<PAGE>   1
 
   
      AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
    
   
                                                      REGISTRATION NO. 333-53479
    
================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ---------------------
   
                                AMENDMENT NO. 1
    
   
                                       TO
    
                                    FORM S-1
            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
                             ---------------------
                            ALLEGIANCE TELECOM, INC.
             (Exact name of registrant as specified in its charter)
 
<TABLE>
<S>                             <C>                             <C>
           DELAWARE                          4832                         75-2721491
 (State or other jurisdiction    (Primary Standard Industrial            (IRS Employer
      of incorporation or
          organization)           Classification Code Number)       Identification Number)
</TABLE>
 
                             ---------------------
                             1950 STEMMONS FREEWAY
                                   SUITE 3026
                              DALLAS, TEXAS 75207
                           TELEPHONE: (214) 853-7100
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)
                             ---------------------
                         ROYCE J. HOLLAND, CHAIRMAN AND
                            CHIEF EXECUTIVE OFFICER
                            Allegiance Telecom, Inc.
                             1950 Stemmons Freeway
                                   Suite 3026
                              Dallas, Texas 75207
                           Telephone: (214) 853-7100
           (Name, address, including zip code, and telephone number,
                   including area code, of agent for service)
                                   Copies to:
 
<TABLE>
<S>                                            <C>
             MARK B. TRESNOWSKI                             ANDREW R. SCHLEIDER
              Kirkland & Ellis                              Shearman & Sterling
           200 East Randolph Drive                         599 Lexington Avenue
           Chicago, Illinois 60601                       New York, New York 10022
               (312) 861-2000                                 (212) 848-4000
</TABLE>
 
                             ---------------------
     APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
 
     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box:  [ ]
 
     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [ ]
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
     If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [ ]
 
     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box:  [ ]
 
                        CALCULATION OF REGISTRATION FEE
 
   
<TABLE>
<CAPTION>
==========================================================================================================
                                                       PROPOSED MAXIMUM
             TITLE OF EACH CLASS OF                   AGGREGATE OFFERING               AMOUNT OF
          SECURITIES TO BE REGISTERED                      PRICE(1)              REGISTRATION FEE(1)(2)
----------------------------------------------------------------------------------------------------------
<S>                                              <C>                          <C>
     Senior Notes due 2008......................         $290,000,000                   $85,550
==========================================================================================================
</TABLE>
    
 
(1)  Estimated solely for the purpose of calculating the registration fee
     pursuant to Rule 457(o) under the Securities Act of 1933.
   
(2)  $59,295 of this amount was paid by the Company in connection with the
     filing of this Registration Statement on May 22, 1998.
    
 
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE>   2
 
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
 
PROSPECTUS (Subject to Completion)
   
Issued June 5, 1998
    
   
                                  $290,000,000
    
 
                        [ALLEGIANCE TELECOM, INC. LOGO]
   
                              % SENIOR NOTES DUE 2008
    
                            ------------------------
 
   
                    Interest payable May 15 and November 15
    
                            ------------------------
   
The Notes will be redeemable at the option of the Company, in whole or in part,
at any time on or after May 15, 2003, at the redemption prices set forth herein,
 plus accrued interest, if any, to the date of redemption. In addition, at any
 time prior to May 15, 2001, the Company may redeem up to 35% of the aggregate
  principal amount of the Notes with the proceeds of one or more Public Equity
  Offerings (as defined herein) at the redemption price set forth herein plus
  accrued interest, if any, to the date of redemption; provided, however, that
  after any such redemption at least 65% of the aggregate principal amount of
                  Notes originally issued remains outstanding.
    
   
  On the closing date, the Company will use a portion of the proceeds from the
 offering of the Notes hereby (the "Debt Offering") to purchase a portfolio of
     Pledged Securities (as defined herein), consisting of U.S. government
    securities, that will be pledged as security for the first six scheduled
                        interest payments on the Notes.
    
   
 Concurrent with the Debt Offering, the Company will make a public offering of
 12,000,000 shares of its Common Stock (the "Equity Offering"). The closing of
 the Debt Offering is conditioned upon the closing of the Equity Offering, but
 the closing of the Equity Offering is not conditioned upon the closing of the
                                 Debt Offering.
    
   
    The Notes will be unsubordinated, unsecured (except as described above)
 indebtedness of the Company, will rank pari passu in right of payment with all
 unsubordinated, unsecured indebtedness of the Company, including the Company's
 11 3/4% Senior Discount Notes due 2008, and will be senior in right of payment
  to all subordinated indebtedness of the Company. At March 31, 1998, on a pro
forma basis after giving effect to the Debt Offering, the Company would have had
  approximately $537.3 million of indebtedness outstanding, all of which would
               have been unsubordinated, unsecured indebtedness.
    
                            ------------------------
 
   
     SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR INFORMATION THAT SHOULD BE
                      CONSIDERED BY PROSPECTIVE INVESTORS
    
                            ------------------------
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
                               CRIMINAL OFFENSE.
                            ------------------------
 
                   PRICE      % AND ACCRUED INTEREST, IF ANY
                            ------------------------
 
<TABLE>
<CAPTION>
                                                                 UNDERWRITING
                                  PRICE TO                       DISCOUNTS AND                     PROCEEDS TO
                                  PUBLIC(1)                     COMMISSIONS(2)                    COMPANY(1)(3)
                                  ---------                     --------------                    -------------
<S>                    <C>                              <C>                              <C>
Per Note.............                 %                                %                                %
Total................                 $                                $                                $
</TABLE>
 
------------
    (1) Plus accrued interest, if any, from           , 1998
    (2) The Company has agreed to indemnify the Underwriters against certain
        liabilities, including liabilities under the Securities Act of 1933, as
        amended. See "Underwriters."
   
    (3) Before deducting expenses payable by the Company estimated at $750,000.
    
                            ------------------------
 
    The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about            , 1998 at the office of Morgan Stanley
& Co. Incorporated, New York, N.Y., against payment therefor in immediately
available funds.
                            ------------------------
 
MORGAN STANLEY DEAN WITTER
                  SALOMON SMITH BARNEY
 
                                     DONALDSON, LUFKIN & JENRETTE
                                             Securities Corporation
 
                                                  GOLDMAN, SACHS & CO.
 
          , 1998
<PAGE>   3
 
     NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
                            ------------------------
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Prospectus Summary..........................................     4
Risk Factors................................................    11
Use of Proceeds.............................................    24
Capitalization..............................................    25
Selected Financial Data.....................................    26
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................    29
Business....................................................    35
Management..................................................    54
Certain Relationships and Related Transactions..............    64
Security Ownership of Certain Beneficial Owners and
  Management................................................    65
Description of Certain Indebtedness.........................    66
Description of the Notes....................................    67
Description of Capital Stock................................    93
Certain United States Federal Tax Considerations............    96
ERISA Considerations........................................    99
Underwriters................................................   100
Legal Matters...............................................   100
Experts.....................................................   100
Additional Information......................................   101
Index to Consolidated Financial Statements..................   F-1
</TABLE>
    
 
                            ------------------------
     THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE FEDERAL SECURITIES LAWS. ALL STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS SUBSIDIARIES BELIEVE
THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN
THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS"
HEREIN. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE
TO THE COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS.
                            ------------------------
     CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
 
                                        3
<PAGE>   4
 
                               PROSPECTUS SUMMARY
 
   
     The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references herein to "Allegiance" and the "Company"
refer to Allegiance Telecom, Inc., a Delaware corporation, and its subsidiaries.
Unless otherwise indicated, the information contained in this Prospectus: (i)
gives effect to the Equity Offering, assuming a public offering price of $17.00
per share and assumes no exercise of the underwriters' over-allotment option and
(ii) gives effect to a 426.2953905-for-one stock split of the Company's Common
Stock. Certain information contained in this summary and elsewhere in this
Prospectus, including information under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and information with respect to
the Company's plans and strategy for its business and related financing,
includes forward-looking statements that involve risk and uncertainties.
Prospective investors should carefully consider the factors set forth under
"Risk Factors" and are urged to read this Prospectus in its entirety.
    
 
                                  THE COMPANY
 
     Allegiance Telecom, Inc. seeks to be a premier provider of
telecommunications services to business, government and other institutional
users in major metropolitan areas across the United States. As a competitive
local exchange carrier ("CLEC"), Allegiance anticipates offering an integrated
set of telecommunications products and services including local exchange, local
access, domestic and international long distance, enhanced voice, data and a
full suite of Internet services. The Company was founded in April 1997 by a
management team led by Royce J. Holland, the former president, chief operating
officer and co-founder of MFS Communications Company, Inc. ("MFS"), and Thomas
M. Lord, former managing director of Bear, Stearns & Co. Inc., where he
specialized in the telecommunications, information services and technology
industries. The Company's initial equity financing of approximately $50.1
million has been provided by this management team and Madison Dearborn Capital
Partners, Morgan Stanley Capital Partners, Frontenac Company and Battery
Ventures.
 
     The Company believes that the Telecommunications Act of 1996 (the
"Telecommunications Act"), by opening the local exchange market to competition,
has created an attractive opportunity for new facilities-based CLECs like the
Company. Most importantly, the Telecommunications Act stated that CLECs should
be able to acquire the unbundled network elements ("UNEs") from the incumbent
local exchange carriers ("ILECs"), which are necessary for the cost-effective
provision of service. As such, the Telecommunications Act will enable the
Company to deploy digital switching platforms with local and long distance
capability and initially lease fiber trunking capacity from the ILECs and other
CLECs to connect the Company's switch with its transmission equipment collocated
in ILEC central offices. Thereafter, the Company plans to lease capacity or
overbuild specific network segments as economically justified by traffic volume
growth. Management believes that pursuing this "smart build" approach should:
(i) accelerate market entry by 9 to 18 months by deferring the need for city
franchises, rights-of-way and building access; (ii) reduce initial capital
requirements for individual market entry prior to revenue generation, allowing
the Company to focus its capital resources on the critical areas of sales,
marketing, and operations support systems ("OSS"); (iii) provide for ongoing
capital expenditures on a "success basis" as demand dictates; and (iv) allow the
Company to address attractive service areas selectively throughout its targeted
markets.
 
     Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that it believes will provide the Company with a
significant competitive advantage in terms of cost, processing large order
volumes and customer service. These systems are required to enter, schedule,
provision and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
legacy systems currently employed by many ILECs, CLECs and long distance
carriers, which systems were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it also creates
numerous opportunities for errors in provisioning service and billing, delays in
 
                                        4
<PAGE>   5
 
installing orders, service interruptions, poor customer service, increased
customer churn and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems and costs of upgrading legacy systems are often prohibitive
for companies whose existing systems support a large number of customers with
ongoing service.
 
     Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 basic trading areas ("BTAs")
with more than 20 million non-residential access lines, representing
approximately 44.7% of the total non-residential access lines in the U.S. With a
network deployment and end user, direct sales marketing strategy focusing on the
central business districts and suburban commercial districts in these areas,
Allegiance plans to address a majority of the non-residential access lines in
most of its targeted markets. The Company plans to deploy its networks
principally in two phases of development. The first, or Phase I, is to offer
services in 12 of the largest metropolitan areas in the U.S., which the Company
believes include approximately 26.0% of the nation's total non-residential
access lines. Allegiance is currently operational in three Phase I markets: New
York City, Dallas and Atlanta; and is in the process of deploying networks in
five additional Phase I markets: Chicago, Los Angeles, San Francisco, Boston and
Fort Worth. In each of these markets, the Company will use a Lucent
Technologies, Inc. ("Lucent") Series 5ESS(R)-2000 digital switch, which provides
local and long distance functionality. With the proceeds from the Offerings (as
defined herein), the Company intends to begin network development in its Phase
II markets. These additional 12 markets are estimated to encompass approximately
18.7% of the total non-residential access lines in the U.S. Management expects
to commence network deployment in these cities in 1999, with service anticipated
to begin during 1999 and 2000.
 
   
     As of May 31, 1998, the Company has sold 14,857 lines to 874 customers, of
which 9,015 lines for 521 customers were in service as of such date.
    
 
BUSINESS STRATEGY
 
     To accomplish its goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, the Company has developed an end-user-focused business
strategy designed to achieve significant market penetration and deliver superior
customer care while maximizing operating margins. The key components of this
strategy include the following:
 
     Leverage Proven Management Team. The Company's veteran management team has
extensive experience and past successes in the CLEC industry, and the Company
believes that its ability to combine and draw upon the collective talent and
expertise of its senior management gives it a competitive advantage in the
effective and efficient execution of network deployment, sales, provisioning,
service installation, billing and collection, and customer service functions.
Allegiance's Chairman and Chief Executive Officer, Royce J. Holland, has more
than 25 years of experience in the telecommunications and energy industries,
including as president, chief operating officer, and co-founder of MFS. Under
his leadership, MFS grew from a start-up operation to become the largest CLEC
with approximately $1.1 billion in revenues before its acquisition by WorldCom,
Inc. ("WorldCom") in 1996. Other key Allegiance executives have significant
experience in the critical functions of network operations, sales and marketing,
back office and OSS, finance and regulatory affairs.
 
     Target End Users with Integrated Service Offerings. Allegiance plans to
focus principally on end user customers in the business, government and other
institutional market segments. The majority of these customers are expected to
be small and medium-sized businesses, to which the Company will offer "one-stop
shopping" consisting of a comprehensive package of communications services with
convenient integrated billing and a single point of contact for sales and
service. For large businesses and government and other institutional users,
which typically obtain telecommunications services from a variety of suppliers,
the Company will focus primarily on capturing a significant portion of these
customers' local exchange, intraLATA toll and data traffic. Although the Company
will principally target end-users in markets where it believes it can achieve
significant market penetration by providing superior customer care at
competitive prices, the Company may augment its core business strategy by
selectively supplying wholesale services including equipment collocation and
facilities management services to Internet service providers ("ISPs").
 
                                        5
<PAGE>   6
 
     Offer Data, Internet, and Enhanced Services to Enhance Market Penetration
and Reduce Churn. The Company believes it can accelerate new account penetration
and reduce customer churn by offering Local Area Network ("LAN")
interconnection, frame relay, Internet services, Integrated Services Digital
Network ("ISDN"), Digital Subscriber Line ("DSL"), Web page design, Web server
hosting, and other enhanced services not generally available from the ILECs (or
available only at high prices) in conjunction with traditional local and long
distance services. This strategy has been successfully employed by certain
CLECs, and Allegiance's management team has extensive experience in providing
these types of enhanced services.
 
   
     Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. Allegiance plans to deploy digital switching platforms with
local and long distance capability and initially lease fiber trunking capacity
from the ILECs and other CLECs to connect the Company's switch with its
transmission equipment collocated in ILEC central offices. Thereafter,
Allegiance may evolve its networks to the next stage of the "smart build"
strategy where Allegiance plans to lease dark fiber or overbuild specific
network segments as economically justified by traffic volume growth. Allegiance
expects that this "smart build" strategy will allow entry into a new market in a
six- to nine-month time frame as compared to the 18 to 24 months required to
construct a metropolitan area fiber network under the "build first, sell later"
approach required before the Telecommunications Act established a framework for
CLECs to acquire unbundled network elements. The Company believes that this
"smart build" approach has the additional advantage of reducing up-front capital
requirements. This "smart build" strategy is currently being implemented by the
Company in all its networks where it is leasing high capacity circuits to
connect the ILEC central offices with the Company's switches. In New York City,
the Company is moving to the next stage of its "smart-build" strategy, where the
Company will lease from Metromedia Fiber Network, Inc. ("MFN"), a thirty-mile
dark fiber ring in Manhattan that extends into Brooklyn.
    
 
     Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using Federal Communications Commission ("FCC") and demographic
data. The Company uses this analysis, together with estimates of the costs and
potential benefits of addressing particular service areas, to identify
attractive areas, determine the optimal concentration of areas to be served and
develop its schedule for network deployment and expansion.
 
     Maximize Operating Margins by Emphasizing Facilities-Based
Services. Allegiance believes that facilities-based solutions where the Company
provides local exchange, local access, and long distance using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in areas where it can serve customers through a direct
connection using unbundled loops or high capacity circuits connected to
Allegiance's facilities collocated in ILEC central offices. The Company plans to
resell ILEC services only in order to provide comprehensive geographical service
coverage to customers with multiple on-net sites (which can be addressed by the
Company's facilities-based services) and a few off-net sites (which can be
addressed only by the Company's reselling ILEC services).
 
     Build Market Share by Focusing on Direct Sales. The Company believes that
the key to achieving its goals is the capturing and retaining of customers
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. The Company's sales management team is composed of executives
with experience in managing a large number of direct sales specialists in the
telecommunications and data networking industries. Additionally, the Company
believes it will be able to attract and retain highly qualified sales and
support personnel by offering them the opportunity to: (i) work with an
experienced and success-proven management team in building a developing,
entrepreneurial company; (ii) market a comprehensive set of products and
services and customer care options;
 
                                        6
<PAGE>   7
 
and (iii) participate in the potential economic returns made available through a
results-oriented compensation package emphasizing sales commissions and stock
options.
 
     Develop Efficient Automated Back Office Systems. Unburdened by existing
legacy OSS, Allegiance is focusing on developing, acquiring and integrating back
office systems to facilitate a smooth, efficient order management, provisioning,
trouble management, billing and collection, and customer service process. To
address this critical issue, the Company has hired a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS that
will synchronize multiple tasks such as provisioning, customer service and
billing and provide management with timely operating and financial data to most
efficiently direct network, sales and customer service resources. The Company
intends to work actively toward "electronic bonding" between the Allegiance OSS
and those of the ILEC, which would permit creation of service requests on-line.
Allegiance believes that these back office systems, once developed, will provide
it with a significant competitive advantage in terms of cost, processing large
order volumes and customer service as compared to companies using legacy
systems.
 
     Expand Customer Base Through Potential Acquisitions. The Company believes
that strategic acquisitions may produce a number of benefits, including
acceleration of market penetration, providing a customer base for cross-selling
additional services, acquiring experienced management and improving margins by
migrating resold services to the Company's network facilities.
 
                                 FINANCING PLAN
 
     Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to the point at which such market's operating cash flow is
sufficient to fund its operating costs and capital expenditures ("Positive Free
Cash Flow"). This approach is designed to allow the Company to be opportunistic
and raise capital on favorable terms and conditions.
 
     To pre-fund each Phase I market's expansion to Positive Free Cash Flow, the
Company consummated the following transactions:
 
          (i) the Company received equity contributions (the "Equity
     Contributions") aggregating approximately $50.1 million, of which
     approximately $47.6 million was from affiliates of four private equity
     investment funds with extensive experience in financing telecommunications
     companies (Morgan Stanley Capital Partners, Madison Dearborn Capital
     Partners, Frontenac Company, and Battery Ventures (such affiliates
     collectively, the "Fund Investors")) and approximately $2.5 million was
     from certain members of the Allegiance management team (the "Management
     Investors"); and
 
   
          (ii) the Company received approximately $240.7 million of net
     proceeds, after deducting estimated underwriting discounts and commissions
     and other expenses payable by the Company, from the sale of 445,000 units
     (the "Units"), consisting in the aggregate of $445.0 million principal
     amount at maturity of the Company's 11 3/4% Senior Discount Notes due 2008
     (the "11 3/4% Notes") and 445,000 warrants (the "Warrants") to purchase an
     aggregate of 649,248 shares of Common Stock (the "Unit Offering").
    
 
     Since completion of the Unit Offering, the Company has increased the scope
of its business plan to accommodate (i) an expansion of the Company's network
buildout in certain Phase I markets to include additional central offices,
thereby giving the Company access to a larger number of potential customers in
those markets, (ii) an accelerated and expanded deployment of data, Internet and
enhanced services in the Company's markets and (iii) the acceleration of network
deployment in Phase II markets.
 
     The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million. To finance this modified business plan, the Company intends to
consummate the following transactions:
 
   
          (i) the Company is offering $290.0 million aggregate principal amount
     of   % Senior Notes due 2008 (the "Notes"), of which approximately $88.0
     million will be used to purchase a portfolio of Pledged
    
 
                                        7
<PAGE>   8
 
   
     Securities, consisting of U.S. government securities, that will be pledged
     as security for the first six scheduled interest payments on the Notes; and
    
 
   
          (ii) the Company is offering 12,000,000 shares of its Common Stock
     (the "Equity Offering" and, together with the Debt Offering, the
     "Offerings").
    
 
     The closing of the Debt Offering is conditioned upon the closing of the
Equity Offering.
 
     The Company believes, based on its modified business plan, that the net
proceeds from the Offerings, together with cash on hand (including proceeds from
the Equity Contributions and the Unit Offering) will be sufficient to pre-fund
its Phase I and Phase II market deployment to Positive Free Cash Flow.
 
     The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all. See "Risk Factors -- Significant Capital Requirements; Uncertainty of
Additional Financing" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
 
                              RECENT DEVELOPMENTS
 
     In February 1998, the Company hired C. Daniel Yost to serve as its
President and Chief Operating Officer. Mr. Yost brings to the Company over 26
years of experience in the telecommunications industry, most recently as
President and Chief Operating Officer for U.S. Operations of NETCOM On-Line
Communications Services, Inc., a leading Internet service provider. Mr. Yost
also serves as a member of the Company's Board of Directors.
 
     In March 1998, Reed E. Hundt was elected to the Company's Board of
Directors. Mr. Hundt served as the chairman of the Federal Communications
Commission from 1993 to 1997. See "Management."
 
                                        8
<PAGE>   9
 
                               THE DEBT OFFERING
 
   
Securities Offered.........  $290,000,000 aggregate principal amount of      %
                             Senior Notes due 2008 of the Company.
    
 
   
Maturity...................  May 15, 2008.
    
 
   
Interest...................  Interest on the Notes will be payable semiannually
                             in cash on May 15 and November 15 of each year,
                             commencing November 15, 1998.
    
 
   
Optional Redemption........  The Notes will be redeemable at the option of the
                             Company, in whole or in part, at any time on or
                             after May 15, 2003, at      % of their principal
                             amount, plus accrued interest, declining to 100% of
                             their principal amount, plus accrued interest, on
                             or after May 15, 2006. In addition, prior to May
                             15, 2001, the Company may redeem up to 35% of the
                             aggregate principal amount of the Notes with the
                             proceeds of one or more Public Equity Offerings (as
                             defined herein) at      % of their principal
                             amount, plus accrued interest; provided, however,
                             that after any such redemption at least 65% of the
                             aggregate principal amount of the Notes originally
                             issued remains outstanding. See "Description of the
                             Notes -- Optional Redemption."
    
 
   
Security...................  The indenture pursuant to which the Notes will be
                             issued (the "Indenture") will require the Company
                             to purchase and pledge to the Trustee as security
                             for the benefit of the holders of the Notes, a
                             portfolio of securities (the "Pledged Securities"),
                             consisting of U.S. government securities, in an
                             amount sufficient to provide for the payment in
                             full of the first six scheduled interest payments
                             due on the Notes. The Company expects to use
                             approximately $88.0 million of the net proceeds
                             from the Debt Offering to acquire the Pledged
                             Securities. However, the precise amount of the
                             Pledged Securities to be acquired will depend upon
                             interest rates prevailing on the closing date of
                             the Debt Offering (the "Closing Date"). See
                             "Description of the Notes -- Security."
    
 
   
Change of Control..........  Upon a Change of Control (as defined herein), the
                             Company will be required to make an offer to
                             purchase the Notes at a purchase price equal to
                             101% of their principal amount plus accrued
                             interest. There can be no assurance that the
                             Company will have sufficient funds available at the
                             time of any Change of Control to make any required
                             debt repayment (including repurchases of the
                             Notes). See "Description of the Notes -- Repurchase
                             of Notes upon a Change of Control."
    
 
   
Ranking....................  The Notes will be unsubordinated, unsecured (except
                             as described above under "-- Security")
                             indebtedness of the Company, will rank pari passu
                             in right of payment with all unsubordinated,
                             unsecured indebtedness of the Company, including
                             the 11 3/4% Notes, and will be senior in right of
                             payment to all subordinated indebtedness of the
                             Company. At March 31, 1998, after giving pro forma
                             effect to the Offerings, the Company would have had
                             approximately $537.3 million of indebtedness
                             outstanding, all of which would have been
                             unsubordinated, unsecured indebtedness. See "Risk
                             Factors -- Substantial Leverage; Possible Inability
                             to Service Indebtedness," "-- Holding Company
                             Structure; Structural Subordination of Notes," and
                             "-- Effective Subordination of Notes to Secured
                             Indebtedness."
    
 
   
Certain Covenants..........  The Indenture will contain certain covenants that,
                             among other things, restrict the ability of the
                             Company and its Restricted Subsidiaries (as
    
 
                                        9
<PAGE>   10
 
                             defined herein) to incur additional 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 other restricted
                             payments, sell assets, issue or sell stock of
                             Restricted Subsidiaries, enter into transactions
                             with stockholders or affiliates or effect a
                             consolidation or merger. However, these limitations
                             will be subject to a number of important
                             qualifications and exceptions. See "Risk
                             Factors -- Restrictive Covenants" and "Description
                             of the Notes -- Covenants."
 
Use of Proceeds............  The Company intends to use the net proceeds from
                             the Offerings, together with the proceeds remaining
                             from the Equity Contributions and the Unit
                             Offering, to fund the cost of deploying networks in
                             its remaining Phase I and Phase II markets and the
                             operation of those networks to Positive Free Cash
                             Flow, including the costs to develop, acquire, and
                             integrate the necessary OSS and other back office
                             systems. However, a portion of such proceeds may be
                             used to fund acquisitions or the deployment of
                             networks and operating costs in other markets. See
                             "Use of Proceeds."
 
                                  RISK FACTORS
 
     See "Risk Factors" for a discussion of certain factors relating to the
Company, its business, and an investment in the Notes. Prior to purchasing any
of the Notes offered hereby, prospective purchasers should carefully consider
such risk factors in addition to the other information contained in this
Prospectus.
 
                                       10
<PAGE>   11
 
                                  RISK FACTORS
 
     Prior to purchasing any of the Notes offered hereby, prospective investors
should carefully consider the following risk factors in addition to the other
information contained in this Prospectus.
 
LIMITED HISTORY OF OPERATIONS; HISTORICAL AND ANTICIPATED FUTURE NEGATIVE EBITDA
AND OPERATING LOSSES
 
   
     The Company was formed in April 1997 and has generated operating losses and
negative cash flow from its limited operating activities to date. The Company's
primary activities have consisted of the procurement of governmental
authorizations, the acquisition of equipment and facilities, the hiring of
management and other key personnel, the raising of capital, the development,
acquisition and integration of OSS and other back office systems and the
negotiation of interconnection agreements. As of May 31, 1998, the Company has
sold 14,857 lines to 874 customers, of which 9,015 lines for 521 customers were
in service as of such date. As a result of the Company's limited operating
history, prospective investors have limited operating and financial data about
the Company upon which to base an evaluation of the Company's performance and an
investment in the Notes. The Company's ability to provide "one-stop shopping"
bundled telecommunications services on a widespread basis and to generate
operating profits and positive operating cash flow will depend on its ability,
among other things, to: (i) develop its operational support and other back
office systems; (ii) obtain state authorizations to operate as a CLEC and any
other required governmental authorizations; (iii) attract and retain an adequate
customer base; (iv) raise additional capital; (v) attract and retain qualified
personnel; and (vi) enter into and implement interconnection agreements with
ILECs. See "Business -- Business Strategy." There can be no assurance that it
will be able to achieve any of these objectives, generate sufficient revenues to
make principal and interest payments on the Notes or its other indebtedness or
compete successfully in the telecommunications industry.
    
 
     The development of the Company's business and the deployment of its
services and systems will require significant capital expenditures, a
substantial portion of which will need to be incurred before the realization of
significant revenues. The Company expects to continue to generate negative
earnings before interest, income taxes, depreciation and amortization ("EBITDA")
while it emphasizes development, construction, and expansion of its
telecommunications services business and until the Company establishes a
sufficient revenue-generating customer base. For the three months ended March
31, 1998 and from inception (April 22, 1997) through December 31, 1997, the
Company had operating losses of $5.9 million and $3.8 million, net losses (after
accreting redeemable preferred stock and warrant values) of $13.7 million and
$7.5 million and negative EBITDA of $5.7 million and $3.8 million, respectively.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company expects that each targeted market will generally
produce negative EBITDA for at least two to three years after operations
commence in such market, and the Company expects to experience increasing
operating losses and negative EBITDA as it expands its operations. There can be
no assurance that the Company will achieve or sustain profitability or generate
sufficient EBITDA to meet its working capital and debt service requirements,
which could have a material adverse effect on the Company and its ability to
meet its obligations on the Notes. See "-- Substantial Leverage; Possible
Inability to Service Indebtedness."
 
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
 
     The expansion and development of the Company's business and deployment of
its networks, services and systems will require significant capital to fund
capital expenditures, working capital, debt service and cash flow deficits. The
Company's principal capital expenditure requirements involve the purchase and
installation of collocation equipment, network switches and switch electronics
and network operations center expenditures. The Company estimates, based on its
current business plan, that its aggregate capital requirements (including
requirements to fund capital expenditures, working capital, debt service and
cash flow deficits) to fund the deployment and operation of its networks in all
Phase I and Phase II markets to Positive Free Cash Flow will total between $650
million and $700 million. Actual capital requirements may vary based upon the
timing and success of the Company's implementation of its business plan.
 
                                       11
<PAGE>   12
 
     Since the completion of the Unit Offering, the Company has increased the
scope of its business plan to accommodate (i) an expansion of the Company's
network buildout in certain Phase I markets to include additional central
offices, thereby giving the Company access to a larger number of potential
customers in those markets, (ii) an accelerated and expanded deployment of data,
Internet and enhanced services in the Company's markets and (iii) the
acceleration of network deployment in Phase II markets. The Company believes,
based on its modified business plan, that the net proceeds from the Offerings,
together with cash on hand (including proceeds from the Equity Contributions and
the Unit Offering), will be sufficient to pre-fund its Phase I and Phase II
market deployment to Positive Free Cash Flow.
 
     The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company's revenues and costs are
dependent upon factors that are not within the Company's control, such as
regulatory changes, changes in technology, and increased competition. Due to the
uncertainty of these factors, actual revenues and costs may vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate; (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities.
 
     There can be no assurance that the Company will be successful in raising
sufficient additional capital at all or on terms that it will consider
acceptable, that the terms of additional indebtedness are within the limitations
contained in the Company's financing agreements, including the Indenture and the
indenture relating to the 11 3/4% Notes (the "11 3/4% Notes Indenture"; and,
together with the Indenture, the "Indentures"), or that the terms of such
indebtedness will not impair the Company's ability to develop its business. See
"-- Restrictive Covenants." Failure to raise sufficient funds may require the
Company to modify, delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
 
BUSINESS DEVELOPMENT AND EXPANSION RISKS; POSSIBLE INABILITY TO MANAGE GROWTH
 
     The Company is in the early stages of its operations and has only recently
begun to deploy networks in its first eight target markets. The success of the
Company will depend, among other things, upon the Company's ability to assess
potential markets, obtain required governmental authorizations, franchises and
permits, secure financing, market to, sell and provision new customers,
implement interconnection and collocation with ILEC facilities, lease adequate
trunking capacity from ILECs or other CLECs, purchase and install switches in
additional markets, implement efficient OSS and other back office systems, and
develop a sufficient customer base. The successful implementation of the
Company's business plan will result in rapid expansion of its operations and the
\provision of bundled telecommunications services on a widespread basis. Rapid
expansion of the Company's operations may place a significant strain on the
Company's management, financial and other resources.
 
     The Company's ability to manage future growth, should it occur, will depend
upon its ability to develop efficient OSS and other back office systems, monitor
operations, control costs, maintain regulatory compliance, maintain effective
quality controls and significantly expand the Company's internal management,
technical, information and accounting systems and to attract, assimilate and
retain additional qualified personnel. See "-- Dependence on Key Personnel."
Failure of the Company to manage its future growth effectively could adversely
affect the expansion of the Company's customer base and service offerings. There
can be no assurance that the Company will successfully implement and maintain
such operational and financial systems or successfully obtain, integrate and
utilize the employees and management, operational and financial resources
necessary to manage a developing and expanding business in an evolving, highly
regulated
 
                                       12
<PAGE>   13
 
and increasingly competitive industry. Any failure to expand these areas and to
implement and improve such systems, procedures and controls in an efficient
manner at a pace consistent with the growth of the Company's business could have
a material adverse effect on the Company and its ability to meet its obligations
on the Notes.
 
     If the Company were unable to hire sufficient qualified personnel or
develop, acquire and integrate successfully its operational and information
systems, customers could experience delays in connection of service and/or lower
levels of customer service. Failure by the Company to meet the demands of
customers and to manage the expansion of its business and operations could have
a material adverse effect on the Company and its ability to meet its obligations
on the Notes.
 
DEPENDENCE ON KEY PERSONNEL
 
     The Company is managed by a small number of key executive officers, most
notably Royce J. Holland, the Company's Chairman and Chief Executive Officer.
The loss of services of one or more of these key individuals, particularly Mr.
Holland, could materially and adversely affect the business of the Company and
its prospects. The Company believes that its success will depend in large part
on its ability to develop a large and effective sales force and its ability to
attract and retain highly skilled and qualified personnel. Most of the executive
officers of the Company, including the regional vice presidents of its operating
subsidiaries, do not have employment agreements, and the Company does not
maintain key person life insurance for any of its executive officers. Although
the Company has been successful in attracting and retaining qualified personnel,
the competition for qualified managers in the telecommunications industry is
intense and, accordingly, there can be no assurance that the Company will be
able to hire or retain necessary personnel in the future. The Company and two of
its executives have been named as defendants in a lawsuit by WorldCom relating
to the Company's hiring of certain former WorldCom employees. See
"Business -- Legal Proceedings."
 
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
 
     Sophisticated back office information and processing systems are vital to
the Company's growth and its ability to monitor costs, bill customers, provision
customer orders and achieve operating efficiencies. The Company's plans for the
development and implementation of these OSS rely, for the most part, on choosing
products and services offered by third party vendors and integrating such
products and services in-house to produce efficient operational solutions. There
can be no assurance that these systems will be successfully implemented on a
timely basis or at all or will perform as expected. Failure of these vendors to
deliver proposed products and services in a timely and effective manner and at
acceptable costs, failure of the Company to adequately identify all of its
information and processing needs, failure of the Company's related processing or
information systems, failure of the Company to effectively integrate such
products or services, or the failure of the Company to upgrade systems as
necessary could have a material adverse effect on the Company and its ability to
meet its obligations on the Notes. In addition, the Company's right to use these
systems is dependent upon license agreements with third party vendors. Certain
of such agreements may be cancellable by the vendor and the cancellation or
nonrenewal of these agreements may have an adverse effect on the Company.
 
     While the Company believes that its systems will be year 2000 compliant,
there can be no assurance until the year 2000 occurs that all systems will then
function adequately. Further, if the systems of the ILECs, long distance
carriers and others on whose services the Company depends or with whom the
Company's systems interface are not year 2000 compliant, it could have a
material adverse effect on the Company and its ability to meet its obligations
on the Notes.
 
SUBSTANTIAL LEVERAGE; POSSIBLE INABILITY TO SERVICE INDEBTEDNESS
 
   
     The Company is highly leveraged. The Company's earnings for the three
months ended March 31, 1998 and the period from inception (April 22, 1997)
through December 31, 1997 were insufficient to cover fixed charges by $8.9
million and $3.7 million, respectively. On a pro forma basis, giving effect to
the Unit Offering and the Debt Offering (assuming an 11.0% per annum effective
interest rate on the Notes) and giving effect to
    
 
                                       13
<PAGE>   14
 
   
$179.7 million and $205.1 million of management ownership allocation charge to
be recorded in connection with the Equity Offering, as if such transactions had
occurred on January 1, 1998 and April 22, 1997, the Company's earnings before
fixed charges would have been insufficient to cover its fixed charges by $199.8
million for the three months ended March 31, 1998 and $254.1 million for the
period from inception (April 22, 1997) through December 31, 1997, respectively.
After giving pro forma effect to the Offerings, as of March 31, 1998, the
Company's aggregate outstanding indebtedness would have been $537.3 million and
the Company's stockholders' equity would have been $228.4 million. In addition,
the accretion of original issue discount on the 11 3/4% Notes will cause an
increase in indebtedness of $197.7 million by February 15, 2008. See "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources," and "Description
of the Notes." The Company's leverage will increase upon consummation of the
Debt Offering. The Indentures limit, but do not prohibit, the incurrence of
additional indebtedness by the Company. In particular, the Indentures permit the
Company and its subsidiaries to incur an unlimited amount of indebtedness to
finance the cost of equipment, inventory and network assets. See "-- Restrictive
Covenants."
    
 
     The Company's high degree of leverage could have important consequences to
holders of Notes, including but not limited to: (i) impairing the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes; (ii) requiring the
Company to dedicate a substantial portion of its cash flow from operations to
the payment of principal and interest on its indebtedness, thereby reducing the
funds available to the Company for its operations and other purposes, including
acquisitions and investments in product development and capital spending; (iii)
placing the Company at a competitive disadvantage with those of its competitors
which are not as highly leveraged as the Company; (iv) impairing the Company's
ability to adjust rapidly to changing market conditions; and (v) making the
Company more vulnerable in the event of a downturn in general economic
conditions or in its business or of changing market conditions and regulations.
 
     There can be no assurance that the Company will be able to meet its debt
service obligations. If the Company is unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments, or if the Company
otherwise fails to comply with the various covenants in its debt obligations, it
would be in default under the terms thereof, which would permit the holders of
such indebtedness to accelerate the maturity of such indebtedness and could
cause defaults under other indebtedness of the Company. The Company's ability to
repay or to refinance its obligations with respect to its indebtedness will
depend on its future financial and operating performance, which, in turn, will
be subject to prevailing economic and competitive conditions and to certain
financial, business and other factors, many of which are beyond the Company's
control. These factors could include operating difficulties, increased operating
costs, pricing pressures, the response of competitors, regulatory developments,
and delays in implementing strategic projects.
 
     The successful implementation of the Company's business strategy, including
deployment of its networks and obtaining and retaining a significant number of
customers, and significant and sustained growth in the Company's cash flow are
necessary for the Company to be able to meet its debt service and working
capital requirements. There can be no assurance that the Company will
successfully implement its business strategy, that the anticipated results of
its strategy will be realized, or that the Company will be able to generate
sufficient cash flow from operating activities to meet its debt service
obligations and working capital requirements. See "Business -- Business
Strategy." If the Company's cash flow and capital resources are insufficient to
fund its debt service and working capital obligations, the Company may be forced
to reduce or delay capital expenditures (including switch and network
expenditures), sell assets, or seek to obtain additional equity capital, or to
refinance or restructure its debt. A disposition of assets in order to make up
for any shortfall in the payments due on the Company's indebtedness could take
place under circumstances that might not be favorable to realizing the highest
price for such assets. There can be no assurance that the Company's cash flow
and capital resources will be sufficient for payment of principal of, and
premium, if any, and interest on, its indebtedness (including the Notes) in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its debt service and working capital obligations.
 
                                       14
<PAGE>   15
 
CONTROL BY FUND INVESTORS; POTENTIAL CONFLICTS OF INTEREST
 
   
     The Fund Investors, through their significant equity ownership, have the
ability to control the direction and future operations of the Company. See
"Management -- Election of Directors; Voting Agreement," "Security Ownership of
Certain Beneficial Owners and Management" and "Certain Relationships and Related
Transactions." Certain decisions concerning the operations or financial
structure of the Company may present conflicts of interest between the Fund
Investors and Management Investors and the holders of the Notes. For example, if
the Company encounters financial difficulties or is unable to pay its debts as
they mature, the interest of these investors may conflict with those of the
holders of Notes. In addition, these investors may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment in the Company, even though such
transactions might involve increased risk to the holders of the Notes. In
addition to their investments in the Company, the Fund Investors or their
affiliates currently have significant investments in other telecommunications
companies and may in the future invest in other entities engaged in the
telecommunications business or in related businesses (including entities engaged
in business in areas in which the Company operates). As a result, these
investors have, and may develop, relationships with businesses that are or may
be competitive with the Company. Conflicts may also arise in the negotiation or
enforcement of arrangements entered into by the Company and entities in which
these investors have an interest. In addition, the Company and these investors
have agreed that such investors are under no obligation to bring to the Company
any investment or business opportunities of which they become aware, even if
such opportunities are within the scope and objectives of the Company. Royce J.
Holland, the Company's Chairman and Chief Executive Officer also has an
investment in, and serves on the board of directors of WNP Communications, Inc.,
which will operate in certain of the Company's target markets.
    
