability to borrow under our new credit facilities; and

    - the consummation of acquisitions.

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    Our cost of rolling out our networks and operating our business, as well as
our revenues, will depend on a variety of factors, including:

    - our ability to meet our roll-out schedules;

    - our ability to negotiate favorable prices for purchases of equipment;

    - our ability to develop, acquire and integrate the necessary operations
      support systems and other back office systems;

    - the number of customers and the services for which they subscribe;

    - the nature and penetration of new services that we may offer; and

    - the impact of changes in technology and telecommunication regulations.

As such, actual costs and revenues may vary from expected amounts, possibly to a
material degree, and such variations are likely to affect our future capital
requirements.

    For the quarters ended September 30, 2001 and 2000, we made capital
expenditures of $88.4 million and $137.6 million, respectively. For the nine
months ended September 30, 2001 and 2000, we made capital expenditures of
$319.0 million and $332.7 million, respectively. We also used capital during
these periods to fund our operations.

    In April 2000, we executed a procurement agreement with Lucent
Technologies, Inc. for a broad range of advanced telecommunications equipment,
software and services. This agreement contains a three-year $350 million
purchase commitment. In July 2001, we amended this agreement to extend the term
to six years. Under the amended agreement, we must complete purchases totaling
$100 million by December 31, 2000, an aggregate of $160 million of purchases by
September 30, 2001, an aggregate of $210 million by December 31, 2002, an
aggregate of $257 million by December 31, 2003, an aggregate of $304 million by
December 31, 2004, and the full $350 million of aggregate purchases on or before
December 31, 2005. If we do not meet the required intermediate purchase
milestones, we will be required to provide cash settlement in an amount equal to
the shortfall. Such shortfall payments may be applied to future purchases during
the next succeeding year. If we do not purchase $350 million of products and
services from Lucent and its affiliates by December 31, 2005, we will be
required to provide cash settlement in an amount equal to the shortfall. We
exceeded the required purchase milestone at December 31, 2000 and September 30,
2001. As of September 30, 2001, we have completed cumulative purchases under
this contract totaling approximately $164 million. Pursuant to our business
plan, we expect to incur approximately $365 million of capital expenditures in
2001, which includes the Lucent capital expenditure requirement for 2001.

    We have purchased dedicated fiber rings in 24 of our markets. As of
September 30, 2001, we had dedicated fiber rings in operation in 14 markets
including Austin, Chicago, Dallas, Denver, Ft. Worth, Houston, New York City,
Northern New Jersey, Philadelphia, Portland, St. Louis, Seattle, Washington,
D.C., and White Plains. The cost of these rings includes both the amounts we pay
to the fiber ring provider as well as the cost of the electronic equipment that
we purchase and install on the rings to make them operational. Our total costs
to date have been $111 million, and our budget to complete the fiber rings for
which we have commitments is approximately $232 million, which will be incurred
over several periods ending in 2020. We plan to fund this cost with our
available cash and future cash flow.

    As of September 30, 2001, we had approximately $537.6 million of
unrestricted cash and short-term investments.

    On February 28, 2000, a three-for-two stock split of our common stock was
effected in the form of a 50% dividend to shareholders of record on
February 18, 2000. All references to the number of

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common shares and per share amounts have been restated to reflect the stock
split for the periods presented.

    On February 3, 1998, we raised gross proceeds of approximately
$250.5 million in an offering of 445,000 units, each unit consisting of one
11 3/4% senior discount note and one redeemable warrant. Net proceeds of
approximately $240.7 million were received from that offering. The 11 3/4% notes
have a principal amount at maturity of $445.0 million and an effective interest
rate of 12.21%. The 11 3/4% notes mature on February 15, 2008. From and after
February 15, 2003, interest on such notes will be payable semiannually in cash
at the rate of 11 3/4% per annum. The accretion of original issue discount will
cause an increase in indebtedness from September 30, 2001 to February 15, 2003
of $70.4 million.

    We raised net proceeds of approximately $124.8 million in our offering of
the 12 7/8% senior discount notes early in the third quarter of 1998. The
12 7/8% notes mature on May 15, 2008. Interest on these notes is payable in cash
semiannually, commencing November 15, 1998. The 12 7/8% notes were sold at less
than par, resulting in an effective rate of 13.24%, and the value of the 12 7/8%
notes is being accreted, using the effective interest method, from the
$200.9 million gross proceeds realized at the time of the sale to the aggregate
value at maturity, $205.0 million, over the period ending May 15, 2008. The
accretion of original issue discount will cause an increase in indebtedness from
September 30, 2001 to May 15, 2008 of $3.2 million.

    In February 2000, we closed on $500.0 million of new senior secured credit
facilities, which replaced our prior $225 million revolving credit facility.
These new senior secured credit facilities consist of a $350.0 million revolving
credit facility and a $150.0 million delayed draw term loan facility. These
credit facilities are available, subject to satisfaction of certain terms and
conditions, to provide purchase money financing for network build-out, including
the cost to develop, acquire and integrate the necessary operations support and
back office systems, as well as for additional dark fiber purchases and central
office colocations. Interest on amounts drawn is variable, based on leverage
ratios, and is expected to be the London Interbank Offered Rate + 3.25%. The
initial commitment fee on the unused portion of these credit facilities will be
1.5% per annum, paid quarterly and will be reduced based upon usage. These
credit facilities contain certain representations, warranties, covenants and
events of default customary for credit of this nature and otherwise agreed upon
by the parties.

    During the third quarter of 2001, we drew $200.0 million under the revolving
credit facility due December 31, 2006 and $150.0 million under the delayed draw
term loan due December 31, 2006. The initial interest rate on the outstanding
balance is 6.28%

FORWARD-LOOKING STATEMENTS

    Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, and
we intend that such forward-looking statements be subject to the safe harbors
created by this law. You generally can identify these statements by our use of
forward-looking words such as "plans," "estimates," "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative or other variations of
such terms or comparable terminology, or by discussion of strategy that involve
risks and uncertainties. We often use these types of statements when discussing
our plans and strategies, our anticipation of revenues from designated markets,
and statements regarding the development of our businesses, the markets for our
services and products, our anticipated capital expenditures, operations support
systems or changes in regulatory requirements and other statements contained in
this report regarding matters that are not historical facts.

