SC TO-I

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE TO
(RULE 13e-4)

TENDER OFFER STATEMENT
UNDER SECTION 14(d)(1) OR 13(e)(1)
OF THE SECURITIES EXCHANGE ACT OF 1934

ALLEGIANCE TELECOM, INC.
(Name of Subject Company (Issuer))

ALLEGIANCE TELECOM, INC.
(Names of Filing Persons (Offerors))

Certain Options to Purchase Common Stock,
par value $.01 per share
(Title of Class of Securities) 01747T10
(CUSIP Number of Class of Securities)
(Underlying Common Stock)

Mark B. Tresnowski, Esq.
Senior Vice President, General Counsel and Secretary
Allegiance Telecom, Inc.
700 E. Butterfield Rd., Suite 400
Lombard, Illinois 60148
Telephone: (630) 522-5200
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of Filing Persons)

Copies to:
Gerald T. Nowak, Esq.
Kirkland & Ellis
200 East Randolph Drive, Suite 5400
Chicago, Illinois 60601
(312) 861-2075

CALCULATION OF FILING FEE

Transaction Valuation*	Amount of Filing Fee**
$7,825,846	$720

*

Calculated solely for purposes of determining the filing fee. This amount assumes that options to purchase 4,992,565 shares of common stock of Allegiance Telecom, Inc., are exchanged for 3,744,424 shares of Restricted Stock, having an aggregate value of $7,825,846 as of April 24, 2002 (based on the closing price of the common stock of $2.09 on the Nasdaq National Market). The amount of the filing fee, calculated in accordance with Rule 0-11 of the Securities Exchange Act of 1934, as amended, equals $92 per $1,000,000 of the value of the transaction.

**

Calculated as $92 per $1,000,000 of the transaction value.

o    Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

Amount Previously Paid:	Not applicable.	Filing party:	Not applicable.
Form or Registration No.:	Not applicable.	Date Filed:	Not applicable.

o    Check the box if the filing relates solely to preliminary communications made before the commencement of a tender offer.

Check the appropriate boxes below to designate any transactions to which the statement relates:

        o    Third-party tender offer subject to Rule 14d-1.

        ý    Issuer tender offer subject to Rule 13e-4.

        o    Going-private transaction subject to Rule 13e-3.

        o    Amendment to Schedule 13D under Rule 13d-2.

Check the following box if the filing is a final amendment reporting the results of the tender offer: o.

Item 1.    Summary Term Sheet.

        The information set forth under "Summary Term Sheet" in the Offer to Exchange, dated April 26, 2002 (the "Offer to Exchange"), attached as Exhibit (a)(1), is incorporated herein by reference.

Item 2.    Subject Company Information.

        (a)  The information set forth in the Offer to Exchange under section 9 ("Information Concerning Allegiance Telecom, Inc.") is incorporated herein by reference.

        (b)  This Schedule TO relates to an offer by Allegiance Telecom, Inc. to each Participant to exchange any or all of such Participant's unexercised options to purchase shares of our common stock, par value $.01 per share, that have an exercise price of $5.50 or greater (excluding outperform stock options) (the "Eligible Options"), that are outstanding under the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, as amended (the "Plan"), for a certain number of restricted shares of our common stock (the "Restricted Stock") to be issued under the Plan, upon the terms and subject to the conditions described in the Offer to Exchange and the related Letter of Transmittal attached as Exhibits (a)(1) and (a)(2) (the Letter of Transmittal and, together with the Offer to Exchange, as they may be amended or supplemented from time to time, the "Offer"). "Participants" mean our current vice presidents (other than city vice presidents), senior vice presidents, executive vice president and board members. Certain stock options granted on October 15, 2001 to our senior vice presidents and executive vice president are not included in this Offer and are not "Eligible Options."

        For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, three shares of Restricted Stock will be issued. The information set forth in the Offer to Exchange on the introductory pages and under "Summary Term Sheet," section 1 ("Number of Shares of Restricted Stock; Expiration Date") and section 8 ("Source and Amount of Consideration; Terms of Restricted Stock") is incorporated herein by reference.

        (c)  The information set forth in the Offer to Exchange under section 7 ("Price Range of Common Stock Underlying the Options") is incorporated herein by reference.

Item 3.    Identity and Background of Filing Person.

        (a)  Allegiance Telecom, Inc. is the filing person. The information set forth in the Offer to Exchange in Schedule A and under section 9 ("Information Concerning Allegiance Telecom, Inc.") is incorporated herein by reference.