 
HOLDING COMPANY STRUCTURE; STRUCTURAL SUBORDINATION OF NOTES
 
     The Company is a holding company and its principal assets consist of the
common stock of its operating subsidiaries. The Company will rely upon dividends
and other payments from its subsidiaries to generate the funds necessary to meet
its obligations, including the payment of principal of and interest on the
Notes. The subsidiaries, however, are legally distinct from the Company and such
subsidiaries will have no obligation, contingent or otherwise, to pay amounts
due pursuant to the Notes or to make funds available for such payment. The
Company's subsidiaries will not guarantee the Notes. The ability of the
Company's subsidiaries to make such payments to the Company will be subject to,
among other things, the availability of funds, the terms of such subsidiaries'
indebtedness and applicable state laws. Claims of creditors of the Company's
subsidiaries, including trade creditors, will generally have priority as to the
assets of such subsidiaries over the claims of the holders of the Company's
indebtedness, including the Notes. Accordingly, the Notes will be effectively
subordinated to the liabilities (including trade payables) of the subsidiaries
of the Company.
 
EFFECTIVE SUBORDINATION OF NOTES TO SECURED INDEBTEDNESS
 
   
     Except as described under "Description of the Notes -- Security," the Notes
will not be secured by any of the Company's or its subsidiaries' assets. The
Indentures do not limit the amount of indebtedness the Company may incur to
finance the acquisition of inventory, equipment or network assets and permit the
Company to secure such indebtedness. The Indentures also permit the Company to
incur up to $100 million of unsubordinated indebtedness and to secure such
indebtedness. See "Description of Certain Indebtedness" and "Description of the
Notes -- Covenants." In the event that a default were to occur with respect to
any of the Company's secured indebtedness and the holders thereof were to
foreclose on the collateral, or in the event of a bankruptcy, liquidation or
reorganization of the Company, the holders of such indebtedness would be
entitled to payment out of the proceeds of their collateral prior to any holders
of general unsecured indebtedness, including the Notes, notwithstanding the
existence of an event of default with respect to the Notes. Also, to the extent
that the value of such collateral is insufficient to satisfy such secured
indebtedness, holders of amounts remaining outstanding on such secured
indebtedness would be entitled to share pari passu with holders of the Notes
with respect to any other assets of the Company. Such assets may not be
sufficient to pay amounts due on any or all of the Notes then outstanding.
    
 
                                       15
<PAGE>   16
 
RESTRICTIVE COVENANTS
 
     The Indentures and the agreements entered into in connection with the
Equity Contributions contain a number of covenants that will limit the
discretion of the Company's management with respect to certain business matters.
These covenants, among other things, restrict the ability of the Company 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. See "Certain Relationships
and Related Transactions," "Description of Certain Indebtedness," and
"Description of the Notes."
 
     A failure to comply with the covenants and restrictions contained in the
Indentures or agreements relating to any subsequent financing could result in an
event of default under such agreements which could permit acceleration of the
related debt and acceleration of debt under other debt agreements that may
contain cross-acceleration or cross-default provisions, and the commitments of
the lenders to make further extensions under such other agreements could be
terminated.
 
DIFFICULTIES IN IMPLEMENTING LOCAL AND ENHANCED SERVICES
 
     The Company has begun, and plans to continue, to deploy high capacity
digital switches in the cities in which it will operate networks and plans
initially to rely on ILEC or CLEC facilities for certain aspects of
transmission. Subject to obtaining interconnection, this will enable the Company
to offer a variety of switched access services, enhanced services and local dial
tone. Although under the Telecommunications Act the ILECs will be required to
unbundle network elements and permit the Company to purchase only the
origination and termination services it needs, thereby decreasing operating
expenses, there can be no assurance that such unbundling will be effected in a
timely manner and result in prices favorable to the Company. In addition, the
Company's ability to implement successfully its switched and enhanced services
will require the negotiation of resale agreements with ILECs and other CLECs and
the negotiation of interconnection and collocation agreements with ILECs, which
can take considerable time, effort and expense and are subject to federal, state
and local regulation.
 
     In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act (the "Interconnection
Decision"). The Interconnection Decision establishes rules for negotiating
interconnection agreements and guidelines for review of such agreements by state
public utilities commissions. On July 18, 1997, the United States Court of
Appeals for the Eighth Circuit (the "Eighth Circuit") vacated certain portions
of the Interconnection Decision, including provisions establishing a pricing
methodology for unbundled network elements and a procedure permitting new
entrants to "pick and choose" among various provisions of existing
interconnection agreements between ILECs and their competitors. On October 14,
1997, the Eighth Circuit issued a decision vacating additional FCC rules that
will likely have the effect of increasing the cost of obtaining the use of
combinations of an ILEC's unbundled network elements. The Eighth Circuit
decisions create uncertainty about the rules governing pricing, terms and
conditions of interconnection agreements, and could make negotiating and
enforcing such agreements more difficult and protracted and may require
renegotiation of existing agreements. See "-- Competition." The Supreme Court
has granted a writ of certiorari to review the Eighth Circuit decisions.
 
     Many new carriers have experienced difficulties in working with the ILECs
with respect to provisioning, interconnection, collocation and implementing the
systems used by these new carriers to order and receive unbundled network
elements and wholesale services from the ILECs. Coordination with ILECs is
necessary for new carriers such as the Company to provide local service to
customers on a timely and competitive basis. The Telecommunications Act created
incentives for regional Bell operating companies ("RBOCs") to cooperate with new
carriers and permit access to their facilities by denying the RBOCs the ability
to provide in-region long distance services until they have satisfied statutory
conditions designed to open their local markets to competition. A federal
District Court has recently held these provisions of the Telecommunications Act
unconstitutional, which decision is subject to appeal. See "-- Government
Regulation." The RBOCs in the Company's markets are not yet permitted by the FCC
to offer long distance services and there can be no assurance that these RBOCs
will be accommodating to the Company once they are permitted to offer long
distance service. If the Company is unable to obtain the cooperation of a RBOC
in a region, whether or not
 
                                       16
<PAGE>   17
 
such RBOC has been authorized to offer long distance service, the Company's
ability to offer local services in such region on a timely and cost-effective
basis would be adversely affected.
 
     A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its May 16, 1997 access
charge reform order, that calls to ISPs should be exempt from interstate access
charges and should be governed by local exchange tariffs. Under the Eighth
Circuit decisions, however, the states have primary jurisdiction over the
determination of reciprocal compensation arrangements and as a result, the
treatment of this issue can vary from state to state. Currently, the state
commissions in Delaware, Maryland, Missouri, New York, North Carolina, Oklahoma,
Pennsylvania, Virginia, Arizona, Connecticut, Colorado, Illinois, Michigan,
Minnesota, Oregon, Washington, West Virginia and Texas have ruled that
reciprocal compensation arrangements do apply to ISP traffic. However, the Texas
Public Utility Commission indicated that it would examine in the near future
whether per-minute compensation is the best way to handle Internet traffic in
future contracts. Disputes over the appropriate treatment of ISP traffic are
pending in California, Georgia and Massachusetts. The National Association of
Regulatory Utility Commissioners ("NARUC") adopted a resolution in favor of
reciprocal compensation for ISP traffic. The Company anticipates that ISPs will
be among its target customers, and adverse decisions in these proceedings could
limit the Company's ability to serve this group of customers profitably.
 
     The profitability of the Company's Internet access services, and related
services such as Web site hosting, may be affected by its ability to obtain
"peering" arrangements with ISPs. In recent years, major ISPs routinely
exchanged traffic with other ISPs that met certain technical criteria on a
"peering" basis, meaning that each ISP accepted traffic routed to Internet
addresses on its system from its "peers" on a reciprocal basis, without payment
of compensation. In 1997, however, UUNET Technologies, Inc. ("UUNET"), the
largest ISP, announced that it intends to greatly restrict its use of peering
arrangements with other providers, and would impose charges for accepting
traffic from providers other than its "peers." Other major ISPs have reportedly
adopted similar policies. There can be no assurance that the Company will be
able to negotiate "peer" status with any of the major nationwide ISPs, or that
it will be able to terminate traffic on ISPs' networks at favorable prices. In
addition, the pending merger between WorldCom (UUNET's parent) and MCI (another
major ISP) is expected to increase the concentration of market power for ISP
backbone services, and may adversely affect the Company's ability to obtain
favorable peering terms.
 
     The Company is a recent entrant into the newly created competitive local
telecommunications services industry. The local dial tone services market in
most states was only recently opened to competition due to the passage of the
Telecommunications Act and related regulatory rulings. There are numerous
operating complexities associated with providing these services. The Company
will be required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services.
 
     The Company's switched services may not be profitable due to, among other
factors, lack of customer demand, inability to secure access to ILEC facilities
on acceptable terms, and competition and pricing pressure from the ILECs and
other CLECs. There can be no assurance that the Company will be able to
successfully implement its switched and enhanced services strategy.
 
     Implementation of the Company's switched and enhanced services is also
dependent upon equipment manufacturers' ability to meet the Company's switch
deployment schedule. There can be no assurance that switches will be deployed on
the schedule contemplated by the Company or that, if deployed, such switches
will be utilized to the degree contemplated by the Company.
 
DEPENDENCE ON LEASED TRUNKING CAPACITY; FUTURE NEED TO OBTAIN PERMITS,
RIGHTS-OF-WAY, AND OTHER THIRD-PARTY AGREEMENTS
 
     Under the Company's "smart build" strategy, the Company will initially seek
to lease from ILECs and other CLECs local fiber trunking capacity connecting the
Allegiance switch to particular ILEC central offices and then replace this
leased trunk capacity in the future with its own fiber on a "success basis" as
warranted by traffic volume growth. There can be no assurance that all such
required trunking capacity will be available to the Company on a timely basis or
on terms acceptable to the Company. The failure to obtain such leased fiber
 
                                       17
<PAGE>   18
 
could delay the Company's ability to penetrate certain market areas or require
it to make additional unexpected up-front capital expenditures to install its
own fiber and could have a material adverse effect on the Company and its
ability to meet its obligations on the Notes. If and when the Company seeks to
install its own fiber, the Company must obtain local franchises and other
permits, as well as rights-of-way to utilize underground conduit and aerial pole
space and other rights-of-way from entities such as ILECs and other utilities,
railroads, long distance companies, state highway authorities, local governments
and transit authorities. There can be no assurance that the Company will be able
to obtain and maintain the franchises, permits and rights needed to implement
its network buildout on acceptable terms. The failure to enter into and maintain
any such required arrangements for a particular network may affect the Company's
ability to develop that network and may have a material adverse effect on the
Company. See "Business -- Network Architecture."
 
RISKS RELATING TO LONG DISTANCE BUSINESS
 
     As part of its "one-stop shopping" offering of bundled telecommunications
services to its customers, the Company plans to offer long distance services to
its customers. The long distance business is extremely competitive and prices
have declined substantially in recent years and are expected to continue to
decline. In addition, the long distance industry has historically had a high
average churn rate, as customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. The Company will initially rely on other carriers to provide
transmission and termination services for all of its long distance traffic. The
Company will need resale agreements with long distance carriers to provide it
with transmission services. Such agreements typically provide for the resale of
long distance services on a per-minute basis and may contain minimum volume
commitments. Negotiation of these agreements involves estimates of future supply
and demand for transmission capacity as well as estimates of the calling pattern
and traffic levels of the Company's future customers. In the event the Company
fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means.
 
COMPETITION
 
     The telecommunications industry is highly competitive. In each of the
markets targeted by the Company, the Company will compete principally with the
ILEC serving that area. ILECs are established providers of local telephone
services to all or virtually all telephone subscribers within their respective
service areas. ILECs also have long-standing relationships with regulatory
authorities at the federal and state levels. While some FCC and state
administrative decisions and initiatives provide business opportunities to
telecommunications providers such as the Company, they also provide the ILECs
with increased pricing flexibility for their private line and special access and
switched access services. In addition, with respect to competitive access
services (as opposed to switched local exchange services), the FCC recently
proposed a rule that would provide for increased ILEC pricing flexibility and
deregulation for such access services either automatically or after certain
competitive levels are reached. If the ILECs 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, ILEC
competitors such as the Company could be materially adversely affected. If
future regulatory decisions afford the ILECs increased access services pricing
flexibility or other regulatory relief, such decisions could also have a
material adverse effect on ILEC competitors such as the Company.
 
     The Company also faces, and expects to continue to face, competition 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 Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint
Corporation ("Sprint"), and WorldCom, and from other CLECs, resellers,
competitive access providers ("CAPs"), 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 to the Company. The
Company also competes with
 
                                       18
<PAGE>   19
 
equipment vendors and installers, and telecommunications management companies
with respect to certain portions of its business. Many of the Company's current
and potential competitors have financial, technical, marketing, personnel and
other resources, including brand name recognition, substantially greater than
those of the Company, as well as other competitive advantages over the Company.
 
     The Telecommunications Act includes provisions which impose certain
regulatory requirements on all local exchange carriers, including ILEC
competitors such as the Company, while granting the FCC expanded authority to
reduce the level of regulation applicable to any or all telecommunications
carriers, including ILECs. The manner in which these provisions of the
Telecommunications Act are implemented and enforced could have a material
adverse effect on the Company's ability to successfully compete against ILECs
and other telecommunications service providers.
 
     As a recent entrant in the integrated telecommunications services industry,
the Company has not achieved and does not expect to achieve a significant market
share for any of its services. In particular, the ILECs have long-standing
relationships with their customers, have financial, technical, marketing,
personnel and other resources substantially greater than those of the Company,
have the potential to subsidize competitive services with revenues from a
variety of businesses and currently benefit from existing regulations that favor
the ILECs over the Company in certain respects. Certain federal and state laws
and regulations that allow CLECs such as the Company to interconnect with ILEC
facilities, provide increased business opportunities for the Company. However,
such interconnection opportunities have been accompanied by increased pricing
flexibility for and relaxation of regulatory oversight of the ILECs.
 
     To the extent the Company interconnects with and uses ILEC networks to
service its customers, the Company will be dependent upon the technology and
capabilities of the ILECs to meet certain telecommunications needs of the
Company's customers and to maintain its service standards, and the Company must
interface with the ILECs' legacy OSS in order to properly provision new
customers. The Telecommunications Act imposes interconnection obligations on
ILECs, but there can be no assurance that the Company will be able to obtain the
interconnection it requires at rates, and on terms and conditions, that permit
the Company to offer switched services that are both competitive and profitable.
See "-- Difficulties in Implementing Local and Enhanced Services." In the event
that the Company experiences difficulties in obtaining high quality, reliable
and reasonably priced services from the ILECs, the attractiveness of the
Company's services to its customers could be impaired.
 
     The long distance telecommunications market has numerous entities competing
for the same customers and a high average churn 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. The
Company will face competition from large carriers such as AT&T, MCI, Sprint, and
WorldCom. Other competitors are likely to include RBOCs providing out-of-region
(and, with the removal of regulatory barriers, in-region) long distance
services, other CLECs, microwave and satellite carriers and private networks
owned by large end users. See "-- Government Regulation." The Company may also
increasingly face competition from companies offering long distance data and
voice services over the Internet. Such companies could enjoy a significant cost
advantage because they do not currently pay carrier access charges or universal
service fees.
 
     The Internet services market is highly competitive and the Company expects
that competition will continue to intensify. The Company's competitors in this
market include ISPs, other telecommunications companies, online services
providers and Internet software providers. Many of these competitors have
greater financial, technological, marketing, personnel and other resources than
those available to the Company.
 
     The Company believes that the principal competitive factors affecting its
business operations are pricing levels and clear pricing policies, reliable
customer service, accurate billing and, to a lesser extent, variety of services.
The ability of the Company to compete effectively will depend upon its continued
ability to maintain high quality, market-driven services at prices generally
equal to or below those charged by its competitors. To maintain its competitive
posture, the Company believes that it must be in a position to reduce its prices
in order to meet reductions in rates, if any, offered by others. Any such
reductions could adversely affect the Company.
 
                                       19
<PAGE>   20
 
     The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by the
Company. Under this agreement, the United States and 72 other members of the WTO
committed themselves to opening their respective telecommunications markets
and/or foreign ownership and/or to adopting regulatory measures to protect
competitors against anticompetitive behavior by dominant telecommunications
companies, effective in some cases as early as January 1998. There can be no
assurance that the pro-competitive effects of the WTO agreement will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."
 
     A continuing trend toward consolidation, mergers, acquisitions and
strategic alliances in the telecommunications industry could also increase the
level of competition faced by the Company. For example, WorldCom acquired MFS in
December 1996, has recently acquired another CLEC, Brooks Fiber Properties,
Inc., and has a pending agreement to merge with MCI. In January 1998, AT&T
announced its intention to acquire Teleport Communications Group Inc. In May
1998, SBC Communications Inc. and Ameritech Corporation agreed to merge. These
types of consolidations and alliances could put the Company at a competitive
disadvantage.
 
GOVERNMENT REGULATION
 
     The Company's 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 have a material adverse effect upon
the Company and its ability to meet its obligations on the Notes.
 
     The FCC exercises jurisdiction over the Company with respect to interstate
and international services. Additionally, the Company files tariffs with the
FCC. On October 29, 1996, the FCC approved an order that eliminates the tariff
filing requirements for interstate domestic long distance service provided by
non-dominant carriers such as the Company. On February 13, 1997, the United
States Court of Appeals for the District of Columbia Circuit stayed the FCC
order, and the Company is required to continue filing tariffs while this stay
remains in effect. If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms, and conditions on which they offer interstate
services. While tariffs offered a means of providing notice of prices, terms,
and conditions, the Company intends to rely primarily on its sales force and
direct marketing to provide such information to its customers. In addition, the
Company must obtain (and has obtained through its subsidiary, Allegiance Telecom
International, Inc.) prior FCC authorization for installation and operation of
international facilities and the provision (including resale) of international
long distance services.
 
     State regulatory commissions exercise jurisdiction over the Company to the
extent it provides intrastate services. As such a provider, the Company is
required to obtain regulatory authorization and/or file tariffs at state
agencies in most of the states in which it operates. If and when the Company
seeks to overbuild certain network segments, local authorities regulate the
Company's access to municipal rights-of-way. Network buildouts are 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. See
"Business -- Regulation."
 
     There can be no assurance that the FCC or state commissions will grant
required authority or refrain from taking action against the Company if it is
found to have provided services without obtaining the necessary authorizations.
If authority is not obtained or if tariffs are not filed, or are not updated, or
otherwise do not fully comply with the tariff filing rules of the FCC or state
regulatory agencies, third parties or regulators could challenge these actions.
Such challenges could cause the Company to incur substantial legal and
administrative expenses.
 
     The Telecommunications Act provides for a significant deregulation of the
domestic telecommunications industry, including the local exchange, long
distance and cable television industries. The Telecommunications Act remains
subject to judicial review and additional FCC rulemaking, and thus it is
difficult to predict what effect the legislation will have on the Company and
its operations. There are currently many regulatory actions
 
                                       20
<PAGE>   21
 
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. There can
be no assurance that these changes will not have a material adverse effect upon
the Company.
 
     On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued a decision (the "SBC Decision") finding that Sections 271 to 275 of
the Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The SBC
Decision has been stayed while an appeal is pending before the United States
Court of Appeals for the Fifth Circuit. The Company cannot predict the likely
outcome of that appeal, although on May 15, 1998, the Court of Appeals for the
District of Columbia Circuit rejected a very similar challenge to the
constitutionality of Section 274 of the Telecommunications Act. If the SBC
Decision is upheld on appeal, however, the RBOCs would be able to provide such
in-region services immediately without satisfying the statutory conditions. This
would likely have an unfavorable effect on the Company's business for at least
two reasons. First, the SBC Decision removes the incentive RBOCs have to
cooperate with companies like Allegiance to foster competition within their
service areas so that they can qualify to offer in-region interLATA services
because the decision allows RBOCs to offer such services immediately. However,
the SBC Decision does not affect other provisions of the Telecommunications Act
which create legal obligations for all ILECs to offer interconnection and
network access. Second, the Company is legally able to offer its customers both
long distance and local exchange services, which the RBOCs currently may not do.
This ability to offer "one-stop shopping" gives the Company a marketing
advantage that it would no longer enjoy if the SBC Decision were upheld on
appeal.
 
     In addition to requirements placed on ILECs, the Telecommunications Act
subjects the Company to certain federal regulatory requirements relating to the
provision of local exchange service in a market. All ILECs and CLECs must
interconnect with other carriers, provide nondiscriminatory access to
rights-of-way, offer reciprocal compensation for termination of traffic, and
provide dialing parity and telephone number portability. The Telecommunications
Act also requires all telecommunications carriers to ensure that their services
are accessible to and usable by persons with disabilities.
 
     On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400.0 million. The FCC also expanded the federal subsidies for local exchange
telephone service provided to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end-user revenues. Currently, the FCC is assessing such payments on the basis of
a provider's revenue for the previous year; since the Company had no significant
revenues in 1997, it will not be liable for subsidy payments in any material
amount during 1998. With respect to subsequent years, however, the Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make and the effect that these required payments will have on its
financial condition. In the May 8th order, the FCC also announced that it will
soon revise its rules for subsidizing service provided to consumers in high cost
areas, which may result in further substantial increases in the overall cost of
the subsidy program. Several parties have appealed the May 8th order. Such
appeals have been consolidated and transferred to the United States Court of
Appeals for the Fifth Circuit where they are currently pending. In addition, on
July 3, 1997, several ILECs filed a petition for stay of the May 8th order with
the FCC. That petition is pending, as well as several petitions for
administrative reconsideration of the order.
 
     To the extent the Company provides interexchange telecommunications
service, it is required to pay access charges to ILECs when it uses the
facilities of those companies to originate or terminate interexchange calls.
Also, as a CLEC, the Company provides access services to other interexchange
service providers. The interstate access charges of ILECs are subject to
extensive regulation by the FCC, while those of CLECs are subject to a lesser
degree of FCC regulation but remain subject to the requirement that all charges
be just, reasonable, and not unreasonably discriminatory. In two orders released
on December 24, 1996, and May 16, 1997, the FCC made major changes in the
interstate access charge structure. In the December 24th order, the FCC removed
restrictions on ILECs' ability to lower access prices and relaxed the regulation
of new switched access services in those markets where there are other providers
of access services. If this increased pricing
 
                                       21
<PAGE>   22
 
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 16th order substantially increased the costs
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through monthly, non-traffic-sensitive access charges and substantially
decreased the costs that price cap LECs recover through traffic-sensitive access
charges. In the May 16th order, the FCC also announced its plan to bring
interstate access rate levels more in line with cost. The plan will include
rules that are expected to be established sometime in 1998 that may grant price
cap LECs increased pricing flexibility upon demonstrations of increased
competition (or potential competition) in relevant markets. The manner in which
the FCC implements this approach to lowering access charge levels could have a
material effect on the Company's ability to compete in providing interstate
access services. Several parties have appealed the May 16th order. Those appeals
have been consolidated and transferred to the United States Court of Appeals for
the Eighth Circuit where they are currently pending.
 
NEED TO ADAPT TO TECHNOLOGICAL CHANGE
 
     The telecommunications industry is subject to rapid and significant changes
in technology, with the Company relying on third parties for the development of
and access to new technology. The effect of technological changes on the
business of the Company cannot be predicted. The Company believes its future
success will depend, in part, on its ability to anticipate or adapt to such
changes and to offer, on a timely basis, services that meet customer demands.
There can be no assurance that the Company will obtain access to new technology
on a timely basis or on satisfactory terms. Any failure by the Company to obtain
new technology could have a material adverse effect on the Company.
 
ACQUISITION RELATED RISKS
 
     The Company may, as part of its business strategy, acquire other businesses
that will complement its existing business. Management is unable to predict
whether or when any prospective acquisitions will occur or the likelihood of a
material transaction being completed on favorable terms and conditions. The
Company's ability to finance acquisitions may be constrained by, among other
things, its high degree of leverage. The Indentures may significantly limit the
Company's ability to make acquisitions and to incur indebtedness in connection
with acquisitions. Such transactions commonly involve certain risks, including,
among others: the difficulty of assimilating the acquired operations and
personnel; the potential disruption of the Company's ongoing business and
diversion of resources and management time; the possible inability of management
to maintain uniform standards, controls, procedures and policies; the risks of
entering markets in which the Company has little or no direct prior experience;
and the potential impairment of relationships with employees or customers as a
result of changes in management. There can be no assurance that any acquisition
will be made, that the Company will be able to obtain additional financing
needed to finance such acquisitions and, if any acquisitions are so made, that
the acquired business will be successfully integrated into the Company's
operations or that the acquired business will perform as expected. The Company
has no definitive agreement with respect to any acquisition, although from time
to time it has discussions with other companies and assesses opportunities on an
ongoing basis.
 
     The Company may also enter into joint venture transactions. These
transactions present many of the same risks involved in acquisitions and may
also involve the risk that other joint venture partners may have economic,
business or legal interests or objectives that are inconsistent with those of
the Company. Joint venture partners may also be unable to meet their economic or
other obligations, thereby forcing the Company to fulfill these obligations.
 
INVESTMENT COMPANY ACT CONSIDERATIONS
 
     After giving effect to the Unit Offering and the Offerings, the Company
will have substantial short-term investments. See "Capitalization" and "Use of
Proceeds." This may result in the Company being treated as an "investment
company" under the Investment Company Act of 1940 (the "1940 Act"). The 1940 Act
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily in,
 
                                       22
<PAGE>   23
 
the business of investing, reinvesting or trading in securities, or that fail
certain statistical tests regarding composition of assets and sources of income
and are not primarily engaged in businesses other than investing, reinvesting,
owning, holding or trading securities.
 
     The Company believes that it is primarily engaged in a business other than
investing, reinvesting, owning, holding or trading securities and, therefore, is
not an investment company within the meaning of the 1940 Act. If the Company is
found to be an investment company, the Company currently intends to rely upon a
safeharbor from the 1940 Act for certain "transient" or temporary investment
companies. However, such exemption is only available to the Company for one year
and this one-year period may terminate as soon as January 1999.
 
     If the Company were required to register as an investment company under the
1940 Act, it would become subject to substantial regulation with respect to its
capital structure, management, operations, transactions with affiliated persons
(as defined in the 1940 Act) and other matters. To avoid having to register as
an investment company, beginning in as early as January 1999, the Company may
have to invest a portion of its liquid assets in cash and demand deposits
instead of securities. The extent to which the Company will have to do so will
depend on the composition and value of the Company's total assets at that time.
Having to register as an investment company under the 1940 Act or having to
invest a material portion of the Company's liquid assets in cash and demand
deposits to avoid such registration, would have a material adverse effect on the
Company's business, financial condition and results of operations.
 
ABSENCE OF A PUBLIC MARKET
 
     The Notes constitute a new issue of securities for which there presently is
no active trading market and none may develop. If the Notes are traded after
their initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities, the financial condition and prospects of the Company and other
factors beyond the control of the Company, including general economic
conditions. Although the Underwriters (other than Morgan Stanley & Co.
Incorporated) have informed the Company that they currently intend to make a
market in the Notes, the Underwriters are not obligated to do so and any such
market-making may be discontinued at any time without notice at the sole
discretion of the Underwriters. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes. See "Underwriters."
 
   
RISKS REGARDING FORWARD-LOOKING STATEMENTS
    
 
     This Prospectus contains "forward-looking statements", which generally can
be identified by the use of forward-looking terminology such as "believes",
"expects", "may", "will", "should", or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussion of strategy
that involve risks and uncertainties. Management wishes to caution the reader
that these forward-looking statements, such as the Company's plans and
strategies, its anticipation of revenues from designated markets, and statements
regarding the development of the Company's businesses, the markets for the
Company's services and products, the Company's anticipated capital expenditures,
possible changes in regulatory requirements and other statements contained
herein regarding matters that are not historical facts, are only predictions and
estimates regarding future events and circumstances. Cautionary statements are
disclosed in this Prospectus, including, without limitation, in connection with
the forward-looking statements included herein and under "Risk Factors." No
assurance can be given that the future results will be achieved; actual events
or results may differ materially as a result of risks facing the Company. Such
risks include, but are not limited to, the Company's ability to successfully
market its services to current and new customers, interconnect with ILECs,
develop efficient OSS and other back office systems, provision new customers,
access markets, identify, finance and complete suitable acquisitions, install
facilities, including switching electronics, and obtain leased trunking
capacity, rights-of-way, building access rights and any required governmental
authorizations, franchises and permits, all in a timely manner, at reasonable
costs and on satisfactory terms and conditions, as well as regulatory,
legislative and judicial developments that could cause actual results to differ
materially from the future results indicated, expressed or implied, in such
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to the Company
 
                                       23
<PAGE>   24
 
or persons acting on its behalf are expressly qualified in their entirety by
such cautionary statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their dates. The
Company undertakes no obligations to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
 
                                USE OF PROCEEDS
 
   
     The net proceeds to the Company from the Debt Offering are estimated to be
approximately $279.8 million, after deducting estimated underwriting discounts
and commissions and other expenses payable by the Company. The net proceeds to
the Company from the Equity Offering are estimated to be approximately $189.5
million (approximately $218.0 million if the underwriters' over-allotment option
is exercised in full), assuming a public offering price of $17.00 per share,
after deducting estimated underwriting discounts and commissions and other
expenses payable by the Company.
    
 
   
     The Company intends to use the net proceeds from the Offerings, together
with the remaining proceeds from the Equity Contributions and the Unit Offering,
to fund the costs of deploying networks in all 24 Phase I and Phase II markets
and the operation of those networks to Positive Free Cash Flow, including the
costs to develop, acquire and integrate the necessary OSS and other back office
systems. The Company's principal capital expenditure requirements include the
purchase and installation of digital switches, transmission equipment collocated
in ILEC central offices, customer premise equipment, and the overbuilding of
leased transmission facilities as traffic volume growth makes it economically
attractive. In addition, on the Closing Date, the Company will use approximately
$88.0 million of the net proceeds from the Debt Offering to purchase the Pledged
Securities, consisting of U.S. government securities. The Pledged Securities
will be pledged to the Trustee as security for the benefit of the holders of the
Notes and will be used to fund the first six scheduled payments of interest on
the Notes. See "Description of the Notes -- Security." The precise amount of
proceeds to be used to purchase the Pledged Securities will depend on the
interest rates on U.S. government securities prevailing on the Closing Date. The
Trustee will hold the Pledged Securities pursuant to a pledge agreement pending
disbursement.
    
 
     As part of its strategy, the Company may make acquisitions and enter into
joint ventures, and a portion of the net proceeds from the Offerings may be used
for such purposes. The Company has no definitive agreement with respect to any
acquisition or joint venture, although from time to time it has discussions with
other companies and assesses opportunities on an ongoing basis. The Company may
require additional financing to complete its Phase I and Phase II market
buildout (or require financing sooner than anticipated) if: (i) the Company's
development plans or projections change or prove to be inaccurate; (ii) the
Company engages in any acquisitions; or (iii) the Company alters the schedule or
targets of its roll-out plan. There can be no assurance that such additional
financing will be available on terms acceptable to the Company or at all. See
"Prospectus Summary -- Financing Plan," "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
 
                                       24
<PAGE>   25
 
                                 CAPITALIZATION
 
   
     The following table sets forth the cash and capitalization of the Company
as of March 31, 1998, and as adjusted to give effect to the sale of Common Stock
in the Equity Offering (based on an assumed public offering price of $17.00 per
share) and the sale of Notes in the Debt Offering. The closing of the Debt
Offering is conditioned upon the closing of the Equity Offering. This table
should be read in conjunction with "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the consolidated financial statements, including the notes thereto, and other
financial data contained elsewhere in this Prospectus.
    
 
   
<TABLE>
<CAPTION>
                                                                   AS OF MARCH 31, 1998
                                                              -------------------------------
                                                                              AS ADJUSTED FOR
                                                                              THE EQUITY AND
                                                                 ACTUAL       DEBT OFFERINGS
                                                              ------------    ---------------
                                                               (AUDITED)        (UNAUDITED)
<S>                                                           <C>             <C>
Cash, cash equivalents, and short-term investments..........  $257,594,702     $ 638,899,702
Restricted cash.............................................            --        88,000,000
                                                              ------------     -------------
         Total cash, cash equivalents, short-term
           investments and restricted cash..................  $257,594,702     $ 726,899,702
                                                              ============     =============
Long-term debt:
  11 3/4% Notes, at accreted value(1).......................  $247,329,420     $ 247,329,420
  Notes offered hereby......................................            --       290,000,000
                                                              ------------     -------------
         Total long-term debt...............................   247,329,420       537,329,420
                                                              ------------     -------------
Redeemable convertible preferred stock(2)(3):
  Redeemable convertible preferred stock, $.01 par value,
    96,000 and 0 shares authorized, 95,641.25 and 0 shares
    issued and outstanding at March 31, 1998 and as
    adjusted, respectively..................................    59,206,139                --
  Preferred stock subscriptions receivable..................      (275,000)               --
                                                              ------------     -------------
         Total redeemable convertible preferred stock.......    58,931,139                --
                                                              ------------     -------------
Redeemable warrants(1)......................................     8,257,542         8,257,542
Stockholders' (deficit) equity:
  Preferred stock, $.01 par value, 0 and 1,000,000 shares
    authorized, 0 and 0 shares issued and outstanding at
    March 31, 1998 and as adjusted, respectively(4).........            --                --
  Common stock, $.01 par value per share, 102,524 and
    150,000,000 shares authorized, 1 share and 52,341,554
    shares issued and outstanding at March 31, 1998 and as
    adjusted, respectively(3)...............................            --           523,416
  Additional paid-in capital(2)(3)(5).......................    14,405,519       495,312,187
  Stock subscriptions receivable............................            --          (275,000)
  Deferred compensation.....................................   (13,216,518)      (13,216,518)
  Deferred management ownership allocation charge(5)........            --       (98,199,717)
  Accumulated (deficit) equity(5)...........................   (21,162,048)     (155,706,276)
                                                              ------------     -------------
         Total stockholders' (deficit) equity(3)(5).........   (19,973,047)      228,438,092
                                                              ------------     -------------
         Total capitalization...............................  $294,545,054     $ 774,025,054
                                                              ============     =============
</TABLE>
    
 
---------------
 
(1) Of the $250,477,150 gross proceeds from the Unit Offering, $242,293,600 was
    allocated to the initial accreted value of the 11 3/4% Notes, and $8,183,550
    was allocated to the Warrants. The Warrants may be required to be redeemed
    by the Company for cash upon the occurrence of a Repurchase Event, as
    defined in the provisions of the Warrant Agreement.
 
   
(2) In connection with the consummation of the Equity Offering, the outstanding
    shares of Redeemable Convertible Preferred Stock will be converted into
    Common Stock. At such time, the obligations of the Company to redeem the
    Redeemable Convertible Preferred Stock terminates and, therefore the value
    of the Redeemable Convertible Preferred Stock accreted to the date of the
    Equity Offering will be reclassified as an increase in the amount of Common
    Stock and additional paid-in capital in the stockholders' equity section of
    the balance sheet.
    
 
(3) As adjusted reflects the net proceeds from the issuance of Common Stock in
    the Equity Offering and the conversion of the outstanding Redeemable
    Convertible Preferred Stock into Common Stock.
 
   
(4) In connection with the consummation of the Equity Offering, the Company will
    authorize 1,000,000 shares of Preferred Stock with a $.01 par value.
    
 
   
(5) Upon the consummation of the Equity Offering, Allegiance LLC, the holder of
    substantially all of the Company's outstanding capital stock, will dissolve
    and its assets (which consist almost entirely of such capital stock) will be
    distributed to the Fund Investors and the Management Investors in accordance
    with a final allocation calculated immediately prior to such dissolution
    (the "Equity Allocation"). The LLC Agreement (as defined herein) provides
    that the Equity Allocation between the Fund Investors and the Management
    Investors will range between 95.0%/5.0% and 66.7%/33.3% based upon the
    valuation of the Company's Common Stock. Based upon the valuation of the
    Company's Common Stock implied by the Equity Offering, the Equity Allocation
    will be 66.7% to the Fund Investors and 33.3% to the Management Investors.
    Under generally accepted accounting principles, upon consummation of the
    Equity Offering, the Company will be required to record the $232.7 million
    increase in the assets of Allegiance LLC allocated to the Management
    Investors as an increase in additional paid-in capital, of which the Company
    will be required to record $134.5 million as a non-cash, non-recurring
    charge to operating expense and $98.2 million will be recorded as deferred
    management ownership allocation charge. The deferred charge will be
    amortized at $64.6 million, $24.7 million, $8.8 million and $.1 million
    during 1998, 1999, 2000 and 2001, respectively, which is the period over
    which the Company has the right to repurchase the securities (at the lower
    of fair market value or the price paid by the employee) in the event the
    management employee's employment with the Company is terminated. See
    "Certain Relationships and Related Transactions."
    
   
    
 
                                       25
<PAGE>   26
 
                            SELECTED FINANCIAL DATA
 
   
     The selected consolidated financial data presented below as of and for the
three months ended March 31, 1998 and as of and for the period from inception
(April 22, 1997) to December 31, 1997 were derived from the audited consolidated
financial statements of the Company and the notes thereto contained elsewhere in
this Prospectus, which statements have been audited by Arthur Andersen LLP,
independent public accountants. The selected pro forma statement of operations
data set forth below is unaudited and gives effect to the Debt Offering, the
Equity Offering (including the conversion of the Redeemable Convertible
Preferred Stock and the Equity Allocation) and the sale of the 11 3/4% Notes in
the Unit Offering as if such transactions had occurred on April 22, 1997 for the
period from inception through December 31, 1997 and on January 1, 1998 for the
three months ended March 31, 1998 and the selected pro forma balance sheet data
set forth below is unaudited and gives effect to such transactions as if they
had occurred on March 31, 1998. Operating results for the three months ended
March 31, 1998 are not necessarily indicative of the results that may be
expected for the entire year.
    
 
     From the Company's formation in April 1997 until December 16, 1997, the
Company was in the development stage. The Company has generated operating losses
and negative cash flow from its limited operating activities to date. As a
result of the Company's limited operating history, prospective investors have
limited operating and financial data about the Company upon which to base an
evaluation of the Company's performance and an investment in the Common Stock.
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements, including the notes
thereto, contained elsewhere in this Prospectus.
 