    We caution you that these forward-looking statements are only predictions
and estimates regarding future events and circumstances. We cannot assure you
that we will achieve the future results reflected in these statements. The risks
we face that could cause us not to achieve these results include, but are

                                       21
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not limited to, our ability to do the following in a timely manner, at
reasonable costs and on satisfactory terms and conditions:

    - successfully market our services to current and new customers;

    - interconnect with and develop cooperative working relationships with
      incumbent local carriers;

    - develop efficient operations support systems and other back office systems
      (including, but not limited to, provisioning and billing);

    - successfully and efficiently transfer new customers to our networks and
      access new geographic markets;

    - identify, finance, complete and integrate suitable acquisitions;

    - borrow under our credit facilities or borrow under alternative financing
      sources;

    - install new switching facilities and other network equipment;

    - electronically interface with incumbent local carriers; and

    - obtain leased fiber optic line capacity, rights-of-way, building access
      rights and any required governmental authorizations, franchises and
      permits.

    Regulatory, legislative and judicial developments could also cause actual
results to differ materially from the future results reflected in such
forward-looking statements. You should consider all of our subsequent written
and oral forward-looking statements only in light of such cautionary statements.
You should not place undue reliance on these forward-looking statements and you
should understand that they represent management's view only as of the dates we
make them.

RISK FACTORS

WE ANTICIPATE HAVING FUTURE OPERATING LOSSES AND NEGATIVE EBITDA AS WE CONTINUE
TO EXPAND OUR BUSINESS AND ENTER INTO NEW MARKETS

    The expansion and development of our business and the deployment of our
networks, systems and services will require significant capital and other
expenditures, a substantial portion of which will need to be incurred before the
realization of significant revenue from these activities. We have incurred net
losses every year since we began operations. We will continue to have
significant operating losses and our adjusted EBITDA will continue to be
negative while we develop and expand our business and until we establish a
sufficient revenue-generating customer base. We expect to experience increasing
operating losses and negative adjusted EBITDA as we expand our operations.
Adjusted EBITDA represents earnings before interest, income taxes, depreciation
and amortization, management allocation charges and non-cash deferred
compensation. Adjusted EBITDA should not be construed as a substitute for
operating income (loss) or cash flow from (used in) operations determined in
accordance with generally accepted accounting principles. For the quarter ended
September 30, 2001, we had net operating losses and net losses applicable to
common stock of $106.5 million and negative adjusted EBITDA of approximately
$26.4 million. We typically do not expect to achieve positive adjusted EBITDA in
any market until at least our third year of operation in that market. We can
make no assurances that we will achieve or sustain profitability or generate
sufficient operating income or adjusted EBITDA to meet our working capital,
capital expenditure and debt service requirements, and if we are unable to do
so, this would have a material adverse effect on our business, financial
condition and results of operations.

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WE COULD LOSE REVENUE IF CALLS TO INTERNET SERVICE PROVIDERS ARE TREATED AS LONG
DISTANCE INTERSTATE CALLS

    We earn "reciprocal compensation" revenue by terminating on our network,
local calls that originate on another carrier's network. We believe that under
the Telecommunications Act of 1996, other local exchange carriers should have to
compensate us when their customers place calls to Internet service providers who
are our customers. Most incumbent local carriers disagree. A majority of our
reciprocal compensation revenues are from calls to our customers that are
Internet service providers. Regulatory decisions providing that other carriers
do not have to compensate us for these calls could limit our ability to service
this group of customers profitably and could have a material adverse effect on
us. Given the uncertainty as to whether reciprocal compensation should be
payable in connection with calls to Internet service providers, we recognize
such revenue only when realization of it is certain, which in most cases is upon
receipt of cash. In addition, we anticipate that the per minute reciprocal
compensation rate we receive from incumbent local carriers under our new
interconnection agreements will be lower than it was under our previous
agreements. These reductions in reciprocal compensation will have a material
adverse effect on us if we are unable to offset them with other revenues.

    The obligation to pay reciprocal compensation does not extend to long
distance interstate calls. The FCC in its Declaratory Ruling of February 26,
1999, determined that Internet service provider traffic is interstate for
jurisdictional purposes, but also determined that its current rules neither
require nor prohibit the payment of reciprocal compensation for such calls. In
the absence of a federal rule, the FCC determined that state commissions have
authority to interpret and enforce the reciprocal compensation provisions of
existing interconnection agreements and to determine the appropriate treatment
of Internet service provider traffic in arbitrating new agreements. The Court of
Appeals for the District of Columbia Circuit issued a decision on March 24,
2000, vacating the Declaratory Ruling. The court held that the FCC had not
adequately explained its conclusion that calls to Internet service providers
should not be treated as "local" traffic. On April 27, 2001, the FCC issued its
Order on remand from the Court of Appeals and concluded that it had erred in its
analysis of Internet traffic in the Declaratory Ruling. In that Order, the FCC
categorized such traffic as "information access" and held that it is not subject
to reciprocal compensation obligations. Nonetheless, it established an interim,
transitional recovery mechanism pursuant to which Internet service provider
traffic will continue to be compensated, but at rates declining over a period of
three years. In a companion Notice of Proposed Rulemaking released April 27,
2001, the FCC initiated a rulemaking to examine all forms of intercarrier
compensation, including reciprocal compensation, and sought comment on the
feasibility of adopting a bill-and-keep approach to such compensation.
Federally-mandated reductions in reciprocal compensation will have a material
adverse affect on us if we are unable to offset them with other revenues.
Additional disputes over the appropriate treatment of Internet service provider
traffic are expected.

THE REGULATION OF ACCESS CHARGES INVOLVES UNCERTAINTIES, AND THE RESOLUTION OF
THESE UNCERTAINTIES COULD ADVERSELY AFFECT OUR BUSINESS

    We earn "access charge" revenue by connecting our voice service customers to
their selected long distance carriers for outbound calls or by delivering
inbound long distance traffic to our voice service customers. Our interstate
access charges were filed largely mirroring those used by the National Exchange
Carrier Association (NECA), an association of independent local exchange
carriers and our state access charges were generally set the same as those of
state associations similar to NECA or of individual incumbent carriers operating
in other areas within the same state. These charges are generally higher than
those charged by the larger carriers operating in the same areas because these
large carriers have many more customers and therefore have lower per unit costs.
Access charges are intended to compensate the local exchange carrier for the
costs incurred in originating and terminating long distance calls on its network
and we believe our access charges are appropriately set at levels approximately
the same as those of the smaller carriers. Access charge levels in general, and
those

                                       23
<Page>
charged by smaller carriers in particular, are subject to various disputes and
are under review by the FCC.