   
<TABLE>
<CAPTION>
                                                                                  PERIOD FROM INCEPTION (APRIL 22, 1997) THROUGH
                                      THREE MONTHS ENDED MARCH 31, 1998                          DECEMBER 31, 1997
                               -----------------------------------------------    -----------------------------------------------
                                                         PRO FORMA                                          PRO FORMA
                                              --------------------------------                   --------------------------------
                                                               AS ADJUSTED FOR                                    AS ADJUSTED FOR
                                                               THE EQUITY AND                                     THE EQUITY AND
                                  ACTUAL       ADJUSTMENT      DEBT OFFERINGS        ACTUAL       ADJUSTMENT      DEBT OFFERINGS
                               ------------   -------------    ---------------    ------------   -------------    ---------------
                                (AUDITED)      (UNAUDITED)       (UNAUDITED)       (AUDITED)      (UNAUDITED)       (UNAUDITED)
<S>                            <C>            <C>              <C>                <C>            <C>              <C>
STATEMENT OF OPERATIONS DATA:
Revenues.....................  $    202,925   $         --      $     202,925     $       403    $         --      $         403
Operating expenses:
  Technical..................       234,831             --            234,831         151,269              --            151,269
  Selling, general and
    administrative...........     5,680,031             --          5,680,031       3,635,872              --          3,635,872
  Management ownership
    allocation charge........            --    179,670,386(1)     179,670,386              --     205,092,580(1)     205,092,580
  Depreciation and
    amortization.............       208,424             --            208,424          12,639              --             12,639
                               ------------   -------------     -------------     -----------    -------------     -------------
    Total operating
      expenses...............     6,123,286    179,670,386        185,793,672       3,799,780     205,092,580        208,892,360
                               ------------   -------------     -------------     -----------    -------------     -------------
Loss from operations.........    (5,920,361)  (179,670,386)      (185,590,747)     (3,799,377)   (205,092,580)      (208,891,957)
Interest income..............     2,194,226             --(2)       2,194,226         111,417              --(2)         111,417
Interest expense.............    (4,669,079)   (11,250,077)(3)    (15,919,156)             --     (45,313,057)(3)    (45,313,057)
                               ------------   -------------     -------------     -----------    -------------     -------------
Net loss.....................  $ (8,395,214)  $(190,920,463)    $(199,315,677)    $(3,687,960)   $(250,405,637)    $(254,093,597)
Accretion of redeemable
  convertible preferred stock
  and warrant values.........    (5,264,684)        (7,435)(4)     (5,272,119)     (3,814,190)       (288,568)(4)     (4,102,758)
                               ------------   -------------     -------------     -----------    -------------     -------------
Net loss applicable to common
  stock......................  $(13,659,898)  $(190,927,898)    $(204,587,796)    $(7,502,150)   $(250,694,205)    $(258,196,355)
                               ============   =============     =============     ===========    =============     =============
Net loss per share, basic....  $(13,659,898)                    $       (3.91)    $(7,502,150)                     $       (4.96)
                               ============                     =============     ===========                      =============
Net loss per share,
  diluted....................  $(13,659,898)                    $       (3.84)    $(7,502,150)                     $       (4.88)
                               ============                     =============     ===========                      =============
Weighted average number of
  shares outstanding,
  basic......................             1     52,341,553(5)      52,341,554               1      52,068,191(5)      52,068,192
                               ============   =============     =============     ===========    =============     =============
</TABLE>
    
 
                                       26
<PAGE>   27
 
   
<TABLE>
<CAPTION>
                                                                                  PERIOD FROM INCEPTION (APRIL 22, 1997) THROUGH
                                      THREE MONTHS ENDED MARCH 31, 1998                          DECEMBER 31, 1997
                               -----------------------------------------------    -----------------------------------------------
                                                         PRO FORMA                                          PRO FORMA
                                              --------------------------------                   --------------------------------
                                                               AS ADJUSTED FOR                                    AS ADJUSTED FOR
                                                               THE EQUITY AND                                     THE EQUITY AND
                                  ACTUAL       ADJUSTMENT      DEBT OFFERINGS        ACTUAL       ADJUSTMENT      DEBT OFFERINGS
                               ------------   -------------    ---------------    ------------   -------------    ---------------
                                (AUDITED)      (UNAUDITED)       (UNAUDITED)       (AUDITED)      (UNAUDITED)       (UNAUDITED)
<S>                            <C>            <C>              <C>                <C>            <C>              <C>
OTHER FINANCIAL DATA:
EBITDA (6)...................  $ (5,711,937)  $(179,670,386)(1)  $(185,382,323)   $(3,786,738)   $(205,092,580)(1)  $(208,879,318)
Net cash used in operating
  activities.................    (2,195,564)            --         (2,195,564)     (1,942,897)    (15,950,000)(7)    (17,892,897)
Net cash used in investing
  activities.................   (43,525,476)   (88,000,000)(7)   (131,525,476)    (21,926,058)    (72,050,000)(7)    (93,976,058)
Net cash provided by
  financing activities.......   261,672,797    468,673,696(8)     730,346,493      29,595,314     710,015,450(8)     739,610,764
Capital expenditures.........     8,510,255             --          8,510,255      23,912,659              --         23,912,659
Ratio of earnings to fixed
  charges(9).................            --             --                 --              --              --                 --
</TABLE>
    
 
   
<TABLE>
<CAPTION>
                                                       MARCH 31, 1998
                                     --------------------------------------------------
                                                                 PRO FORMA
                                                    -----------------------------------   DECEMBER 31,
                                                                        AS ADJUSTED FOR       1997
                                                                        THE EQUITY AND    ------------
                                        ACTUAL       ADJUSTMENT         DEBT OFFERINGS       ACTUAL
                                     ------------   -------------       ---------------   ------------
                                      (AUDITED)      (UNAUDITED)          (UNAUDITED)      (AUDITED)
<S>                                  <C>            <C>                 <C>               <C>
BALANCE SHEET DATA
  (AT END OF PERIOD):
Cash, cash equivalents and short-
  term investments.................  $257,594,702   $381,305,000(8)      $ 638,899,702    $ 5,726,359
Restricted cash....................            --     88,000,000(7)         88,000,000             --
Property and equipment, net........    32,669,385             --            32,669,385     23,900,020
Total assets.......................   300,227,692    479,480,000(3)(8)     779,707,692     30,047,014
Long-term debt.....................   247,329,420    290,000,000(10)       537,329,420             --
Redeemable convertible preferred
  stock, net.......................    58,931,139    (58,931,139)(11)               --     33,409,404
Redeemable warrants................     8,257,542             --             8,257,542             --
Stockholders' (deficit) equity.....   (19,973,047)   248,411,139(12)       228,438,092     (7,292,090)
</TABLE>
    
 
---------------
 
   
 (1) Upon the consummation of the Equity Offering, Allegiance LLC, the holder of
     substantially all of the Company's outstanding capital stock, will dissolve
     and its assets (which consist almost entirely of such capital stock) will
     be distributed to the Fund Investors and the Management Investors in
     accordance with a final allocation calculated immediately prior to such
     dissolution (the "Equity Allocation"). The LLC Agreement (as defined
     herein) provides that the Equity Allocation between the Fund Investors and
     the Management Investors will range between 95.0%/5.0% and 66.7%/33.3%
     based upon the valuation of the Company's Common Stock. Based upon the
     valuation of the Company's Common Stock implied by the Equity Offering, the
     Equity Allocation will be 66.7% to the Fund Investors and 33.3% to the
     Management Investors. Under generally accepted accounting principles, upon
     consummation of the Equity Offering, the Company will be required to record
     the $232.7 million increase in the assets of Allegiance LLC allocated to
     the Management Investors as an increase in additional paid-in capital, of
     which the Company will be required to record $134.5 million as a non-cash,
     non-recurring charge to operating expense and $98.2 million will be
     recorded as deferred management ownership allocation charge. The deferred
     charge will be amortized at $64.6 million, $24.7 million, $8.8 million and
     $.1 million during 1998, 1999, 2000 and 2001, respectively, which is the
     period over which the Company has the right to repurchase the securities
     (at the lower of fair market value or the price paid by the employee) in
     the event the management employee's employment with the Company is
     terminated. See "Certain Relationships and Related Transactions." The pro
     forma gives effect to the initial $134.5 million non-cash, non-recurring
     charge to operating expense and the related amortization of the deferred
     management ownership allocation charge for each period.
    
 
   
 (2) Pro forma interest income excludes interest income that would have been
     earned on the estimated $88.0 million of the proceeds from the Debt
     Offering required to be placed in a pledged account to secure and fund the
     first six scheduled interest payments on the Notes.
    
 
   
 (3) Reflects $8.0 million and $22.1 million of interest expense related to the
     Notes offered in the Debt Offering (assuming an effective interest rate of
     11.0%), $.3 million and $.7 million of amortization of the $10.2 million of
     deferred debt issuance cost related thereto, $3.0 million and $22.1 million
     of interest expense related to the accretion of the 11 3/4% Notes and
     $67,350 and $.5 million of amortization of deferred debt issuance cost
     related to the 11 3/4% Notes for the three months ended March 31, 1998 and
     for the period from Inception (April 22, 1997) through December 31, 1997,
     respectively.
    
 
   
 (4) Reflects the increase of $7,435 and $.3 million of accretion for the
     warrants for the three months ended March 31, 1998 and for the period from
     inception (April 22, 1997) through December 31, 1997, respectively.
    
 
   
 (5) The pro forma weighted average number of shares outstanding gives effect to
     (i) the 426.2953905 per share stock split to be effective in connection
     with the Equity Offering, (ii) 12,000,000 shares of the Company's Common
     Stock issued as a result of the Equity Offering and (iii) the conversion of
     95,641.25 and 95,000 shares of Redeemable Convertible Preferred Stock to
     Common Stock for the three months ended March 31, 1988 and for the period
     from inception (April 22, 1997) through December 31, 1997, respectively.
    
 
   
 (6) EBITDA represents earnings before interest, income taxes, depreciation and
     amortization. EBITDA is not a measurement of financial performance under
     generally accepted accounting principles, is not intended to represent cash
     flow from operations, and should not be considered
    
                                       27
<PAGE>   28
 
     as an alternative to net loss as an indicator of the Company's operating
     performance or to cash flows as a measure of liquidity. The Company
     believes that EBITDA is widely used by analysts, investors and other
     interested parties in the telecommunications industry. EBITDA is not
     necessarily comparable with similarly titled measures for other companies.
 
   
 (7) Reflects the purchase of $88.0 million of U.S. government securities, which
     securities will be placed in a pledged account, to fund the first six
     scheduled interest payments on the Notes. The period from inception (April
     22, 1997) through December 31, 1997 also reflects the $16.0 million cash
     interest payment on the Notes, which is funded through a reduction of the
     pledged account.
    
 
   
 (8) Reflects $279.8 million of net proceeds to be received from the Debt
     Offering of which $88.0 million will be required to be placed in a pledged
     account to secure and fund the first six scheduled interest payments on the
     Notes and $189.5 million of net proceeds to be received from the Equity
     Offering. In addition, net cash provided by financing activities for the
     three months ended March 31, 1998 on a pro forma basis also reflects $.6
     million of deferred debt issuance cost related to the Unit Offering and for
     the period from inception (April 22, 1997) through December 31, 1997 on a
     pro forma basis also reflects the $240.7 million of net proceeds from the
     Unit Offering.
    
 
   
 (9) For purposes of calculating the ratio of earnings to fixed charges,
     earnings is defined as net loss plus fixed charges (other than capitalized
     interest). Fixed charges consist of interest and amortization of debt
     discount and debt issuance costs, whether expensed or capitalized, and that
     portion of rental expense deemed to represent interest (estimated to be
     1/3 of such expense). The Company's earnings for the three months ended
     March 31, 1998 and for the period from inception (April 22, 1997) through
     December 31, 1997 were insufficient to cover fixed charges by approximately
     $8.9 million and $3.7 million, respectively. After giving pro forma effect
     to the increase in interest expense resulting from the issuance of the
     Notes in the Debt Offering (assuming an 11.0% per annum effective interest
     rate on the Notes) and the 11 3/4% Notes in the Unit Offering and giving
     effect to $179.7 million and $205.1 million of management ownership
     allocation charge to be recorded in connection with the Equity Offering,
     the Company's earnings would have been insufficient to cover fixed charges
     by approximately $199.8 million and $254.1 million, for the three months
     ended March 31, 1998 and for the period from inception (April 22, 1997)
     through December 31, 1997, respectively.
    
 
   
(10) Reflects the issuance of the Notes hereby.
    
 
   
(11) In connection with the consummation of the Equity Offering, all outstanding
     shares of Redeemable Convertible Preferred Stock will be converted into
     Common Stock. At such time, the obligation of the Company to redeem the
     Redeemable Convertible Preferred Stock terminates and, therefore, the value
     of the Redeemable Convertible Preferred Stock accreted to the date of the
     Equity Offering will be reclassified as an increase in the amount of Common
     Stock and additional paid-in capital in the stockholders' equity section of
     the balance sheet.
    
 
   
(12) Reflects the $189.5 million of net proceeds received from the sale of
     Common Stock in the Equity Offering, the conversion of the $58.9 million
     Redeemable Convertible Preferred Stock into Common Stock and the management
     ownership allocation described in footnote (1) above.
    
 
                                       28
<PAGE>   29
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
     The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus. Certain information contained in the discussion and analysis set
forth below and elsewhere in this Prospectus, including information with respect
to the Company's plans and strategy for its business and related financing,
includes forward-looking statements that involve risk and uncertainties. See
"Risk Factors" for a discussion of important factors that could cause actual
results to differ materially from the results described in or implied by the
forward-looking statements contained herein.
 
OVERVIEW
 
     Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services. The Company was founded in
April 1997 by a management team led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS, and Thomas M. Lord, former
managing director of Bear, Stearns & Co. Inc., where he specialized in the
telecommunications, information services and technology industries. The
Company's initial equity financing of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
 
     The Company has generated only nominal revenues to date. Since its
inception on April 22, 1997, the Company's principal activities have included
developing its business plans, procuring governmental authorizations, raising
capital, hiring management and other key personnel, working on the design and
development of its local exchange telephone networks and OSS, acquiring
equipment and facilities and negotiating interconnection agreements. The Company
does not expect to achieve positive EBITDA in any market until at least two to
three years after it commences initial service in such market. As a result of
its development activities, the Company has experienced significant operating
losses and negative EBITDA to date. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in five additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. The Company expects to continue to experience
increasing operating losses and negative EBITDA as it expands its operations.
See "Risk Factors -- Limited History of Operations; Historical and Anticipated
Future Negative EBITDA and Operating Losses."
 
   
     The Fund Investors and the Management Investors currently own 95.0% and
5.0%, respectively, of the ownership interests of Allegiance LLC, an entity that
owns substantially all of the Company's outstanding capital stock. Upon
consummation of the Equity Offering, Allegiance LLC will dissolve and its assets
(which consist almost entirely of such capital stock) will be distributed to the
Fund Investors and the Management Investors in accordance with the LLC Agreement
(as defined herein). The LLC Agreement provides that the Equity Allocation
between the Fund Investors and the Management Investors will range between
95.0%/5.0% and 66.7%/33.3% based upon the valuation of the Company's Common
Stock implied by the Equity Offering. Based upon the current valuation of the
Company's Common Stock implied by the Equity Offering, the Equity Allocation
will be 66.7% to the Fund Investors and 33.3% to the Management Investors. Under
generally accepted accounting principles, upon consummation of the Equity
Offering, the Company will be required to record the $232.7 million increase in
the assets of Allegiance LLC allocated to the Management Investors as an
increase in additional paid-in capital, of which the Company will be required to
record $134.5 million as a non-cash, non-recurring charge to operating expense
and $98.2 million will be recorded as deferred management ownership allocation
charge. The deferred charge will be amortized at $64.6 million, $24.7 million,
$8.8 million and $.1 million during 1998, 1999, 2000 and 2001, respectively,
which is the period over which the Company has the right to repurchase the
securities (at the lower of fair market value or the price paid by the employee)
in the event the management employee's employment with the Company is
terminated. See "Certain Relationships and Related Transactions."
    
 
                                       29
<PAGE>   30
 
     As a result of the Company's limited operating history, prospective
investors have limited operating and financial data about the Company upon which
to base an evaluation of the Company's performance and an investment in the
Notes.
 
FACTORS AFFECTING FUTURE OPERATIONS
 
  Revenues
 
     Allegiance expects to generate most of its revenues from sales to end user
customers in the business, government, and other institution market segments,
but may augment this core revenue source by selectively supplying wholesale
services including equipment collocation and facilities management services to
ISPs. Allegiance plans to deploy its sales teams in areas where the Company can
serve customers through a direct connection using unbundled loops or high
capacity circuits connected to Allegiance's facilities collocated in ILEC
central offices. The Company currently plans to resell ILEC services only in
order to provide comprehensive geographical service coverage to customers with
multiple on-net sites (which can be addressed by the Company's facilities-based
services) and a few off-net sites (which can be addressed only by the Company's
reselling ILEC services). Allegiance believes that it will be able to generate
significantly higher gross margins by providing local exchange, local access and
long distance services using its own facilities than could be obtained by
reselling such services.
 
     Allegiance will seek to price its services competitively in relation to
that of the ILECs and may offer combined service discounts designed to give
customers incentives to buy a portfolio of services through the Company.
Although pricing will be an important part of the Company's strategy, management
believes that, especially for small to medium-sized business customers, customer
relationships, customer care, "one stop shopping" and consistent quality will be
the key to generating customer loyalty. During the past several years, market
prices for many telecommunications services have been declining, which is a
trend that the Company believes will likely continue. This decline will have a
negative effect on the Company's gross margin that may not be offset completely
by savings from decreases in the Company's cost of services.
 
     Current industry statistics demonstrate that there is significant churn of
customers within the industry, and the Company believes that the churn is
especially high when customers are only buying long distance services from a
carrier or when customers are buying resold services. Allegiance believes that
by offering LAN interconnection, frame relay, Internet services, ISDN, DSL and
other enhanced services not generally available from the ILECs (or available
only at high prices) in conjunction with traditional local and long distance
services and providing superior customer care, it will be in a position to
minimize customer churn.
 
  Operating Expenses
 
     The Company expects that its primary operating expenses will consist of
cost of services and selling, general and administrative expenses.
 
     Cost of Services. Under its "smart build" strategy, Allegiance plans to
deploy digital switching platforms with local and long distance capability and
initially lease fiber trunking capacity from the ILECs and other CLECs to
connect the Company's switch with its transmission equipment collocated in ILEC
central offices. Allegiance will lease unbundled copper loop lines and high
capacity digital lines from the ILECs to connect the Company's customers and
other carriers' networks to the Company's network. Allegiance plans to lease
capacity or overbuild specific network segments as economically justified by
traffic volume growth. In addition, Allegiance expects to increase the capacity
of its switches, and may add additional switches, in a market as demand
warrants.
 
     In October 1997, the Company entered into a five-year general agreement
with Lucent establishing terms and conditions for the purchase of Lucent
products, services and licensed materials. The agreement includes a three-year
exclusivity commitment for the purchase of products and services related to new
switches. The agreement contains no minimum purchase requirements.
 
     The Company expects switch site lease costs will be a significant part of
the Company's ongoing cost of services. The costs to lease unbundled copper loop
lines and high capacity digital lines from the ILECs will vary by ILEC and are
regulated by state authorities pursuant to the Telecommunications Act. The
Company believes that in most of the markets it plans to enter there are
multiple carriers in addition to the ILEC from
 
                                       30
<PAGE>   31
 
which it could lease trunking capacity. The Company expects that the costs
associated with these leases will increase with customer volume and will be a
significant part of the Company's ongoing cost of services.
 
     Collocation costs are also expected to be a significant part of the
Company's network development and ongoing cost of services. Under the
Telecommunications Act, carriers like the Company must be allowed to place their
equipment within the central offices of the ILEC for the purposes of
interconnecting its network with that of the ILEC ("collocation"). For example,
Allegiance will use collocation to access the ILECs unbundled networks elements.
This collocation can be a physical space or cage within the ILEC central office
where the Company would place its equipment. In some cases, virtual collocation
would be used where the ILEC places equipment within the central office and
would maintain the equipment on behalf of the Company. In this virtual
collocation scenario, the Company would not have physical access to the ILEC's
central office. For use of their central offices for collocation, ILECs
typically charge both a start-up fee as well as a monthly recurring fee. The
Company will be required to invest a significant amount of funds to develop the
central office collocation sites and to deploy the transmission and distribution
electronics.
 
     In order to enter a market, Allegiance must enter into an interconnection
agreement with the ILEC to make ubiquitous calling available to its customers.
Typically these agreements set the cost per minute to be charged by each party
for the calls which have traversed between each carrier's network. These costs
will grow in proportion to the Company's customers outbound call volume and are
expected to be a major portion of the Company's cost of services. However, the
Company does expect to generate increased revenue from the ILECs as the
Company's customers inbound calling volume increases. To the extent the
Company's customers' outbound call volume is equivalent to their inbound call
volume, the Company expects that its interconnection costs paid to the ILECs
will be substantially offset by the interconnection revenues received from the
ILECs.
 
     The Company has entered into one resale agreement with a long distance
carrier to provide the Company with transmission services and expects to enter
into resale agreements with other carriers in the future. Such agreements
typically provide for the resale of long distance services on a per-minute basis
and may contain minimum volume commitments; however, the existing resale
agreement does not contain any minimum volume commitments. In the event the
Company fails to meet its minimum volume commitments, it may be obligated to pay
underutilization charges and in the event it underestimates its need for
transmission capacity, the Company may be required to obtain capacity through
more expensive means. These costs will increase as the Company's customers' long
distance calling volume increases, and the Company expects that these costs will
be a significant portion of its cost of long distance services. As traffic on
specific routes increases, the Company may lease long distance trunk capacity.
 
     Selling, General and Administrative Expenses. The Company's selling,
general and administrative expenses will include its infrastructure costs,
including selling and marketing costs, customer care, billing, corporate
administration, personnel and network maintenance.
 
     The Company plans to employ a large direct sales force in each market and
to build a national sales force as the Company grows. To attract and retain a
highly qualified sales force, the Company plans to offer its sales and customer
care personnel a compensation package emphasizing commissions and stock options.
The Company expects to incur significant selling and marketing costs as it
continues to expand its operations. In addition, Allegiance plans to offer sales
promotions to win customers, especially in the first few years as its
establishes its market presence.
 
     Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that are required to enter, schedule, provision,
track a customer order from point of sale to the installation and testing of
service and that will include or interface with trouble management, inventory,
billing, collection and customer care service systems. Along with the
development cost of the systems, the Company will also incur ongoing expenses
for customer care and billing. As the Company's strategy stresses the importance
of personalized customer care, the Company expects that its customer care
department will become a larger part of the Company's ongoing administrative
expenses. The Company also expects billing costs to increase as its number of
customers, and the call volume, increases. Billing is expected to be a
significant part of the Company's ongoing administrative expenses.
 
                                       31
<PAGE>   32
 
     Allegiance will incur other costs and expenses, including the costs
associated with the maintenance of its network, administrative overhead, office
leases and bad debt. The Company expects that these costs will grow
significantly as its expands its operations and that administrative overhead
will be a large portion of these expenses during the start-up phase of the
Company's business. However, the Company expects these expenses to become
smaller as a percentage of the Company's revenue as the Company builds its
customer base.
 
RESULTS OF OPERATIONS
 
   
     From its inception on April 22, 1997 through December 16, 1997, the Company
was in the development stage of operations. Its principle activities during that
period included developing its business plans, raising capital, hiring
management and other key personnel, working on the design and development of its
local exchange telephone networks and OSS and negotiating interconnection
agreements. From inception (April 22, 1997) through December 31, 1997, the
Company's operations resulted in a $7.5 million net loss (after accreting
redeemable preferred stock and warrant values). As of December 31, 1997, the
Company generated only nominal revenues.
    
 
   
     For the three months ended March 31, 1998, the Company generated revenues
of $.2 million from local and long distance services provided to customers in
the Dallas market. The net loss for the first quarter was $13.7 million (after
accreting redeemable preferred stock and warrant values). The Company incurred
approximately $.5 million in delivering service and preparing its local exchange
facilities in Dallas, New York City and Atlanta to become operational. For the
three months ended March 31, 1998, the Company also incurred $5.7 million for
selling and general and administrative expenses, primarily resulting from $3.6
million of payroll, employee benefits, travel, legal and consulting fees
relating to the commencement of business in several Phase I markets and $1.0
million in amortization of deferred stock compensation expense. The Company also
incurred $.5 million for office space and related operating costs. Interest
expense during the three months ended March 31, 1998 was $4.7 million,
reflecting the issuance of the 11 3/4% Notes during February 1998. Interest
income during such period was $2.2 million resulting from the investment of the
net proceeds from the Equity Contributions and the Unit Offering.
    
 
   
     As required by accounting principles promulgated by the Securities and
Exchange Commission, the Company is recording the potential redemption values of
the Redeemable Convertible Preferred Stock and the redeemable warrants in the
potential event that they are redeemed at fair market value in August 2004 and
February 2008, respectively. Amounts are accreted using the effective interest
method and managements' estimates of the future fair market value of these
securities when redemption is first permitted. Amounts accreted increase the
recorded value of the Redeemable Convertible Preferred Stock and redeemable
warrants on the balance sheet and result in a non-cash charge to increase the
net loss applicable to Common Stock. Upon consummation of the Equity Offering,
the redemption provisions of the Redeemable Convertible Preferred Stock
terminate and such preferred stock will be converted into Common Stock.
Accordingly, the amounts accreted for the Redeemable Convertible Preferred Stock
will be reclassified as an increase in the amount of the Common Stock and
additional paid-in capital in the stockholders' equity section of the balance
sheet.
    
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Allegiance plans to establish networks in 24 Tier I U.S. markets. The
Company plans to deploy its networks principally in two phases of development,
each to contain 12 major U.S. metropolitan markets.
 
     The development of the Company's business and deployment and start-up of
its networks in these markets and the establishment of reliable OSS will require
significant capital to fund capital expenditures, working capital, debt service
and cash flow deficits. The Company's principal capital expenditure requirements
include the purchase and installation of digital switches, transmission
equipment collocated in ILEC central offices, and customer premise equipment,
the development of efficient OSS and other automated back office systems, and
the overbuilding of leased transmission facilities as traffic volume growth
makes it economically attractive. Additional capital will be required for office
space, switch site, and collocation space buildout at ILEC central offices,
corporate overhead and personnel and the development, acquisition and
integration of the Company's back office systems. Future overbuilds of leased
transmissions facilities and potential strategic acquisitions may increase
capital requirements, although cash requirements may be reduced if network
expansions are accomplished over a longer time frame or market penetration rates
are less than expected.
 
                                       32
<PAGE>   33
 
     Allegiance's financing plan is predicated on the pre-funding of each
market's expansion to Positive Free Cash Flow (operating cash flow from a market
sufficient to fund such market's operating costs and capital expenditures). This
approach is designed to allow the Company to be opportunistic and raise capital
on more favorable terms and conditions.
 
     To pre-fund each Phase I market's expansion, the Company raised
approximately $50.1 million from the Equity Contributions and received
approximately $240.7 million of net proceeds, after deducting estimated
underwriting discounts and commissions and other expenses payable by the
Company, from the Unit Offering. Allegiance is currently operational in three
Phase I markets: New York City, Dallas and Atlanta; and is in the process of
deploying networks in five additional Phase I markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. As part of this effort, in October 1997, the
Company acquired two Lucent Series 5ESS(R)-2000 digital switches in New York
City and Atlanta and certain furniture and fixtures in Dallas from US ONE
Communications, Inc. for an aggregate purchase price of $19.3 million. The
Company has also purchased from Lucent, switches for the Dallas, Chicago, Los
Angeles, San Francisco and Boston markets. The cost of these switches and
related equipment and installation will be approximately $37.1 million.
 
     Since completion of the Unit Offering, the Company has increased the scope
of its business plan to accommodate (i) an expansion of the Company's network
buildout in certain Phase I markets to include additional central offices,
thereby giving the Company access to a larger number of potential customers in
those markets, (ii) an accelerated and expanded deployment of data, Internet and
enhanced services in the Company's markets and (iii) the acceleration of network
deployment in Phase II markets.
 
     The Company estimates that its cumulative cash requirements to fund its
modified business plan, including pre-funding each Phase I and Phase II market's
expansion to Positive Free Cash Flow, will be between $650 million and $700
million.
 
     The Company believes, based on its modified business plan, that the net
proceeds from the Offerings, together with cash on hand (including proceeds from
the Equity Contributions and the Unit Offering) will be sufficient to pre-fund
its Phase I and Phase II market deployment to Positive Free Cash Flow.
 
     The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates as a result of, among other
things, the demand for the Company's services and regulatory, technological and
competitive developments (including additional market developments and new
opportunities) in the Company's industry. The Company also expects that it will
require additional financing (or require financing sooner than anticipated) if:
(i) the Company's development plans or projections change or prove to be
inaccurate: (ii) the Company engages in any acquisitions; or (iii) the Company
alters the schedule or targets of its roll-out plan. Sources of additional
financing may include commercial bank borrowings, vendor financing, or the
private or public sale of equity or debt securities. There can be no assurance
that such financing will be available on terms acceptable to the Company or at
all. See "Risk Factors -- Significant Capital Requirements; Uncertainty of
Additional Financing."
 
     Because the Company's cost of rolling out its networks and operating its
business, as well as the Company's revenues, will depend on a variety of factors
(including the ability of the Company to meet its roll-out schedules, negotiate
favorable prices for purchases of equipment, and develop, acquire and integrate
the necessary OSS and other back office systems, as well as the number of
customers and the services for which they subscribe, the nature and penetration
of new services that may be offered by the Company, regulatory changes and
changes in technology), actual costs and revenues will vary from expected
amounts, possibly to a material degree, and such variations are likely to affect
the Company's future capital requirements. Accordingly, there can be no
assurance that the Company's actual capital requirements will not exceed the
anticipated amounts described above. Further, the exact amount of the Company's
future capital requirements will depend upon many factors, including the cost of
the development of its networks in each of its markets, the extent of
competition and pricing of telecommunications services in its markets, and the
acceptance of the Company's services. Also, the Company expects that the
expansion into additional markets will require additional financing, which may
include commercial bank borrowing, vendor financing, or the public or private
sale of equity or debt securities. There can be no assurance that the Company
will be successful in raising sufficient additional capital at all or on terms
acceptable to the Company. See "Risk Factors -- Significant Capital
Requirements; Uncertainty of Additional Financing."
 
                                       33
<PAGE>   34
 
YEAR 2000
 
     The Company has reviewed its computer systems to identify those areas that
could be affected by the "Year 2000" issue. The Company believes that its
systems are Year 2000 compliant. In addition, the Company believes that many of
its customers and suppliers, particularly the ILECs and long distance carriers,
are also impacted by the Year 2000 issue, which in turn could affect the
Company. The Company is assessing the compliance efforts of its major customers
and suppliers. If the systems of certain of the Company's customers and
suppliers, particularly the ILECs, long distance carriers and others on whose
services the Company depends or with whom the Company's systems interface, are
not Year 2000 compliant, it would have a material adverse effect on the Company.
 
                                       34
<PAGE>   35
 
                                    BUSINESS
 
THE COMPANY
 
     Allegiance seeks to be a premier provider of telecommunications services to
business, government and other institutional users in major metropolitan areas
across the United States. As a CLEC, Allegiance anticipates offering an
integrated set of telecommunications products and services including local
exchange, local access, domestic and international long distance, enhanced
voice, data and a full suite of Internet services. The Company was founded in
April 1997 by a management team led by Royce J. Holland, the former president,
chief operating officer and co-founder of MFS, and Thomas M. Lord, former
managing director of Bear, Stearns & Co. Inc., where he specialized in the
telecommunications, information services and technology industries. The
Company's initial equity financing of approximately $50.1 million has been
provided by the Management Investors and the Fund Investors.
 
     The Company believes that the Telecommunications Act, by opening the local
exchange market to competition, has created an attractive opportunity for new
facilities-based CLECs like the Company. Most importantly, the
Telecommunications Act stated that CLECs should be able to acquire the UNEs from
the ILECs, which are necessary for the cost-effective provision of service. As
such, the Telecommunications Act will enable the Company to deploy digital
switching platforms with local and long distance capability and initially lease
fiber trunking capacity from the ILECs and other CLECs to connect the Company's
switch with its transmission equipment collocated in ILEC central offices.
Thereafter, the Company plans to lease capacity or overbuild specific network
segments as economically justified by traffic volume growth. Management believes
that pursuing this "smart build" approach should: (i) accelerate market entry by
9 to 18 months by deferring the need for city franchises, rights-of-way and
building access; (ii) reduce initial capital requirements for individual market
entry prior to revenue generation, allowing the Company to focus its capital
resources on the critical areas of sales, marketing, and OSS; (iii) provide for
ongoing capital expenditures on a "success basis" as demand dictates; and (iv)
allow the Company to address attractive service areas selectively throughout its
targeted markets.
 
     Allegiance is currently developing tailored systems and procedures for OSS
and other back office systems that it believes will provide the Company with a
significant competitive advantage in terms of cost, processing large order
volumes and customer service. These systems are required to enter, schedule,
provision and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
legacy systems currently employed by many ILECs, CLECs and long distance
carriers, which systems were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it also creates
numerous opportunities for errors in provisioning service and billing, delays in
installing orders, service interruptions, poor customer service, increased
customer churn and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems and costs of upgrading legacy systems are often prohibitive
for companies whose existing systems support a large number of customers with
ongoing service.
 
     Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with more than 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. With a network deployment and end user,
direct sales marketing strategy focusing on the central business districts and
suburban commercial districts in these areas, Allegiance plans to address a
majority of the non-residential access lines in most of its targeted markets.
The Company plans to deploy its networks principally in two phases of
development. Phase I is to offer services in 12 of the largest metropolitan
areas in the U.S., which the Company believes include approximately 26.0% of the
nation's total non-residential access lines. Allegiance is currently operational
in three Phase I markets: New York City, Dallas and Atlanta; and is in the
process of deploying networks in five additional Phase I markets: Chicago, Los
Angeles, San Francisco, Boston and Fort Worth. In each of these markets, the
Company will use a Lucent Series 5ESS(R)-2000 digital switch, which provides
local and long distance functionality. With the proceeds from the Offerings, the
Company intends to begin network development in its
 
                                       35
<PAGE>   36
 
Phase II markets. These additional 12 markets are estimated to encompass
approximately 18.7% of the total non-residential access lines in the U.S.
Management expects to commence network deployment in these cities in 1999, with
service anticipated to begin during 1999 and 2000.
 
   
     As of May 31, 1998, the Company has sold 14,857 lines to 874 customers, of
which 9,015 lines for 521 customers were in service as of such date.
    
 
     The Company is a Delaware corporation with its principal executive offices
located at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207, and its
telephone number is (214) 853-7100.
 
BUSINESS STRATEGY
 
     To accomplish its goal of becoming a premier provider of telecommunications
services to business, government, and other institutional users in U.S.
metropolitan areas, the Company has developed an end-user-focused business
strategy designed to achieve significant market penetration and deliver superior
customer care while maximizing operating margins. The key components of this
strategy include the following:
 
     Leverage Proven Management Team. The Company's veteran management team has
extensive experience and past successes in the CLEC industry, and the Company
believes that its ability to combine and draw upon the collective talent and
expertise of its senior management gives it a competitive advantage in the
effective and efficient execution of network deployment, sales, provisioning,
service installation, billing and collection, and customer service functions.
Allegiance's Chairman and Chief Executive Officer, Royce J. Holland, has more
than 25 years of experience in the telecommunications and energy industries,
including as president, chief operating officer, and co-founder of MFS. Under
his leadership, MFS grew from a start-up operation to become the largest CLEC
with approximately $1.1 billion in revenues before its acquisition by WorldCom
in 1996. Other key Allegiance executives have significant experience in the
critical functions of network operations, sales and marketing, back office and
OSS, finance and regulatory affairs.
 
     Target End Users with Integrated Service Offerings. Allegiance plans to
focus principally on end user customers in the business, government and other
institutional market segments. The majority of these customers are expected to
be small and medium-sized businesses, to which the Company will offer "one-stop
shopping" consisting of a comprehensive package of communications services with
convenient integrated billing and a single point of contact for sales and
service. For large businesses and government and other institutional users,
which typically obtain telecommunications services from a variety of suppliers,
the Company will focus primarily on capturing a significant portion of these
customers' local exchange, intraLATA toll and data traffic. Although the Company
will principally target end-users in markets where it believes it can achieve
significant market penetration by providing superior customer care at
competitive prices, the Company may augment its core business strategy by
selectively supplying wholesale services including equipment collocation and
facilities management services to ISPs.
 
     Offer Data, Internet, and Enhanced Services to Enhance Market Penetration
and Reduce Churn. The Company believes it can accelerate new account penetration
and reduce customer churn by offering LAN interconnection, frame relay, Internet
services, ISDN, DSL, Web page design, Web server hosting, and other enhanced
services not generally available from the ILECs (or available only at high
prices) in conjunction with traditional local and long distance services. This
strategy has been successfully employed by certain CLECs, and Allegiance's
management team has extensive experience in providing these types of enhanced
services.
 
     Utilize "Smart Build" Strategy to Maximize Speed to Market and Minimize
Investment Risk. Allegiance plans to deploy digital switching platforms with
local and long distance capability and initially lease fiber trunking capacity
from the ILECs and other CLECs to connect the Company's switch with its
transmission equipment collocated in ILEC central offices. Thereafter,
Allegiance may evolve its networks to the next stage of the "smart build"
strategy where Allegiance plans to lease dark fiber or overbuild specific
network segments as economically justified by traffic volume growth. Allegiance
expects that this "smart build" strategy will allow entry into a new market in a
six- to nine-month time frame as compared to the 18 to 24 months required to
construct a metropolitan area fiber network under the "build first, sell later"
approach
 
                                       36
<PAGE>   37
 
   
required before the Telecommunications Act established a framework for CLECs to
acquire unbundled network elements. The Company believes that this "smart build"
approach has the additional advantage of reducing up-front capital requirements.
This "smart build" strategy is currently being implemented by the Company in all
its networks where it is leasing high capacity circuits to connect the ILEC
central offices with the Company's switches. In New York City, the Company is
moving to the next stage of its "smart-build" strategy, where the Company will
lease from MFN, a thirty-mile dark fiber ring in Manhattan that extends into
Brooklyn.
    
 
     Achieve Broad Coverage of Attractive Areas within Each Targeted Market. As
a result of the substantial up-front capital requirements necessary to construct
metropolitan area fiber networks, CLECs have traditionally limited their initial
network buildout to highly concentrated downtown areas, thereby limiting their
ability to provide service to customers in other attractive, but geographically
dispersed, portions of their targeted markets. The Company intends to leverage
the benefits of using a "smart build" strategy by selectively deploying its
facilities to address attractive service areas throughout each target market in
order to optimize the Company's penetration. Prior to entering a market,
Allegiance prepares a detailed, "bottoms-up" analysis of that market's local
exchange areas using FCC and demographic data. The Company uses this analysis,
together with estimates of the costs and potential benefits of addressing
particular service areas, to identify attractive areas, determine the optimal
concentration of areas to be served and develop its schedule for network
deployment and expansion.
 
     Maximize Operating Margins by Emphasizing Facilities-Based
Services. Allegiance believes that facilities-based solutions where the Company
provides local exchange, local access, and long distance using its own
facilities should generate significantly higher gross network margins than could
be obtained by reselling such services. As a result, Allegiance plans to deploy
its marketing activities in areas where it can serve customers through a direct
connection using unbundled loops or high capacity circuits connected to
Allegiance's facilities collocated in ILEC central offices. The Company plans to
resell ILEC services only in order to provide comprehensive geographical service
coverage to customers with multiple on-net sites (which can be addressed by the
Company's facilities-based services) and a few off-net sites (which can be
addressed only by the Company's reselling ILEC services).
 
     Build Market Share by Focusing on Direct Sales. The Company believes that
the key to achieving its goals is the capturing and retaining of customers
through direct sales, a full suite of turn-key product offerings and
personalized customer care. Management believes that its targeted small and
medium-sized business customers have been neglected by the ILECs with respect to
these functions. The Company's sales management team is composed of executives
with experience in managing a large number of direct sales specialists in the
telecommunications and data networking industries. Additionally, the Company
believes it will be able to attract and retain highly qualified sales and
support personnel by offering them the opportunity to: (i) work with an
experienced and success-proven management team in building a developing,
entrepreneurial company; (ii) market a comprehensive set of products and
services and customer care options; and (iii) participate in the potential
economic returns made available through a results-oriented compensation package
emphasizing sales commissions and stock options.
 
     Develop Efficient Automated Back Office Systems. Unburdened by existing
legacy OSS, Allegiance is focusing on developing, acquiring and integrating back
office systems to facilitate a smooth, efficient order management, provisioning,
trouble management, billing and collection, and customer service process. To
address this critical issue, the Company has hired a team of engineering and
information technology professionals experienced in the CLEC industry. This team
will work to develop, with the assistance of key third party vendors, OSS that
will synchronize multiple tasks such as provisioning, customer service and
billing and provide management with timely operating and financial data to most
efficiently direct network, sales and customer service resources. The Company
intends to work actively toward "electronic bonding" between the Allegiance OSS
and those of the ILEC, which would permit creation of service requests on-line.
Allegiance believes that these back office systems, once developed, will provide
it with a significant competitive advantage in terms of cost, processing large
order volumes and customer service as compared to companies using legacy
systems.
 
                                       37
<PAGE>   38
 
     Expand Customer Base Through Potential Acquisitions. The Company believes
that strategic acquisitions may produce a number of benefits, including
acceleration of market penetration, providing a customer base for cross-selling
additional services, acquiring experienced management and improving margins by
migrating resold services to the Company's network facilities.
 
MARKET OPPORTUNITY
 
     U.S. Census Bureau data indicates that the United States communications
services market (including cable television, but excluding Internet access and
content) in 1995 totaled approximately $221 billion in annual revenue. As
depicted on the chart below, wireline telecommunications services (other than
Internet access and content) purchased by non-residential users accounted for
about 43%, or approximately $96 billion, of the total U.S. market in 1995:
 
                        [US COMMUNICATIONS MARKET GRAPH]
 
     The major segments of the non-residential wireline telecommunications
services market, based on U.S. Census Bureau data, are as follows:
 
                  [NON-RESIDENTIAL WIRELESS TELECOMMUNICATIONS GRAPH]
 
Traditional voice traffic accounted for the vast majority of non-residential
communications revenue in 1995, with local exchange and exchange access
accounting for over half of the total non-residential wireline
telecommunications market (excluding Internet access and content). Due to its
rapid growth, estimates of data and Internet services revenue are not as well
established as those relating to traditional voice traffic communications.
However, the Company believes that a significant market opportunity exists for
providers of non-residential Internet services.
 
                                       38
<PAGE>   39
 
     The Company believes that the rapid opening of the local market to
competition, accelerated growth rates in local traffic related to increases in
Internet access, the desire for multiple suppliers by large businesses, and the
desire for "one-stop shopping" by small and medium-sized businesses and
consumers, presents an opportunity for new entrants to achieve product
differentiation and significant penetration into this very large, established
market. Success in this environment will, in the opinion of management, depend
primarily on speed-to-market, marketing creativity and a CLEC's ability to
provide competitively priced services rapidly and accurately, and to issue
concise, accurate integrated billing statements.
 
     Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with more than 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. With a network deployment and end user,
direct sales marketing strategy focusing on the most significant areas of
business concentration in these areas, Allegiance plans to address a majority of
the non-residential access lines in most of its targeted markets.
 
THE COMPANY'S TELECOMMUNICATIONS SERVICES
 
     The Company intends to tailor its service offerings to meet the specific
needs of the business, government, and other institutional end users in its
target markets. Management believes that the Company's close contact with
customers from its direct sales force and customer care personnel will enable it
to tailor its service offerings to meet customers' needs and to creatively
package its services to provide "one-stop shopping" solutions for those
customers. The Company plans to offer the following services:
 
     Local Exchange Services. The Company plans to offer local exchange
services, including local dial tone as well as enhanced features such as call
forwarding, call waiting, dial back, caller ID, and voice mail, in all of its
target markets. By offering dial tone service, the Company will also receive
originating and terminating access charges for interexchange calls placed or
received by its subscribers.
 
     PBX/Shared Tenant Services. In areas where telephone density is high and
most telephone customers desire similar services (such as office buildings,
apartments, condominiums or campus-type environments), PBX or shared tenant
services such as Centrex are among the most efficient means of providing
telephone services. The Company will offer these services in areas where market
potential warrants.
 
     ISDN and High Speed Data Services. The Company will offer high speed data
transmission services, such as wide area network ("WAN") interconnection and
broadband Internet access, via frame relay and dedicated point-to-point
connections. In order to provide these services, the Company intends to utilize
leased T1 and higher speed (multiple T1 or T3) fiber connections to medium- and
large-sized business, government, and other institutional customers, while
employing DSL and/or ISDN connections over unbundled copper loops to smaller
business users whose bandwidth requirements may not justify fiber connections or
which are located in areas where T1 connections are not available.
 
     Interexchange/Long Distance Services. The Company will offer a full range
of domestic (interLATA and intraLATA) and international long distance services,
including "1+" outbound calling, inbound toll free service, and such
complementary services as calling cards, operator assistance, and conference
calling.
 
     Enhanced Internet Services. The Company will offer dedicated and dial-up
high speed Internet access services via conventional modem connections, ISDN,
DSL, and T1 and higher speed dedicated connections.
 
     Web Site Design and Hosting Services. The Company intends to offer Web site
design services and will offer Web site hosting on its own computer servers to
provide customers with a turn-key solution that gives them a presence on the
World Wide Web.
 
     Facilities and Systems Integration Services. The Company plans to assist
individual customers with the design and implementation of turn-key solutions in
order to meet their specific needs, including the selection of the customer's
premises equipment, interconnection of LANs and WANs, provision of Advanced
Intelligent Network applications and implementation of virtual private networks.
 
     Wholesale Services to ISPs. The Company believes that with the recent
growth in demand for Internet services, numerous ISPs are unable to obtain
network capacity rapidly enough to meet customer demand and
 
                                       39
<PAGE>   40
 
eliminate network congestion problems. Allegiance plans to supplement its core
end user product offerings by providing a full array of local services to ISPs,
including telephone numbers and switched and dedicated access to the Internet.
 
SALES AND CUSTOMER SUPPORT
 
     The Company will offer an integrated package of local exchange, local
access, domestic and international long distance, enhanced voice, data
transmission, and a full suite of Internet services to small and medium-sized
businesses, with "medium-sized" describing a user having approximately 200-300
phone lines and 250 employees. Unlike large corporate, government, or other
institutional users, small and medium-sized businesses often have no in-house
telecommunications manager. Based on management's previous experience,
Allegiance believes that a direct sales and customer care program focusing on
turn-key, "one-stop shopping" solutions will have a competitive advantage in
capturing this type of customers' total telecommunications traffic.
 
     Although the vast majority of the Company's sales force will focus
primarily on the small and medium-sized business segment, the Company also
intends to provide services to large business, government, and other
institutional users, as well as to ISPs, and expects that a significant portion
of its initial revenue will come from these segments. Therefore, Allegiance will
organize its sales and customer care organizations to serve each of these three
market segments. Sales and marketing approaches in the telecommunications market
are market-segment specific, and the Company believes the following are the most
effective approaches with respect to its three targeted market segments:
 
     - Small/medium business -- The Company will use direct sales, print
       advertising, and agency programs.
 
     - Large business, government, and other institutional users -- The Company
       will use account teams, established business relationships, applications
       sales, trade show advertising, and technical journal articles.
 
     - Wholesale (ISPs) -- The Company will use direct sales, established
       business relationships, and competitive pricing.
 
     The principal portion of Allegiance's sales and customer care resources
will be dedicated to the small and medium-sized business segment. The Company
will organize account executives into teams with a team manager and a sales
support specialist. These teams will utilize telemarketing to "qualify" leads
and set up initial appointments. The Company will closely manage account
executives with regard to activity (i.e. number of sales calls per week) with
the goal of eventually calling on every prospective business customer in an
account executive's sales territory. The Company intends to use commission plans
and incentive programs to reward and retain the top performers and encourage
strong customer relationships. The sales team managers in a market will report
to a city sales director who will in turn report to a regional vice president.
In addition, each team's sales support specialist will act as a "customer
advocate" for the customers served by that team, so that the customer needs to
contact only one person for sales information and personalized customer service.
 
     The Company's wholesale sales to local and regional ISPs will be performed
by account executives reporting to the city sales director. Account executives
reporting to the senior vice president of national accounts will handle large
national ISPs. The senior vice president of national accounts will also have
responsibility for large corporate, government, and other institutional
accounts, with designated national account managers and sales support personnel
assigned to the major accounts. Unlike the small and medium-sized business
segment, the national account program will be built by recruiting national
account managers with established business relationships with large corporate
accounts, supported by technical applications personnel and customer care
specialists.
 
                                       40
<PAGE>   41
 
INFORMATION SYSTEMS
 
     Allegiance is currently developing tailored information systems and
procedures for OSS and other back-office systems that it believes will provide a
significant competitive advantage in terms of cost, processing large order
volumes, and customer service. These systems are required to enter, schedule,
provision, and track a customer's order from the point of sale to the
installation and testing of service and also include or interface with trouble
management, inventory, billing, collection and customer service systems. The
required high-level information requirements to support facilities-based service
are depicted in the following figure:
 
                       [INFORMATION REQUIREMENTS DIAGRAM]
 
     The legacy systems currently employed by most ILECs, CLECs and long
distance carriers, which were developed prior to the passage of the
Telecommunications Act, generally require multiple entries of customer
information to accomplish order management, provisioning, switch administration
and billing. This process is not only labor intensive, but it creates numerous
opportunities for errors in provisioning service and billing, delays in
installing orders, service interruptions, poor customer service, increased
customer churn, and significant added expenses due to duplicated efforts and the
need to correct service and billing problems. The Company believes that the
practical problems and costs of upgrading legacy systems are often prohibitive
for companies whose existing systems support a large number of customers with
ongoing service. Unburdened by legacy systems, the Company's team of engineering
and information technology professionals experienced in the CLEC industry is
working to develop, with the assistance of key third party vendors, OSS and
other back office systems designed to facilitate a smooth, efficient order
management, provisioning, trouble management, billing and collection, and
customer care process. See "Risk Factors -- Dependence on Billing, Customer
Service, and Information Systems."
 
                                       41
<PAGE>   42
 
     Order Management. Allegiance has signed a contract with a third-party
vendor to license their order management software. This product allows the sales
team not only to enter customer orders, but also to monitor the status of the
order as it progresses through the service initiation process.
 
     Provisioning Management. The licensed order management software also
supports the design and management of the provisioning process, including
circuit design and work flow management. The system has been designed to permit
programming into the system of a standard schedule of tasks which must be
accomplished in order to initiate service to a customer, as well as the standard
time intervals during which each such task must be completed. This way, when a
standard order is selected in the system, each required task in the service
initiation process can be efficiently managed to its assigned time interval.
 
     External Interfaces. Several external interfaces are required to initiate
service for a customer. While some of these will be automated initially via
gateways from the order management software, the most important interfaces
(those to the ILEC) will be accomplished initially via fax or e-mail. Certain
ILECs are just beginning to develop automated interfaces on a limited basis.
Allegiance intends to take a lead role with selected ILECs to create standards
for automation of these interfaces.
 
     Network Element Administration. The Company has signed a contract with a
third-party vendor to license their network element administration software. The
Company is currently developing an interface between its order management system
and the network element manager to integrate data integrity and eliminate
redundant data entry.
 
     Customer Billing. Allegiance has selected a billing services provider, and
a contract for this service is currently being negotiated. Customer information
will be electronically interfaced with this provider from the Company's order
management system via a gateway being developed, thereby integrating all
repositories of information.
 
     Billing Records. Billing records will be generated by the Lucent Series
5ESS(R)-2000 switches to record customer calling activity. These records will be
automatically processed by the billing services provider in order to calculate
and produce bills in a customer-specified billing format.
 
     Allegiance believes this integrated OSS approach will provide for faster
customer service initiation, improved billing accuracy and customization, and a
superior level of customer service. See "Risk Factors -- Dependence on Billing,
Customer Service, and Information Systems." The Company will actively work
toward "electronic bonding" between the Allegiance OSS and those of the ILECs,
which would permit creation of service requests on-line.
 
NETWORK DEPLOYMENT
 
     Allegiance plans to deploy networks in 24 Tier I markets. The Company
estimates that these 24 markets will include 18 BTAs with over 20 million
non-residential access lines, representing approximately 44.7% of the total
non-residential access lines in the U.S. The Company plans to deploy its
networks principally in two phases of development, with Phase I to offer service
in 12 of the largest U.S. metropolitan markets, which the Company believes
include approximately 26.0% of the nation's non-residential access lines. Phase
II will offer service in an additional 12 major U.S. metropolitan markets, which
the Company believes include approximately an additional 18.7% of total U.S.
non-residential access lines. Allegiance is currently operational in three Phase
I markets: New York City, Dallas and Atlanta; and is in the process of deploying
networks in five additional Phase II markets: Chicago, Los Angeles, San
Francisco, Boston and Fort Worth. The following table sets forth the markets
targeted by the Company in Phase I and the Company's current buildout schedule,
although the order and timing of network deployment may vary and will depend on
a number of factors, including recruiting city management, the regulatory
environment, the Company's results
 
                                       42
<PAGE>   43
 
of operations and the existence of specific market opportunities, such as
acquisitions, and no assurance can be given that the Company will deploy
networks in each such market:
 
                   PHASE I MARKET SIZE AND BUILDOUT SCHEDULE
 
<TABLE>
<CAPTION>
                                  ESTIMATED TOTAL NON-          % OF TOTAL U.S. NON-            INITIAL FACILITIES-
            MARKET             RESIDENTIAL ACCESS LINES(1)   RESIDENTIAL ACCESS LINES(2)       BASED SERVICE DATE(3)
            ------             ---------------------------   ---------------------------   -----------------------------
                                       (THOUSANDS)
<S>                            <C>                           <C>                           <C>
New York City.................            3,298(4)                       6.7%(4)               March 1998
Dallas, TX....................              867(5)                       1.8%(5)               April 1998
Atlanta, GA...................              612                          1.2%                  April 1998
Fort Worth, TX................               --(5)                         --(5)                3Q, 1998
Chicago, IL...................            1,951                          4.0%                   3Q, 1998
Los Angeles, CA...............            3,430(6)                       7.0%(6)                3Q, 1998
Northern New Jersey...........               --(4)                         --(4)                4Q, 1998
San Francisco, CA.............            2,148(7)                       4.4%(7)                4Q, 1998
Boston, MA....................              649                          1.3%                   4Q, 1998
Long Island, NY...............               --(4)                         --(4)                  1999
Washington, D.C...............              871                          1.8%                     1999
Orange County, CA.............               --(6)                         --(6)                  1999
                                         ------                         -----
          Total...............           13,826(7)                      28.2%(7)
</TABLE>
 
---------------
 
(1) Data as of December 31, 1996.
 
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
    December 31, 1996.
(3) Refers to the first month during which the Company could offer
    facilities-based service or the quarter or year during which the Company
    expects to be able to offer facilities-based service based on its current
    business plan.
(4) Data for New York City also includes Northern New Jersey and Long Island,
    NY.
(5) Data for Dallas, TX also includes Fort Worth, TX.
(6) Data for Los Angeles, CA also includes Orange County, CA.
(7) Data for San Francisco, CA also includes San Jose, CA and Oakland, CA, both
    of which are Phase II markets.
 
     The following table sets forth the markets targeted by the Company in Phase
II, although the order and timing of network deployment may vary and will depend
on a number of factors, including recruiting city management, the regulatory
environment, the Company's results of operations and the existence of specific
market opportunities, such as acquisitions, and no assurance can be given that
the Company will deploy networks in each such market. Management currently
expects to commence network deployment in the following Phase II markets in
1999, with service anticipated to begin during 1999 and 2000.
 
                              PHASE II MARKET SIZE
 
<TABLE>
<CAPTION>
                                                    ESTIMATED TOTAL NON-           % OF TOTAL U.S. NON-
                   MARKET                        RESIDENTIAL ACCESS LINES(1)    RESIDENTIAL ACCESS LINES(2)
                   ------                        ---------------------------    ---------------------------
                                                         (THOUSANDS)
<S>                                              <C>                            <C>
San Jose, CA.................................                  --(3)                         --(3)
Oakland, CA..................................                  --(3)                         --(3)
San Diego, CA................................                 790                           1.6%
Houston, TX..................................                 765                           1.6%
Philadelphia, PA.............................               1,754                           3.6%
Detroit, MI..................................                 821                           1.7%
Denver, CO...................................                 632                           1.3%
Baltimore, MD................................                 639                           1.3%
Seattle, WA..................................                 779                           1.6%
Miami, FL....................................                 769                           1.6%
St. Louis, MO................................                 449                           0.9%
Cleveland, OH................................                 654                           1.3%
                                                            -----                          ----
          Total..............................               8,052(3)                       16.5%(3)
</TABLE>
 
---------------
 
(1) Data as of December 31, 1996.
(2) Based on an estimated 49.0 million U.S. non-residential access lines as of
    December 31, 1996.
(3) Data for San Jose, CA and Oakland, CA is included in data for San Francisco,
    CA in Phase I above.
 
     In the majority of its targeted markets, Allegiance will initially deploy
switches and collocate transmission equipment in ILEC central offices with heavy
concentrations of non-residential access lines. Over time, the
 
                                       43
<PAGE>   44
 
Company plans to expand its networks throughout the metropolitan areas to
address the majority of the business market in each area. In some markets, such
as Northern New Jersey, Allegiance will not initially deploy its own switch, but
will deploy transmission equipment in major central offices and route traffic to
an existing Allegiance switch until traffic growth warrants the addition of a
switch to service that market.
 
NETWORK ARCHITECTURE
 
     Allegiance is deploying Lucent Series 5ESS(R)-2000 digital switches in New
York City, Dallas, Atlanta, Chicago, Los Angeles and San Francisco. The Company
currently plans to deploy similar switches in its other markets. As a result of
the network unbundling provisions of the Telecommunications Act, the Company
believes it can accelerate its market entry, reduce its initial capital
requirements and mitigate risks in estimating market share growth by employing a
"smart build" strategy. The Company plans to install the Lucent switch and
related equipment at a central location in each market and deploy transmission
equipment in ILEC central offices. Allegiance intends initially to lease local
network trunking facilities from the ILEC and/or one or more CLECs in order to
connect Allegiance's switch to major ILEC central offices serving the central
business district and outlying areas of business concentrations in each market.
The switch will also be connected to ILEC tandem switches and certain
interexchange carrier ("IXC") points-of-presence ("POPs"). Allegiance will
deploy integrated digital loop carriers ("IDLCs") and related equipment in each
of the ILEC central offices in which it is connected. As each customer is
obtained, service will be provisioned by leasing unbundled loops from the ILEC
to connect the Company's IDLC (located in the serving central office) to the
customer premise equipment. For large business, government, or other
institutional customers or for numerous customers located in large buildings, it
may be more cost-effective for Allegiance to use leased ILEC or CLEC capacity in
the 1.5 to 150 megabit range (or perhaps a wireless local loop leased from one
of the emerging wireless CLECs) to connect the customer(s) to the Allegiance
network. In this case, Allegiance will locate its IDLC or other equipment in the
customer's building. A diagram of the Company's typical network layout is
presented in the following figure:
 
                          [ALLEGIANCE NETWORK DIAGRAM]
 
     Although Allegiance will initially lease its local network transmission
facilities, the Company plans to replace leased trunk capacity with its own
fiber optic facilities as and when it experiences sufficient traffic volume
growth between its switch and specific ILEC central offices.
 
     Allegiance will employ a similar "success-based" strategy to manage its
long distance network expenses. Initially, the Company will resell long distance
transmission services by buying minutes on a wholesale basis.
 
                                       44
<PAGE>   45
 
As traffic on a specific route increases (for example, on the New York
City-Chicago route), Allegiance will subsequently lease long distance trunk
capacity connecting its switches between the two markets. Allegiance would thus
transport its calls from New York City to Chicago (or vice versa) over its own
network and terminate the calls at the ILEC tandem switch in Chicago. For
international calls, the Company plans to negotiate agreements with various
international carriers for termination of its international calls throughout the
world. As Allegiance's international traffic volumes increase to major
destinations (e.g. Canada, Mexico, the United Kingdom, France, Germany and
Japan), the Company expects to be able to improve its resale margins.
 
IMPLEMENTATION OF SERVICES
 
     In order to offer services in a market, Allegiance generally must secure
certification from the state regulator and typically must file tariffs or price
lists for the services that it will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good customer service.
New entrants are also required to show that they have a staff that possesses the
knowledge and ability required to establish and operate a telecommunications
network. Allegiance has made such demonstrations in Texas, California, Illinois,
Maryland and New York, where the Company has obtained certificates to provide
local exchange and intrastate toll service as well as in Georgia where the
Company was granted a certificate to provide local exchange service.
Applications for such authority are pending in the District of Columbia. The
Company intends to file similar applications in the near future for
Massachusetts, New Jersey and Virginia.
 
     Before providing local service, a new entrant must negotiate and execute an
interconnection agreement with the ILEC. While such agreements can be voluminous
and may take months to negotiate, most of the key interconnection issues have
now been thoroughly addressed and commissions in most states have ruled on
arbitrations between the ILECs and new entrants. New entrants may adopt an
interconnection agreement already entered into by the ILEC and another carrier.
Such an approach will be selectively adopted by Allegiance to enable it to enter
markets quickly while at the same time preserving its right to replace the
adopted agreement with a customized interconnection agreement that can be
negotiated once service has already been established. For example, Allegiance
has adopted the interconnection agreement entered into between Southwestern Bell
and WinStar Communications, Inc. in Texas and has begun to negotiate
enhancements to that agreement for ultimate inclusion in Allegiance's customized
agreement with Southwestern Bell.
 
     While such interconnection agreements include key terms and prices for
interconnection circuits, a significant joint implementation effort must be made
with the ILEC in order to establish operationally efficient and reliable traffic
interchange arrangements. Such interchange arrangements must include those
between the new entrant's network and the facilities of other service providers
as well as public service agencies. For example, Allegiance worked closely with
Southwestern Bell in order to devise and implement an efficient 911 call routing
plan that will meet the requirements of each individual 911 service bureau in
Southwestern Bell areas that Allegiance will serve using its own switches.
Allegiance has begun to meet with key personnel from 911 service bureaus to
obtain their acceptance and to establish dates for circuit establishment and
joint testing. Other examples of traffic interchange and interconnection
arrangements utilizing the ILEC's network include connectivity to its
out-of-band signaling facilities, interconnectivity to the ILEC's operator
services and directory assistance personnel, and access through the ILEC to the
networks of wireless companies and interexchange carriers.
 
     After the initial implementation activities are completed in a market, an
on-going trunking capacity management plan must be followed to ensure that
adequate quantities of network facilities (e.g., interconnection trunks) are in
place, and a contingency plan must be devised to address spikes in demand caused
by events such as a larger-than-expected customer sale in a relatively small
geographic area.
 
                                       45
<PAGE>   46
 
REGULATION
 
     The Company's telecommunications services business is subject to varying
degrees of federal, state and local regulation.
 
  Federal Regulation
 
     The FCC regulates interstate and international telecommunications services.
The Company provides service on a common carrier basis. The FCC imposes certain
regulations on common carriers such as the RBOCs that have some degree of market
power. The FCC imposes less regulation on common carriers without market power
including, to date, CLECs. The FCC requires common carriers to receive an
authorization to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points.
 
     In August 1996, the FCC released a decision (the "Interconnection
Decision") establishing rules implementing the Telecommunications Act
requirements that ILECs negotiate interconnection agreements and providing
guidelines for review of such agreements by state public utilities commissions.
On July 18, 1997, the Eighth Circuit vacated certain portions of the
Interconnection Decision, including provisions establishing a pricing
methodology and a procedure permitting new entrants to "pick and choose" among
various provisions of existing interconnection agreements between ILECs and
their competitors. On October 14, 1997, the Eighth Circuit issued a decision
vacating additional FCC rules that will likely have the effect of increasing the
cost of obtaining the use of combinations of an ILEC's unbundled network
elements. The Eighth Circuit decisions create uncertainty about the rules
governing pricing and the terms and conditions of interconnection agreements,
and could make negotiating and enforcing such agreements more difficult and
protracted and may require renegotiation of existing agreements. There can be no
assurance that the Company will be able to obtain or enforce interconnection
agreements on terms acceptable to the Company. The Supreme Court has granted a
writ of certiorari to review the Eighth Circuit decisions.
 
     In October 1996, the FCC adopted an order in which it eliminated the
requirement that non-dominant interstate carriers such as the Company maintain
tariffs on file with the FCC for domestic interstate services. This order
applies to all non-dominant interstate carriers, including AT&T. The order does
not apply to the switched and special access services of the RBOCs or other
local exchange providers. The FCC order was issued pursuant to authority granted
to the FCC in the Telecommunications Act to "forbear" from regulating any
telecommunications services provider if the FCC determines that the public
interest will be served. After a nine-month transition period, relationships
between interstate carriers and their customers will be set by contract. At that
point long distance companies may no longer file with the FCC tariffs for
interstate, domestic, interexchange services. Carriers have the option to
immediately cease filing tariffs. Several parties have filed notices for
reconsideration of the FCC order and other parties appealed the decision. On
February 13, 1997, the United States Court of Appeals for the District of
Columbia Circuit stayed the implementation of the FCC order pending its review
of the order on the merits. Currently, that temporary stay remains in effect.
 
     If the stay is lifted and the FCC order becomes effective,
telecommunications carriers such as the Company will no longer be able to rely
on the filing of tariffs with the FCC as a means of providing notice to
customers of prices, terms and conditions on which they offer their interstate
services. The obligation to provide non-discriminatory, just and reasonable
prices remains unchanged under the Communications Act of 1934, as amended (the
"Communications Act"). While tariffs provided a means of providing notice of
prices, terms and conditions, the Company intends to rely primarily on its sales
force and direct marketing to provide such information to its customers.
 
                                       46
<PAGE>   47
 
     The Telecommunications Act is intended to increase competition. The act
opens the local services market by requiring ILECs to permit interconnection to
their networks and establishing ILEC obligations with respect to:
 
     Reciprocal Compensation. Requires all ILECs and CLECs to complete calls
originated by competing carriers under reciprocal arrangements at prices based
on a reasonable approximation of incremental cost or through mutual exchange of
traffic without explicit payment.
 
     Resale. Requires all ILECs and CLECs to permit resale of their
telecommunications services without unreasonable restrictions or conditions. In
addition, ILECs are required to offer wholesale versions of all retail services
to other telecommunications carriers for resale at discounted rates, based on
the costs avoided by the ILEC in the wholesale offering.
 
     Interconnection. Requires all ILECs and CLECs to permit their competitors
to interconnect with their facilities. Requires all ILECs to permit
interconnection at any technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a reasonable
profit). At the option of the carrier seeking interconnection, collocation of
the requesting carrier's equipment in the ILECs' premises must be offered,
except where an ILEC can demonstrate space limitations or other technical
impediments to collocation.
 
     Unbundled Access. Requires all ILECs to provide nondiscriminatory access to
unbundled network elements (including, network facilities, equipment, features,
functions, and capabilities) at any technically feasible point within their
networks, on nondiscriminatory terms, at prices based on cost (which may include
a reasonable profit).
 
     Number Portability. Requires all ILECs and CLECs to permit users of
telecommunications services to retain existing telephone numbers without
impairment of quality, reliability or convenience when switching from one
telecommunications carrier to another.
 
     Dialing Parity. Requires all ILECs and CLECs to provide "1+" equal access
to competing providers of telephone exchange service and toll service, and to
provide nondiscriminatory access to telephone numbers, operator services,
directory assistance, and directory listing, with no unreasonable dialing
delays.
 
     Access to Rights-of-Way. Requires all ILECs and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at regulated prices.
 
     ILECs are required to negotiate in good faith with carriers requesting any
or all of the above arrangements. If the negotiating carriers cannot reach
agreement within a prescribed time, either carrier may request binding
arbitration of the disputed issues by the state regulatory commission. Where an
agreement has not been reached, ILECs remain subject to interconnection
obligations established by the FCC and state telecommunication regulatory
commissions.
 
     On May 8, 1997, the FCC released an order establishing a significantly
expanded federal universal service subsidy regime. For example, the FCC
established new subsidies for telecommunications and information services
provided to qualifying schools and libraries with an annual cap of $2.3 billion
and for services provided to rural health care providers with an annual cap of
$400.0 million. The FCC also expanded the federal subsidies for local exchange
telephone services provided to low-income consumers. Providers of interstate
telecommunications service, such as the Company, as well as certain other
entities, must pay for these programs. The Company's share of these federal
subsidy funds will be based on its share of certain defined telecommunications
end user revenues. Currently, the FCC is assessing such payments on the basis of
a provider's revenue for the previous year; since the Company had no significant
revenues in 1997, it will not be liable for subsidy payments in any material
amount during 1998. With respect to subsequent years, however, the Company is
currently unable to quantify the amount of subsidy payments that it will be
required to make or the effect that these required payments will have on its
financial condition. In the May 8th order, the FCC also announced that it will
soon revise its rules for subsidizing service provided to consumers in high cost
areas, which may result in further substantial increases in the overall cost of
the subsidy program. Several parties have appealed the May 8th order. Such
appeals have been consolidated and transferred to the United States Court of
Appeals for the Fifth Circuit where they are currently pending. In addition, on
July 3, 1997, several ILECs filed a petition for stay of the May 8th order with
the FCC. That petition is pending.
 
                                       47
<PAGE>   48
 
     The Telecommunications Act codifies the ILECs' equal access and
nondiscrimination obligations and preempts inconsistent state regulation. The
Telecommunications Act also contains special provisions that eliminate the AT&T
Antitrust Consent Decree (and similar antitrust restrictions on the GTOCs)
restricting the RBOCs from providing long distance services and engaging in
telecommunications equipment manufacturing. The Telecommunications Act permitted
the RBOCs to enter the out-of-region long distance market immediately upon its
enactment. Further, provisions of the Telecommunications Act permit a RBOC to
enter the long distance market in its traditional service area if it satisfies
several procedural and substantive requirements, including obtaining FCC
approval upon a showing that the RBOC has entered into interconnection
agreements (or, under some circumstances, has offered to enter into such
agreements) in those states in which it seeks long distance relief, the
interconnection agreements satisfy a 14-point "checklist" of competitive
requirements, and the FCC is satisfied that the RBOC's entry into long distance
markets is in the public interest. To date, several petitions by RBOCs for such
entry have been denied by the FCC, and none have been granted.
 
     On December 31, 1997, the U.S. District Court for the Northern District of
Texas issued the SBC Decision finding that Sections 271 to 275 of the
Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions they must satisfy before
they may provide in-region interLATA telecommunications services. The SBC
Decision has been stayed pending appeal. If the SBC Decision is upheld on
appeal, however, the RBOCs would be able to provide such in-region services
immediately without satisfying the statutory conditions. The Company believes
that the factual assumptions and legal reasoning in the SBC Decision are
erroneous and that the decision will likely be reversed on appeal, although
there can be no assurance of this outcome. If the SBC Decision is upheld on
appeal, it would likely have an unfavorable effect on the Company's business for
at least two reasons. First, the SBC Decision removes the incentive RBOCs have
to cooperate with companies like Allegiance to foster competition within their
service areas so that they can qualify to offer in-region interLATA services
because the decision allows RBOCs to offer such services immediately. However,
the SBC Decision does not affect other provisions of the Act which create legal
obligations for all ILECs to offer interconnection and network access. Second,
the Company is legally able to offer its customers both long distance and local
exchange services, which the RBOCs currently may not do. This ability to offer
"one-stop shopping" gives the Company a marketing advantage that it would no
longer enjoy if the SBC Decision were upheld on appeal. See "-- Competition."
 
     Under the Telecommunications Act, any entity, including cable television
companies and electric and gas utilities, may enter any telecommunications
market, subject to reasonable state regulation of safety, quality and consumer
protection. Because implementation of the Telecommunications Act is subject to
numerous federal and state policy rulemaking proceedings and judicial review
there is still uncertainty as to what impact such legislation will have on the
Company.
 
     Pursuant to authority granted by the FCC, the Company will resell the
international telecommunications services of other common carriers between the
United States and international points. In connection with such authority, the
Company's subsidiary, Allegiance Telecom International, Inc., has filed tariffs
with the FCC stating the rates, terms and conditions for its international
services.
 
     With respect to its domestic service offerings, various subsidiaries of the
Company have filed tariffs with the FCC stating the rates, terms and conditions
for their interstate services. The Company's tariffs are generally not subject
to pre-effective review by the FCC, and can be amended on one day's notice. The
Company's interstate services are provided in competition with interexchange
carriers and, with respect to access services, the ILECs. With limited
exceptions, the current policy of the FCC for most interstate access services
dictates that ILECs charge all customers the same price for the same service.
Thus, the ILECs generally cannot lower prices to those customers likely to
contract for their services without also lowering charges for the same service
to all customers in the same geographic area, including those whose
telecommunications requirements would not justify the use of such lower prices.
The FCC may, however, alleviate this constraint on the ILECs and permit them to
offer special rate packages to very large customers, as it has done in a few
cases, or permit other forms of rate flexibility. The FCC has adopted some
proposals that significantly lessen the regulation of ILECs that are subject to
competition in their service areas and provide such ILECs with additional
flexibility in pricing their interstate switched and special access on a
 
                                       48
<PAGE>   49
 
central office specific basis; and, as discussed in the following paragraph, is
considering expanding such flexibility.
 
     In two orders released on December 24, 1996, and May 16, 1997, the FCC made
major changes in the interstate access charge structure. In the December 24th
order, the FCC removed restrictions on ILECs' ability to lower access prices and
relaxed the regulation of new switched access services in those markets where
there are other providers of access services. If this increased pricing
flexibility is not effectively monitored by federal regulators, it could have a
material adverse effect on the Company's ability to compete in providing
interstate access services. The May 16th order substantially increased the costs
that ILECs subject to the FCC's price cap rules ("price cap LECs") recover
through monthly, non-traffic sensitive access charges and substantially decrease
the costs that price cap LECs recover through traffic sensitive access charges.
In the May 16th order, the FCC also announced its plan to bring interstate
access rate levels more in line with cost. The plan will include rules that are
expected to be established sometime in 1998 that may grant price cap LECs
increased pricing flexibility upon demonstrations of increased competition (or
potential competition) in relevant markets. The manner in which the FCC
implements this approach to lowering access charge levels could have a material
effect on the Company's ability to compete in providing interstate access
services. Several parties have appealed the May 16th order. Those appeals have
been consolidated and transferred to the United States Court of Appeals for the
Eighth Circuit where they are currently pending.
 
     A number of ILECs around the country have been contesting whether the
obligation to pay reciprocal compensation to CLECs should apply to local
telephone calls terminating to ISPs. The ILECs claim that this traffic is
interstate in nature and therefore should be exempt from compensation
arrangements applicable to local, intrastate calls. The FCC, however, has
determined on a number of occasions, most recently in its May 16, 1997, access
charge reform order, that calls to ISPs should be exempt from interstate access
charges and should be governed by local exchange tariffs. Under the Eighth
Circuit decisions, however, the states have primary jurisdiction over the
determination of reciprocal compensation arrangements and as a result, the
treatment of this issue can vary from state to state. Currently, the state
commissions in Delaware, Maryland, Missouri, New York, North Carolina, Oklahoma,
Pennsylvania, Virginia, Arizona, Connecticut, Colorado, Illinois, Michigan,
Minnesota, Oregon, Washington, West Virginia and Texas have ruled that
reciprocal compensation arrangements do apply to ISP traffic. However, certain
of these rulings are subject to appeal. Disputes over the appropriate treatment
of ISP traffic are pending in California, Georgia, and Massachusetts. The
Company anticipates that ISPs will be among its target customers, and adverse
decisions in these proceedings could limit the Company's ability to serve this
group of customers profitably.
 
  State Regulation
 
     The Telecommunications Act is intended to increase competition in the
telecommunications industry, especially in the local exchange market. With
respect to local services, ILECs are required to allow interconnection to their
networks and to provide unbundled access to network facilities, as well as a
number of other procompetitive measures. Because the implementation of the
Telecommunications Act is subject to numerous state rulemaking proceedings on
these issues, it is currently difficult to predict how quickly full competition
for local services, including local dial tone, will be introduced.
 
     State regulatory agencies have regulatory jurisdiction when Company
facilities and services are used to provide intrastate services. A portion of
the Company's current traffic may be classified as intrastate and therefore
subject to state regulation. The Company expects that it will offer more
intrastate services (including intrastate switched services) as its business and
product lines expand and state regulations are modified to allow increased local
services competition. To provide intrastate services, the Company generally must
obtain a certificate of public convenience and necessity from the state
regulatory agency and comply with state requirements for telecommunications
utilities, including state tariffing requirements. The Company has obtained such
certificates to provide local exchange and intrastate toll service in Texas,
California, Illinois, Maryland and New York. In Georgia, the Company was granted
a certificate to provide local exchange service. Applications for such authority
are pending in the District of Columbia. The Company intends to file similar
applications in the near future for Massachusetts, New Jersey and Virginia.
There can be no assurance that such state authorizations will be granted.
 
                                       49
<PAGE>   50
 
  Local Regulation
 
     The Company's networks are subject to numerous local regulations such as
building codes and licensing. Such regulations vary on a city by city and county
by county basis. To the extent the Company decides in the future to install its
own fiber optic transmission facilities, it will need to obtain rights-of-way
over private and publicly owned land. There can be no assurance that such
rights-of-way will be available to the Company on economically reasonable or
advantageous terms.
 
COMPETITION
 
     The telecommunications industry is highly competitive. The Company believes
that the principal competitive factors affecting its business will be pricing
levels and clear pricing policies, customer service, accurate billing and, to a
lesser extent, variety of services. The ability of the Company to compete
effectively will depend upon its continued ability to maintain high quality,
market-driven services at prices generally equal to or below those charged by
its competitors. To maintain its competitive posture, the Company believes that
it must be in a position to reduce its prices in order to meet reductions in
rates, if any, by others. Any such reductions could adversely affect the
Company. Many of the Company's current and potential competitors have financial,
personnel and other resources, including brand name recognition, substantially
greater than those of the Company, as well as other competitive advantages over
the Company.
 
     Local Exchange Carriers ("LECs"). In each of the markets targeted by the
Company, the Company will compete principally with the ILEC serving that area,
such as BellSouth, Southwestern Bell, or Bell Atlantic Corporation. The Company
believes the RBOCs' primary agenda is to be able to offer long distance service
in their service territories. The independent telcos have already achieved this
goal with good early returns. Many experts expect the RBOCs to be successful in
entering the long distance market in a few states by early 1998 and in all
states by mid-1999. The Company believes the RBOCs expect to offset share losses
in their local markets by capturing a significant percentage of the in-region
long distance market, especially in the residential segment where the RBOCs'
strong regional brand names and extensive advertising campaigns may be very
successful. In the event that the SBC Decision, which held that the
Telecommunications Act's restrictions on the lines of business in which RBOCs
may engage (including the conditions to the RBOCs provision of in-region
interLATA telecommunications services) are unconstitutional, is upheld, the
RBOCs would immediately thereafter be able to enter the long distance market in
their service territories. See "-- Regulation."
 
     As a recent entrant in the integrated telecommunications services industry,
the Company has not achieved and does not expect to achieve a significant market
share for any of its services. In particular, the ILECs have long-standing
relationships with their customers, have financial, technical and marketing
resources substantially greater than those of the Company, have the potential to
subsidize competitive services with revenues from a variety of businesses and
currently benefit from certain existing regulations that favor the ILECs over
the Company in certain respects. While recent regulatory initiatives, which
allow CLECs such as the Company to interconnect with ILEC facilities, provide
increased business opportunities for the Company, such interconnection
opportunities have been (and likely will continue to be) accompanied by
increased pricing flexibility for and relaxation of regulatory oversight of the
ILECs.
 
     ILECs have long-standing relationships with regulatory authorities at the
federal and state levels. While recent FCC administrative decisions and
initiatives provide increased business opportunities to telecommunications
providers such as the Company, they also provide the ILECs with increased
pricing flexibility for their private line and special access and switched
access services. In addition, with respect to competitive access services (as
opposed to switched local exchange services), the FCC recently proposed a rule
that would provide for increased ILEC pricing flexibility and deregulation for
such access services either automatically or after certain competitive levels
are reached. If the ILECs 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, the income of
competitors to the ILECs, including the Company, could be materially adversely
affected. If future regulatory decisions afford the ILECs increased access
services pricing flexibility or other
 
                                       50
<PAGE>   51
 
regulatory relief, such decisions could also have a material adverse effect on
competitors to the ILEC, including the Company.
 
     Competitive Access Carriers/Competitive Local Exchange Carriers/IXCs/Other
Market Entrants. The Company also faces, and expects to continue to face,
competition from other current and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into the local
exchange market such as AT&T, MCI, and Sprint, and from other CLECs, resellers
of local exchange services, CAPs, cable television companies, electric
utilities, microwave carriers, wireless telephone system operators and private
networks built by large end users. In addition, a continuing trend toward
consolidation of telecommunications companies and the formation of strategic
alliances within the telecommunications industry, as well as the development of
new technologies, could give rise to significant new competitors to the Company.
For example, WorldCom acquired MFS in December 1996, has recently acquired
another CLEC, Brooks Fiber Properties, Inc., and has a pending agreement to
merge with MCI. In January 1998 AT&T announced its intention to acquire Teleport
Communications Group Inc. In May 1998, SBC Communications Inc. and Ameritech
Corporation agreed to merge. These types of consolidations and strategic
alliances could put the Company at a competitive disadvantage. The
Telecommunications Act includes provisions which impose certain regulatory
requirements on all local exchange carriers, including competitors such as the
Company, while granting the FCC expanded authority to reduce the level of
regulation applicable to any or all telecommunications carriers, including
ILECs. The manner in which these provisions of the Telecommunications Act are
implemented and enforced could have a material adverse effect on the Company's
ability to successfully compete against ILECs and other telecommunications
service providers. The Company also competes with equipment vendors and
installers, and telecommunications management companies with respect to certain
portions of its business.
 
     The changes in the Telecommunications Act radically altered the market
opportunity for traditional CAPs and CLECs. Due to the fact that most existing
CAP/CLECs initially entered the market providing dedicated access in the
pre-1996 era, these companies had to build a fiber infrastructure before
offering services. Switches were added by most CAP/CLECs in the last year to
take advantage of the opening of the local market. With the Telecommunications
Act requiring unbundling of the LEC networks, CAP/CLECs will now be able to more
rapidly enter the market by installing switches and leasing trunk and loop
capacity until traffic volume justifies building facilities. New CLECs will not
have to replicate existing facilities and can be more opportunistic in designing
and implementing networks.
 
     The Company believes the major IXCs (AT&T, MCI, Sprint) have a two pronged
strategy: (1) keep the RBOCs out of in-region long distance as long as possible
and (2) develop facilities-based and unbundled local service, an approach
already being pursued by WorldCom with the acquisition of MFS, and more recently
by AT&T with its proposed acquisition of Teleport Communications.
 
     Competition for Provision of Long Distance Services. The long distance
telecommunications industry has numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. Prices in the long distance market have declined
significantly in recent years and are expected to continue to decline. The
Company expects to increasingly face competition from companies offering long
distance data and voice services over the Internet. Such companies could enjoy a
significant cost advantage because they do not currently pay carrier access
charges or universal service fees.
 