    AT&T has challenged the switched access rates of Allegiance and other
carriers and has withheld some or all payments for the switched access services
that they continue to receive. AT&T has asserted that they have not ordered
switched access service from us and/or that our charges for switched access
services are higher than those of the larger carriers serving the same territory
and are therefore unjust and unreasonable. AT&T has refused to pay us any
originating access charges at our tariffed rates. Since 1997, the company has
invoiced AT&T in excess of $25 million in aggregate for switched access
services, a substantial portion of which remains unpaid by AT&T pursuant to
AT&T's dispute of certain of the switched access charges.. On March 30, 2000, we
filed a lawsuit against each of AT&T and Sprint in the Federal District Court of
the District of Columbia requesting that such parties pay us for outstanding
interstate and intrastate access charges. AT&T and Sprint filed counterclaims
against us alleging that our access charges fail to comply with the
Telecommunications Act of 1996 because they are unjust and unreasonable. We have
settled this dispute with Sprint and in doing so have reached an agreement with
respect to access charges payable by them for originating and terminating calls
on our local networks. Although we believe we will ultimately receive payment
from AT&T for the amounts owed to us by them, we cannot provide any assurance as
to the amount of payments that we will ultimately receive, the actual outcome of
the FCC proceedings or our lawsuit or the positions various states will take on
the similar issue of intrastate switched access rates. If we do not receive
payment from AT&T for interstate and intrastate access charges that we believe
are owed to us, this will have a material adverse effect on us unless we are
able to offset this access revenue with other revenues. In addition, our
switched access rates will have to be adjusted to comply with future decisions
of the FCC or state commissions and these adjustments could have a material
adverse effect on us.

    On July 5, 1999, the FCC issued a ruling to address the issue of competitive
carrier access charges in the context of a complaint filed by MGC
Communications, Inc. (now known as Mpower Communications), a carrier that had
not been receiving payments from AT&T. In that ruling, the FCC stated that "AT&T
is liable to MGC, at MGC's tariffed rate, for the originating access service
that it received..." The FCC indicated that AT&T had no obligation to purchase
access from MGC based on the arguments that MGC had made, but the FCC also made
clear that there may be other requirements that could limit AT&T's ability to
not purchase such access from a competitive local carrier. In response to that
FCC decision, AT&T filed a Petition for Review with the FCC, which was denied on
December 28, 1999. The FCC is also reviewing the switched access rate level
issue and related matters in its Access Charge Reform docket. In this docket,
the FCC has requested comment as to whether long distance carriers, also known
as "interexchange carriers," may refuse to purchase switched access services
from particular carriers. We are an active participant in that proceeding. In an
action to collect unpaid access charges brought by several competitive carriers
against AT&T and Sprint, the federal district court in Alexandria, Virginia
referred two related issues to the FCC for decision. Pursuant to the referral,
AT&T and Sprint asked the FCC to determine (1) whether any statutory or
regulatory constraints prevent an interexchange carrier from declining access
services or from terminating access services previously ordered or
constructively ordered and if not (2) what steps interexchange carriers must
take either to avoid ordering access or to cancel service after ordering or
constructively ordering. On October 22, 2001, the FCC issued a Declaratory
Ruling in response to AT&T's and Sprint's requests in which it held that where a
CLEC's tariffed charges for access service were presumptively reasonable at the
time service was offered, interexchange carriers such as AT&T and Sprint cannot
refuse to exchange traffic with the CLEC. At all times relevant in our
collection action against AT&T, access tariffs filed by non-dominant carriers
such as Allegiance were presumptively lawful and reasonable. The FCC's
October 22nd ruling will likely be applied by the Court in our collection action
against AT&T. AT&T has appealed the FCC's Declaratory Ruling to the Court of
Appeals for the District of Columbia Circuit. We can provide no assurances that
the outcome of this appeal will be in our favor, that the delay caused by the
appeal will not have a material adverse effect

                                       24
<Page>
on us or that, even if we are successful on the appeal, the result will not be
subject to further appeal by AT&T.

    On April 27, 2001, the FCC issued a Report and Order in the Access Charge
Reform docket addressing competitive local exchange carrier access charge rates.
The FCC established safe harbor benchmark rates that decrease over three years
to the rates charged by incumbent local exchange carriers. The FCC stated that
interexchange carriers must pay the benchmark rates for access services they
receive or face suit in federal court. On April 27, 2001, the FCC also released
a Notice of Proposed Rulemaking through which it proposes to examine all forms
of intercarrier compensation including access charges, and seeks comment on the
feasibility of adopting a bill-and-keep approach for all such compensation.
Federally-mandated reductions in access charges could have a material adverse
affect on us if we are unable to offset them with other revenues.

    On May 31, 2000, the FCC approved a proposal made by a coalition of the
largest incumbent local carriers, AT&T and Sprint, to restructure interstate
access charges. Pursuant to the proposal, certain incumbent carriers, designated
as "price cap" incumbent local carriers, are required to reduce their interstate
access rates to targeted levels approved by the FCC or submit cost studies to
justify different rates. We anticipate that implementation of the FCC's decision
will lead to an industry-wide reduction in interstate access rates, even by
those carriers that are not bound by the decision, including smaller carriers.
Reduction in interstate access rates will have a material adverse effect on us
unless we are able to offset the access revenues with other revenues.

    Several states, including Colorado, Maryland, Massachusetts, Missouri, New
Jersey, New York, Texas, Virginia and Washington, have proposed or required that
access charges of competitive local carriers be limited to those charged by
incumbent local carriers operating in the same area as the competitive local
carriers with respect to calls originating or terminating in such area, except
where the competitive carrier in question can establish that its costs justify a
higher access rate through a formal cost proceeding. We believe that it is
possible that other states will enact similar requirements. We also believe,
however, that it is more likely that many states will use the same approach for
intrastate long distance as the FCC ultimately decides to use for interstate
long distance.

OUR SUCCESS DEPENDS ON OUR KEY PERSONNEL AND WE MAY NOT BE ABLE TO REPLACE KEY
EXECUTIVES WHO LEAVE

    We are managed by a small number of key executive officers, most notably
Royce J. Holland, our Chairman and Chief Executive Officer, who is widely
recognized as one of the pioneers in managing providers of competitive local
exchange services. The loss of services of one or more of these key individuals,
particularly Mr. Holland, could materially and adversely affect our business and
our prospects. Most of our executive officers do not have employment agreements,
and we do not maintain key person life insurance for any of our executive
officers. The competition for qualified personnel in the telecommunications
industry is intense. For this reason, we cannot assure you that we will be able
to hire or retain necessary personnel in the future.