     Data/Internet Services Providers. The Internet services market is highly
competitive, and the Company expects that competition will continue to
intensify. The Company's competitors in this market will include ISPs, other
telecommunications companies, online services providers and Internet software
providers. Many of these competitors have greater financial, technological and
marketing resources than those available to the Company.
 
     Competition from International Telecommunications Providers. Under the
recent WTO agreement on basic telecommunications services, the United States and
72 other members of the WTO committed themselves to opening their respective
telecommunications markets and/or foreign ownership and/or to adopting
regulatory measures to protect competitors against anticompetitive behavior by
dominant
 
                                       51
<PAGE>   52
 
telecommunications companies, effective in some cases as early as January 1998.
Although the Company believes that the WTO agreement could provide the Company
with significant opportunities to compete in markets that were not previously
accessible and to provide more reliable services at lower costs than the Company
could have provided prior to implementation of the WTO agreement, it could also
provide similar opportunities to the Company's competitors. There can be no
assurance that the pro-competitive effects of the WTO agreement will not have a
material adverse effect on the Company's business, financial condition and
results of operations or that members of the WTO will implement the terms of the
WTO agreement. See "Risk Factors -- Competition."
 
EMPLOYEES
 
   
     As of May 31, 1998, the Company had a total of 219 employees. The Company
believes that its future success will depend on its continued ability to attract
and retain highly skilled and qualified employees. None of the Company's
employees are currently represented by a collective bargaining agreement. The
Company believes that it enjoys good relationships with its employees.
    
 
LEGAL PROCEEDINGS
 
     On August 29, 1997, WorldCom sued the Company and two of its Senior Vice
Presidents. In its complaint, WorldCom alleges that these employees violated
certain noncompete and nonsolicitation agreements by accepting employment with
the Company and by soliciting then-current WorldCom employees to leave
WorldCom's employment and join the Company. In addition, WorldCom claims that
the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief, including barring two of the Company's
executives from continued employment with the Company, and monetary damages,
although it has filed no motion for a temporary restraining order or preliminary
injunction. The Company denies all claims and will vigorously defend itself. The
Company does not expect the ultimate outcome of this matter to have a material
adverse effect on the results of operations or financial condition of the
Company.
 
     On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one-stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but moved to dismiss
the abuse of process and unfair competition claims. On March 4, 1998, the court
dismissed the claim for unfair competition.
 
     The Company is not party to any other pending legal proceedings that the
Company believes would, individually or in the aggregate, have a material
adverse effect on the Company's financial condition or results of operations.
 
                                       52
<PAGE>   53
 
FACILITIES
 
     The Company is headquartered in Dallas, Texas and leases offices and space
in a number of locations, primarily for sales offices and network equipment
installations. The table below lists the Company's current leased facilities:
 
<TABLE>
<CAPTION>
                                                                                   APPROXIMATE
                          LOCATION                            LEASE EXPIRATION    SQUARE FOOTAGE
                          --------                            ----------------    --------------
<S>                                                           <C>                 <C>
Dallas, TX..................................................  January 2008            40,000
Atlanta, GA.................................................  February 2003            7,400
Atlanta, GA.................................................  August 1998              1,000
Atlanta, GA.................................................  November 2001            7,900
Chicago, IL.................................................  February 2009            9,200
Chicago, IL.................................................  July 2008               14,000
Los Angeles, CA.............................................  June 2008               11,000
Los Angeles, CA.............................................  June 2008               10,000
New York, NY................................................  August 2006              8,700
New York, NY................................................  April 2008              19,500
Westchester, IL.............................................  January 2001            10,600
</TABLE>
 
     The Company believes that its leased facilities are adequate to meet its
current needs in the eight markets in which it has begun to deploy networks, and
that additional facilities are available to meet its development and expansion
needs in existing and projected target markets for the foreseeable future.
 
                                       53
<PAGE>   54
 
                                   MANAGEMENT
 
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
 
     The following table sets forth certain information concerning the
directors, executive officers and other key personnel of the Company, including
their ages as of May 1, 1998:
 
<TABLE>
<CAPTION>
            NAME               AGE                          POSITION(S)
            ----               ---                          -----------
<S>                            <C>   <C>
Royce J. Holland(1)..........  49    Chairman of the Board and Chief Executive Officer
C. Daniel Yost...............  49    President and Chief Operating Officer, and Director
Thomas M. Lord...............  41    Executive Vice President of Corporate Development, Chief
                                     Financial Officer, and Director
John J. Callahan.............  48    Senior Vice President of Sales and Marketing, and
                                     Director
Dana A. Crowne...............  37    Senior Vice President and Chief Engineer
Stephen N. Holland...........  46    Senior Vice President and Chief Information Officer
Patricia E. Koide............  49    Senior Vice President of Human Resources, Real Estate,
                                     Facilities and Administration
Gregg A. Long................  44    Senior Vice President of Development and Regulatory
L.C. Baird...................  54    Regional Vice President -- Southeast Division
Anthony J. Parella...........  38    Regional Vice President -- Central Division
Lawrence A. Price............  35    Regional Vice President -- Northeast Division
Paul D. Carbery..............  37    Director
James E. Crawford, III(1)....  52    Director
John B. Ehrenkranz...........  33    Director
Paul J. Finnegan.............  45    Director
Richard D. Frisbie...........  48    Director
Reed E. Hundt................  49    Director
Robert H. Niehaus (1)........  42    Director
James N. Perry, Jr. (1)......  37    Director
</TABLE>
 
---------------
 
(1) Member of the Board's Executive Committee.
 
     Royce J. Holland, the Company's Chairman of the Board and Chief Executive
Officer, has more than 25 years of experience in the telecommunications,
independent power and engineering/construction industries. Prior to founding
Allegiance in April 1997, Mr. Holland was one of several co-founders of MFS,
where he served as President and Chief Operating Officer from April 1990 until
September 1996 and as Vice Chairman from September 1996 to February 1997. In
January 1993, Mr. Holland was appointed by President George Bush to the National
Security Telecommunications Advisory Committee. Mr. Holland also presently
serves on the Board of Directors of CSG Systems, a publicly held billing
services company. Mr. Holland's brother, Stephen N. Holland, is employed as the
Company's Senior Vice President and Chief Information Officer.
 
     C. Daniel Yost, who joined the Company as President and Chief Operating
Officer in February 1998, was elected to the Company's Board of Directors in
March 1998. Mr. Yost has more than 26 years of experience in the
telecommunications industry. From July 1997 until he joined the Company, Mr.
Yost was the President and Chief Operating Officer for U.S. Operations of Netcom
On-Line Communications Services, Inc., a leading Internet service provider. Mr.
Yost served as the President, Southwest Region of AT&T Wireless Services, Inc.
from June 1994 to July 1997. Prior to that, from July 1991 to June 1994, Mr.
Yost was the President, Southwest Region of McCaw Cellular Communications/LIN
Broadcasting.
 
     Thomas M. Lord, a co-founder and Director of the Company and its Executive
Vice President of Corporate Development and Chief Financial Officer, is
responsible for overseeing the Company's mergers and acquisitions, corporate
finance and investor relations functions. Mr. Lord is an 18-year veteran in
investment banking, securities research and portfolio management, including
serving as a managing director of Bear, Stearns & Co. Inc. from January 1986 to
December 1996. In the five-year period ending December 1996,
 
                                       54
<PAGE>   55
 
Mr. Lord oversaw 43 different transactions valued in excess of $6.2 billion for
the telecommunications, information services and technology industries.
 
     John J. Callahan, who joined the Company as Senior Vice President of Sales
and Marketing in December 1997, has more than 18 years of experience in the
telecommunications industry. Most recently, Mr. Callahan was President of the
Western Division for MFS from December 1991 to November 1997, where he was
responsible for the company's sales and operations in Arizona, California,
Georgia, Florida, Illinois, Michigan, Missouri, Ohio, Oregon, Texas and
Washington. Prior to joining MFS, Mr. Callahan was Vice President and General
Manager, Southwest Division for Sprint. Mr. Callahan also held sales positions
with Data Switch and North American Telecom. Mr. Callahan was elected to the
Company's Board of Directors in March 1998.
 
     Dana A. Crowne became the Company's Senior Vice President and Chief
Engineer in August 1997. Prior to joining Allegiance, Mr. Crowne held various
management positions at MFS from the time of its founding in 1988, where his
responsibilities included providing engineering support and overseeing budgets
for the construction of MFS' networks. Mr. Crowne ultimately became Vice
President, Network Optimization for MFS from January 1996 to May 1997 and
managed the company's network expenses and planning and its domestic engineering
functions. Prior to joining MFS, Mr. Crowne designed and installed fiber optic
transmission systems for Morrison-Knudsen and served as a consultant on the
construction of private telecommunications networks with JW Reed and Associates.
 
     Stephen N. Holland joined the Company as its Senior Vice President and
Chief Information Officer in September 1997. Prior to that time, Mr. Holland
held several senior level positions involving management of or consulting on
information systems, accounting, taxation and finance. Mr. Holland's experience
includes serving as Practice Manager and Information Technology Consultant for
Oracle Corporation from June 1995 to September 1997, as Chief Financial Officer
of Petrosurance Casualty Co. from September 1992 to June 1995, as Manager of
Business Development for Electronic Data Systems, and as a partner of Price
Waterhouse. Mr. Holland's brother, Royce J. Holland, presently serves as the
Company's Chairman of the Board and Chief Executive Officer.
 
     Patricia E. Koide has been the Company's Senior Vice President of Human
Resources, Real Estate, Facilities and Administration since August 1997. Before
then, Ms. Koide was Vice President of Corporate Services, Facilities and
Administration for WorldCom from March 1997 to August 1997. Ms. Koide also held
various management positions within MFS and its subsidiaries since 1989,
including Senior Vice President of Facilities, Administration and Purchasing for
MFS North America from 1996 to 1997, Senior Vice President of Human Resources,
Facilities and Administration for MFS Telecom from 1994 to 1996, and Vice
President of Human Resources and Administration for MFS North America from 1989
to 1993. Prior to MFS, Ms. Koide was with Sprint for eight years where she
managed the company's human resources, real estate and facilities for the
Midwest.
 
     Gregg A. Long, who became the Company's Senior Vice President of Regulatory
and Development in September 1997, spent 11 years at Destec Energy, Inc. as
Project Development Manager, Vice President, and Director. In that position, he
was responsible for the development of gas-fired power plants from conceptual
stages through project financing. Prior to joining Destec, Mr. Long was Manager
of Project Finance at Morrison-Knudsen, where he was responsible for analyzing
and arranging finance packages for various industrial, mining and civil projects
and also served as financial consultant and analyst.
 
     L.C. Baird, who became the Company's Regional Vice President -- Southeast
Division in September 1997, has more than 25 years of experience in the
telecommunications industry. Prior to joining Allegiance, Mr. Baird held several
senior level positions in operating units of MFS, including serving as President
of MFS Intelenet's Southern Division from January 1993 to April 1997 and as vice
president of sales and marketing for MFS Network Technologies from August 1987
to January 1993. Mr. Baird also served as area manager for Motorola's Latin
American Communications where he was responsible for sales in Central America,
Mexico, South America and the Caribbean.
 
                                       55
<PAGE>   56
 
     Anthony J. Parella, who joined the Company as its Regional Vice
President -- Central Division in August 1997, has more than 10 years of
experience in the telecommunications industry. Prior to joining Allegiance, Mr.
Parella was Vice President and General Manager for MFS Intelenet, Inc., an
operating unit of MFS, from February 1994 to January 1997, where he was
responsible for the company's sales and operations in Texas. Mr. Parella also
served as Director of Commercial Sales for Sprint from 1991 to January 1994.
 
     Lawrence A. Price joined the Company as its Regional Vice
President -- Northeast Division in February, 1998. From February 1997 until he
joined the Company, Mr. Price was a Vice President/General Manager of WinStar
Telecommunications, Inc. From June 1995 to February 1997, Mr. Price held
management positions with ADC Telecommunications, Inc. From July 1994 to June
1995, he was the Director of U.S. Sales and Operations of ATX Telecom Systems,
Inc, and from July 1993 to July 1994 he was a sales manager with Teleport
Communications Group, Inc.
 
     Paul D. Carbery, who was elected to the Company's Board of Directors in
August 1997, is a general partner of Frontenac Company, a Chicago-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications and technology industries. Mr. Carbery also presently serves
on the boards of directors of Whittman Hart, Inc., a publicly traded information
services company, and Mastering Computers Inc., a publicly traded information
technology training company.
 
     James E. Crawford, III, who was elected to the Company's Board of Directors
in August 1997, is a general partner of Frontenac Company, a Chicago-based
private equity investing firm, where he specializes in investing in companies in
the telecommunications and technology industries. Mr. Crawford also presently
serves on the boards of directors of Focal Communications Corporation ("Focal"),
a privately held CLEC that will compete with the Company, as well as of Optika
Imaging Systems, Inc., a publicly held document imaging software company, and
Cornerstone Imaging, Inc., a publicly held document imaging displays company.
 
   
     John B. Ehrenkranz, who was elected to the Company's Board of Directors in
March 1998, is a Principal of Morgan Stanley & Co. Incorporated where he has
been employed since 1987. Mr. Ehrenkranz is also a Principal of Morgan Stanley
Capital Partners III, Inc.
    
 
     Paul J. Finnegan, who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Finnegan also presently
serves on the boards of directors of Focal, a privately held CLEC that will
compete with the Company, and Omnipoint Corporation, a publicly traded PCS
provider.
 
     Richard D. Frisbie, who was elected to the Company's Board of Directors in
August 1997, is a Managing Partner of Battery Ventures, a Boston-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications industry. Mr. Frisbie also presently serves on the board of
directors of Focal, a privately held CLEC that will compete with the Company.
 
     Reed E. Hundt was elected to the Company's Board of Directors in March
1998. Mr. Hundt served as chairman of the Federal Communications Commission from
1993 to 1997. He currently serves as chairman of The Forum on Communications and
Society (FOCAS) at The Aspen Institute and is a principal of Charles Ross
Partners, LLC, a consulting firm. Prior to joining the FCC, Mr. Hundt was a
partner at Latham & Watkins, an international law firm.
 
   
     Robert H. Niehaus, who was elected to the Company's Board of Directors in
August 1997, is a Managing Director of Morgan Stanley & Co. Incorporated where
he has been employed since 1982. Mr. Niehaus also presently serves on the boards
of directors of numerous companies including American Italian Pasta Company,
PageMart Wireless, Inc., Silgan Holdings Inc., and Waterford Wedgewood, plc. Mr.
Niehaus is also a Managing Director and a Director of Morgan Stanley Capital
Partners III, Inc.
    
 
     James N. Perry, Jr., who was elected to the Company's Board of Directors in
August 1997, is a vice president of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Perry also presently serves
on
 
                                       56
<PAGE>   57
 
the boards of directors of Focal, a privately held CLEC that will compete with
the Company, as well as Omnipoint Corporation, a publicly traded PCS provider,
and Clearnet Communications, a Canadian publicly traded PCS and enhanced
specialized mobile radio company.
 
ELECTION OF DIRECTORS; VOTING AGREEMENT
 
     The Company's bylaws establish the size of the Company's Board of Directors
at 13 Directors; there is presently one vacancy. The Company anticipates that
one additional director not otherwise affiliated with the Company or any of its
stockholders will be elected by the Board of Directors following the completion
of the Equity Offering. The Company's certificate of incorporation and by-laws
provide that its Directors will be appointed and may be removed by majority vote
of the Company's stockholders (without cumulative voting).
 
     At present all directors are elected annually and serve until the next
annual meeting of stockholders, or until the election and qualification of their
successors. Effective upon the consummation of the Equity Offering, the Board of
Directors will be divided into three classes, as nearly equal in number as
possible, with each Director serving a three year term and one class being
elected at each year's annual meeting of stockholders. Messrs. Callahan,
Finnegan, Carbery, and Ehrenkranz will be in the class of directors whose term
expires at the 1999 annual meeting of the Company's stockholders. Messrs. Lord,
Yost, Crawford, Frisbie and the additional director anticipated to be appointed
by the Board of Directors will be in the class of directors whose term expire at
the 2000 annual meeting of the Company's stockholders. Messrs. Holland, Hundt,
Perry, and Niehaus will be in the class of directors whose term expires at the
2001 annual meeting of the Company's stockholders. At each annual meeting of the
Company's stockholders, successors to the class of directors whose term expires
at such meeting will be elected to serve for three-year terms and until their
successors are elected and qualified.
 
     The current direct and indirect stockholders of the Company are parties to
a voting agreement, pursuant to which they have each agreed to vote all of their
shares in such a manner as to elect the following persons to serve as Directors:
Madison Dearborn Capital Partners, Morgan Stanley Capital Partners, and
Frontenac Company (and their respective successors, assigns, transferees, and
affiliates) each have the right to designate two Directors; Battery Ventures
(and its successors, assigns, transferees, and affiliates) has the right to
designate one Director; the Company's Chief Executive Officer has the right to
serve as a Director; the Management Investors (and their successors and assigns)
have the right to designate three Directors; and the final two directorships may
be filled by representatives designated by the Fund Investors and acceptable to
the Management Investors.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     The Board of Directors currently has three committees: (i) an Executive
Committee, (ii) an Audit Committee and (iii) a Compensation Committee.
 
     The current direct and indirect stockholders of the Company are parties to
a voting agreement, pursuant to which they have agreed to vote all of their
shares in such a manner that the Executive Committee will comprise the Company's
Chief Executive Officer and three other representatives, one designated by each
of Morgan Stanley Capital Partners, Madison Dearborn Capital Partners, and
Frontenac Company (and their respective successors, assigns, transferees and
affiliates). The Executive Committee will be authorized, subject to certain
limitations, to exercise all of the powers of the Board of Directors during
periods between Board meetings.
 
     The Audit Committee is currently comprised of Messrs. Yost, Hundt, Carbery,
Ehrenkranz and Finnegan. The Audit Committee is responsible for making
recommendations to the Board of Directors regarding the selection of independent
auditors, reviewing the results and scope of the audit and other services
provided by the Company's independent accountants and reviewing and evaluating
the Company's audit and control functions.
 
     The Compensation Committee is currently comprised of Messrs. Holland,
Frisbie, Crawford, Niehaus and Perry. The Compensation Committee is responsible
for reviewing, and as it deems appropriate,
 
                                       57
<PAGE>   58
 
recommending to the Board of Directors, policies, practices and procedures
relating to the compensation of the officers and other managerial employees of
the Company and the establishment and administration of employee benefit plans.
The Compensation Committee exercises all authority under any stock option or
stock purchase plans of the Company (unless the Board appoints any other
committee to exercise such authority), and advises and consults with the
officers of the Company as may be requested regarding managerial personnel
policies.
 
COMPENSATION OF DIRECTORS
 
     The Company will reimburse the members of its Board of Directors for their
reasonable out-of-pocket expenses incurred in connection with attending Company
Board or committee meetings. Additionally, the Company is obligated to maintain
its present level of directors' and officers' insurance. Members of the
Company's Board of Directors receive no other compensation for services provided
as a Director or as a member of any Board committee.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth compensation paid during the period from
April 22, 1997 to December 31, 1997 to the Chief Executive Officer of the
Company (the "Named Executive Officer"). There were no other executive officers
of the Company whose annual salary and bonus exceeded $100,000 for all services
rendered to the Company during such period.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                 ANNUAL COMPENSATION
                                      ------------------------------------------
                                                                    OTHER ANNUAL    ALL OTHER
                                                                    COMPENSATION   COMPENSATION
    NAME AND PRINCIPAL POSITION       YEAR   SALARY($)   BONUS($)      ($)(A)          ($)
    ---------------------------       ----   ---------   --------   ------------   ------------
<S>                                   <C>    <C>         <C>        <C>            <C>
Royce J. Holland....................  1997    $72,308    $     --     $    --        $     --
  Chairman of the Board and Chief
  Executive Officer
</TABLE>
 
---------------
 
(a)  Includes perquisites and other benefits paid to the Named Executive Officer
     in excess of 10% of the total annual salary and bonus received by the Named
     Executive Officer during the last fiscal year.
 
     Prior to April 1998, the Board did not have a Compensation Committee and
decisions concerning the compensation of executive officers and other key
employees of the Company were determined by the Company's Board of Directors.
During the Company's fiscal year ending December 31, 1998, Royce J. Holland, C.
Daniel Yost, Thomas M. Lord, and John J. Callahan expect to earn salaries at an
annual rate of $200,000, $200,000, $175,000, and $175,000, respectively.
 
STOCK PLANS
 
  1997 NONQUALIFIED STOCK OPTION PLAN
 
   
     On November 13, 1997, the Company's Board of Directors adopted the 1997
Nonqualified Stock Option Plan (the "Option Plan"), under which the Company may
issue to Directors, consultants, and executive and other key employees of the
Company, stock options (the "Options") exercisable for an aggregate of 2,131,477
shares of the Company's Common Stock (subject to adjustment in the Board's
discretion upon the occurrence of certain events that might otherwise lead to
the expansion or dilution of the rights of participants under the Option Plan).
As of May 31, 1998, Options to acquire an aggregate of 886,594 shares of Common
Stock have been granted under such Option Plan. The Option Plan is administered
by the Compensation Committee. The Option Plan authorizes the Compensation
Committee to issue Options in such forms and amounts and on such terms as
determined by the Compensation Committee. The per-share exercise price for
Options will be set by the Compensation Committee, but may not be less than the
fair market value of a share of the Company's Common Stock on the date of grant
(as determined in good faith by the Compensation
    
 
                                       58
<PAGE>   59
 
Committee). The Compensation Committee currently intends to issue Options under
the Option Plan to all Company employees other than the Management Investors,
and to set the number of Options issued as an annual component of an employee's
compensation package. The terms of the Options issued under the Option Plan to
date are, and the Compensation Committee presently anticipates that the terms of
all Options issued under the Option Plan in the future will be, as summarized
below.
 
     The Company will establish an annual amount of Options to be granted to an
employee each year. Three years' amount of Options will be issued on the first
business day of the quarter succeeding the date which a participant joins the
Company. Such Options will vest over a three-year period, with 1/3 "cliff"
vesting on the first anniversary of the date of grant and 1/12 vesting on each
of the first eight quarter-ends thereafter. Subject to available Options under
the Option Plan, one year's amount of Options will be issued on each anniversary
of the initial grant, and such Options will vest in the third year after grant,
with 1/4 vesting on each of the 27-, 30-, 33-, and 36-month anniversaries of the
date of grant. Through this mechanism, a participant will at any given time have
three years' amount of Options unvested. Vesting is accelerated 100% upon an
employee's death or permanent physical disability. If there is a sale of the
Company and the participant is terminated (or constructively terminated) within
the two-year period following the sale, vesting is accelerated 100% upon such
termination. Options expire if not exercised within six years after the date of
grant. If a participant is terminated for any reason, all unvested Options
immediately expire and all vested Options must be exercised within 90 days after
termination. Options are nontransferable during the life of the participant.
Shares of Common Stock issued upon exercise of Options are subject to various
restrictions on transferability, holdback periods in the event of a public
offering of the Company's securities and provisions requiring the holder of such
shares to approve and, if requested by the Company, sell its shares in any sale
of the Company that is approved by the Board.
 
  1998 STOCK INCENTIVE PLAN
 
   
     Prior to the consummation of the Equity Offering, the Board and
stockholders of the Company will approve the Company's 1998 Stock Incentive Plan
(the "1998 Stock Plan"). The 1998 Stock Plan will be administered by the
Compensation Committee. Certain employees, advisors and consultants of the
Company will be eligible to participate in the 1998 Stock Plan (a
"Participant"). The Compensation Committee will be authorized under the 1998
Stock Plan to select the Participants and determine the terms and conditions of
the awards under the 1998 Stock Plan. The 1998 Stock Plan provides for the
issuance of the following types of incentive awards: stock options, stock
appreciation rights, restricted stock, performance grants and other types of
awards that the Compensation Committee deems consistent with the purposes of the
1998 Stock Plan. An aggregate of 2,561,775 shares of Common Stock of the Company
will be reserved for issuance under the 1998 Stock Plan, subject to certain
adjustments reflecting changes in the Company's capitalization.
    
 
     Options granted under the 1998 Stock Plan may be either incentive stock
options ("ISOs") or such other forms of non-qualified stock options ("NQOs") as
the Compensation Committee may determine. ISOs are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). The exercise price of (i) an ISO
granted to an individual who owns shares possessing more than 10% of the total
combined voting power of all classes of stock of the Company (a "10% Owner")
will be at least 110% of the fair market value of a share of Common Stock on the
date of grant and (ii) an ISO granted to an individual other than a 10% Owner
and an NQO will be at least 100% of the fair market value of a share of Common
Stock on the date of grant.
 
     Options granted under the 1998 Stock Plan may be subject to time vesting
and certain other restrictions at the sole discretion of the Compensation
Committee. Subject to certain exceptions, the right to exercise an option
generally will terminate at the earlier of (i) the first date on which the
initial grantee of such option is not employed by the Company for any reason
other than termination without cause, death or permanent disability or (ii) the
expiration date of the option. If the holder of an option dies or suffers a
permanent disability while still employed by the Company, the right to exercise
all unexpired installments of such option shall be accelerated and shall vest as
of the latest of the date of such death, the date of such permanent disability
and the date of the discovery of such permanent disability, and such option
shall be exercisable,
 
                                       59
<PAGE>   60
 
subject to certain exceptions, for 180 days after such date. If the holder of an
option is terminated without cause, to the extent the option has vested, such
option will be exercisable for 30 days after such date.
 
     All outstanding awards under the 1998 Stock Plan will terminate immediately
prior to consummation of a liquidation or dissolution of the Company, unless
otherwise provided by the Board. In the event of the sale of all or
substantially all of the assets of the Company or the merger of the Company with
another corporation, all restrictions on any outstanding awards will terminate
and Participants will be entitled to the full benefit of their awards
immediately prior to the closing date of such sale or merger, unless otherwise
provided by the Board.
 
     The Board generally will have the power and authority to amend the 1998
Stock Plan at any time without approval of the Company's stockholders, subject
to applicable federal securities and tax laws limitations (including regulations
of the Nasdaq National Market).
 
  STOCK PURCHASE PLAN
 
     The Company's Employee Stock Discount Purchase Plan (the "Stock Purchase
Plan") will be approved by the Board and stockholders prior to the consummation
of the Equity Offering. The Stock Purchase Plan is intended to give employees
desiring to do so a convenient means of purchasing shares of Common Stock
through payroll deductions. The Stock Purchase Plan is intended to provide an
incentive to participate by permitting purchases at a discounted price. The
Company believes that ownership of stock by employees will foster greater
employee interest in the success, growth and development of the Company.
 
   
     Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of the
United States will be eligible to participate in the Stock Purchase Plan if he
or she has been employed by the Company for more than six months. Participation
will be discretionary with each eligible employee. The Company will reserve
2,305,718 shares of Common Stock for issuance in connection with the Stock
Purchase Plan. Elections to participate and purchases of stock will be made on a
quarterly basis. Each participating employee contributes to the Stock Purchase
Plan by choosing a payroll deduction in any specified amount, with a specified
minimum deduction per payroll period. A participating employee may increase or
decrease the amount of such employee's payroll deduction, including a change to
a zero deduction as of the beginning of any calendar quarter. Elected
contributions will be credited to participants' accounts at the end of each
calendar quarter. In addition, employees may make lump sum contributions at the
end of the year to enable them to purchase the maximum number of shares
available for purchase during the plan year.
    
 
     Each participating employee's contributions will be used to purchase shares
for the employee's share account within 15 days after the last day of each
calendar quarter. The cost per share will be 85% of the lower of the closing
price of the Company's Common Stock on the Nasdaq National Market on the first
or the last day of the calendar quarter. The number of shares purchased on each
employee's behalf and deposited in his/her share account will be based on the
amount accumulated in such participant's cash account and the purchase price for
shares with respect to any calendar quarter. Shares purchased under the Stock
Purchase Plan carry full rights to receive dividends declared from time to time.
Under the Stock Purchase Plan, any dividends attributable to shares in the
employee's share account will be automatically used to purchase additional
shares for such employee's share account. Share distributions and share splits
will be credited to the participating employee's share account as of the record
date and effective date, respectively. A participating employee will have full
ownership of all shares in such employee's share account and may withdraw them
for sale or otherwise by written request to the Compensation Committee following
the close of each calendar quarter. Subject to applicable federal securities and
tax laws, the Board will have the right to amend or to terminate the Stock
Purchase Plan. Amendments to the Stock Purchase Plan will not affect a
participating employee's right to the benefit of the contributions made by such
employee prior to the date of any such amendment. In the event the Stock
Purchase Plan is terminated, the Compensation Committee will be required to
distribute all shares held in each participating employee's share account plus
an amount of cash equal to the balance in each participating employee's cash
account.
 
                                       60
<PAGE>   61
 
401(K) PLAN
 
     The Company is in the process of adopting a tax-qualified employee savings
and retirement plan (the "401(k) Plan") covering all of the Company's full-time
employees. Pursuant to the 401(k) Plan, employees may elect to reduce their
current compensation up to the statutorily prescribed annual limit and have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Section 401 of the Code so that contributions by
employees to the 401(k) Plan, and income earned on plan contributions, are not
taxable to employees until withdrawn from the 401(k) Plan. The trustees under
the 401(k) Plan, at the direction of each participant, invest such participant's
assets in the 401(k) Plan in selected investment options.
 
EXECUTIVE AGREEMENTS
 
  Royce J. Holland Executive Agreement
 
     In August 1997, in connection with Royce J. Holland's purchase of an
ownership interest in Allegiance, LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Holland entered into an Executive Purchase Agreement (the "Holland Executive
Agreement"), including, among others, the following terms:
 
     Vesting. The Allegiance LLC securities purchased by Mr. Holland, as well as
any Company securities distributed with respect to such Allegiance LLC
securities (collectively, the "Holland Executive Securities") are subject to
vesting over a four-year period, with 20.0% vesting on the date of grant and
20.0% vesting on each of the first four anniversaries thereof. Vesting will be
accelerated by one year upon the consummation of the Equity Offering, 100.0% in
the event of Mr. Holland's death or disability, and 100.0% upon a sale of the
Company where at least 50.0% of the consideration for such sale is cash or
marketable securities.
 
     Repurchase of Securities. If Mr. Holland's employment is terminated for any
reason other than a termination by the Company without cause, Allegiance LLC and
the Company (or their assignees) will have the right to repurchase all vested
Holland Executive Securities at fair market value, and all unvested Holland
Executive Securities at the lesser of fair market value and original cost.
 
     Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Holland
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of the Company's securities
and provisions requiring the holder of such shares to approve and, if requested
by the Company, sell its shares in any sale of the Company that is approved by
the Board.
 
     Terms of Employment. Mr. Holland is an "at will" employee of the Company
and, thus, may be terminated by the Company at any time and for any reason. Mr.
Holland is not entitled to receive any severance payments upon any such
termination, other than payments in consideration of the noncompetition and
nonsolicitation agreements discussed below.
 
     Noncompetition and Nonsolicitation Agreements. During the Noncompete Period
(as defined below), Mr. Holland may not hire or attempt to induce any employee
of the Company to leave the Company's employ, nor attempt to induce any customer
or other business relation of the Company to cease doing business with the
Company, nor in any other way interfere with the Company's relationships with
its employees, customers, and other business relations. Also, during the
Noncompete Period, Mr. Holland may not participate in any business engaged in
the provision of telecommunications services in any Covered Market. As used in
the Holland Executive Agreement, the "Noncompete Period" means the period of
employment and the following additional period: (i) if Mr. Holland is terminated
prior to August 13, 2000, the period ending on the later of August 13, 2001 and
the second anniversary of termination; (ii) if Mr. Holland is terminated at any
time on or after August 13, 2000 but prior to August 13, 2001, the period ending
on August 13, 2002; and (iii) if Mr. Holland is terminated at any time on or
after August 13, 2001, the one-year period following termination; provided that
the "Noncompete Period" shall end if at any time the Company ceases to pay Mr.
Holland his base salary and benefits in existence at the time of termination
(reduced by any salary or benefits Mr. Holland receives as a result of other
employment). As used in the Holland Executive Agreement, "Covered Market"
 
                                       61
<PAGE>   62
 
means: (i) any market in which the Company is conducting business or preparing,
pursuant to a business plan approved by the Board of Directors and the Fund
Investors, to conduct business; (ii) Dallas, New York City, Atlanta, Chicago,
Los Angeles and 15 additional Phase I and Phase II markets; and (iii) any market
for which the Company has prepared a business plan unless such business plan has
been rejected by the Board of Directors or the Fund Investors.
 
  C. Daniel Yost Executive Agreement
 
     In February 1998, in connection with C. Daniel Yost's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Yost entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
 
  Thomas M. Lord Executive Agreement
 
     In August 1997, in connection with Thomas M. Lord's purchase of an
ownership interest in Allegiance LLC, the Company's sole shareholder (see
"Certain Relationships and Related Transactions" and "Security Ownership of
Certain Beneficial Owners and Management"), the Company, Allegiance LLC, and Mr.
Lord entered into an Executive Purchase Agreement, containing the same terms as
the Holland Executive Agreement described above.
 
  Executive Agreements Entered into by Other Management Investors
 
     Each of the Management Investors has entered into an Executive Purchase
Agreement (the "Other Executive Agreements"), including, among others, the
following terms:
 
     Vesting. The Allegiance LLC securities purchased by a Management Investor,
as well as any Company securities distributed with respect to such Allegiance
LLC securities (collectively, the "Executive Securities") are subject to vesting
over a four-year period, with 25.0% vesting on each of the first four
anniversaries of the grant date. Vesting will be accelerated by one year upon
the consummation of the Equity Offering, 100.0% in the event of such Management
Investor's death or disability, and 100.0% upon a sale of the Company where at
least 50.0% of the consideration for such sale is cash or marketable securities.
 
     Repurchase of Securities. If a Management Investor's employment is
terminated for any reason, Allegiance LLC and the Company (or their assignees)
will have the right to repurchase all such Management Investor's vested
Executive Securities at fair market value, and all unvested Executive Securities
at the lesser of fair market value and original cost.
 
     Restrictions on Transfer; Holdback and "Drag Along" Agreements. The
Executive Securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of the Company's securities
and provisions requiring the holder of such shares to approve and, if requested
by the Company, sell its shares in any sale of the Company that is approved by
the Board.
 
     Terms of Employment. Each Management Investor is an "at will" employee of
the Company and, thus, may be terminated by the Company at any time and for any
reason. No Management Investor is entitled to receive any severance payments
upon any such termination.
 
                                       62
<PAGE>   63
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     Prior to April 1998, the Company did not have a Compensation Committee and
the compensation of executive officers and other key employees of the Company
was determined by the Company's Board of Directors. Royce J. Holland, the
Company's Chairman and Chief Executive Officer, Thomas M. Lord, the Company's
Executive Vice President of Corporate Development and Chief Financial Officer,
C. Daniel Yost, the Company's President and Chief Operating Officer, and John J.
Callahan, the Company's Senior Vice President of Sales and Marketing, are all
currently members of the Company's Board of Directors. The Board of Directors
established the Compensation Committee, which is responsible for decisions
regarding salaries, incentive compensation, stock option grants and other
matters regarding executive officers and key employees of the Company. See
" -- Committees of the Board of Directors."
 
                                       63
<PAGE>   64
 
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
LIMITED LIABILITY COMPANY AGREEMENT
 
     On August 13, 1997, the Fund Investors and the Management Investors entered
into a limited liability company agreement (the "LLC Agreement") in order to
govern the affairs of Allegiance LLC, which presently holds the one outstanding
share of the Company's Common Stock and all substantially all of the outstanding
shares of the Company's Preferred Stock.
 
     Upon consummation of the Equity Offering, Allegiance LLC will dissolve and
its assets (which consist almost entirely of Company stock) will be distributed
to the Fund Investors and the Management Investors in accordance with the LLC
Agreement. The LLC Agreement provides that the Equity Allocation between the
Fund Investors and the Management Investors will range between 95.0%/5.0% and
66.7%/33.3% based upon the valuation of the Company's Common Stock implied by
the Equity Offering. Based upon the current valuation of the Company's Common
Stock implied by the Equity Offering, the Equity Allocation will be 66.7% to the
Fund Investors and 33.3% to the Management Investors. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
 
SECURITYHOLDERS AGREEMENT
 
     The Fund Investors, the Management Investors, the Company, and Allegiance
LLC are parties to a securityholders agreement dated as of August 13, 1997 (the
"Securityholders Agreement"). Pursuant to the terms of the Securityholders
Agreement, in the event of an approved sale of the Company, each of the Fund
Investors (and their transferees) agrees to approve and, if requested, to sell
its shares in such sale of the Company. The Securityholders Agreement, apart
from certain provisions thereof, will be automatically terminated upon the
consummation of the Equity Offering.
 
REGISTRATION AGREEMENT
 
     The Fund Investors, the Management Investors, and the Company are parties
to the Registration Agreement dated as of August 13, 1997. See "Description of
Capital Stock -- Registration Rights."
 
VOTING AGREEMENT
 
   
     The current direct and indirect stockholders of the Company are parties to
a voting agreement, pursuant to which they have each agreed to vote all of their
shares in such a manner as to elect the following persons to serve as Directors:
Madison Dearborn Capital Partners, Morgan Stanley Capital Partners, and
Frontenac Company (and their respective successors, assigns, transferees, and
affiliates) each have the right to designate two Directors; Battery Ventures
(and its successors, assigns, transferees, and affiliates) has the right to
designate one Director; the Company's Chief Executive Officer has the right to
serve as a Director; the Management Investors (and their successors and assigns)
have the right to designate three Directors; and the final two directorships may
be filled by representatives designated by the Fund Investors and acceptable to
the Management Investors.
    
 
OTHER
 
     Morgan Stanley & Co. Incorporated ("Morgan Stanley"), an affiliate of
Morgan Stanley Capital Partners, one of the Fund Investors, acted as a placement
agent in connection with the Unit Offering and received fees of approximately
$4.4 million. In addition, Morgan Stanley is one of the Underwriters and will
receive fees in connection with each of the Offerings. See "Underwriters."
 
                                       64
<PAGE>   65
 
         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
   
     Prior to the Equity Offering, substantially all of the Company's
outstanding equity securities were held by Allegiance LLC. The following table
sets forth certain information regarding the beneficial ownership of the
outstanding Common Stock of the Company after giving effect to the LLC
Dissolution and the Equity Allocation and as adjusted for the Equity Offering
by: (i) each of the directors and the executive officers of the Company; (ii)
all directors and executive officers as a group and (iii) each owner of more
than 5% of the equity securities of the Company ("5% Owners"). Unless otherwise
noted, the address for each director and executive officer of the Company is c/o
the Company, 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207.
    
 
   
<TABLE>
<CAPTION>
                                                   SHARES OWNED PRIOR TO    SHARES OWNED AFTER THE
                                                      EQUITY OFFERING         EQUITY OFFERING(1)
                                                   ---------------------    -----------------------
      NAME AND ADDRESS OF BENEFICIAL OWNER           NUMBER      PERCENT      NUMBER       PERCENT
      ------------------------------------         ----------    -------    -----------    --------
<S>                                                <C>           <C>        <C>            <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(2)..............................   3,881,105      9.6%      3,881,105        7.4%
C. Daniel Yost...................................   1,619,940      4.0       1,619,940        3.1
Thomas M. Lord(3)................................   1,822,432      4.5       1,822,432        3.5
John J. Callahan.................................     607,477      1.5         607,477        1.2
Paul D. Carbery(4)...............................   4,262,999     10.6       4,262,999        8.1
James E. Crawford, III(4)........................   4,262,999     10.6       4,262,999        8.1
John B. Ehrenkranz...............................          --       --              --         --
Paul J. Finnegan(5)..............................          --       --              --         --
Richard D. Frisbie(6)............................   2,131,499      5.3       2,131,499        4.1
Reed E. Hundt(7).................................     101,246      *           101,246       *
Robert H. Niehaus(8).............................          --       --              --         --
James N. Perry, Jr.(5)...........................          --       --              --         --
All directors and executive officers as a group
  (12 persons)...................................  14,426,698     35.8      14,426,698       27.6
5% OWNERS:
Madison Dearborn Capital Partners(9).............  10,302,247     25.5      10,302,247       19.7
Morgan Stanley Capital Partners(10)..............  10,302,247     25.5      10,302,247       19.7
Frontenac Company(11)............................   4,262,999     10.6       4,262,999        8.1
Battery Ventures(12).............................   2,131,499      5.3       2,131,499        4.1
</TABLE>
    
 
---------------
 
   
  *  Denotes less than one percent.
    
 
   
 (1) Assumes no exercise of the underwriters' over-allotment option and does not
     give effect to any purchases, if any, by such persons named in the table in
     the Equity Offering.
    