WE ARE DEPENDENT ON EFFECTIVE BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
AND WE MAY HAVE DIFFICULTIES IN DEVELOPING THESE SYSTEMS

    Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill and service customers,
initiate, implement and track customer orders and achieve operating
efficiencies. We are in the process of introducing a new billing platform across
our geographic markets. Although we are taking steps to mange the migration to
the new system and we believe that the new system will enhance our ability to
accurately and efficiently bill for our services, we cannot assure you that the
transition to the new system will be implemented without any adverse impact on
our business. Since our inception, we have also been engaged in developing and
integrating

                                       25
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our essential information systems consisting of our billing system, our sales
order entry system, our customer implementation system and our switch
information systems. This is a challenging project because these systems were
developed by different vendors and must be coordinated through custom software
and integration processes. Our sales, line count and other core operating and
financial data are generated by these systems and the accuracy of this data
depends on the quality and progress of the system integration project. Although
we have made significant progress in our system integration efforts, we have not
completed it and we have experienced and expect to experience negative
adjustments to our financial and operating data as we complete this effort.
These adjustments have not had a material adverse effect on our financial or
operating data to date but until we complete the entire project we cannot assure
you that any such adjustments arising out of our systems integration efforts
will not have a material adverse effect in the future. In addition, if we are
unable to develop, acquire and integrate our operations and financial systems,
our customers could experience delays in connection of service, billing issues
and/or lower levels of client service. We also cannot assure you that any of our
systems will be successfully implemented on a timely basis or at all or will
perform as expected because:

    - we have and will likely continue to have difficulties in getting products
      and services from our vendors delivered in a timely and effective manner,
      at acceptable costs and at the service and performance level required;

    - we may fail to adequately identify all of our information and processing
      needs;

    - our processing or information systems may fail or be inadequate;

    - we may not be able to effectively integrate such products or services;

    - we may fail to upgrade systems as necessary; and

    - third party vendors may cancel or fail to renew license agreements that
      relate to these systems.

WE ARE DEPENDENT ON MANY VENDORS AND SUPPLIERS AND THEIR FINANCIAL DIFFICULTIES
MAY ADVERSELY AFFECT OUR BUSINESS

    We depend on many vendors and suppliers to conduct our business. For
example, we purchase our network assets from equipment manufacturers and other
suppliers and we lease fiber and other circuits from other carriers as well as
from companies which construct these network elements for resale. Many of these
third parties have experienced substantial financial difficulties in recent
months, in some cases leading to bankruptcies and liquidations. In particular,
the providers of fiber for our metropolitan fiber rings as well as our long-haul
fiber routes have experienced financial difficulties, including difficulty in
raising the necessary capital to complete fiber construction projects. The
financial difficulties of these companies could have a material adverse affect
on our business and prospects.

THE FINANCIAL DIFFICULTIES OF OUR CUSTOMERS COULD ADVERSELY AFFECT OUR FINANCIAL
RESULTS

    We provide services to small and medium-sized businesses as well as other
network service providers. Many of these businesses have experienced substantial
financial difficulties in recent months, in some cases leading to bankruptcies
and liquidations. The financial difficulties of these companies could have a
material adverse affect on our financial results if we are unable to collect
revenues from these customers. In addition, among other things, we believe
companies in financial difficulty are less likely to expand their operations and
related demand for communications services and to migrate from dial-up Internet
connections to more advanced dedicated connections such as those that we offer.

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THE FINANCIAL DIFFICULTIES OF OTHER COMPETITIVE COMMUNICATIONS PROVIDERS COULD
ADVERSELY AFFECT OUR FINANCIAL RESULTS

    Many competitive local exchange carriers and other emerging communications
providers have experienced substantial financial difficulties over the past
year, in some cases leading to bankruptcies and liquidations. The financial
difficulties of these companies could reflect poorly on our own financial
stability and may adversely affect the willingness of potential customers to
move their communications services to an emerging carrier like Allegiance
Telecom. Moreover, we have experienced efforts by established carriers to
promote this problem and suggest to their customers that they should not risk
placing their communications services in the hands of an emerging carrier. We
believe these concerns are unfounded in our case and that raising these concerns
with respect to Allegiance Telecom is inappropriate. We vigorously respond to
illegal attempts by other carriers to spread false information about our
financial stability. We have a lawsuit pending against AT&T in the Federal
District Court in the District of Columbia regarding this practice.

UNDER CERTAIN CIRCUMSTANCES WE MAY NEED ADDITIONAL CAPITAL TO EXPAND OUR
BUSINESS AND INCREASE REVENUES

    We may need additional capital to fund capital expenditures, working
capital, debt service and cash flow deficits during the period in which we are
expanding and developing our business and deploying our networks, services and
systems. We believe that the borrowings under our credit facilities, together
with our cash on hand, will be sufficient to pre-fund our business plan.
However, we will only be able to borrow additional funds under these credit
facilities if we are in compliance with the financial covenants and other
conditions in our credit agreement. In the event we cannot borrow all of the
funds committed under these credit facilities or if our estimates of capital
requirements and revenues are inaccurate, we may need to access alternative
sources of capital, reduce or delay capital expenditures, sell assets, refinance
or restructure our debt and/or modify our business plan, which may have an
adverse effect on us.

    The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of financial, business and other
factors, many of which are beyond our control, as well as prevailing economic
conditions.

OUR SUBSTANTIAL INDEBTEDNESS COULD MAKE US UNABLE TO SERVICE INDEBTEDNESS AND
MEET OUR OTHER REQUIREMENTS AND COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH

    We have a significant amount of debt outstanding and may need to access
additional debt financing to fund our business plan, including under our credit
facilities. On September 30, 2001, we had $983.2 million of outstanding
indebtedness.

    This level of debt could:

    - impair our ability to obtain additional financing for working capital,
      capital expenditures, debt service, acquisitions or general corporate
      purposes;

    - require us to dedicate a substantial portion of our cash flow from
      operations to the payment of principal and interest on our indebtedness,
      thereby reducing the funds available for maintenance or growth of our
      business;

    - place us at a competitive disadvantage with those of our competitors who
      do not have as much debt as we do;

    - impair our ability to adjust rapidly to changing market conditions; and

    - make us more vulnerable if there is a continued downturn in general
      economic conditions or in our business.

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<Page>
    Our ability to repay or refinance our debt obligations will depend on our
future financial and operational performance. We cannot assure you that we will
be able to meet our working capital, capital expenditure and debt service
requirements and if we are unable to do so, this could have a material adverse
effect on our business, financial condition and results of operations.