 
   
 (2) Includes 1,940,552 shares of Common Stock owned by the Royce J. Holland
     Family Limited Partnership, of which Royce J. Holland is the sole general
     partner. All of the shares of Common Stock owned by Mr. Holland and the
     Royce J. Holland Family Limited Partnership are subject to vesting, with
     20% of such shares of Common Stock vested on August 13, 1997, 20% vesting
     upon the consummation of the Equity Offering and an additional 20% vesting
     on each of August 13, 1998, 1999 and 2000. See "Management -- Executive
     Agreements."
    
 
   
 (3) Includes 911,216 shares of Common Stock owned by Mr. Lord's wife and
     children, as to which Mr. Lord disclaims beneficial ownership. All of the
     shares of Common Stock owned by Mr. Lord and his family are subject to
     vesting with 20% of such shares of Common Stock vested on August 13, 1997,
     20% vesting upon the consummation of the Equity Offering and an additional
     20% vesting on each of August 13, 1998, 1999 and 2000. See
     "Management -- Executive Agreements."
    
 
   
 (4) All shares of Common Stock shown are owned by Frontenac VII Limited
     Partnership and Frontenac Masters VII Limited Partnership. Messrs. Carbery
     and Crawford are members of Frontenac Company, VII, L.L.C., the general
     partner of Frontenac VII Limited Partnership and Frontenac Masters VII
     Limited Partnership and their address is c/o Frontenac Company, 135 S.
     LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
     ownership of these shares of Common Stock.
    
 
   
 (5) Messrs. Finnegan and Perry are vice presidents of Madison Dearborn
     Partners, Inc., the general partner of the general partner of Madison
     Dearborn Capital Partners II, L.P. and their address is c/o Madison
     Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
     IL 60602.
    
 
   
 (6) All shares of Common Stock shown are owned by Battery Ventures, IV, L.P.
     and Battery Investment Partners IV, LLC. Mr. Frisbie is a managing partner
     of Battery Ventures, the general partner of these funds and his address is
     c/o Battery Ventures, 20 William Street, Wellesley, MA 02181. He disclaims
     beneficial ownership of these shares of Common Stock.
    
 
   
 (7) Mr. Hundt owns options to acquire 50,623 shares of Common Stock and Charles
     Ross Partners, LLC, a Delaware limited liability company, of which Mr.
     Hundt is a member, owns 50,623 shares of Common Stock.
    
 
   
 (8) Mr. Niehaus is a managing director and director of Morgan Stanley Capital
     Partners III, Inc., the general partner of the general partner of these
     funds and their address is c/o Morgan Stanley Capital Partners, 1221 Avenue
     of the Americas, New York, NY 10020.
    
 
   
 (9) These shares of Common Stock are owned by Madison Dearborn Capital Partners
     II, L.P.
    
 
   
(10) These shares of Common Stock are owned by Morgan Stanley Capital Partners
     III, L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital
     Investors, L.P.
    
 
   
(11) These shares of Common Stock are owned by Frontenac VII Limited Partnership
     and Frontenac Masters VII Limited Partnership.
    
 
   
(12) These shares of Common Stock are owned by Battery Ventures IV, L.P. and
     Battery Investment Partners IV, LLC.
    
 
                                       65
<PAGE>   66
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
11 3/4% NOTES
 
     The Company issued $445,000,000 aggregate principal amount at maturity of
11 3/4% Senior Discount Notes due February 15, 2008 pursuant to the 11 3/4%
Notes Indenture between the Company and The Bank of New York. The 11 3/4% Notes
were issued in units, with each unit consisting of one 11 3/4% Note and one
Warrant.
 
     No interest will be payable on the 11 3/4% Notes prior to August 15, 2003.
From and after February 15, 2003, interest on the 11 3/4% Notes will accrue at
the rate of 11 3/4% per annum from February 15, 2003 or from the most recent
interest payment date to which interest has been paid or provided for, payable
semiannually (to holders of record at the close of business on the February 1 or
August 1 immediately preceding the interest payment date) on February 15 and
August 15 of each year, commencing August 15, 2003.
 
     The 11 3/4% Notes are unsubordinated, unsecured obligations of the Company,
ranking pari passu in right of payment with all unsubordinated, unsecured
indebtedness of the Company, including the Notes offered hereby, and will rank
senior in right of payment to all future subordinated indebtedness of the
Company.
 
     The 11 3/4% Notes may be redeemed at any time on or after February 15,
2003, in whole or in part, at 105.8750% of their principal amount at maturity,
plus accrued interest, declining to 100% of their principal amount at maturity,
plus accrued interest, on and after February 15, 2006. In addition, at any time
on or before February 15, 2001, the Company may redeem up to 35% of the
aggregate principal amount at maturity of the 11 3/4% Notes with the net
proceeds of one or more public equity offerings at a redemption price equal to
111.75% (expressed as a percentage of the accreted value of the 11 3/4% Notes on
the redemption date), provided that at least $289,250,000 aggregate principal
amount at maturity of the 11 3/4% Notes remains outstanding immediately after
such redemption.
 
     The 11 3/4% Notes Indenture contains certain restrictive covenants,
including among others, limitations on the ability of the Company and its
restricted subsidiaries to incur indebtedness, pay dividends, prepay
subordinated indebtedness, repurchase capital stock, make investments, engage in
transactions with affiliates, create liens, sell assets and engage in mergers
and consolidations and certain other events which could cause an event of
default, which are substantially similar to those relating to the Notes offered
hereby. See "Description of the Notes."
 
                                       66
<PAGE>   67
 
                            DESCRIPTION OF THE NOTES
 
     The Notes are to be issued under an Indenture, dated as of the Closing
Date, between the Company, as issuer, and The Bank of New York (the "Trustee").
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act"). The Notes are subject to all such terms, and
holders of the Notes are referred to the Indenture and the Trust Indenture Act
for a statement of them. The following is a summary of the material terms and
provisions of the Notes. This summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and
qualified in its entirety by reference to, the Notes and the Indenture
(including the definitions contained therein). A copy of the form of Indenture
is filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. For definitions of certain capitalized terms, see "-- Certain
Definitions."
 
GENERAL
 
   
     The Notes will be unsecured (except to the extent described under
"-- Security" below), unsubordinated obligations of the Company, initially
limited to $290.0 million aggregate principal amount, and will mature on May 15,
2008. Each Note will bear interest at the rate shown on the front cover of this
Prospectus from the Closing Date or from the most recent Interest Payment Date
to which interest has been paid or provided for, payable semiannually (to
Holders of record at the close of business on the May 1 or November 1
immediately preceding the Interest Payment Date) on May 15 and November 15 of
each year, commencing November 15, 1998. Interest will be computed on the basis
of a 360-day year of twelve 30-day months.
    
 
     Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at One Wall Street, New York, New
York 10286); provided that, at the option of the Company, payment of interest
may be made by check mailed to the Holders at their addresses as they appear in
the Security Register.
 
   
     The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
The Notes will initially be represented by one or more global notes (the "Global
Notes") and will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of a nominee of the
Depositary. Except as set forth under "-- Book-Entry; Delivery and Form," owners
of beneficial interests in such Global Notes will not be entitled to have Notes
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture. See "Book-Entry; Delivery and Form." No
service charge will be made for any registration of transfer or exchange of
Notes, but the Company may require payment of a sum sufficient to cover any
transfer tax or other similar governmental charge payable in connection
therewith.
    
 
     Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated as
a single class for all purposes under the Indenture.
 
                                       67
<PAGE>   68
 
OPTIONAL REDEMPTION
 
   
     The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after May 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the Redemption Prices (expressed in percentages of principal
amount) set forth below, plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing May 15
of the years set forth below:
    
 
<TABLE>
<CAPTION>
                            YEAR                              REDEMPTION PRICE
                            ----                              ----------------
<S>                                                           <C>
2003........................................................             %
2004........................................................
2005........................................................
2006 and thereafter.........................................      100.000%
</TABLE>
 
   
     In addition, at any time prior to May 15, 2001, the Company may redeem up
to 35% of the principal amount of the Notes originally issued with the proceeds
of one or more Public Equity Offerings following which there is a Public Market,
at any time or from time to time in part, at a Redemption Price (expressed as a
percentage of principal amount) of        % plus accrued and unpaid interest to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date); provided that at least 65% of the
aggregate principal amount of Notes originally issued remains outstanding after
each such redemption and notice of any such redemption is mailed within 60 days
after the related Public Equity Offering.
    
 
   
     In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not listed on a national securities exchange, by lot
or by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
    
 
SINKING FUND
 
     There will be no sinking fund payments for the Notes.
 
   
SECURITY
    
 
   
     The Indenture will provide that on the Closing Date, the Company must
purchase and pledge to the Trustee as security for the benefit of the Holders of
the Notes, the Pledged Securities in such amount as will be sufficient upon
receipt of scheduled interest and principal payments of such securities to
provide for payment in full of the first six scheduled interest payments due on
the Notes. The Company expects to use approximately $88.0 million of the net
proceeds from the Debt Offering to acquire the Pledged Securities; however, the
precise amount of the Pledged Securities to be acquired will depend upon
interest rates prevailing on the Closing Date.
    
 
   
     The Pledged Securities will be pledged by the Company to the Trustee for
the benefit of the Holders of the Notes pursuant to the Pledge Agreement and
will be held by the Trustee in the Pledge Account. Pursuant to the Pledge
Agreement, immediately prior to an Interest Payment Date, the Company may either
deposit with the Trustee from funds otherwise available to the Company cash
sufficient to pay the interest scheduled to be paid on such date or the Company
may direct the Trustee to release from the Pledge Account proceeds sufficient to
pay interest then due on the Notes. In the event the Company exercises the
former option, the Company may direct the Trustee to release a like amount of
proceeds from the Pledge Account. A failure to pay interest on the Notes in a
timely manner through the first six scheduled interest payment dates will
    
 
                                       68
<PAGE>   69
 
   
constitute an immediate Event of Default under the Indenture, with no grace or
cure period. The Pledged Securities and Pledge Account will also secure the
repayment of the principal amount and premium on the Notes.
    
 
   
     Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Notes, all of the remaining Pledged Securities, if any,
will be released from the Pledge Account and thereafter the Notes will be
unsecured.
    
 
RANKING
 
   
     The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the Company,
including the 11 3/4% Notes, and senior in right of payment to all subordinated
indebtedness of the Company. After giving pro forma effect to the Offerings, as
of March 31, 1998, the Company and its subsidiaries would have had approximately
$537.3 million of indebtedness outstanding all of which would have been
unsubordinated, unsecured indebtedness. In addition, all existing and future
liabilities (including trade payables) of the Company's subsidiaries will be
effectively senior to the Notes. See "Risk Factors -- Holding Company Structure;
Structural Subordination of Notes" and "Effective Subordination of Notes to
Secured Indebtedness."
    
 
CERTAIN DEFINITIONS
 
     Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for which
no definition is provided.
 
   
     "Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition.
    
 
     "Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; provided that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income (or loss) of any Person that is not a Restricted Subsidiary,
except (x) with respect to net income, to the extent of the amount of dividends
or other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period and (y) with respect to net
losses, to the extent of the amount of Investments made by the Company or any
Restricted Subsidiary in such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first paragraph of the "Limitation on Restricted
Payments" covenant described below (and in such case, except to the extent
includable pursuant to clause (i) above), the net income (or loss) of any Person
accrued prior to the date it becomes a Restricted Subsidiary or is merged into
or consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock of the Company or any Restricted Subsidiary owned by Persons other than
the Company and any of its Restricted Subsidiaries; (vi) all extraordinary gains
and extraordinary losses; and (vii) any compensation expense paid or payable
solely with Capital Stock (other than Disqualified Stock) of the Company or any
options, warrants or other rights to acquire Capital Stock (other than
Disqualified Stock) of the Company.
 
     "Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of the Company and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the
 
                                       69
<PAGE>   70
 
extent resulting from write-ups of capital assets (excluding write-ups in
connection with accounting for acquisitions in conformity with GAAP), after
deducting therefrom (i) all current liabilities of the Company and its
Restricted Subsidiaries (excluding intercompany items) and (ii) all goodwill,
trade names, trademarks, patents, unamortized debt discount and expense and
other like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant.
 
     "Affiliate", as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
 
     "Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; provided that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; provided that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
 
     "Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
 
     "Asset Sale" means any sale, transfer or other disposition (including by
way of merger, consolidation or sale-leaseback transaction) in one transaction
or a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets (other than the Capital Stock or other
Investment in an Unrestricted Subsidiary) of the Company or any of its
Restricted Subsidiaries outside the ordinary course of business of the Company
or such Restricted Subsidiary and, in each case, that is not governed by the
provisions of the Indenture applicable to mergers, consolidations and sales of
all or substantially all of the assets of the Company; provided that "Asset
Sale" shall not include (a) sales or other dispositions of inventory,
receivables and other current assets, (b) sales, transfers or other dispositions
of assets constituting a Restricted Payment permitted to be made under the
"Limitation on Restricted Payments" covenant, (c) sales, transfers or other
dispositions of assets with a fair market value (as certified in an Officers'
Certificate) not in excess of $1 million in any transaction or series of related
transactions, or (d) sales or other dispositions of assets for consideration at
least equal to the fair market value of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (B) of the "Limitation on Asset Sales" covenant.
 
     "Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
 
     "Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
 
                                       70
<PAGE>   71
 
     "Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
 
     "Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
 
     "Change of Control" means such time as (i) a "person" or "group" (within
the meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the
ultimate "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of
more than 35% of the total voting power of the Voting Stock of the Company on a
fully diluted basis and such ownership represents a greater percentage of the
total voting power of the Voting Stock of the Company, on a fully diluted basis,
than is held by the Existing Stockholders on such date; or (ii) individuals who
on the Closing Date constitute the Board of Directors (together with any new
directors whose election by the Board of Directors or whose nomination by the
Board of Directors for election by the Company's stockholders was approved by a
vote of at least two-thirds of the members of the Board of Directors then in
office who either were members of the Board of Directors on the Closing Date or
whose election or nomination for election was previously so approved or cease
for any reason to constitute a majority of the members of the Board of Directors
then in office.
 
     "Closing Date" means the date on which the Notes are originally issued
under the Indenture.
 
     "Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and (v)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is, or
is required by GAAP to be, made), less all non-cash items increasing Adjusted
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP; provided that,
if any Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary,
Consolidated EBITDA shall be reduced (to the extent not otherwise reduced in
accordance with GAAP) by an amount equal to (A) the amount of the Adjusted
Consolidated Net Income attributable to such Restricted Subsidiary multiplied by
(B) the percentage ownership interest in the income of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries.
 
     "Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the Offerings, all as determined on a consolidated basis (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
 
     "Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such
 
                                       71
<PAGE>   72
 
four fiscal quarter period being the "Four Quarter Period"); provided that, in
making the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Transaction Date; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset Disposition)
that occur from the beginning of the Four Quarter Period through the Transaction
Date (the "Reference Period"), as if they had occurred and such proceeds had
been applied on the first day of such Reference Period; (C) pro forma effect
shall be given to asset dispositions and asset acquisitions (including giving
pro forma effect to the application of proceeds of any asset disposition) that
have been made by any Person that has become a Restricted Subsidiary or has been
merged with or into the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four full
fiscal quarters immediately preceding the Transaction Date of the Person, or
division or line of business of the Person, that is acquired or disposed of for
which financial information is available; and (D) the aggregate amount of
Indebtedness outstanding as of the end of the Reference Period will be deemed to
include the total amount of funds outstanding and/or available on the
Transaction Date under any revolving credit or similar facilities of the Company
or its Restricted Subsidiaries.
 
     "Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries (which
shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of the
Capital Stock of the Company or any of its Restricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign currency
exchange adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
 
     "Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
 
     "Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
 
     "Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Disqualified Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes upon a Change of Control" covenants described below and
such Capital Stock, or the agreements or instruments governing the redemption
rights thereof, specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes upon a Change of Control"
covenants described below.
 
     "Existing Stockholders" means Madison Dearborn Partners, Inc., Morgan
Stanley Capital Partners III, Inc., Frontenac Company, Battery Partners IV, L.P.
and Battery Investment Partners IV, LLC and their respective Affiliates.
 
                                       72
<PAGE>   73
 
     "fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution; provided that for purposes of clause (viii) of
the second paragraph of the "Limitation on Indebtedness" covenant, (x) the fair
market value of any security registered under the Exchange Act shall be the
average of the closing prices, regular way, of such security for the 20
consecutive trading days immediately preceding the sale of Capital Stock and (y)
in the event the aggregate fair market value of any other property (other than
cash or cash equivalents) received by the Company exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm and set forth in their written opinion which shall be
delivered to the Trustee.
 
     "GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the Offerings and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
 
     "Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
 
     "Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
 
     "Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all Capitalized
Lease Obligations of such Person, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not
 
                                       73
<PAGE>   74
 
otherwise included in this definition, obligations under Currency Agreements and
Interest Rate Agreements. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date (or, in the case of a revolving
credit or other similar facility, the total amount of funds outstanding and/or
available on the date of determination) of all unconditional obligations as
described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the obligation,
provided (A) that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance as determined in conformity with GAAP,
(B) that money borrowed and set aside at the time of the Incurrence of any
Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" so long as such money is
held to secure the payment of such interest and (C) that Indebtedness shall not
include any liability for federal, state, local or other taxes.
 
     "Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
 
     "Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant; provided that the
fair market value of the Investment remaining in any Person that has ceased to
be a Restricted Subsidiary shall not exceed the aggregate amount of Investments
previously made in such Person valued at the time such Investments were made
less the net reduction of such Investments. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of its
Restricted Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary shall be considered a reduction in outstanding Investments and (iii)
any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer.
 
     "Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
 
     "Moody's" means Moody's Investors Service, Inc. and its successors.
 
     "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the
 
                                       74
<PAGE>   75
 
consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by the
Company or any Restricted Subsidiary as a reserve against any liabilities
associated with such Asset Sale, including, without limitation, pension and
other post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP and (b) with respect
to any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal, but
not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
paid or payable as a result thereof.
 
   
     "Offer to Purchase" means an offer to purchase Notes by the Company from
the Holders commenced by mailing a notice to the Trustee and each Holder
stating: (i) the covenant pursuant to which the offer is being made and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; provided
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or an integral multiple thereof. On the Payment Date, the Company
shall (i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent
money sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
an integral multiple thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
    
 
     "Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; provided that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of
 
                                       75
<PAGE>   76
 
such advances ultimately to be treated as expenses in accordance with GAAP; (iv)
stock, obligations or securities received in satisfaction of judgments; (v)
Investments in prepaid expenses, negotiable instruments held for collection and
lease, utility and worker's compensation, performance and other similar
deposits; (vi) Interest Rate Agreements and Currency Agreements designed solely
to protect the Company or its Restricted Subsidiaries against fluctuations in
interest rates or foreign currency exchange rates; and (vii) loans or advances
to officers or employees of the Company or any Restricted Subsidiary that do not
in the aggregate exceed $2 million at any time outstanding.
 
     "Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property, (b) the
principal amount of the Indebtedness secured by such Lien does not exceed 100%
of such cost and (c) any such Lien shall not extend to or cover any property or
assets other than such item of property or assets and any improvements on such
item; (vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its Restricted
Subsidiaries, taken as a whole; (viii) Liens encumbering property or assets
under construction arising from progress or partial payments by a customer of
the Company or its Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease; (x) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xi) Liens on property
of, or on shares of Capital Stock or Indebtedness of, any Person existing at the
time such Person becomes, or becomes a part of, any Restricted Subsidiary;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens encumbering customary
initial deposits and margin deposits, and other Liens that are within the
general parameters customary in the industry and incurred in the ordinary course
of business, in each case, securing Indebtedness under Interest Rate Agreements
and Currency Agreements and forward contracts, options, future contracts,
futures options or similar agreements or arrangements designed solely to protect
the Company or any of its Restricted Subsidiaries from fluctuations in interest
rates, currencies or the price of commodities; (xvii) Liens arising out of
conditional sale, title retention, consignment or similar arrangements for the
sale of goods entered into by the Company or any of its Restricted Subsidiaries
in the ordinary course
 
                                       76
<PAGE>   77
 
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or sales of
receivables; and (xix) Liens that secure Indebtedness with an aggregate
principal amount not in excess of $5 million at any time outstanding.
 
   
     "Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities to
be purchased by the Company with the net proceeds from the sale of the Notes.
    
 
   
     "Pledge Agreement" means the Collateral Pledge and Security Agreement,
dated as of the Closing Date, made by the Company in favor of the Trustee,
governing the disbursement of funds from the Pledge Account, as such agreement
may be amended, restated, supplemented or otherwise modified from time to time.
    
 
   
     "Pledged Securities" means the U.S. government securities to be purchased
by the Company and held in the Pledge Account in accordance with the Pledge
Agreement.
    
 
     "Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
 
     A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company immediately prior to the consummation of such Public
Equity Offering has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
 
     "Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
 
     "Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
 
     "S&P" means Standard & Poor's Ratings Services and its successors.
 
   
     "Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
    
 
     "Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in a business that is
related, ancillary or complementary to the business conducted by the Company or
any of its Restricted Subsidiaries, which Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such Indebtedness is
Incurred, (i) is expressly made subordinate in right of payment to the Notes and
(ii) provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of a
capital contribution or the sale of Capital Stock (other than Disqualified
Stock) of the Company after the Incurrence of such Indebtedness.
 
     "Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
 
     "Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America, and which bank or trust company has capital,
surplus and undivided profits
 
                                       77
<PAGE>   78
 
aggregating in excess of $50 million (or the foreign currency equivalent
thereof) and has outstanding debt which is rated "A" (or such similar equivalent
rating) or higher by at least one nationally recognized statistical rating
organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than one year after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
 
     "Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
 
     "Transaction Date" means, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
 
     "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below; and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; provided that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted Payments" covenants described below. The Board of Directors may
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that (i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after such
designation would, if Incurred at such time, have been permitted to be Incurred
(and shall be deemed to have been Incurred) for all purposes of the Indenture.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing provisions.
 
     "Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
 
     "Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
 
                                       78
<PAGE>   79
 
COVENANTS
 
  Limitation on Indebtedness
 
     (a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur Indebtedness
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds therefrom, the Consolidated Leverage Ratio would
be greater than zero and less than 6:1.
 
     Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed $100 million, less any amount of such Indebtedness permanently repaid as
provided under the "Limitation on Asset Sales" covenant described below; (ii)
Indebtedness owed (A) to the Company evidenced by a promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness (other than Indebtedness Incurred under clause (i),
(ii), (iv), (vi), (viii) or (xi) of this paragraph) and any refinancings thereof
in an amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); provided that Indebtedness the proceeds of
which are used to refinance or refund the Notes or Indebtedness that is pari
passu with, or subordinated in right of payment to, the Notes shall only be
permitted under this clause (iii) if (A) in case the Notes are refinanced in
part or the Indebtedness to be refinanced is pari passu with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made pari
passu with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of Incurrence
of such new Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the Indebtedness
to be refinanced or refunded; and provided further that in no event may
Indebtedness of the Company be refinanced by means of any Indebtedness of any
Restricted Subsidiary pursuant to this clause (iii); (iv) Indebtedness (A) in
respect of performance, surety or appeal bonds provided in the ordinary course
of business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (a) are designed solely to protect the Company or
its Restricted Subsidiaries against fluctuations in foreign currency exchange
rates or interest rates and (b) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities and
compensation payable thereunder; and (C) arising from agreements providing for
indemnification, adjustment of purchase price or similar obligations, or from
Guarantees or letters of credit, surety bonds or performance bonds securing any
obligations of the Company or any of its Restricted Subsidiaries pursuant to
such agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of Indebtedness
Incurred by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition; (v)
Indebtedness of the Company, to the extent the net proceeds thereof are promptly
(A) used to purchase Notes tendered in an Offer to Purchase made as a result of
a Change in Control or (B) deposited to defease the Notes as described below
under "Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness
of the Company by any Restricted Subsidiary provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness (including Guarantees) Incurred to finance the
 
                                       79
<PAGE>   80
 
   
cost (including the cost of design, development, acquisition, construction,
installation, improvement, transportation or integration) to acquire equipment,
inventory or network assets (including acquisitions by way of Capitalized Lease
and acquisitions of the Capital Stock of a Person that becomes a Restricted
Subsidiary to the extent of the fair market value of the equipment, inventory or
network assets so acquired) by the Company or a Restricted Subsidiary after the
Closing Date; (viii) Indebtedness of the Company not to exceed, at any one time
outstanding, two times (A) the Net Cash Proceeds received by the Company after
February 3, 1998 as a capital contribution or from the issuance and sale of its
Capital Stock (other than Disqualified Stock) to a Person that is not a
Subsidiary of the Company, to the extent (I) such capital contribution or Net
Cash Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv), (vi), (vii), or (viii) of the second paragraph
of the "Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Net Cash Proceeds
are used to consummate a transaction pursuant to which the Company Incurs
Acquired Indebtedness, the amount of such Net Cash Proceeds exceeds one-half of
the amount of Acquired Indebtedness so Incurred and (B) 80% of the fair market
value of property (other than cash and cash equivalents) received by the Company
after February 3, 1998 from the sale of its Capital Stock (other than
Disqualified Stock) to a Person that is not a Subsidiary of the Company, to the
extent (I) such capital contribution or sale of Capital Stock has not been used
pursuant to clause (iii), (iv), (vi) or (vii) of the second paragraph of the
"Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (II) if such capital contribution or Capital Stock is
used to consummate a transaction pursuant to which the Company Incurs Acquired
Indebtedness, 80% of the fair market value of the property received exceeds
one-half of the amount of Acquired Indebtedness so Incurred; provided that such
Indebtedness does not mature prior to the Stated Maturity of the Notes and has
an Average Life longer than the Notes; (ix) Acquired Indebtedness; (x) Strategic
Subordinated Indebtedness; and (xi) subordinated Indebtedness of the Company (in
addition to Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding at any time not to exceed $100 million,
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below.
    
 
     (b) Notwithstanding any other provision of this "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that the Company or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
 
     (c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify, and from time to
time may reclassify, such item of Indebtedness and only be required to include
the amount and type of such Indebtedness in one of such clauses.
 
  Limitation on Restricted Payments
 
     The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of the Company (other than a
Wholly Owned Restricted Subsidiary) or any holder (or any Affiliate of such
 
                                       80
<PAGE>   81
 
   
holder) of 5% or more of the Capital Stock of the Company, (iii) make any
voluntary or optional principal payment, or voluntary or optional redemption,
repurchase, defeasance, or other acquisition or retirement for value, of
Indebtedness of the Company that is subordinated in right of payment to the
Notes or (iv) make any Investment, other than a Permitted Investment, in any
Person (such payments or any other actions described in clauses (i) through (iv)
above being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) 50% of the
aggregate amount of the Adjusted Consolidated Net Income (or, if the Adjusted
Consolidated Net Income is a loss, minus 100% of the amount of such loss)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning on
April 1, 1998 and ending on the last day of the last fiscal quarter preceding
the Transaction Date for which reports have been filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant plus (2) the aggregate Net Cash Proceeds received by the
Company after February 3, 1998 as a capital contribution or from the issuance
and sale permitted by the Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of the
Company for cash subsequent to February 3, 1998 upon the conversion of such
Indebtedness into Capital Stock (other than Disqualified Stock) of the Company,
or from the issuance to a Person who is not a Subsidiary of the Company of any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Disqualified Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes), in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to clause
(viii) of the second paragraph under the "Limitation on Indebtedness" covenant,
plus (3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in each
case, to the extent any such payment or proceeds are included in the calculation
of Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in such
Person or Unrestricted Subsidiary.
    
 
     The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company or
an Unrestricted Subsidiary (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a capital contribution
or a substantially concurrent offering of, shares of Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (iv) the making of any principal payment or the
repurchase, redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of a capital contribution or a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
any Person the primary business of which is related, ancillary or
 
                                       81
<PAGE>   82
 
   
complementary to the business of the Company and its Restricted Subsidiaries on
the date of such Investments; provided that the aggregate amount of Investments
made pursuant to this clause (vi) does not exceed the sum of (a) $20 million and
(b) the amount of Net Cash Proceeds received by the Company after February 3,
1998 as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or clauses
(iii), (iv) or (viii) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant to
this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such Investment
(except in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any Investment
shall not exceed the amount of such Investment; (vii) Investments acquired in
exchange for Capital Stock (other than Disqualified Stock) of the Company;
(viii) the declaration or payment of dividends on Capital Stock (other than
Disqualified Stock) of the Company in an aggregate annual amount not to exceed
6% of the Net Cash Proceeds received by the Company from the sale of such
Capital Stock after the Closing Date; (ix) repurchases of Warrants pursuant to a
Repurchase Offer; (x) any purchase of any fractional share of Common Stock (or
other Capital Stock of the Company issuable upon exercise of the Warrants) in
connection with an exercise of the Warrants; and (xi) other Restricted Payments
in an aggregate amount not to exceed $2 million; provided that, except in the
case of clauses (i) and (iii), no Default or Event of Default shall have
occurred and be continuing or occur as a consequence of the actions or payments
set forth therein.
    
 
     Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof, an
exchange of Capital Stock for Capital Stock or Indebtedness referred to in
clause (iii) or (iv) thereof and an Investment referred to in clause (vi)
thereof), and the Net Cash Proceeds from any capital contribution or any
issuance of Capital Stock referred to in clauses (iii), (iv) and (vi), shall be
included in calculating whether the conditions of clause (C) of the first
paragraph of this "Limitation on Restricted Payments" covenant have been met
with respect to any subsequent Restricted Payments. In the event the proceeds of
an issuance of Capital Stock of the Company are used for the redemption,
repurchase or other acquisition of the Notes, or Indebtedness that is pari passu
with the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
 
  Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
 
     The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
 
     The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced; (ii) existing under or by reason of applicable law; (iii)
existing with respect to any Person or the property or assets of such Person
acquired by the Company or any Restricted Subsidiary, existing at the time of
such acquisition and not incurred in contemplation thereof, which encumbrances
or restrictions are not applicable to any Person or the property or assets of
any Person other than such Person or
 
                                       82
<PAGE>   83
 
the property or assets of such Person so acquired; (iv) in the case of clause
(iv) of the first paragraph of this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant, (A) that restrict in a
customary manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the Indenture or (C) arising
or agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate, detract from
the value of property or assets of the Company or any Restricted Subsidiary in
any manner material to the Company or any Restricted Subsidiary; (v) with
respect to a Restricted Subsidiary and imposed pursuant to an agreement that has
been entered into for the sale or disposition of all or substantially all of the
Capital Stock of, or property and assets of, such Restricted Subsidiary; or (vi)
contained in the terms of any Indebtedness or any agreement pursuant to which
such Indebtedness was issued if (A) the encumbrance or restriction applies only
in the event of a payment default or a default with respect to a financial
covenant contained in such Indebtedness or agreement, (B) the encumbrance or
restriction is not materially more disadvantageous to the Holders of the Notes
than is customary in comparable financings (as determined by the Company) and
(C) the Company determines that any such encumbrance or restriction will not
materially affect the Company's ability to make principal or interest payments
on the Notes. Nothing contained in this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
the Company or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
 
  Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
 
     The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been permitted
to be made under the "Limitation on Restricted Payments" covenant if made on the
date of such issuance or sale; or (iv) issuances or sales of Common Stock of a
Restricted Subsidiary, provided that the Company or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale in accordance with
clause (A) or (B) of the "Limitation on Asset Sales" covenant described below.
 
  Limitation on Issuances of Guarantees by Restricted Subsidiaries
 
     The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; provided that this paragraph shall not be
applicable to any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary. If the Guaranteed Indebtedness is (A) pari passu with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu with, or
subordinated to, the Subsidiary Guarantee or (B) subordinated to the Notes, then
the Guarantee of such Guaranteed Indebtedness shall be subordinated to the
Subsidiary Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated to the Notes.
 
                                       83
<PAGE>   84
 
     Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
 
  Limitation on Transactions with Shareholders and Affiliates
 
     The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is pursuant to a written agreement, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate.
 
     The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; or (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant. Notwithstanding
the foregoing, any transaction or series of related transactions covered by the
first paragraph of this "Limitation on Transactions with Shareholders and
Affiliates" covenant and not covered by clauses (ii) through (v) of this
paragraph, the aggregate amount of which exceeds $1 million in value, must be
approved or determined to be fair in the manner provided for in clause (i)(A) or
(B) above.
 
  Limitation on Liens
 
     The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character (including, without limitation, licenses), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due under
the Indenture to be directly secured equally and ratably with (or, if the
obligation or liability to be secured by such Lien is subordinated in right of
payment to the Notes, prior to) the obligation or liability secured by such
Lien.
 
     The foregoing limitation does not apply to (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or Capital
Stock of the Company or its Restricted Subsidiaries created in favor of the
Holders; (iii) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary to secure Indebtedness owing to the Company or such other
Restricted Subsidiary; (iv) Liens securing Indebtedness which is Incurred to
refinance secured Indebtedness which is permitted to be Incurred under clause
(iii) of the second paragraph of the "Limitation on Indebtedness" covenant;
provided that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets securing
the Indebtedness being refinanced; (v) Liens on the Capital Stock of, or any
property or assets of, a Restricted Subsidiary securing Indebtedness of such
Restricted Subsidiary permitted under the "Limitation on Indebtedness" covenant;
(vi) Liens on the Capital Stock of Restricted Subsidiaries securing up to
 
                                       84
<PAGE>   85
 
$100.0 million of Indebtedness Incurred under clause (vii) of the "Limitation on
Indebtedness" covenant; or (vii) Permitted Liens.
 
  Limitation on Sale-Leaseback Transactions
 
     The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
 
     The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount not less than the net proceeds received from such sale in
accordance with clause (A) or (B) of the first paragraph of the "Limitation on
Asset Sales" covenant described below.
 
  Limitation on Asset Sales
 
     The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the Company
or such Restricted Subsidiary is at least equal to the fair market value of the
assets sold or disposed of and (ii) at least 75% of the consideration received
consists of cash or Temporary Cash Investments; provided, however, that this
clause (ii) shall not apply to long-term assignments in capacity in a
telecommunications network. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its Subsidiaries has
been filed with the Commission pursuant to the "Commission Reports and Reports
to Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company, or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within 12 months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) and (ii) apply (no later than the end of
the 12-month period referred to in clause (i)) such excess Net Cash Proceeds (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Limitation on Asset Sales" covenant. The amount of such
excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds."
 
   
     If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of
    
 
                                       85
<PAGE>   86
 
   
Notes equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the Notes, plus, in each case, accrued interest
to the Payment Date.
    
 
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
 
   
     The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
interest to the Payment Date.
    
 
     There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
 
COMMISSION REPORTS AND REPORTS TO HOLDERS
 
     Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as it would be required to file with the Commission by
Sections 13(a) or 15(d) under the Securities Exchange Act of 1934 if it were
subject thereto. The Company shall supply the Trustee and each Holder or shall
supply to the Trustee for forwarding to each such Holder, without cost to such
Holder, copies of such reports and other information.
 
EVENTS OF DEFAULT
 
   
     The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note when
the same becomes due and payable, and such default continues for a period of 30
days; provided that a failure to make any of the first six scheduled interest
payments on the Notes on the applicable Interest Payment Date will constitute an
Event of Default with no grace or cure period; (c) default in the performance or
breach of the provisions of the Indenture applicable to mergers, consolidations
and transfers of all or substantially all of the assets of the Company or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or "Repurchase of Notes upon a Change of Control"
covenant; (d) the Company defaults in the performance of or breaches any other
covenant or agreement of the Company in the Indenture or under the Notes (other
than a default specified in clause (a), (b) or (c) above) and such default or
breach continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal amount
of $5 million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default; (f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles, self-
insurance or retention as not so covered) shall be rendered against the Company
or any Significant Subsidiary and shall not be paid or discharged, and there
shall be any period of 30 consecutive days following entry of the final judgment
or order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $5
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (g) a court
having jurisdiction in the premises enters a decree or order for (A) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law
    
 
                                       86
<PAGE>   87
 
   
now or hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 30 consecutive days; (h) the Company or any Significant Subsidiary (A)
commences a voluntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (B) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge Agreement shall cease
to be in full force and effect or enforceable in accordance with its terms,
other than in accordance with its terms.
    
 
   
     If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "-- Modification and Waiver."
    
 
   
     The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
    
 
     The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and
 
                                       87
<PAGE>   88
 
its Restricted Subsidiaries and the Company's and its Restricted Subsidiaries'
performance under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any default
or defaults in the performance of any covenants or agreements under the
Indenture.
 
CONSOLIDATION, MERGER AND SALE OF ASSETS
 
     The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction; (iv) immediately after giving effect to
such transaction on a pro forma basis the Company, or any Person becoming the
successor obligor of the Notes, as the case may be, could Incur at least $1.00
of Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; provided that this clause (iv) shall not apply to (x) a consolidation,
merger or sale of all (but not less than all) of the assets of the Company if
all Liens and Indebtedness of the Company or any Person becoming the successor
obligor on the Notes, as the case may be, and its Restricted Subsidiaries
outstanding immediately after such transaction would, if Incurred at such time,
have been permitted to be Incurred (and all such Liens and Indebtedness, other
than Liens and Indebtedness of the Company and its Restricted Subsidiaries
outstanding immediately prior to the transaction, shall be deemed to have been
Incurred) for all purposes of the Indenture or (y) a consolidation, merger or
sale of all or substantially all of the assets of the Company if immediately
after giving effect to such transaction on a pro forma basis, the Company or any
Person becoming the successor obligor of the Notes shall have a Consolidated
Leverage Ratio equal to or less than the Consolidated Leverage Ratio of the
Company immediately prior to such transaction; and (v) the Company delivers to
the Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv) above) and Opinion of
Counsel, in each case stating that such consolidation, merger or transfer and
such supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose of
such transaction is to change the state of incorporation of the Company; and
provided further that any such transaction shall not have as one of its purposes
the evasion of the foregoing limitations.
 
DEFEASANCE
 
     Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel
 
                                       88
<PAGE>   89
 
to the effect that Holders will not recognize income, gain or loss for federal
income tax purposes as a result of the Company's exercise of its option under
this "Defeasance" provision and will be subject to federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after giving
effect to such deposit on a pro forma basis, no Event of Default, or event that
after the giving of notice or lapse of time or both would become an Event of
Default, shall have occurred and be continuing on the date of such deposit or
during the period ending on the 123rd day after the date of such deposit, and
such deposit shall not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
is bound and (D) if at such time the Notes are listed on a national securities
exchange, the Company has delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge.
 
     Defeasance of Certain Covenants and Certain Events of Default. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and (iv)
under "Consolidation, Merger and Sale of Assets," clause (d) under "Events of
Default" with respect to such other covenants and clauses (e) and (f) under
"Events of Default" shall be deemed not to be Events of Default upon, among
other things, the deposit with the Trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
Notes on the Stated Maturity of such payments in accordance with the terms of
the Indenture and the Notes, the satisfaction of the provisions described in
clauses (B)(ii), (C) and (D) of the preceding paragraph and the delivery by the
Company to the Trustee of an Opinion of Counsel to the effect that, among other
things, the Holders will not recognize income, gain or loss for federal income
tax purposes as a result of such deposit and defeasance of certain covenants and
Events of Default and will be subject to federal income tax on the same amount
and in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred.
 
     Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
 
MODIFICATION AND WAIVER
 
   
     Modifications and amendments of the Indenture may be made by the Company
and the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal of, or premium, if any, or
interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after
    
 
                                       89
<PAGE>   90
 
the Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium, if
any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is necessary
for waiver of compliance with certain provisions of the Indenture or for waiver
of certain defaults.
 
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
 
     The Indenture provides that no recourse for the payment of the principal
of, premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any of
the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
 
CONCERNING THE TRUSTEE
 
     The Indenture provides that, except during the continuance of a Default,
the Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise of the rights and powers vested in it under the Indenture as a prudent
person would exercise under the circumstances in the conduct of such person's
own affairs.
 
     The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, incorporated by reference therein contain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
 
     The Trustee is also the trustee under the 11 3/4% Notes Indenture.
 
BOOK-ENTRY; DELIVERY AND FORM
 
     The Notes will be initially represented by one or more global notes (the
"Global Notes") issued in the form of fully registered Global Notes, which will
be deposited with, or on behalf of, the Depositary and registered in the name of
a nominee of the Depositary. Transfers between participants in the Depositary
will be effected in the ordinary way in accordance with the Depositary's rules
and will be settled in same-day funds.
 
     The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
 
          The Depositary will act as securities depository for the Global Notes.
     The Global Notes will be issued as a fully registered security registered
     in the name of Cede & Co. (the Depositary's nominee).
 