LIMITATIONS IMPOSED BY RESTRICTIVE COVENANTS COULD LIMIT HOW WE CONDUCT BUSINESS
AND A DEFAULT UNDER OUR INDENTURES AND FINANCING AGREEMENTS COULD SIGNIFICANTLY
IMPACT OUR ABILITY TO REPAY OUR INDEBTEDNESS

    Our indentures and our credit facilities contain covenants that restrict our
ability to:

    - incur additional indebtedness;

    - pay dividends and make other distributions;

    - prepay subordinated indebtedness;

    - make investments and other restricted payments;

    - enter into sale and leaseback transactions;

    - create liens;

    - sell assets; and

    - engage in certain transactions with affiliates.

    Our current and future financing arrangements contain and will continue to
contain similar or more restrictive covenants, as well as other covenants that
will require us to maintain specified financial ratios and satisfy financial
tests. In addition, under our credit agreement, we have granted a security
interest in substantially all of our and our subsidiaries' assets. As a result
of these restrictions and encumbrances, we are limited in how we conduct
business and we may be unable to raise additional debt or equity financing to
operate during general economic or business downturns, to compete effectively or
to take advantage of new business opportunities. This may affect our ability to
generate revenues and make profits. Without sufficient revenues and cash, we may
not be able to pay interest and principal on our indebtedness.

    Our failure to comply with the covenants and restrictions contained in our
indentures and other financing agreements could lead to default under the terms
of these agreements. If such a default occurs, the other parties to such
agreements could declare all amounts borrowed and all amounts due under other
instruments that contain provisions for cross-acceleration or cross-default due
and payable. In addition, lenders under our current and future financing
arrangements could terminate their commitments to lend to us. If that occurs, we
cannot assure you that we would be able to make payments on our indebtedness,
meet our working capital or meet our capital expenditure requirements, or that
we would be able to find additional alternative financing. Even if we could
obtain additional alternative financing, we cannot assure you that it would be
on terms that are favorable or acceptable to us.

WE MAY NOT HAVE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF CONTROL OFFER WHICH
MAY BE REQUIRED BY OUR FINANCING AGREEMENTS

    Our indentures provide that upon a change of control, each note holder will
have the right to require us to purchase all or a portion of such holder's
notes. We would be required to purchase the notes at a purchase price of 101% of
the accreted value of the 11 3/4% notes and 101% of the principal amount of the
12 7/8% notes, plus any accrued and unpaid interest to the date of repurchase.
Our credit facilities provide that upon a change of control, we may be required
to repay all of our obligations under these credit facilities. It is possible
that we will not have sufficient funds at that time to repurchase our notes or
repay any debt outstanding under our credit facilities.

                                       28
<Page>
IF WE DO NOT INTERCONNECT WITH AND MAINTAIN EFFICIENT WORKING RELATIONSHIPS WITH
OUR PRIMARY COMPETITORS, THE INCUMBENT LOCAL CARRIERS, OUR BUSINESS WILL BE
ADVERSELY AFFECTED

    Many new carriers, including us, have experienced difficulties in working
with the incumbent local carriers with respect to initiating, interconnecting,
and implementing the systems used by these new carriers to order and receive
unbundled network elements and wholesale services and locating the new carriers'
equipment in the offices of the incumbent local carriers. As a new carrier, we
must coordinate with incumbent local carriers so that we can provide local
service to customers on a timely and competitive basis. The Telecommunications
Act of 1996 created incentives for regional Bell operating companies to
cooperate with new carriers and permit access to their facilities by denying
such companies the ability to provide in-region long distance services until
they have satisfied statutory conditions designed to open their local markets to
competition. The FCC has granted approval to Verizon to provide in-region long
distance service in New York, Connecticut, Massachusetts and Pennsylvania and to
SBC Communications to provide in-region long distance service in Texas, Oklahoma
and Kansas. Other regional Bell operating companies in our markets may petition
and receive approval from the FCC to offer long distance services. These
companies may not be accommodating to us once they are permitted to offer long
distance service. If we cannot obtain the cooperation of a regional Bell
operating company in a region, whether or not it has been authorized to offer
long distance service or a regional Bell operating company otherwise fails to
meet our requirements, for example, because of (1) labor shortages, (2) work
stoppages or (3) disruption caused by mergers or other organizational changes or
terrorist attacks, our ability to offer local services in such region on a
timely and cost-effective basis will be adversely affected.

THE NEED TO MOVE FROM TARIFFS TO INDIVIDUAL CONTRACTS FOR DOMESTIC INTERSTATE
AND INTERNATIONAL LONG DISTANCE SERVICES MAY INCREASE OUR COSTS

    In a decision issued April 28, 2000, the United States Court of Appeals for
the District of Columbia affirmed the FCC's 1996 order that prohibits the filing
of tariffs for domestic interstate long distance service. The FCC's order, which
had been stayed by the Court pending its decision, went into effect on July 31,
2001, as of which date carriers were required to cancel all interstate domestic
long distance tariffs on file with the FCC and file no new tariffs for such
service. Although the FCC will not accept interstate long distance tariffs for
filing after July 31, 2001, carriers will still be required to maintain and make
available to the public upon request the rates, terms and conditions applicable
to their domestic long distance services. In the absence of retail tariffs, we
will be required to memorialize our legal relationship with our long distance
customers by some other means, such as individual contracts setting forth the
rates, terms and conditions of service. Negotiating individual contracts in this
manner is likely to increase our cost of providing domestic interstate long
distance services. In an order issued March 16, 2001, the FCC ruled that
carriers likewise are prohibited from filing tariffs for international long
distance service. Within nine months of the effective date of the FCC's order,
carriers will be required to cancel all international long distance tariffs on
file with the FCC and file no new tariffs for such service.

OUR PRINCIPAL COMPETITORS FOR LOCAL SERVICES, THE INCUMBENT LOCAL CARRIERS, AND
POTENTIAL ADDITIONAL COMPETITORS, HAVE ADVANTAGES THAT MAY ADVERSELY AFFECT OUR
ABILITY TO COMPETE WITH THEM

    The telecommunications industry is highly competitive. Many of our current
and potential competitors in the local market have financial, technical,
marketing, personnel and other resources, including brand name recognition,
substantially greater than ours, as well as other competitive advantages over
us. In each of the markets targeted by us, we will compete principally with the
incumbent local carrier serving that area. These incumbent local carriers enjoy
advantages that may adversely affect our ability to compete with them. Incumbent
local carriers are established providers of local telephone services to all or
virtually all telephone subscribers within their respective service areas.

                                       29
<Page>
Incumbent local carriers also have long-standing relationships with federal and
state regulatory authorities. FCC and state administrative decisions and
initiatives provide the incumbent local carriers with pricing flexibility for
their:

    - private lines, which are private, dedicated telecommunications connections
      between customers;

    - special access services, which are dedicated lines from a customer to a
      long distance company provided by the local phone company; and

    - switched access services, which refers to the call connection provided by
      the local phone company's switch between a customer's phone and the long
      distance company's switch.

    In addition, with respect to competitive access services, such as special
access services as opposed to switched access services, the FCC recently
approved incumbent local carriers increased pricing flexibility and deregulation
for such access services after certain competitive levels are reached. If the
incumbent local carriers are allowed by regulators to offer discounts to large
customers through contract tariffs, engage in aggressive volume and term
discount pricing practices for their customers, and/or seek to charge
competitors excessive fees for interconnection to their networks, competitors
such as us could be materially adversely affected. If future regulatory
decisions afford the incumbent local carriers increased pricing flexibility or
other regulatory relief, such decisions could also have a material adverse
effect on competitors such as us.

    We also face, and expect to continue to face, competition in the local
market from other current and potential market entrants, including long distance
carriers seeking to enter, reenter or expand entry into the local exchange
marketplace such as AT&T, WorldCom and Sprint, and from other competitive local
carriers, resellers, competitive access providers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end users. In addition, the development of new
technologies could give rise to significant new competitors in the local market.

SIGNIFICANT COMPETITION IN PROVIDING LONG DISTANCE AND INTERNET SERVICES COULD
REDUCE THE DEMAND FOR AND PROFITABILITY OF OUR SERVICES

    We also face significant competition in providing long distance and Internet
services. Many of these competitors have greater financial, technological,
marketing, personnel and other resources than those available to us.

    The long distance telecommunications market has numerous entities competing
for the same customers and a high average turnover rate, as customers frequently
change long distance providers in response to the offering of lower rates or
promotional incentives. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. We face
competition from large carriers such as AT&T, WorldCom and Sprint and many
smaller long distance carriers. Other competitors are likely to include regional
Bell operating companies providing long distance services outside of their local
service area and, with the removal of regulatory barriers, long distance
services within such local service areas, other competitive local carriers,
microwave and satellite carriers and private networks owned by large end users.
The FCC has granted approval to provide in-region long distance service to
Verizon in New York, Connecticut, Massachusetts and Pennsylvania and to SBC
Communications in Texas, Oklahoma and Kansas and other regional Bell operating
companies may petition and be granted such approval in the future. We may also
increasingly face competition from companies offering local and long distance
data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay many of the charges
or fees that we have to pay.

    The Internet services market is highly competitive and there are limited
barriers to entry. We expect that competition will continue to intensify. Our
competitors in this market include Internet

                                       30
<Page>
service providers, other telecommunications companies, online service providers
and Internet software providers. Most of the regional Bell operating companies
and Verizon operating units have announced plans to rapidly roll out DSL
services. Some of these entities, including SBC Communications, Qwest (formerly
known as US West) and Verizon, have already commenced deployment of DSL services
in selected markets and may in the future deploy DSL services on a widespread
basis.

OUR NEED TO COMPLY WITH EXTENSIVE GOVERNMENT REGULATION CAN INCREASE OUR COSTS
AND SLOW OUR GROWTH

    Our networks and the provision of telecommunications services are subject to
significant regulation at the federal, state and local levels. Delays in
receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may slow our growth and have a material
adverse effect upon us.

    The FCC exercises jurisdiction over us with respect to interstate and
international services. We must obtain, and have obtained through our
subsidiary, Allegiance Telecom International, Inc., prior FCC authorization for
installation and operation of international facilities and the provision,
including by resale, of international long distance services. Additionally, we
currently have on file a publicly available tariff detailing our services and
pricing with the FCC for international long-distance services. As noted above,
as of July 31, 2001, we were prohibited from filing tariffs with the FCC for
domestic interstate long distance service and were required to cancel any such
tariffs on file as of that date. As of nine months from the effective date of
the FCC's March 16, 2001 order detariffing international services, we will also
be prohibited from filing tariffs with the FCC for international long distance
service and will be required to cancel any such tariffs on file as of that date.

    State regulatory commissions exercise jurisdiction over us because we
provide intrastate services. We are required to obtain regulatory authorization
and/or file tariffs at state agencies in most of the states in which we operate.
If and when we seek to build our own network segments, local authorities
regulate our access to municipal rights-of-way. Constructing a network is also
subject to numerous local regulations such as building codes and licensing. Such
regulations vary on a city by city and county by county basis.

    Regulators at both the federal and state level require us to pay various
fees and assessments, file periodic reports, and comply with various rules
regarding the contents of our bills, protection of subscriber privacy, service
quality and similar matters on an ongoing basis.

    We cannot assure you that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations, or to have
violated other requirements of their rules and orders. Regulators or others
could challenge our compliance with applicable rules and orders. Such challenges
could cause us to incur substantial legal and administrative expenses.

DEREGULATION OF THE TELECOMMUNICATIONS INDUSTRY INVOLVES UNCERTAINTIES, AND THE
RESOLUTION OF THESE UNCERTAINTIES COULD ADVERSELY AFFECT OUR BUSINESS

    The Telecommunications Act of 1996 provides for a significant deregulation
of the domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act of 1996
remains subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on us and our
operations. There are currently many regulatory actions underway and being
contemplated by federal and state authorities regarding interconnection pricing
and other issues that could result in significant changes to the business
conditions in the telecommunications industry. We cannot assure you that these
changes will not have a material adverse effect upon us.

                                       31
<Page>
THE REGULATION OF INTERCONNECTION WITH INCUMBENT LOCAL CARRIERS INVOLVES
UNCERTAINTIES, AND THE RESOLUTION OF THESE UNCERTAINTIES COULD ADVERSELY AFFECT
OUR BUSINESS

    Although the incumbent local carriers are required under the
Telecommunications Act of 1996 to unbundle and make available elements of their
network and permit us to purchase only the origination and termination services
that we need, thereby decreasing our operating expenses, such unbundling may not
be done as quickly as we require and may be priced higher than we expect. This
is important because we rely on the facilities of these other carriers to
connect to our high capacity digital switches so that we can provide services to
our customers. Our ability to obtain these interconnection agreements on
favorable terms, and the time and expense involved in negotiating them, can be
adversely affected by legal developments.