          The Depositary is a limited-purpose trust company organized under the
     New York Banking Law, a "banking organization" within the meaning of the
     New York Banking Law, a member of the Federal Reserve System, a "clearing
     corporation" within the meaning of the New York Uniform Commercial Code,
     and a "clearing agency" registered pursuant to the Provisions of Section
     17A of the Exchange Act. The Depositary holds securities that its
     participants ("Participants") deposit with the Depositary. The Depositary
     also facilitates the settlement among Participants of securities
     transactions, such as transfers and pledges, in deposited securities
     through electronic computerized book-entry changes in Participants'
     accounts, thereby eliminating the need for physical movement of securities
     certificates. Direct Participants include securities brokers and dealers,
     banks, trust companies, clearing corporations, and certain other
     organizations ("Direct Participants"). The Depositary is owned by a number
     of its Direct Participants and by the New York Stock Exchange, Inc., the
     AMEX and the National Association of Securities Dealers, Inc. Access to the
     Depositary's system is also available to others such as securities
 
                                       90
<PAGE>   91
 
     brokers and dealers, banks, and trust companies that clear through or
     maintain a custodial relationship with a Direct Participant, either
     directly or indirectly ("Indirect Participants"). The Rules applicable to
     the Depositary and its Participants are on file with the Commission.
 
          Purchases of Notes must be made by or through Direct Participants,
     which will receive a credit for the Notes on the Depositary's records. The
     ownership interest of each actual purchaser of each Note ("Beneficial
     Owner") is in turn recorded on the Direct and Indirect Participant's
     records. Transfers of ownership interests in the Notes are to be
     accomplished by entries made on the books of Participants acting on behalf
     of Beneficial Owners. Beneficial Owners will not receive certificates
     representing their ownership interests in the Notes, except in the event
     that use of the book-entry system for the Notes is discontinued.
 
          Conveyance of Notes and other communications by the Depositary to
     Direct Participants, by Direct Participants to Indirect Participants, and
     Direct Participants and Indirect Participants to Beneficial Owners are
     governed by arrangements among them, subject to any statutory or regulatory
     requirements as may be in effect from time to time.
 
          Redemption notices shall be sent to Cede & Co. If less than all of the
     Notes are being redeemed, the Depositary's practice is to determine by lot
     the amount of the interest of each Direct Participant in such issue to be
     redeemed.
 
          Neither the Depositary nor Cede & Co. will consent or vote with
     respect to the Notes. Under its usual procedures, the Depositary mails an
     Omnibus Proxy to the issuer as soon as possible after the record date. The
     Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those
     Direct Participants to whose accounts the Notes are credited on the record
     date (identified in a listing attached to the Omnibus Proxy).
 
          Principal, premium (if any), and interest payments on the Notes will
     be made to the Depositary. The Depositary's practice is to credit Direct
     Participants' accounts on the payable date in accordance with their
     respective holdings shown on the Depositary's records unless the Depositary
     has reason to believe that it will not receive payment on the payable date.
     Payments by Participants to Beneficial Owners will be governed by standing
     instructions and customary practices, as is the case with securities held
     for the accounts of customers in bearer form or registered in "street
     name," and will be the responsibility of such Participant and not of the
     Depositary, the Paying Agent, or the Company, subject to any statutory or
     regulatory requirements as may be in effect from time to time. Payment to
     the Depositary of principal, premium (if any) and interest on the Notes are
     the responsibility of the Company or the Paying Agent, disbursement of such
     payments to Direct Participants shall be the responsibility of the
     Depositary, and disbursement of such payments to the Beneficial Owners
     shall be the responsibility of Direct and Indirect Participants.
 
     The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
 
     So long as the Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary or its nominee, as the case
may be, will be considered the sole owner or Holder of the Notes represented by
the Global Notes for all purposes under the Indenture. Except as set forth
below, owners of beneficial interests in such Global Notes will not be entitled
to have Notes represented by such Global Notes registered in their names, will
not receive or be entitled to receive physical delivery of Notes in definitive
form and will not be considered the owners or Holders thereof under the
Indenture. Accordingly, each person owning a beneficial interest in Global Notes
must rely on the procedures of the Depositary and, if such person is not a
Participant, those of the Participant through which such person owns its
interests, in order to exercise any rights of a Holder under the Indenture or
such Note.
 
     The Indenture provides that the Depositary, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other
 
                                       91
<PAGE>   92
 
action which a Holder is entitled to give or take under the Indenture, including
the right to sue for payment of principal or interest pursuant to Section 316(b)
of the Trust Indenture Act of 1939, as amended. The Company understands that
under existing industry practices, when the Company requests any action of
Holders or when a Beneficial Owner desires to give or take any action which a
Holder is entitled to give or take under the Indenture, the Depositary generally
will give or take such action, or authorize the relevant Participants to give or
take such action, and such Participants would authorize Beneficial Owners owning
through such Participants to give or take such action or would otherwise act
upon the instructions of Beneficial Owners owning through them.
 
     The Company has been informed by the Depositary that the Depositary will
assist its Participants and their customers (Beneficial Owners) in taking any
action a Holder is entitled to take under the Indenture or exercise any rights
available to Cede & Co., as the holder of record of the Notes and including the
right to demand acceleration of the Notes upon an Event of Default or to
institute suit for the enforcement of payment or interest pursuant to Section
316(b) of the Trust Indenture Act of 1939, as amended. The Depositary has
advised the Company that it will act with respect to such matters upon written
instructions from a Participant to whose account with the Depositary the
relevant beneficial ownership in the Notes is credited. The Company understands
that a Participant will deliver such written instructions to the Depositary upon
itself receiving similar written instructions from either Indirect Participants
or Beneficial Owners, as the case may be. Under Rule 6 of the rules and
procedures filed by the Depositary with the Commission pursuant to Section 17 of
the Exchange Act, Participants are required to indemnify the Depositary against
all liability the Depositary may sustain, without fault on the part of the
Depositary or its nominee, as a result of any action they may take pursuant to
the instructions of the Participant in exercising any such rights.
 
     The laws of some jurisdictions require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
the Global Notes.
 
     Principal, premium, if any, and interest payments on Notes registered in
the name of or held by the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner or the
Holder of the Global Notes representing such Notes. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
 
   
     If the Depositary is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by the
Company within 60 days or, if an Event of Default under the Indenture has
occurred and is continuing, the Company will issue Notes in definitive
registered form, without coupons, in denominations of $1,000 of principal amount
and any integral multiple thereof, in exchange for the Global Notes representing
such Notes. In addition, the Company may at any time and in its sole discretion
determine not to have any Notes in registered form represented by the Global
Notes and, in such event, will issue Notes or in definitive registered form in
exchange for the Global Notes representing such Notes. In any such instance, an
owner of a beneficial interest in a Global Note will be entitled to physical
delivery in definitive form of Notes registered in its name. Upon the exchange
of the Global Notes for Notes in definitive form, the Global Notes will be
cancelled by the Trustee.
    
 
                                       92
<PAGE>   93
 
                          DESCRIPTION OF CAPITAL STOCK
 
GENERAL MATTERS
 
   
     At the time of the Equity Offering, the total amount of authorized capital
stock of the Company will consist of 150,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"). Upon completion of the Equity Offering,
52,341,554 shares of Common Stock will be issued and outstanding and no shares
of Preferred Stock will be issued and outstanding. The discussion herein
describes the Company's capital stock, the Restated Certificate and By-laws to
be in effect upon consummation of the Equity Offering. The following summary of
certain provisions of the Company's capital stock describes all material
provisions of, but does not purport to be complete and is subject to, and
qualified in its entirety by, the Restated Certificate and the By-laws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
    
 
     The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of delaying,
deferring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Board of Directors.
 
COMMON STOCK
 
     The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company will be upon payment therefor, validly
issued, fully paid and nonassessable. Subject to the prior rights of the holders
of any Preferred Stock, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. The shares of Common Stock are not convertible and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution, after payment of all debts
and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
is no cumulative voting.
 
PREFERRED STOCK
 
     The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Upon the affirmative vote of a majority
of the total number of directors then in office, the Board of Directors of the
Company, without stockholder approval, may issue shares of Preferred Stock with
voting and conversion rights which could adversely affect the holders of shares
of Common Stock. Upon consummation of the Equity Offering, there will be no
shares of Preferred Stock outstanding, and the Company has no present intention
to issue any shares of Preferred Stock.
 
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
 
     The Restated Certificate provides for the Board of Directors to be divided
into three classes, as nearly equal in number as possible, serving staggered
terms. Approximately one-third of the Board of Directors will
 
                                       93
<PAGE>   94
 
be elected each year. See "Management." Under the Delaware General Corporation
Law, directors serving on a classified board can only be removed for cause. The
provision for a classified board could prevent a party who acquires control of a
majority of the outstanding voting stock from obtaining control of the Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest. The classified board provision
could have the effect of discouraging a potential acquiror from making a tender
offer or otherwise attempting to obtain control of the Company and could
increase the likelihood that incumbent directors will retain their positions.
 
     The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provides
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by the Chief Executive Officer of the Company. Stockholders will
not be permitted to call a special meeting or to require the Board of Directors
to call a special meeting.
 
     The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board of Directors.
 
     Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has given to the Company's Secretary timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. Although the By-laws do not give the Board of Directors the
power to approve or disapprove stockholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting, the By-laws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed or may
discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company.
 
     The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certification of Incorporation and By-laws could
enable a minority of the Company's stockholders to exercise veto power over any
such amendments.
 
CERTAIN PROVISIONS OF DELAWARE LAW
 
     Following the consummation of the Equity Offering, the Company will be
subject to the "Business Combination" provisions of the Delaware General
Corporation Law. In general, such provisions prohibit a publicly held Delaware
corporation from engaging in various "business combination" transactions with
any "interested stockholder" for a period of three years after the date of the
transaction which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" obtained such status; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder," owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned by (a) persons who are directors and also officers and (b) employee
stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date the "business
combination" is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder. In
general, an "interested stockholder" is a Person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or other
 
                                       94
<PAGE>   95
 
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
 
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
 
     The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate of Incorporation will provide that the Company shall
indemnify Directors and officers of the Company to the fullest extent permitted
by such law. The Company anticipates entering into indemnification agreements
with its current Directors and executive officers prior to the completion of the
Offerings and any new Directors or executive officers following such time.
 
WARRANTS
 
     In connection with the Unit Offering, the Company issued 445,000 Warrants
pursuant to the Warrant Agreement between the Company and The Bank of New York.
Wherever particular terms of the Warrant Agreement, not otherwise defined
herein, are referred to, such defined terms are incorporated herein by
reference. A copy of the Warrant Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
 
   
     Each Warrant is exercisable to purchase 1.458983995 shares of Common Stock
at an exercise price of $.01 per share, subject to adjustment. The Warrants may
be exercised at any time on or after February 3, 1999 and prior to February 3,
2008. Upon the occurrence of a merger with a person that does not have a class
of equity securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") in connection with which the consideration to
stockholders of the Company is not all cash, the Company or its successor by
merger or consolidation will be required to offer to repurchase the Warrants.
All such repurchases will be at the market price of the Common Stock or other
securities issuable upon exercise of the Warrants (or, if the Common Stock (or
such other securities) are not registered under the Exchange Act, the value of
the Common Stock or other securities as determined by an independent financial
expert), less the exercise price thereof.
    
 
REGISTRATION RIGHTS
 
     The Fund Investors, the Management Investors, and the Company are parties
to a Registration Agreement dated as of August 13, 1997 (the "Registration
Agreement"). Each of Morgan Stanley Capital Partners, Madison Dearborn Capital
Partners, and Frontenac Company are entitled to demand two long-form
registrations and unlimited short-form registrations, and Battery Ventures is
entitled to demand one long-form registration and unlimited short-form
registrations. In addition, the Fund Investors and the Management Investors may
"piggyback" on primary or secondary registered public offerings of the Company's
securities. Each Fund Investor and Management Investor is subject to holdback
restrictions in the event of a public offering of Company securities. The
parties to the Registration Agreement have agreed to permit the holders of
Warrants to "piggyback" on any registrations under the Registration Agreement.
 
     The Company and The Bank of New York are parties to a Warrant Registration
Rights Agreement dated as of February 3, 1998 (the "Warrant Registration
Agreement"). The holders of the Warrants are entitled to "piggyback"
registration rights in connection with certain public offerings of the Common
Stock. In addition, the Company is required to use its best efforts to cause to
become effective under the Securities Act, within 180 days after the closing of
the Equity Offering, a shelf registration statement with respect to the issuance
of the Common Stock issuable upon exercise of the Warrants; provided, however,
that such shelf registration statement may not be declared effective prior to
the first anniversary of the issuance of the Warrants. Once the shelf
registration statement is declared effective, the Company is required to
maintain the effectiveness of such registration statement until all Warrants
have expired or been exercised.
 
                                       95
<PAGE>   96
 
                CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
 
     The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes to initial purchasers thereof. This discussion is based on currently
existing provisions of the Code, existing, temporary and proposed Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect or proposed on the date hereof and all
of which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers who acquire the
Notes at their issue price and hold such Notes as capital assets, within the
meaning of section 1221 of the Code. Moreover, this discussion is for general
information only and does not address all of the tax consequences that may be
relevant to particular initial purchasers in light of their personal
circumstances or to certain types of initial purchasers, such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, certain U.S. expatriates, persons who have hedged the risk of owning
a Note or holders whose "functional currency" is not the U.S. dollar.
 
     As used herein, the term "U.S. Holder" means an initial purchaser of a Note
that is, for United States federal income tax purposes, (a) a citizen or
individual resident of the United States, (b) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, (c) an estate the income of which is subject
to United States federal income taxation regardless of source, or (d) a trust
subject to the primary supervision of a court within the United States and the
control of a United States person, as described in the Code. An individual may,
subject to certain exceptions, be deemed to be a United States resident (as
opposed to a non-resident alien) by virtue of being present in the United States
on at least 31 days in the calendar year and for an aggregate of at least 183
days during a three-year period ending in the current calendar year (counting
for such purposes all of the days present in the current year, one-third of the
days present in the immediately preceding year, and one-sixth of the days
present in the second preceding year). Resident aliens are subject to U.S.
federal tax as if they were U.S. citizens. As used herein, a "Non-U.S. Holder"
is a holder that is not a U.S. Holder.
 
     ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
 
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
 
   
     Interest. Interest paid on a Note generally will be taxable to a U.S.
Holder as ordinary interest income as it accrues or is received, in accordance
with such U.S. Holder's method of accounting for United States federal income
tax purposes.
    
 
   
     Optional Redemption. Notes may be redeemed prior to their stated maturity
at the option of the Company. For purposes of computing the yield of such
instruments, the Company will be deemed to exercise or not exercise its option
to redeem the Notes in a manner that minimizes the yield on the Notes. In the
event the Company were deemed to exercise its option to redeem, for purposes of
determining whether the Notes were issued with OID, the Notes' yield to maturity
would be computed by treating the deemed redemption date as the maturity date of
the Note and the amount payable on redemption as the principal amount of the
Note. It is not anticipated that the Company's option to redeem the Notes prior
to stated maturity will be treated as exercised.
    
 
   
     Redemption, Sale, Exchange or Retirement of the Notes. In general, a U.S.
Holder will recognize gain or loss on the redemption, sale, exchange or
retirement of the Notes equal to the difference between the amount realized on
the redemption, sale, exchange or retirement (reduced by any amounts
attributable to accrued but unpaid interest, which will be taxable as such) and
such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax
basis in the Note generally will be its cost to such U.S. Holder. As a general
rule, such
    
 
                                       96
<PAGE>   97
 
gain or loss recognized on the redemption, sale, exchange or retirement of the
Notes will be capital gain or loss. With respect to individuals, gain is subject
to reduced rates of tax if the Note was held for more than twelve months and is
subject to further reduced rates if the Note was held for more than eighteen
months, in each case as of the date of redemption, sale, exchange or retirement.
 
   
UNITED STATES FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
    
 
     Under present U.S. federal income and estate tax law and subject to the
discussion of backup withholding below:
 
          (i) payments of principal, premium (if any) and interest on a Note by
     the Company or any agent of the Company to any Non-U.S. Holder will not be
     subject to withholding of U.S. federal income tax, provided that, in the
     case of interest (1) the Non-U.S. Holder does not actually or
     constructively own 10% or more of the total combined voting power of all
     classes of stock of the Company entitled to vote, (2) the Non-U.S. Holder
     is not (x) a controlled foreign corporation that is related to the Company
     through stock ownership, or (y) a bank receiving interest described in
     Section 881(c)(3)(A) of the Code, and (3) the beneficial owner of the Note
     certifies to the Company or its agent, under penalties of perjury, that it
     is not a "United States person" (as defined in the Code) and provides its
     name and address, and (A) such beneficial owner files the Form W-8 with the
     withholding agent or (B) in the case of a securities clearing organization,
     bank or other financial institution that holds customers' securities in the
     ordinary course of its trade or business (a "financial institution") and
     holds the Note on behalf of the beneficial owner, such financial
     institution certifies to the Company or its agent under penalties of
     perjury that such statement has been received from the beneficial owner and
     furnishes the payor with a copy thereof;
 
          (ii) a Non-U.S. Holder will not be subject to U.S. federal income tax
     on gain realized on the sale, exchange, redemption, retirement at maturity
     or other disposition of a Note unless (1) such holder is an individual who
     is present in the United States for 183 days or more during the taxable
     year and certain other conditions are met, or (2) the gain is effectively
     connected with a U.S. trade or business of the holder, and if an income tax
     treaty applies, is generally attributable to a U.S. "permanent
     establishment" maintained by the holder;
 
          (iii) a Note held by an individual who at the time of death is not a
     citizen or resident of the United States will not be subject to U.S.
     federal estate tax as a result of such individual's death if, at the time
     of such death, (1) the individual did not actually or constructively own 10
     percent or more of the total combined voting power of all classes of stock
     of the Company entitled to vote, and (2) the income on the Note would not
     have been effectively connected with the conduct of a trade or business by
     the individual in the United States; and
 
     If a Non-U.S. Holder is engaged in a trade or business in the United
States, and interest on the Note or gain realized on the sale, exchange or other
disposition of the Note is effectively connected with the conduct of such trade
or business (and, if an income tax treaty applies, the Non-U.S. Holder maintains
a U.S. "permanent establishment" to which the interest or gain is attributable),
the Non-U.S. Holder, although exempt from the withholding tax discussed in the
preceding paragraph (i) (provided that such holder furnishes a properly executed
Internal Revenue Service ("IRS") Form 4224 or successor form on or before any
payment date to claim such exemption), generally will be subject to U.S. federal
income tax on such interest or gain on a net basis in the same manner as if it
were a U.S. Holder.
 
     In addition, a foreign corporation that is a Non-U.S. Holder may be subject
to a branch profits tax equal to 30% of its effectively connected earnings and
profits for the taxable year, subject to certain adjustments, unless it
qualifies for a lower rate under an applicable tax treaty. For this purpose,
interest on a Note or gain on the disposition of a Note will be included in
earnings and profits if such interest or gain is effectively connected with the
conduct by the foreign corporation of a trade or business in the United States.
 
     Recently finalized Treasury regulations pertaining to U.S. federal
withholding tax, generally effective for payments made after December 31, 1999
(the "Final Withholding Tax Regulations"), will provide alternative
 
                                       97
<PAGE>   98
 
methods for satisfying the certification requirement described in paragraph
(i)(3) above and will require a Non-U.S. Holder that provides an IRS Form 4224
or successor form (as discussed above) to also provide its U.S. taxpayer
identification number. The Final Withholding Tax Regulations generally also will
require, in the case of a Note held by a foreign partnership, that (x) the
certification described in paragraph (i)(3) above be provided by the partners
rather than the partnership and (y) the partnership provide certain information,
including a U.S. taxpayer identification number. A look-through rule will apply
in the case of tiered partnerships.
 
     Non-U.S. Holders should consult with their tax advisors regarding U.S. and
foreign tax consequences with respect to the Notes.
 
INFORMATION REPORTING AND BACKUP WITHHOLDING
 
     In general, information reporting requirements will apply to certain
payments made in respect of a Note made to U.S. Holders other than certain
exempt recipients (such as corporations). A 31% backup withholding tax will
apply to such payments if the U.S. Holder fails to provide a correct taxpayer
identification number or certification of exempt status or, with respect to
certain payments, the U.S. Holder fails to report in full all dividend and
interest income and the IRS notifies the payor of such underreporting.
 
     Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a Note if such holder has
provided the required certification that it is not a United States person as set
forth in paragraph (i) under "United States Federal Income Taxation of Foreign
Holders," provided that neither the Company nor its agent has actual knowledge
that the holder is a United States person. The Company or its agent may,
however, report (on IRS Form 1042S) payments of interest on the Notes.
 
     Payment of the proceeds from the disposition of a Note made to or through a
foreign office of a broker will not be subject to information reporting or
backup withholding, except that if the broker is a United States person, a
controlled foreign corporation for U.S. tax purposes or a foreign person 50% or
more of whose gross income from all sources for the three-year period ending
with the close of its taxable year preceding the payment was effectively
connected with a U.S. trade or business, information reporting may apply to such
payments. Payments of the proceeds from a disposition of a Note made to or
through the U.S. office of a broker is subject to information reporting and
backup withholding unless the holder or beneficial owner certifies as to its
taxpayer identification number or otherwise establishes an exemption from
information reporting and backup withholding.
 
     In general, the Final Withholding Tax Regulations do not significantly
alter the current substantive backup withholding and information reporting
requirements, but unify current certification procedures and clarify reliance
standards. Under the Final Withholding Tax Regulations, special rules apply
which permit the shifting of primary responsibility for withholding to certain
financial intermediaries acting on behalf of beneficial owners. A holder of a
Note should consult with its tax advisor regarding the application of the backup
withholding rules to its particular situation, the availability of an exemption
therefrom, the procedure for obtaining such an exemption, if available, and the
impact of the Final Withholding Tax Regulations on payments made with respect to
Notes after December 31, 1999.
 
     Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's U.S.
federal income tax liability, provided the required information is timely
furnished to the IRS.
 
                                       98
<PAGE>   99
 
                              ERISA CONSIDERATIONS
 
     A fiduciary of a pension, profit-sharing, retirement, or other employee
benefit plan ("Plan") subject to Title I of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of a portion of such Plan's assets in the
Notes. Accordingly, such fiduciary should consider (i) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA,
(ii) whether the investment is in accordance with the documents and instruments
governing the Plan as required by Section 404(a)(1)(D) of ERISA and (iii)
whether the investment is prudent under ERISA.
 
     In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the corresponding provisions of the Code
prohibit a wide range of transactions involving the assets of a Plan or a plan
subject to Section 4975 of the Code (such plans are collectively referred to as
"ERISA Plans") and persons who have certain specified relationships to the ERISA
Plan ("parties in interest" within the meaning of ERISA, and "disqualified
persons" within the meaning of the Code). A prohibited transaction described in
Section 406 of ERISA or Section 4975 of the Code could arise if the Company
were, or were to become, a party in interest or a disqualified person with
respect to an ERISA Plan purchasing the Notes. Certain exemptions from the
prohibited transaction rules could be applicable to the purchase of the Notes by
an ERISA Plan depending on the type and circumstances of the fiduciary of the
ERISA Plan making the decision to acquire the Notes. Included among these
exemptions are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding
investments by insurance company pooled separate accounts; PTCE 91-38, regarding
investments by bank collective investment funds; PTCE 84-14, regarding
transactions effected by a qualified professional asset manager; PTCE 95-60,
regarding investments by insurance company general amounts; and PTCE 96-23,
regarding transactions effected by an in-house asset manager. Thus, a fiduciary
of an ERISA Plan considering an investment in the Notes also should consider
whether the acquisition or the continued holding of the Notes might constitute
or give rise to a non-exempt prohibited transaction. No ERISA Plan with respect
to which the Company is a party in interest or a disqualified person may
purchase the Notes, unless a statutory or administrative exemption is available.
 
     Certain employee benefit plans, such as governmental plans and church plans
(if no election has been made under Section 410(d) of the Code), are not subject
to the restrictions of ERISA, and assets of such Plans may be invested in the
Notes without regard to the ERISA considerations described above. The investment
in the Notes by such employee benefit plans may, however, be subject to other
applicable federal and state laws, which should be carefully considered by such
employee benefit plans before investing in the Notes.
 
     Every ERISA Plan investor considering the acquisition of the Notes should
consult with its counsel with respect to the potential applicability of ERISA
and Section 4975 of the Code to such investment, and whether any prohibited
transaction exemption would be applicable.
 
                                       99
<PAGE>   100
 
                                  UNDERWRITERS
 
   
     Under the terms and subject to the conditions contained in the Underwriting
Agreement dated as of the date hereof (the "Underwriting Agreement"), the form
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, the Underwriters named herein (the "Underwriters") have
severally agreed to purchase, and the Company has agreed to sell to them, the
respective principal amount of Notes set forth opposite the names of such
Underwriters below:
    
 
   
<TABLE>
<CAPTION>
                                                               PRINCIPAL
                                                               AMOUNT OF
                            NAME                                 NOTES
                            ----                              ------------
<S>                                                           <C>
Morgan Stanley & Co. Incorporated...........................  $
Salomon Brothers Inc........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
                                                              ------------
          Total.............................................  $290,000,000
                                                              ============
</TABLE>
    
 
     The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of the
Notes offered hereby if any are taken.
 
     The Underwriters propose to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page thereof and part to certain
dealers at a price which represents a concession not in excess of      % of the
public offering price for the Notes. Each Underwriter may allow, and such
dealers may reallow, a concession to certain other dealers not in excess of
     % of the public offering price for the Notes. After the initial offering of
the Notes, the offering price and other selling terms may from time to time be
varied by the Underwriters.
 
     In order to facilitate the Debt Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may over-allot in connection with the Debt
Offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Notes in the Debt Offering, if the syndicate
purchases previously distributed Notes in transactions to cover syndicate short
positions, in stabilizing transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the Notes above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
 
     The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
 
                                 LEGAL MATTERS
 
     The validity of the Notes offered hereby will be passed upon for the
Company by Kirkland & Ellis (a partnership including professional corporations),
Chicago, Illinois. Certain legal matters will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.
 
                                    EXPERTS
 
     The consolidated balance sheets of the Company as of March 31, 1998 and
December 31, 1997, and the related consolidated statements of operations,
stockholders' deficit, and cash flows for the three months ended March 31, 1998
and for the period from inception (April 22, 1997) to December 31, 1997, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said report.
 
                                       100
<PAGE>   101
 
                             ADDITIONAL INFORMATION
 
     The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement," which term shall encompass all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, with respect to the Notes offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement. For further information with respect to the Company and
the Notes, reference is made to the Registration Statement. Statements made in
this Prospectus as to the contents of any contract, agreement or any other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the document or matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
 
     As a result of the effectiveness of its Registration Statement on Form S-4
(Registration No. 333-49013) relating to the 11 3/4% Notes, the Company is
subject to the informational requirements of the Exchange Act and in accordance
therewith is required to file periodic reports and other information with the
Commission. Copies of the Registration Statement, periodic reports and other
information filed by the Company with the Commission can be obtained at
prescribed rates at the public reference facilities maintained by the Commission
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. In addition, the Commission maintains a website that contains
periodic reports and other information filed by the Company via the Commission's
Electronic Data Gathering and Retrieval System (EDGAR). This website can be
accessed at www.sec.gov.
 
                                       101
<PAGE>   102
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
<S>                                                           <C>
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheet as of March 31, 1998 and December
  31, 1997..................................................  F-3
Consolidated Statement of Operations for the three months
  ended March 31, 1998 and the period from Inception (April
  22, 1997) through December 31, 1997.......................  F-4
Consolidated Statement of Stockholders' Deficit for the
  three months ended March 31, 1998 and the period from
  Inception (April 22, 1997) through December 31, 1997......  F-5
Consolidated Statement of Cash Flows for the three months
  ended March 31, 1998 and the period from Inception (April
  22, 1997) through December 31, 1997.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   103
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Stockholders of
Allegiance Telecom, Inc.:
 
     We have audited the accompanying consolidated balance sheets of Allegiance
Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of
March 31, 1998 and December 31, 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the three months ended
March 31, 1998, and for the period from inception (April 22, 1997) to December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allegiance Telecom, Inc. and
subsidiaries as of March 31, 1998 and December 31, 1997, and the results of
their operations and their cash flows for the three months ended March 31, 1998,
and for the period from inception to December 31, 1997, in conformity with
generally accepted accounting principles.
 
                                            ARTHUR ANDERSEN LLP
 
Dallas, Texas,
   
April 24, 1998 (except for
Note 10 which date
is June 5, 1998)
    
 
                                       F-2
<PAGE>   104
 
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                          ASSETS
                                                               MARCH 31,      DECEMBER 31,
                                                                  1998            1997
                                                              ------------    ------------
<S>                                                           <C>             <C>
CURRENT ASSETS:
  Cash and cash equivalents.................................  $221,678,116    $  5,726,359
  Short-term investments....................................    35,916,586              --
  Accounts receivable.......................................       307,430           4,310
  Prepaid expenses and other current assets.................       396,460         245,152
                                                              ------------    ------------
          Total current assets..............................   258,298,592       5,975,821
PROPERTY AND EQUIPMENT:
  Property and equipment....................................    32,890,448      23,912,659
  Accumulated depreciation and amortization.................      (221,063)        (12,639)
                                                              ------------    ------------
          Property and equipment, net.......................    32,669,385      23,900,020
OTHER NON-CURRENT ASSETS:
  Deferred debt issuance costs (net of accumulated
     amortization of $100,793)..............................     9,034,603              --
  Other assets..............................................       225,112         171,173
                                                              ------------    ------------
          Total other non-current assets....................     9,259,715         171,173
                                                              ------------    ------------
          Total assets......................................  $300,227,692    $ 30,047,014
                                                              ============    ============
                          LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Accounts payable..........................................  $  1,962,575    $  2,261,690
  Accrued liabilities and other.............................     3,651,842       1,668,010
  Deferred revenue..........................................        68,221              --
                                                              ------------    ------------
          Total current liabilities.........................     5,682,638       3,929,700
LONG-TERM DEBT..............................................   247,329,420              --
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK:
  Redeemable cumulative convertible preferred stock -- $.01
     par value, 96,000 and 95,000 shares authorized,
     95,641.25 and 95,000 shares issued and outstanding at
     March 31, 1998, and December 31, 1997, respectively....    59,206,139      33,409,404
  Preferred stock subscriptions receivable..................      (275,000)             --
                                                              ------------    ------------
          Total redeemable cumulative convertible preferred
            stock...........................................    58,931,139      33,409,404
REDEEMABLE WARRANTS.........................................     8,257,542              --
COMMITMENTS AND CONTINGENCIES (see Notes 5 and 7)
STOCKHOLDERS' DEFICIT:
  Common stock -- $.01 par value, 102,524 and 100,001 shares
     authorized, 1 share issued and outstanding at March 31,
     1998, and December 31, 1997............................            --              --
  Additional paid-in capital................................    14,405,519       3,008,437
  Deferred compensation.....................................   (13,216,518)     (2,798,377)
  Accumulated deficit.......................................   (21,162,048)     (7,502,150)
                                                              ------------    ------------
          Total stockholders' deficit.......................   (19,973,047)     (7,292,090)
                                                              ------------    ------------
          Total liabilities and stockholders' deficit.......  $300,227,692    $ 30,047,014
                                                              ============    ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-3
<PAGE>   105
 
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                                 PERIOD FROM
                                                                                  INCEPTION
                                                              THREE MONTHS    (APRIL 22, 1997),
                                                                 ENDED             THROUGH
                                                               MARCH 31,        DECEMBER 31,
                                                                  1998              1997
                                                              ------------    -----------------
<S>                                                           <C>             <C>
REVENUES....................................................  $    202,925      $        403
OPERATING EXPENSES:
  Technical.................................................       234,831           151,269
  Selling...................................................       689,778            22,844
  General and administrative................................     4,990,253         3,613,028
  Depreciation and amortization.............................       208,424            12,639
                                                              ------------      ------------
          Total operating expenses..........................     6,123,286         3,799,780
                                                              ------------      ------------
          Loss from operations..............................    (5,920,361)       (3,799,377)
OTHER (EXPENSE) INCOME:
  Interest income...........................................     2,194,226           111,417
  Interest expense..........................................    (4,669,079)               --
                                                              ------------      ------------
          Total other (expense) income......................    (2,474,853)          111,417
                                                              ------------      ------------
NET LOSS....................................................    (8,395,214)       (3,687,960)
ACCRETION OF REDEEMABLE PREFERRED STOCK AND WARRANT
  VALUES....................................................    (5,264,684)       (3,814,190)
                                                              ------------      ------------
NET LOSS APPLICABLE TO COMMON STOCK.........................  $(13,659,898)     $ (7,502,150)
                                                              ============      ============
NET LOSS PER SHARE, basic and diluted.......................  $(13,659,898)     $ (7,502,150)
                                                              ============      ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-4
<PAGE>   106
 
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
 
<TABLE>
<CAPTION>
                                       COMMON STOCK
                                    ------------------   ADDITIONAL
                                    NUMBER OF              PAID-IN       DEFERRED     ACCUMULATED
                                     SHARES     AMOUNT     CAPITAL     COMPENSATION     DEFICIT         TOTAL
                                    ---------   ------   -----------   ------------   ------------   ------------
<S>                                 <C>         <C>      <C>           <C>            <C>            <C>
BALANCE, April 22, 1997 (date of
  inception)......................     --        $ --    $        --   $         --   $         --   $         --
  Issuance of common stock at $100
     per share....................      1          --            100             --             --            100
  Accretion of redeemable
     preferred stock and warrant
     values.......................     --          --             --             --     (3,814,190)    (3,814,190)
  Deferred compensation...........     --          --      3,008,337     (3,008,337)            --             --
  Amortization of deferred
     compensation.................     --          --             --        209,960             --        209,960
  Net loss........................     --          --             --             --     (3,687,960)    (3,687,960)
                                       --        ----    -----------   ------------   ------------   ------------
BALANCE, December 31, 1997........      1          --      3,008,437     (2,798,377)    (7,502,150)    (7,292,090)
  Accretion of redeemable
     preferred stock and warrant
     values.......................     --          --             --             --     (5,264,684)    (5,264,684)
  Deferred compensation...........     --          --     11,397,082    (11,397,082)            --             --
  Amortization of deferred
     compensation.................     --          --             --        978,941             --        978,941
  Net loss........................     --          --             --             --     (8,395,214)    (8,395,214)
                                       --        ----    -----------   ------------   ------------   ------------
BALANCE, March 31, 1998...........      1        $ --    $14,405,519   $(13,216,518)  $(21,162,048)  $(19,973,047)
                                       ==        ====    ===========   ============   ============   ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-5
<PAGE>   107
 
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                                                PERIOD FROM
                                                                                 INCEPTION
                                                                                 (APRIL 22,
                                                              THREE MONTHS         1997),
                                                                 ENDED            THROUGH
                                                               MARCH 31,        DECEMBER 31,
                                                                  1998              1997
                                                              ------------    ----------------
<S>                                                           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss..................................................  $ (8,395,214)     $ (3,687,960)
  Adjustments to reconcile net loss to net cash used in
     operating activities --
     Depreciation and amortization..........................       208,424            12,639
     Accretion of senior discount notes.....................     4,568,286                --
     Amortization of deferred debt issuance costs...........       100,793                --
     Deferred compensation..................................       978,941           209,960
     Changes in assets and liabilities --
       Accounts receivable..................................      (303,120)           (4,310)
       Prepaid expenses and other current assets............      (151,308)         (245,152)
       Other assets.........................................       (53,939)         (171,173)
       Accounts payable.....................................        45,951           275,089
       Accrued liabilities and other........................       737,401         1,668,010
       Deferred revenue.....................................        68,221                --
                                                              ------------      ------------
          Net cash used in operating activities.............    (2,195,564)       (1,942,897)
                                                              ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment.......................    (7,608,890)      (21,926,058)
  Short-term investments....................................   (35,916,586)               --
                                                              ------------      ------------
          Net cash used in investing activities.............   (43,525,476)      (21,926,058)
                                                              ------------      ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from senior discount notes.......................   242,293,600                --
  Proceeds from issuance of warrants........................     8,183,550                --
  Debt issuance costs.......................................    (9,135,396)               --
  Proceeds from issuance of redeemable preferred stock......        62,500         5,000,000
  Proceeds from redeemable capital contributions............    20,268,543        24,595,214
  Proceeds from issuance of common stock....................            --               100
                                                              ------------      ------------
          Net cash provided by financing activities.........   261,672,797        29,595,314
                                                              ------------      ------------
INCREASE IN CASH AND CASH EQUIVALENTS.......................   215,951,757         5,726,359
CASH AND CASH EQUIVALENTS, beginning of period..............     5,726,359                --
                                                              ------------      ------------
CASH AND CASH EQUIVALENTS, end of period....................  $221,678,116      $  5,726,359
                                                              ============      ============
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                       F-6
<PAGE>   108
 
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      MARCH 31, 1998 AND DECEMBER 31, 1997
 
1. GENERAL:
 
     Allegiance Telecom, Inc., a competitive local exchange carrier ("CLEC"),
was incorporated on April 22, 1997, as a Delaware corporation for the purpose of
providing voice, data, and Internet services to business, government, and other
institutional users in major metropolitan areas across the United States.
Allegiance Telecom, Inc. and its subsidiaries are referred to herein as the
"Company." The consolidated financial statements of the Company include the
accounts of Allegiance Telecom, Inc., Allegiance Telecom Service Corporation,
Allegiance Telecom of California, Inc., Allegiance Telecom of Georgia, Inc.,
Allegiance Telecom of Illinois, Inc., Allegiance Telecom of New Jersey, Inc.,
Allegiance Telecom of New York, Inc., Allegiance Telecom of Texas, Inc., and
Allegiance Telecom International, Inc. Each of these companies is a wholly owned
subsidiary of Allegiance Telecom, Inc.
 
     The Company plans two phases of development, the first to offer services in
12 of the largest U.S. metropolitan areas and the second to offer services in 12
additional large metropolitan areas in the U.S. The Company is currently
developing its networks in six markets: New York City, Dallas, Atlanta, Chicago,
Los Angeles, and San Francisco. During December 1997, the Company began
providing service in Dallas. Initial facilities-based service for the New York
City market began in the first quarter of 1998. Initial facilities-based
services for the Dallas and Atlanta markets are scheduled to begin in the second
quarter of 1998, for the Chicago and Los Angeles markets in the third quarter of
1998, and for the San Francisco and Boston markets in the fourth quarter of
1998. The Company is planning to begin services in an additional six markets in
the second half of 1998 and early 1999. The build-out of the second phase will
be dependent upon the Company obtaining additional financing.
 
     Until December 16, 1997, the Company was in the development stage. Since
its inception on April 22, 1997, the Company's principal activities have
included developing its business plans, procuring governmental authorizations,
raising capital, hiring management and other key personnel, working on the
design and development of its local exchange telephone networks and operations
support systems ("OSS"), acquiring equipment and facilities and negotiating
interconnection agreements. Accordingly, the Company has incurred operating
losses and operating cash flow deficits.
 
     The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and the
competitive environment in which the Company intends to operate. The Company's
performance will further be affected by its ability to assess potential markets,
secure financing or raise additional capital, implement expanded interconnection
and collocation with incumbent local exchange carrier ("ILEC") facilities, lease
adequate trunking capacity from ILECs or other CLECs, purchase and install
switches in additional markets, implement efficient OSS and other back office
systems, develop a sufficient customer base, and attract, retain, and motivate
qualified personnel. The Company's networks and the provisions 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 location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
 
                                       F-7
<PAGE>   109
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
CONSOLIDATION
 
     The accompanying financial statements include the accounts of Allegiance
Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
 
CASH AND CASH EQUIVALENTS
 
     For purposes of reporting cash flows, the Company includes as cash and cash
equivalents, cash, marketable securities and commercial paper with original
maturities of three months or less.
 
SHORT-TERM INVESTMENTS
 
     Short-term investments consist primarily of commercial paper with original
maturities at date of purchase beyond three months and less than 12 months. Such
short-term investments are carried at their accreted value, which approximates
fair value, due to the short period of time to maturity.
 
ACCOUNTS RECEIVABLE
 
     Accounts receivable consists of end user receivables, interest receivable,
and at December 31, 1997, a receivable from an employee.
 
PREPAID EXPENSES AND OTHER CURRENT ASSETS
 
     Prepaid expenses and other current assets consist of prepaid rent, prepaid
insurance, and refundable deposits. Prepayments are expensed on a straight-line
basis over the life of the underlying agreements.
 