    The United States Supreme Court vacated a FCC rule determining which network
elements the incumbent local carriers must provide to competitors on an
unbundled basis. On November 5, 1999, the FCC released an order revising its
unbundled network element rules to conform to the Supreme Court's interpretation
of the law, and reaffirmed the availability of the basic network elements, such
as local loops, the connection from a customer's location to the established
telephone company, and dedicated transport, used by us. It is likely that this
order may be subject to further agency reconsideration and/or court review.
While these court and FCC proceedings were pending, we entered into
interconnection agreements with a number of incumbent local carriers through
negotiations or, in some cases, adoption of another competitive local carrier's
approved agreement. These agreements remain in effect, although in some cases
one or both parties may be entitled to demand renegotiation of particular
provisions based on intervening changes in the law. However, it is uncertain
whether any of these agreements will be so renegotiated or whether we will be
able to obtain renewal of these agreements on as favorable terms when they
expire.

    On July 19, 2000, in a decision on remand from the Supreme Court, the United
States Court of Appeals for the Eighth Circuit vacated certain of the FCC's
total element long run incremental (TELRIC) pricing rules. While sustaining the
FCC's use of a forward-looking incremental cost methodology to set rates for
interconnection and unbundled network elements, the Court rejected the FCC's
conclusion that the costs should be based on the use of the most efficient
technology currently available and the lowest cost network configuration.
Instead, the Court stated that the statute required that costs be based on the
use of the incumbent local carrier's existing facilities and actual network
equipment but that these costs should not be based on the historic costs
actually paid by such carrier for network elements. The Court also found that
the FCC erred in using avoidable, rather than actually avoided, costs to
calculate the wholesale discount for resale products. Interconnection and
unbundled network element rates set using the Court's methodology may be higher
than and the wholesale discounts set using the Court's methodology may be lower
than the comparable rates established using the FCC's methodology. The Supreme
Court has agreed to review the Eighth Circuit's decision and the Eighth Circuit
in turn has stayed issuance of the mandate vacating the TELRIC rules pending the
Supreme Court's decision. It is difficult to evaluate the potential impact of
this ruling on the prices we pay incumbent local carriers for unbundled network
elements until the Supreme Court rules. We believe that the pricing of unbundled
network elements approved by many state commissions and reflected in many of our
interconnection agreements is already materially in compliance with the standard
set forth in the Eighth Circuit's ruling. This ruling could have a material
adverse effect on us, however, if it is interpreted to authorize materially
higher charges for unbundled network elements than those prevailing in our
current interconnection agreements.

OUR PAST AND FUTURE ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE, DISRUPT OUR
BUSINESS, DILUTE OUR STOCKHOLDERS AND DIVERT MANAGEMENT ATTENTION

    We have acquired a number of companies and we may in the future acquire or
invest in additional businesses that we believe could complement or expand our
business, augment our market coverage,

                                       32
<Page>
enhance our service offerings or that may otherwise offer other opportunities.
We may encounter problems with the assimilation of acquired businesses,
including, among others:

    - the difficulty of integrating the acquired operations, including
      provisioning, billing and customer service systems;

    - the diversion of personnel from other business concerns and potential
      disruption of our ongoing business;

    - unanticipated costs associated with acquisitions;

    - the difficulty in combining the service offerings of the acquired company
      with our existing service offerings;

    - the inability of management to maintain uniform standards, controls,
      procedures and policies;

    - the risks of entering businesses and markets in which we have little or no
      direct prior experience;

    - the impairment of relationships with employees or customers of the
      acquired company as a result of changes in management or otherwise arising
      out of such transactions;

    - use of some of our available cash to purchase these businesses; and

    - dilution of current stockholders due to issuances of additional securities
      as consideration for acquisitions.

    We can make no assurances that we will be able to successfully integrate
acquired businesses or operations that we have acquired or that we may acquire
in the future. In addition, we may not achieve the anticipated benefits from our
acquisitions. If we fail to achieve the anticipated benefits from such
acquisitions, we may incur increased expenses and experience a shortfall in our
anticipated revenues and we may not obtain a satisfactory return on our
investment.

OUR STOCK HAS BEEN EXTREMELY VOLATILE

    Our stock has experienced significant price and volume fluctuations. The
market price for our common stock may continue to be subject to wide
fluctuations in response to a variety of factors, including but not limited to
the following, some of which are beyond our control:

    - revenues and operating results of our company or other emerging
      communications companies failing to meet the expectations of securities
      analysts or investors in any period;

    - failure to successfully implement our business strategy;

    - announcements of operating results and business conditions by our
      customers and competitors;

    - technological innovations by competitors or in competing technologies;

    - announcements by us or our competitors of significant contracts,
      acquisitions, strategic partnerships, joint ventures or capital
      commitments;

    - announcements by third parties of significant claims or proceedings
      against us;

    - investor perception of our industry or our prospects;

    - economic developments in the telecommunications industry or general market
      conditions; or

    - events such as the September 11, 2001 terrorist attacks in the United
      States.

                                       33
<Page>
FUTURE SALES OF OUR STOCK BY EXISTING STOCKHOLDERS MAY ADVERSELY AFFECT OUR
STOCK PRICE

    As of September 30, 2001, we had 114,555,096 shares of common stock
outstanding and 21,324,694 shares of common stock reserved for issuance upon
exercise of outstanding options and warrants. Many of these shares are
"restricted securities" under the federal securities laws, and such shares are
or will be eligible for sale subject to restrictions as to timing, manner,
volume, notice and the availability of current public information regarding
Allegiance. Sales of substantial amounts of stock in the public market, or the
perception that sales could occur, could depress the prevailing market price for
our stock. Sales of substantial amounts of stock in the public market may also
make it more difficult for us to sell equity securities or equity-related
securities in the future at a time and price that we deem appropriate.

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND BYLAWS COULD LIMIT OUR SHARE PRICE
AND DELAY A CHANGE OF MANAGEMENT

    Our charter and bylaws contain provisions that could make it more difficult
or even prevent a third party from acquiring Allegiance without the approval of
our incumbent board of directors. In addition, our credit facilities and some of
our other agreements may discourage a change in control.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    Our investment policy is limited by our existing bond indentures. We are
restricted to investing in financial instruments with a maturity of one year or
less. The indentures require investments in high quality instruments, such as
obligations of the U.S. government or any agency thereof guaranteed by the
United States of America, money market deposits and commercial paper with a
rating of A1/P1.

    We are thus exposed to market risk related to changes in short-term U.S.
interest rates. We manage these risks by closely monitoring market rates and the
duration of our investments. We do not enter into financial or commodity
investments for speculation or trading purposes and are not a party to any
financial or commodity derivatives.

    Interest income earned on our investment portfolio is affected by changes in
short-term interest rates. We believe that we are not exposed to significant
changes in fair value because of our conservative investment strategy. However,
the estimated interest income for 2001, based on the estimated average 2000
earned rate on investments, is $29.6 million. Assuming a 100-basis-point drop in
the estimated average rate, we would be exposed to a $4.7 million reduction in
interest income for the year. The following table illustrates this impact on a
quarterly basis:

<Table>
<Caption>
                                                       QUARTER ENDING
                                    -----------------------------------------------------
                                     MARCH       JUNE     SEPTEMBER   DECEMBER
                                      2001       2001       2001        2001      TOTAL
                                    --------   --------   ---------   --------   --------
                                                    (DOLLARS IN MILLIONS)
<S>                                 <C>        <C>        <C>         <C>        <C>
Estimated average investments.....   $577.5     $404.7     $425.0      $473.8       N/A
Estimated average interest earned
  at the average rate of 6.3% for
  the year ended December 31,
  2000............................   $  9.1     $  6.4     $  6.7      $  7.4     $29.6
Estimated impact of interest rate
  drop............................   $  1.4     $  1.0     $  1.1      $  1.2     $ 4.7
</Table>

    Our outstanding long-term debt consists both of long-term, fixed rate notes,
not subject to interest rate fluctuations, and our senior secured credit
facilities. Borrowings under our senior secured credit facilities incur interest
at a variable rate, based on leverage ratios, and is currently the London
Interbank Offered Rate + 3.25%. Our initial borrowing rate of 6.28% will remain
fixed until

                                       34
<Page>
March 2002. Therefore, we will not be exposed to market risk related to rate
fluctuations during the remainder of 2001.

    During 2002, we will be exposed to market risk related to market changes in
the London Interbank Offered Rate and other market indexes. Based on our current
level of debt, the impact of a 100-basis-point increase in our average interest
rate would cause an increase in interest expense during 2002 of $3.5 million.

                                       35
<Page>
                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

    Not applicable.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

    Not applicable.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

    Not applicable.

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

    (a) The 2001 annual meeting of stockholders was held on July 26, 2001. The
number of shares of common stock present at the annual meeting in person or by
proxy and voting and withholding authority to vote was 102,087,493 or 89.9% of
the common stock of Allegiance outstanding on May 29, 2001, the record date for
the annual meeting.

    (b) The following nominees, having received the FOR votes set opposite their
respective names, constituting a plurality of the votes cast at the annual
meeting for the election of directors, were elected directors of Allegiance to
terms expiring in 2004.

<Table>
<Caption>
DIRECTOR                                                   FOR       WITHHELD
--------                                               -----------   ---------
<S>                                                    <C>           <C>
Howard I. Hoffen.....................................  100,813,425   1,274,068
Royce J. Holland.....................................   98,433,546   3,653,947
Reed E. Hundt........................................  101,664,038     423,455
James N. Perry, Jr...................................  101,866,997     220,496
</Table>

    James E. Crawford, III, John B. Ehrenkranz, Paul J. Finnegan, and
Anthony J. Parella are directors of Allegiance whose terms expire in 2002 and
Richard D. Frisbie, Andrew Lipman, Thomas M. Lord and C. Daniel Yost are
directors of Allegiance whose terms expire in 2003.

    (c) Stockholders approved the amendment to Allegiance's Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
Allegiance common stock from 150,000,000 to 750,000,000. The vote was 63,039,545
shares FOR and 39,036,769 shares AGAINST such amendment, with 11,179 shares
abstaining.

    (d) Stockholders ratified the appointment of Arthur Andersen LLP, as
independent public accountants, to audit Allegiance's consolidated financial
statements for the current year ending December 31, 2001. The vote was
102,001,375 shares FOR and 75,237 shares AGAINST such ratification, with 10,881
shares abstaining.

ITEM 5.  OTHER INFORMATION

    Not applicable.

                                       36
<Page>
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) The following exhibits are filed with this report and made a part
hereof.

<Table>
<Caption>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
         4.1            Certificate of Amendment to Amended and Restated Certificate
                        of Incorporation

        10.1            Amendment One to Master Procurement Agreement dated
                        July 13, 2001 between Allegiance Telecom, Inc. and Lucent
                        Technologies Inc.

        11.1            Statement regarding computation of per share loss for the
                        three months ended September 30, 2001

        11.2            Statement regarding computation of per share loss for the
                        nine months ended September 30, 2001

        11.3            Statement regarding computation of per share loss for the
                        three months ended September 30, 2000

        11.4            Statement regarding computation of per share loss for the
                        nine months ended September 30, 2000
</Table>

                                       37
<Page>
                                   SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<Table>
<S>                                                    <C>  <C>
                                                       ALLEGIANCE TELECOM, INC.

                                                       By:             /s/ ROYCE J. HOLLAND
                                                            -----------------------------------------
                                                                      Name: Royce J. Holland
                                                               Title: CHAIRMAN AND CHIEF EXECUTIVE
                                                                             OFFICER

                                                       By:              /s/ THOMAS M. LORD
                                                            -----------------------------------------
                                                                       Name: Thomas M. Lord
                                                            Title: EXECUTIVE VICE PRESIDENT AND CHIEF
                                                                        FINANCIAL OFFICER
</Table>

Dated: November 14, 2001

                                       38
<Page>
                               INDEX TO EXHIBITS

<Table>
<Caption>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------   ------------------------------------------------------------
<C>                     <S>
         4.1            Certificate of Amendment to Amended and Restated Certificate
                        of Incorporation

        10.1            Amendment One to Master Procurement Agreement dated
                        July 13, 2001 between Allegiance Telecom, Inc. and Lucent
                        Technologies Inc.

        11.1            Statement regarding computation of per share loss for the
                        three months ended September 30, 2001

        11.2            Statement regarding computation of per share loss for the
                        nine months ended September 30, 2001

        11.3            Statement regarding computation of per share loss for the
                        three months ended September 30, 2000

        11.4            Statement regarding computation of per share loss for the
                        nine months ended September 30, 2000
</Table>

                                       39