PROPERTY AND EQUIPMENT
 
     Property and equipment includes switches, office equipment, furniture and
fixtures, and construction-in-progress of switches and leasehold improvements.
These assets are stated at cost, which includes direct costs and interest
expense capitalized and are depreciated once placed in service using the
straight-line method. Interest expense for the three months ended March 31, 1998
was $5,136,613 before the capitalization of $467,534 of interest expense related
to construction-in-progress. The estimated useful lives of office equipment,
furniture and fixtures, leasehold improvements and switches are two, five, and
seven years, respectively. Repair and maintenance costs are expensed as
incurred. Property and equipment at March 31, 1998, and December 31, 1997,
consisted of the following:
 
<TABLE>
<CAPTION>
                                                             MARCH 31,     DECEMBER 31,
                                                               1998            1997
                                                            -----------    ------------
<S>                                                         <C>            <C>
Construction-in-progress switches.........................  $10,774,433    $19,989,924
Construction-in-progress leasehold improvements...........      521,546      2,458,728
Construction-in-progress office equipment.................    3,272,779      1,186,457
Switches..................................................   13,835,717             --
Leasehold improvements....................................    3,696,150         37,466
Office equipment..........................................      583,560         89,855
Furniture and fixtures....................................      206,263        150,229
Less: Accumulated depreciation............................     (221,063)       (12,639)
                                                            -----------    -----------
Property and equipment, net...............................  $32,669,385    $23,900,020
                                                            ===========    ===========
</TABLE>
 
     In October 1997, the Company acquired digital switches in New York City and
Atlanta and certain furniture and fixtures from US ONE Communications for an
aggregate purchase price of approximately
                                       F-8
<PAGE>   110
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
$19.3 million. Operating and application software costs for both network and
administration systems are capitalized and amortized over the estimated life of
the system, which approximates five years.
 
REVENUE RECOGNITION
 
     Revenue is recognized in the month in which the service is provided. All
expenses related to services provided are recognized as incurred. Deferred
revenue represents advance billings for services not yet performed. Such revenue
is deferred and recognized in the month in which the service is provided.
 
USE OF ESTIMATES IN FINANCIAL STATEMENTS
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
 
EARNINGS PER SHARE
 
     The net loss per share amount reflected on the statement of operations is
based upon the weighted average number of common shares outstanding of one
share. The preferred shares, warrants and options were not included in the net
loss per share calculation as the effect from the conversion would be
antidilutive (see Note 3). The net loss applicable to common stock at March 31,
1998, and December 31, 1997, includes the accretion of redeemable preferred
stock and warrant values of $5,264,684 and $3,814,190, respectively.
 
COMPREHENSIVE INCOME
 
     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes reporting and disclosure requirements for
comprehensive income and its components within the Financial Statements. The
Company's comprehensive income components were immaterial as of March 31, 1998
and the Company had no comprehensive income components as of December 31, 1997;
therefore, comprehensive income is the same as net income for both periods.
 
RECLASSIFICATIONS
 
     Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period presentation.
 
3. CAPITALIZATION:
 
STOCK PURCHASE AGREEMENT AND SECURITY HOLDERS AGREEMENT
 
     On August 13, 1997, the Company entered into a stock purchase agreement
with Allegiance Telecom, L.L.C. ("Allegiance LLC") (see Note 6). Allegiance LLC
purchased 95,000 shares of 12% redeemable cumulative convertible Preferred Stock
par value $.01 per share ("Initial Closing") and agreed to make additional
contributions as necessary to fund expansion into new markets ("Subsequent
Closings"). In order to obtain funds through Subsequent Closings, the Company
must submit a proposal to Allegiance LLC detailing the funds necessary to build
out the Company's business in a new market. Allegiance LLC is not required to
make any contributions until the proposal has been approved by Allegiance LLC.
The maximum commitment of Allegiance LLC is $100 million and no capital
contributions are required to be made after the Company consummates an initial
public offering of its stock (see Note 10). As of March 31, 1998, and December
31, 1997, Allegiance LLC has contributed a total of $49.9 million and $29.6
million, respectively. At any time and from time to time after August 13, 2004,
but not after the consummation of a public offering
                                       F-9
<PAGE>   111
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
   
(see Note 10) or sale of the Company, each security holder in Allegiance LLC
shall have the right to require Allegiance LLC to repurchase all of the
outstanding securities held by such security holder at the greater of the
original cost for such security and the fair market value as defined in the
security holders agreement. The original cost shall be equal to the
contributions made to Allegiance LLC together with interest thereon at 12% per
annum. Twenty-three days after the issuance of a Repurchase Notice (as defined
in the Securityholders Agreement), the security holders may have the fair value
of their securities determined. Fair market value is defined as the amount
agreed to be the fair market value by Allegiance LLC, the majority of the Fund
Investors, and the majority of the Management Investors. If mutual agreement
cannot be reached, fair market value for (a) publicly traded securities
generally means the average of the closing prices of such securities for the 21
day period after the filing of the Repurchase Notice and (b) non-publicly traded
securities, a valuation determined by an appraisal mechanism. In the event the
repurchase provisions are exercised, the Company has agreed, at the request and
direction of Allegiance LLC, to take any and all actions necessary, including
declaring and paying dividends and repurchasing preferred or common stock to
enable Allegiance LLC to satisfy its repurchase obligations. Accordingly, as
required by SEC accounting standards the Company is recognizing the accretion of
the value of the Preferred Stock (as defined below) to reflect management's
estimate of the potential future fair market value of the Preferred Stock
payable in the event the repurchase provisions are exercised. Amounts are
accreted using the effective interest method assuming the Preferred Stock is
redeemed at a redemption price based on the estimated potential future fair
market value of the equity of the Company in August 2004. The accretion is
recorded each period as an increase in the balance of Preferred Stock
outstanding and a non-cash increase in the net loss applicable to common stock.
In the event of an initial public offering of the common stock of the Company
before August 2004, the redemption provision terminates. At such time, the
Preferred Stock would convert to common stock and the amounts accreted would be
reclassified as a component of additional paid-in capital in the stockholders'
equity section of the balance sheet.
    
 
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
 
     As of March 31, 1998, and December 31, 1997, the Company had authorized
96,000 and 95,000 shares, respectively of 12% redeemable cumulative convertible
Preferred Stock ("Preferred Stock"), par value $.01 per share. Each share is
convertible into shares of the Company's common stock with a par value of $.01
per share (the "Common Stock"). Each share of Preferred Stock is currently
convertible into Common Stock on a 1:1 basis, subject to certain antidilution
provisions. No dividends were declared in 1998 or in 1997. As of March 31, 1998,
and December 31, 1997, the Company had recorded accretion in the value of the
Preferred Stock using the effective interest method of $5,190,692 and
$3,814,190, to reflect the potential future repurchase value of the Preferred
Stock in August 2004 based upon management's estimate of the fair market value
of the Preferred Stock at that date.
 
     On August 13, 1997, as a result of the Initial Closing, 95,000 shares of
Preferred Stock were issued at a per share price of $52.63, for an aggregate
price of $5 million.
 
     Capital contributed in the Subsequent Closings occurring in October 1997
and January 1998, and other capital contributions totaled approximately $45.2
million.
 
     On February 25, 1998, the Company issued 522.50 shares of Preferred Stock.
The Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $275,000 which is recorded as a subscription receivable on the balance
sheet.
 
     On March 13, 1998, the Company issued 118.75 shares of Preferred Stock. The
Preferred Stock was issued at a per share price of $526.32, for an aggregate
price of $62,500.
 
                                      F-10
<PAGE>   112
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
COMMON STOCK
 
     As of December 31, 1997, the Company had authorized 100,001 shares of $.01
par value Common Stock. One share was issued and outstanding at March 31, 1998,
and December 31, 1997. In February 1998, the Company increased the number of
authorized shares of Common Stock to 102,524 shares. Of the authorized but
unissued Common Stock, 96,000 shares are reserved for issuance upon conversion
of Preferred Stock, 5,000 shares are reserved for issuance upon exercise of
stock options issued under the Stock Option Plan (see Note 9) and 1,523 shares
are reserved for issuance, sale, and delivery upon the exercise of warrants (see
Note 4).
 
4. LONG-TERM DEBT:
 
     On February 3, 1998, the Company raised gross proceeds of approximately
$250.5 million in an offering of 445,000 Units (the "Unit Offering"), each of
which consists of one 11 3/4% Senior Discount Note due 2008 of the Company (the
"11 3/4% Notes") and one warrant to purchase .0034224719 shares of Common Stock
(the "Redeemable Warrants") at an exercise price of $.01 per share, subject to
certain antidilution provisions. Of the gross proceeds, $242.3 million was
allocated to the initial accreted value of the 11 3/4% Notes and $8.2 million
was allocated to the Redeemable Warrants. The Redeemable Warrants are separately
transferable and are exercisable at any time beginning February 3, 1999, through
their expiration on February 3, 2008. The Redeemable Warrants will also become
exercisable in connection with a public equity offering. The 11 3/4% Notes have
a principal amount at maturity of $445.0 million and an effective interest rate
of 12.45%. The 11 3/4% Notes mature on February 15, 2008. From and after
February 15, 2003, interest on the 11 3/4% Notes will be payable semi-annually
in cash at the rate of 11 3/4% per annum.
 
     The fair market value of the Redeemable Warrants was determined based upon
estimates of the fair value of the Common Stock the Redeemable Warrants could be
used to acquire and the achievement of an effective interest rate on the 11 3/4%
Notes of 12.45% required to sell the Units. The fair market value of the
Redeemable Warrants was also corroborated using the Black-Scholes valuation
model.
 
   
     The Company must make an offer to purchase the Redeemable Warrants for cash
at the Relevant Value upon the occurrence of a Repurchase Event. A Repurchase
Event is defined to occur when (i) the Company consolidates with or merges into
another person if the Common Stock thereafter issuable upon exercise of the
Redeemable Warrants is not registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or (ii) the Company sells all or substantially
all of its assets to another person, if the Common Stock thereafter issuable
upon the exercise of the Redeemable Warrants is not registered under the
Exchange Act, unless the consideration for such a transaction is cash. The
Relevant Value is defined to be the fair market value of the Common Stock as
determined by the trading value of the securities if publicly traded or at an
estimated fair market value without giving effect to any discount for lack of
liquidity, lack of registered securities, or the fact that the securities
represent a minority of the total shares outstanding. As required by SEC
accounting standards the Company is recognizing the potential future redemption
value of the Redeemable Warrants by recording accretion of the Redeemable
Warrant to its estimated fair market value at February 3, 2008 using the
effective interest method. In the event the Redeemable Warrant is exercised and
used to purchase the common stock of the Company or expires, the redemption
provisions terminate and amounts accreted would be reversed as a reduction of
the losses applicable to common stock in measuring results of operations of the
Company. Accretion recorded in the first quarter of 1998 was $73,992.
    
 
     The 11 3/4% Notes are redeemable by the Company, in whole or in part,
anytime on or after February 15, 2003, at 105.875% of their principal amount at
maturity, plus accrued and unpaid interest, declining to 100% of their principal
amount at maturity, plus accrued and unpaid interest on and after February 15,
2006. In addition, at any time prior to February 15, 2001, the Company may, at
its option, redeem up to 35% of the principal amount at maturity of the 11 3/4%
Notes in connection with a public equity offering at 111.750% of the
 
                                      F-11
<PAGE>   113
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
accreted value on the redemption date; provided that at least $289.3 million
aggregate principal amount at maturity of the 11 3/4% Notes remains outstanding
after such redemption.
 
     The 11 3/4% Notes carry certain restrictive covenants that, among other
things, limit the ability of the Company to incur indebtedness, pay dividends,
issue or sell capital stock, create liens, sell assets, and enter into
transactions with any holder of 5% or more of any class of capital stock of the
Company or any of its affiliates. The Company was in compliance with all such
restrictive covenants at March 31, 1998.
 
5. LEGAL MATTERS:
 
     On August 29, 1997, WorldCom, Inc. ("WorldCom") sued the Company and two
individual employees. In its complaint, WorldCom alleges that these employees
violated certain noncompete and nonsolicitation agreements by accepting
employment with the Company and by soliciting then current WorldCom employees to
leave WorldCom's employment and join the Company. In addition, WorldCom claims
that the Company tortiously interfered with WorldCom's relationships with its
employees, and that the Company's behavior constituted unfair competition.
WorldCom seeks injunctive relief and damages, although it has filed no motion
for a temporary restraining order or preliminary injunction. The Company denies
all claims and will vigorously defend itself. The Company does not expect the
ultimate outcome to have a material adverse effect on the results of operations
or financial condition of the Company and an estimate of possible loss cannot be
made at this time.
 
     On October 7, 1997, the Company filed a counterclaim against WorldCom for,
among other things, attempted monopolization of the "one stop shopping"
telecommunications market, abuse of process, and unfair competition. WorldCom
did not move to dismiss the attempted monopolization claim, but has moved to
dismiss the abuse of process and unfair competition claims. On March 4, 1998,
the court dismissed the claim for unfair competition.
 
6. RELATED PARTIES:
 
     The Company is a majority owned subsidiary of Allegiance LLC. As of March
31, 1998, and December 31, 1997, Allegiance LLC has made aggregate capital
contributions to the Company of approximately $49.9 million and $29.6 million,
respectively. Allegiance LLC may continue to make additional capital
contributions to the Company as discussed in Note 3 to these financial
statements, but no such contributions will be required after the Company
consummates an initial public offering of its stock. Certain investors in
Allegiance LLC are also employees of the Company. Upon an initial public
offering by the Company, a sale of the Company or liquidation or dissolution of
the Company, Allegiance LLC will dissolve and its assets (which are expected to
consist almost entirely of capital stock of the Company) will be distributed to
the institutional investors and employee investors of Allegiance LLC in
accordance with an allocation formula calculated immediately prior to such
dissolution. The Company will account for any increase in the allocation of
assets to the employee investors in Allegiance LLC in accordance with generally
accepted accounting principles and SEC regulations in effect at the time of such
increase, and this will result in a charge to the Company's earnings (see Note
10).
 
     As the estimated fair market value of the Company has exceeded the price at
which units of Allegiance LLC have been sold to management employees since the
foundation of the Company, the Company has recognized deferred compensation of
$9,436,950 and $977,632 at March 31, 1998 and December 31, 1997, respectively,
of which $650,911 and $40,735 has been amortized to expense at March 31, 1998
and December 31, 1997, respectively. The deferred compensation charge is
amortized based upon the period over which the Company has the right to
repurchase the securities (at the lower of fair market value or the price paid
by the employee) in the event the management employee's employment with the
Company is terminated which expires over a four year period from the date of
issuance. During 1998 and 1997, the Company paid all
 
                                      F-12
<PAGE>   114
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
organizational and legal fees of Allegiance LLC, the amount of which was not
material. No amounts are due from Allegiance LLC at March 31, 1998, or December
31, 1997.
 
     In connection with the Unit Offering (see Note 4), the Company incurred
approximately $4.4 million in fees to an affiliate of an investor in Allegiance
LLC.
 
7. COMMITMENTS AND CONTINGENCIES:
 
     The Company has entered into various operating lease agreements, with
expirations through 2007, for office space and equipment. Future minimum lease
obligations related to the Company's operating leases as of March 31, 1998 are
as follows:
 
<TABLE>
<S>                                                <C>
1998.............................................  $1,199,679
1999.............................................   1,588,907
2000.............................................   1,597,751
2001.............................................   1,160,961
2002.............................................   1,119,128
Thereafter.......................................   4,743,351
</TABLE>
 
     Total rent expense for the three months ended March 31, 1998, was $331,862
and for the period from inception (April 22, 1997), to December 31, 1997, was
$212,053.
 
     In October 1997, the Company entered into a five-year general agreement
with Lucent Technologies, Inc. ("Lucent") establishing terms and conditions for
the purchase of Lucent products, services, and licensed materials. This
agreement includes a three-year exclusivity commitment for the purchase of
products and services related to new switches. The agreement contains no minimum
purchase requirements.
 
8. FEDERAL INCOME TAXES:
 
     The Company accounts for income tax under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). SFAS 109 requires an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events which have been recognized in the Company's financial
statements. The Company had approximately $2,916,156 and $460,475 of net
operating loss carryforwards for federal income tax purposes at March 31, 1998
and December 31, 1997, respectively. The net operating loss carryforwards will
expire in the years 2012 and 2013 if not previously utilized. The Company has
recorded a valuation allowance equal to the net deferred tax assets at March 31,
1998, and December 31, 1997, due to the uncertainty of future operating results.
The valuation allowance will be reduced at such time as management believes it
is more likely than not that the net deferred tax assets will be realized. Any
reductions in the valuation allowance will reduce future provisions for income
tax expense.
 
     The Company's deferred tax assets and the changes in those assets are:
 
   
<TABLE>
<CAPTION>
                                               DECEMBER 31,                  MARCH 31,
                                                   1997         CHANGE         1998
                                               ------------    ---------    -----------
<S>                                            <C>             <C>          <C>
Start-up costs capitalized for tax
  purposes...................................  $ 1,025,959     $ (59,848)   $   966,111
Net operating loss carryforwards.............      156,562       834,932        991,494
Valuation allowance..........................   (1,182,521)     (775,084)    (1,957,605)
                                               -----------     ---------    -----------
                                               $        --     $      --    $        --
                                               ===========     =========    ===========
</TABLE>
    
 
     Amortization of the original issue discount on the Notes as interest
expense is not deductible in the income tax return until paid.
                                      F-13
<PAGE>   115
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Under existing income tax law, all operating expenses incurred prior to a
company commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes.
 
9. STOCK OPTION PLAN:
 
     The Company has a stock option plan (the "Plan") under which it grants
options to purchase Common Stock. The options granted have a term of six years
and vest over a three-year period. As of March 31, 1998, and December 31, 1997,
5,000 shares of Common Stock are reserved for issuance under the Plan.
 
     The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and the related
interpretations in accounting for the Plan. Had compensation cost for the Plan
been determined based on the fair value of the options as of the grant dates for
awards under the Plan consistent with the method prescribed in Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company's net loss would have increased to the
pro forma amount indicated below. The Company estimated the fair value of each
option grant using the minimum value method permitted by SFAS No. 123 for
entities not publicly traded. The Company utilized the following assumptions in
the calculations for March 31, 1998, and December 31, 1997: weighted average
risk-free interest rates of 5.88% and 6.06%, respectively, expected life of six
years, and no dividends being paid over the life of the options.
 
<TABLE>
<CAPTION>
                                                             MARCH 31,     DECEMBER 31,
                                                                1998           1997
                                                             ----------    ------------
<S>                                                          <C>           <C>
Net loss -- As reported....................................  $8,395,214     $3,687,960
Net loss -- Pro forma......................................  $8,409,836     $3,698,012
</TABLE>
 
     A summary of the status of the Plan as of March 31, 1998, and December 31,
1997, is presented in the table below:
 
<TABLE>
<CAPTION>
                                              MARCH 31, 1998             DECEMBER 31, 1997
                                        --------------------------   --------------------------
                                                  WEIGHTED AVERAGE             WEIGHTED AVERAGE
                                        SHARES     EXERCISE PRICE    SHARES     EXERCISE PRICE
                                        -------   ----------------   -------   ----------------
<S>                                     <C>       <C>                <C>       <C>
Outstanding, beginning of period......      444      $1,052.63            --      $      --
Granted...............................      314       1,052.63           444       1,052.63
Exercised.............................       --             --            --             --
Forfeited.............................     (131)      1,052.63            --             --
                                        -------                      -------
Outstanding, end of period............      627      $1,052.63           444      $1,052.63
                                        =======                      =======
Options exercisable at period-end.....       --                           --
                                        =======                      =======
Weighted average fair value of options
  granted.............................  $314.25                      $320.85
                                        =======                      =======
</TABLE>
 
     As of March 31, 1998, the 627 options outstanding under the Plan have an
exercise price of $1,052.63 and a weighted average remaining contractual life of
5.6 years. As of December 31, 1997, the 444 options outstanding have an exercise
price of $1,052.63 and a weighted average remaining contractual life of 5.8
years.
 
     As the estimated fair market value of the Company stock exceeded the
exercise price of the options granted, the Company has recognized deferred
compensation expense of $2,559,281 and $2,030,705 at March 31, 1998 and December
31, 1997, respectively of which $328,030 and $169,225 has been amortized to
expense at March 31, 1998 and December 31, 1997, respectively over the vesting
period of the options. As of March 31, 1998, the Company has reversed $599,149
of deferred compensation related to options forfeited.
 
                                      F-14
<PAGE>   116
                   ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. SUBSEQUENT EVENTS:
 
CAPITAL LEASE
 
   
     On May 29, 1998, the Company signed a capital lease agreement for three,
four-fiber rings at an expected total cost of $3,485,000 for a term of ten years
with a renewal term of ten years.
    
 
PUBLIC STOCK AND NOTE OFFERINGS
 
   
     The Company will seek to raise approximately $200.0 million of gross
proceeds in an initial public offering of Common Stock (the "Equity Offering")
and an additional $290.0 million of gross proceeds in an offering of Senior
Notes due 2008 (the "Debt Offering") of which approximately $88.0 million will
be required to be placed in a pledged account to secure and fund the first six
scheduled payments of interest on the notes.
    
 
   
     The Fund Investors and Management Investors currently own 95.0% and 5.0%,
respectively, of the ownership interests of Allegiance LLC, an entity that owns
substantially all of the Company's outstanding capital stock. If the Equity
Offering is consummated, Allegiance LLC will dissolve and its assets (which
consist almost entirely of such capital stock) will be distributed to the Fund
Investors and the Management Investors in accordance with the LLC Agreement. The
LLC Agreement provides that the Equity Allocation between the Fund Investors and
the Management Investors will range between 95.0%/5.0% and 66.7%/33.3% based
upon the valuation of the Company's Common Stock implied by the Equity Offering.
Based upon the current valuation of the Company's Common Stock implied by the
Equity Offering, the Equity Allocation will be 66.7% to the Fund Investors and
33.3% to the Management Investors. Under generally accepted accounting
principles, upon the consummation of the Equity Offering, the Company will be
required to record the increase (based upon the valuation of the Common Stock
implied by the Equity Offering) in the assets of Allegiance LLC allocated to the
Management Investors as an increase in additional paid-in capital, a portion of
which will be recorded as a non-cash, non-recurring charge to operating expense
and a portion of which will be recorded as a deferred management ownership
allocation charge. The deferred charge will be amortized over 1998, 1999, 2000
and 2001, which is the period over which the Company has the right to repurchase
the securities (at the lower of fair market value or the price paid by the
employee) in the event the management employee's employment with the Company is
terminated. Based upon the Common Stock valuation estimated in the Equity
Offering the total management ownership allocation charge is estimated to be
$232.7 million.
    
 
   
     In connection with the consummation of the Equity Offering, the outstanding
shares of Preferred Stock will be converted to Common Stock and the obligation
of Allegiance LLC to make additional capital contributions to the Company (and
the obligation of the members of Allegiance LLC to make capital contributions to
it) will terminate. Upon such conversion of the Preferred Stock, the obligation
of the Company to redeem the Preferred Stock also terminates and, therefore, the
Preferred Stock dividends accrued to the date of the Equity Offering will be
reclassified to additional paid-in capital in the stockholders' equity section
of the balance sheet.
    
 
                                      F-15
<PAGE>   117
 
                        'ALLEGIANCE TELECOM, INC. LOGO'
<PAGE>   118
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The following is a statement of estimated expenses, to be paid solely by
the Company, of the issuance and distribution of the securities being
registered:
 
   
<TABLE>
<S>                                                           <C>
Securities and Exchange Commission registration fee.........  $ 85,550
NASD filing fee.............................................  $ 29,500
Blue Sky fees and expenses (including attorneys' fees and
  expenses).................................................  $ 15,000
Printing expenses...........................................  $250,000
Accounting fees and expenses................................  $ 30,000
Legal fees and expenses.....................................  $200,000
Miscellaneous expenses......................................  $139,950
                                                              --------
          Total.............................................  $750,000
                                                              ========
</TABLE>
    
 
---------------
 
   
All amounts are estimated except for the SEC registration fee and the NASD
filing fee.
    
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  General Corporation Law
 
     The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law"), inter alia, provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
 
     Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
 
                                      II-1
<PAGE>   119
 
  Certificate of Incorporation
 
     The Company's Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
 
     All of the Company's directors and officers are covered by insurance
policies maintained by it against certain liabilities for actions taken in their
capacities as such, including liabilities under the Securities Act.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
 
   
     Since its inception, the Company has issued the following securities
without registration under the Securities Act (the number of shares set forth
below does not give effect to the proposed stock split of the Company's Common
Stock referred to in the Prospectus).
    
 
     On August 13, 1997, in connection with the Company's formation, the Company
issued one share of Common Stock to Allegiance LLC for consideration of $1,000.
 
     On August 13, 1997, the Company issued 95,000 shares of Redeemable
Convertible Preferred Stock to Allegiance LLC for an aggregate initial purchase
price of approximately $5 million.
 
   
     On February 25, 1998, the Company issued: (i) 71.25 shares of Redeemable
Convertible Preferred Stock to Richard Fields for an aggregate initial purchase
price of $37,500; (ii) 95 shares of Redeemable Convertible Preferred Stock to
Roger Curry for an aggregate initial purchase price of $50,000; (iii) 23.75
shares of Redeemable Convertible Preferred Stock to Northwestern University for
an aggregate initial purchase price of $12,500; (iv) 237.5 shares of Redeemable
Convertible Preferred Stock to MKW Partners, L.P. for an aggregate initial
purchase price of $125,001; (v) 47.5 shares of Redeemable Convertible Preferred
Stock to Tom Shattan for an aggregate initial purchase price of $25,000; (vi)
28.5 shares of Redeemable Convertible Preferred Stock to Greg Mendel for an
aggregate initial purchase price of $15,000; and (vii) 19 shares of Redeemable
Convertible Preferred Stock to Kevin Fechtmeyer for an aggregate initial
purchase price of $10,000.
    
 
     On March 13, 1998, the Company issued 118.75 shares of Redeemable
Convertible Preferred Stock to Charles Ross Partners, LLC for an aggregate
initial purchase price of $62,500.
 
     The above-described transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act, as transactions
not involving any public offering.
 
   
     On February 3, 1998, the Company issued 445,000 units (the "Units"), with
each Unit consisting of one 11 3/4% Senior Discount Note due 2008 and one
warrant to purchase .0034224719 shares of the Company's Common Stock. The
Company received approximately $240.7 million of net proceeds, after deducting
underwriting discounts and commissions of approximately $8.75 million and other
expenses payable by the Company of approximately $1.0 million, from the issuance
of the Units. Such Units were issued to (i) "qualified institutional buyers" (as
defined in Rule 144A of the Securities Act), (ii) other institutional
"accredited investors" (as defined in Rule 501(a) of the Securities Act), and
(iii) outside the United States in compliance with Regulation S under the
Securities Act, and therefore, the issuance of such Units was exempt from
registration under the Securities Act. Morgan Stanley & Co. Incorporated,
Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation were the initial purchasers of the Units.
    
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
     (a) EXHIBITS.
 
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
          1.1            Form of Underwriting Agreement.*
          3.1            Form of Amended and Restated Certificate of Incorporation of
                         Allegiance Telecom, Inc.*
</TABLE>
 
                                      II-2
<PAGE>   120
 
   
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
          3.2            Form of Amended and Restated By-Laws of Allegiance Telecom,
                         Inc.*
          4.1            Form of Indenture by and between the Company and The Bank of
                         New York, as trustee (including the Form of Notes).*
          4.2            Indenture, dated as of February 3, 1998, by and between the
                         Company and The Bank of New York, as trustee (incorporated
                         by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
                         Registration Statement on Form S-4 (Registration No.
                         333-49013), filed on March 31, 1998 and amended on May 6,
                         1998, May 15, 1998 and May 22, 1998 (the "Form S-4
                         Registration Statement")).
          4.3            Form of 11 3/4% Senior Discount Notes (incorporated by
                         reference to Exhibit 4.3 to the Form S-4 Registration
                         Statement).
          4.4            Form of Collateral Pledge and Security Agreement by and
                         between the Company and The Bank of New York, as trustee.*
          5.1            Opinion of Kirkland & Ellis.*
         10.1            Stock Purchase Agreement, dated August 13, 1997, between
                         Allegiance LLC and the Company (incorporated by reference to
                         Exhibit 10.1 to the Form S-4 Registration Statement).
         10.2            Securityholders Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Fund Investors, the Management Investors
                         and the Company (incorporated by reference to Exhibit 10.2
                         to the Form S-4 Registration Statement).
         10.3            Registration Agreement, dated August 13, 1997, among the
                         Fund Investors, the Management Investors and the Company
                         (incorporated by reference to Exhibit 10.3 to the Form S-4
                         Registration Statement).
         10.4            Warrant Registration Rights Agreement, dated as of January
                         29, 1998, by and among the Company and Morgan Stanley & Co.
                         Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc.
                         and Donaldson, Lufkin & Jenrette Securities Corporation, as
                         initial purchasers of the 11 3/4% Senior Discount Notes
                         (incorporated by reference to Exhibit 10.11 to the Form S-4
                         Registration Statement).
         10.5            Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
                         (incorporated by reference to Exhibit 10.4 to the Form S-4
                         Registration Statement).
         10.6            Allegiance Telecom, Inc. 1998 Stock Incentive Plan.*
         10.7            Executive Purchase Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Company and Royce J. Holland
                         (incorporated by reference to Exhibit 10.5 to the Form S-4
                         Registration Statement).
         10.8            Executive Purchase Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Company and Thomas M. Lord (incorporated
                         by reference to Exhibit 10.6 to the Form S-4 Registration
                         Statement).
         10.9            Executive Purchase Agreement, dated January 28, 1998, among
                         Allegiance LLC, the Company and C. Daniel Yost (incorporated
                         by reference to Exhibit 10.7 to the Form S-4 Registration
                         Statement).
         10.10           Form of Executive Purchase Agreement among Allegiance LLC,
                         the Company and each of the other Management Investors
                         (incorporated by reference to Exhibit 10.8 to the Form S-4
                         Registration Statement).
         10.11           Warrant Agreement, dated February 3, 1998, by and between
                         the Company and The Bank of New York, as Warrant Agent
                         (including the form of the Warrant Certificate)
                         (incorporated by reference to Exhibit 10.9 to the Form S-4
                         Registration Statement).
</TABLE>
    
 
                                      II-3
<PAGE>   121
 
   
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.12           General Agreement, dated October 16, 1997, as amended,
                         between the Company and Lucent Technologies Inc.
                         (incorporated by reference to Exhibit 10.10 to the Form S-4
                         Registration Statement).
         10.13           Form of Indemnification Agreement by and between the Company
                         and its directors and officers.*
         11.1            Statement Regarding Computation of Pro Forma Per Share
                         Earnings for the three months ended March 31, 1998.*
         11.2            Statement Regarding Computation of Pro Forma Per Share
                         Earnings for the period from inception (April 22, 1997)
                         through December 31, 1997.*
         12.1            Statement Regarding Computation of Ratios of Earnings (Loss)
                         to Fixed Charges.*
         21.1            Subsidiaries of the Company (incorporated by reference to
                         Exhibit 21.1 to the Form S-4 Registration Statement).
         23.1            Consent of Arthur Andersen, LLP.
         23.2            Consent of Kirkland & Ellis (included in Exhibit 5.1).*
         24.1            Powers of Attorney (included in Part II to the Registration
                         Statement).**
         25.1            Statement of Eligibility of Trustee on Form T-1.*
         27.1            Financial Data Schedule for the three months ended March 31,
                         1998 (incorporated by reference to Exhibit 27.1 to the Form
                         S-4 Registration Statement).
         27.2            Financial Data Schedule for the period from inception (April
                         22, 1997) through December 31, 1997 (incorporated by
                         reference to Exhibit 27.2 to the Form S-4 Registration
                         Statement).
</TABLE>
    
 
---------------
 
*  To be filed by amendment.
 
   
** Previously filed.
    
 
     (b) FINANCIAL STATEMENT SCHEDULES.
 
          All schedules for which provision is made in the applicable accounting
     regulations of the Securities and Exchange Commission are not required
     under the related instructions, are inapplicable or not material, or the
     information called for thereby is otherwise included in the financial
     statements and therefore has been omitted.
 
ITEM 17. UNDERTAKINGS.
 
     The undersigned registrant hereby undertakes to provide to the underwriter
at closing specified in the underwriting agreement certificates in such
denominations and registered in such names as requested by the underwriter to
permit prompt delivery to each purchaser.
 
     The undersigned registrant hereby undertakes:
 
          (1) For purposes of determining any liability under the Securities Act
     of 1933, the information omitted from the form of prospectus filed as part
     of this registration statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
     (4) or 497(h) under the Securities Act shall be deemed to be part of this
     registration statement as of the time it was declared effective.
 
          (2) For purposes of determining any liability under the Securities Act
     of 1933, each post-effective amendment that contains a form of prospectus
     shall be deemed to be a new registration statement relating to the
     securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof.
 
                                      II-4
<PAGE>   122
 
     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
 
                                      II-5
<PAGE>   123
 
                                   SIGNATURES
 
   
     Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on June 5, 1998.
    
 
                                            ALLEGIANCE TELECOM, INC.
 
                                            By:    /s/ ROYCE J. HOLLAND
                                              ----------------------------------
                                                       Royce J. Holland
                                                   Chief Executive Officer
 
                                      ****
 
   
     Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed on June 5, 1998 by the following
persons in the capacities indicated:
    
 
   
<TABLE>
<CAPTION>
                      SIGNATURE                                    CAPACITY
                      ---------                                    --------
<C>                                                    <S>                               <C>
                /s/ ROYCE J. HOLLAND                   Chairman of the Board and Chief
-----------------------------------------------------    Executive Officer (Principal
                  Royce J. Holland                       Executive Officer)
                          *                            President, Chief Operating
-----------------------------------------------------    Officer and Director
                   C. Daniel Yost
                          *                            Executive Vice President, Chief
-----------------------------------------------------    Financial Officer, and
                   Thomas M. Lord                        Director (Principal Financial
                                                         Officer)
                /s/ DENNIS M. MAUNDER                  Vice President and Controller
-----------------------------------------------------    (Principal Accounting Officer)
                  Dennis M. Maunder
                          *                            Senior Vice President of Sales
-----------------------------------------------------    and Marketing and Director
                  John J. Callahan
 
                          *                            Director
-----------------------------------------------------
                   Paul D. Carbery
 
                          *                            Director
-----------------------------------------------------
               James E. Crawford, III
 
                          *                            Director
-----------------------------------------------------
                 John B. Ehrenkranz
 
                          *                            Director
-----------------------------------------------------
                  Paul J. Finnegan
 
                          *                            Director
-----------------------------------------------------
                 Richard D. Frisbie
</TABLE>
    
 
                                      II-6
<PAGE>   124
 
   
<TABLE>
<CAPTION>
                      SIGNATURE                                    CAPACITY
                      ---------                                    --------
<C>                                                    <S>                               <C>
                          *                            Director
-----------------------------------------------------
                    Reed E. Hundt
 
                          *                            Director
-----------------------------------------------------
                  Robert H. Niehaus
 
                          *                            Director
-----------------------------------------------------
                 James N. Perry, Jr.
</TABLE>
    
 
   
* The undersigned, by signing his name hereto, does sign and execute this
  Amendment No. 1 to Registration Statement on behalf of the above named
  officers and directors of Allegiance Telecom, Inc. pursuant to the Power of
  Attorney executed by such officers and directors and filed with the Securities
  and Exchange Commission.
 
<TABLE>
<C>                                                    <S>                               <C>
 
                /s/ DENNIS M. MAUNDER                  Attorney-in-Fact
-----------------------------------------------------
                  Dennis M. Maunder
</TABLE>
    
 
                                      II-7
<PAGE>   125
 
                               INDEX TO EXHIBITS
 
   
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
          1.1            Form of Underwriting Agreement.*
          3.1            Form of Amended and Restated Certificate of Incorporation of
                         Allegiance Telecom, Inc.*
          3.2            Form of Amended and Restated By-Laws of Allegiance Telecom,
                         Inc.*
          4.1            Form of Indenture by and between the Company and The Bank of
                         New York, as trustee (including the Form of Notes).*
          4.2            Indenture, dated as of February 3, 1998, by and between the
                         Company and The Bank of New York, as trustee (incorporated
                         by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s
                         Registration Statement on Form S-4 (Registration No.
                         333-49013), filed on March 31, 1998 and amended on May 6,
                         1998, May 15, 1998 and May 22, 1998 (the "Form S-4
                         Registration Statement")).
          4.3            Form of 11 3/4% Senior Discount Notes (incorporated by
                         reference to Exhibit 4.3 to the Form S-4 Registration
                         Statement).
          4.4            Form of Collateral Pledge and Security Agreement by and
                         between the Company and The Bank of New York, as trustee.*
          5.1            Opinion of Kirkland & Ellis.*
         10.1            Stock Purchase Agreement, dated August 13, 1997, between
                         Allegiance LLC and the Company (incorporated by reference to
                         Exhibit 10.1 to the Form S-4 Registration Statement).
         10.2            Securityholders Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Fund Investors, the Management Investors
                         and the Company (incorporated by reference to Exhibit 10.2
                         to the Form S-4 Registration Statement).
         10.3            Registration Agreement, dated August 13, 1997, among the
                         Fund Investors, the Management Investors and the Company
                         (incorporated by reference to Exhibit 10.3 to the Form S-4
                         Registration Statement).
         10.4            Warrant Registration Rights Agreement, dated as of January
                         29, February 3, 1998, by and among the Company and Morgan
                         Stanley & Co. Incorporated, Salomon Brothers Inc, Bear,
                         Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
                         Securities Corporation, as initial purchasers of the 11 3/4%
                         Senior Discount Notes (incorporated by reference to Exhibit
                         10.11 to the Form S-4 Registration Statement).
         10.5            Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan
                         (incorporated by reference to Exhibit 10.4 to the Form S-4
                         Registration Statement).
         10.6            Allegiance Telecom, Inc. 1998 Stock Incentive Plan.*
         10.7            Executive Purchase Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Company and Royce J. Holland
                         (incorporated by reference to Exhibit 10.5 to the Form S-4
                         Registration Statement).
         10.8            Executive Purchase Agreement, dated August 13, 1997, among
                         Allegiance LLC, the Company and Thomas M. Lord (incorporated
                         by reference to Exhibit 10.6 to the Form S-4 Registration
                         Statement).
         10.9            Executive Purchase Agreement, dated January 28, 1998, among
                         Allegiance LLC, the Company and C. Daniel Yost (incorporated
                         by reference to Exhibit 10.7 to the Form S-4 Registration
                         Statement).
</TABLE>
    
<PAGE>   126
 
   
<TABLE>
<CAPTION>
        EXHIBIT
          NO.                                    DESCRIPTION
        -------                                  -----------
<C>                      <S>
         10.10           Form of Executive Purchase Agreement among Allegiance LLC,
                         the Company and each of the other Management Investors
                         (incorporated by reference to Exhibit 10.8 to the Form S-4
                         Registration Statement).
         10.11           Warrant Agreement, dated February 3, 1998, by and between
                         the Company and The Bank of New York, as Warrant Agent
                         (including the form of the Warrant Certificate)
                         (incorporated by reference to Exhibit 10.9 to the Form S-4
                         Registration Statement).
         10.12           General Agreement, dated October 16, 1997, as amended,
                         between the Company and Lucent Technologies Inc.
                         (incorporated by reference to Exhibit 10.10 to the Form S-4
                         Registration Statement).
         10.13           Form of Indemnification Agreement by and between the Company
                         and its directors and officers.*
         11.1            Statement Regarding Computation of Pro Forma Per Share
                         Earnings for the three months ended March 31, 1998.*
         11.2            Statement Regarding Computation of Pro Forma Per Share
                         Earnings for the period from inception (April 22, 1997)
                         through December 31, 1997.*
         12.1            Statement Regarding Computation of Ratios of Earnings (Loss)
                         to Fixed Charges.*
         21.1            Subsidiaries of the Company (incorporated by reference to
                         Exhibit 21.1 to the Form S-4 Registration Statement).
         23.1            Consent of Arthur Andersen, LLP.
         23.2            Consent of Kirkland & Ellis (included in Exhibit 5.1).*
         24.1            Powers of Attorney (included in Part II to the Registration
                         Statement).**
         25.1            Statement of Eligibility of Trustee on Form T-1.*
         27.1            Financial Data Schedule for the three months ended March 31,
                         1998 (incorporated by reference to Exhibit 27.1 to the Form
                         S-4 Registration Statement).
         27.2            Financial Data Schedule for the period from inception (April
                         22, 1997) through December 31, 1997 (incorporated by
                         reference to Exhibit 27.2 to the Form S-4 Registration
                         Statement).
</TABLE>
    
 
---------------
 
*  To be filed by amendment.
 
   
** Previously filed.