Item 4.    Terms of the Transaction.

        (a)  The information set forth in the Offer to Exchange on the introductory pages and under "Summary Term Sheet," section 1 ("Number of Shares of Restricted Stock; Expiration Date"), section 3 ("Procedures for Tendering Options"), section 4 ("Withdrawal Rights"), section 5 ("Acceptance of Options for Exchange and Issuance of Restricted Stock"), section 6 ("Conditions of the Offer"), section 8 ("Source and Amount of Consideration; Terms of Restricted Stock"), section 11 ("Status of Options Acquired by Us in the Offer; Accounting Consequences of the Offer"), section 12 ("Legal Matters; Regulatory Approvals"), section 13 ("Material Federal Income Tax Consequences") and section 14 ("Extension of Offer; Termination; Amendment") is incorporated herein by reference.

        (b)  The information set forth in the Offer to Exchange under section 10 ("Interests of Directors and Officers; Transactions and Arrangements Concerning the Options") is incorporated herein by reference.

Item 5.    Past Contacts, Transactions, Negotiations and Arrangements.

        (e)  The information set forth in the Offer to Exchange under section 10 ("Interests of Directors and Officers; Transactions and Arrangements Concerning the Options") is incorporated herein by reference.

Item 6.    Purposes of the Transaction and Plans or Proposals.

        (a)  The information set forth in the Offer to Exchange under section 2 ("Purpose of the Offer") is incorporated herein by reference.

        (b)  The information set forth in the Offer to Exchange on the introductory pages and under section 1 ("Number of Shares of Restricted Stock; Expiration Date"), section 5 ("Acceptance of Options for Exchange and Issuance of Restricted Stock") and section 11 ("Status of Options Acquired by Us in the Offer; Accounting Consequences of the Offer") is incorporated herein by reference.

        (c)  The information set forth in the Offer to Exchange under section 2 ("Purpose of the Offer") is incorporated herein by reference.

Item 7.    Source and Amount of Funds or Other Consideration.

        (a)  The information set forth in the Offer to Exchange under section 8 ("Source and Amount of Consideration; Terms of Restricted Stock") and section 15 ("Fees and Expenses") is incorporated herein by reference.

        (b)  The information set forth in the Offer to Exchange under section 6 ("Conditions of the Offer") is incorporated herein by reference.

        (d)  Not applicable.

Item 8.    Interest in Securities of the Subject Company.

        (a)  The information set forth in the Offer to Exchange under section 10 ("Interests of Directors and Officers; Transactions and Arrangements Concerning the Options") is incorporated herein by reference.

        (b)  The information set forth in the Offer to Exchange under section 10 ("Interests of Directors and Officers; Transactions and Arrangements Concerning the Options") is incorporated herein by reference.

Item 9.    Person/Assets, Retained, Employed, Compensated or Used.

        (a)  Not applicable.

Item 10.    Financial Statements.

        (a)  The information set forth in the Offer to Exchange under section 9 ("Information Concerning Allegiance Telecom, Inc.") and section 16 ("Additional Information"), and in item 14 of the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2001 is incorporated herein by reference.

        (b)  Not applicable.

Item 11.    Additional Information.

        (a)  The information set forth in the Offer to Exchange under section 10 ("Interests of Directors and Officers; Transactions and Arrangements Concerning the Options") and section 12 ("Legal Matters; Regulatory Approvals") is incorporated herein by reference.

        (b)  Not applicable.

Item 12.    Exhibits.

(a)	(1)	Offer to Exchange, dated April 26, 2002.
	(2)	Form of Letter of Transmittal.
	(3)	Form of Notice to Eligible Option Holders.

		(4)	Form of Notice to Tendering Option Holders.
		(5)	Form of Notice of Deferral.
		(6)	Allegiance Telecom, Inc. Annual Report on Form 10-K for fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission (the "Commission") on April 1, 2002 and incorporated herein by reference.
		(7)	Allegiance Telecom, Inc. Amendment to its Annual Report on Form 10-K/A for fiscal year ended December 31, 2001, filed with the Commission on April 9, 2002, and incorporated herein by reference.
		(8)	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-86260), filed with the Commission on April 15, 2002 and incorporated herein by reference.
		(9)	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-60486), filed with the Commission on May 9, 2001 and incorporated herein by reference.
		(10)	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-46866), filed with the Commission on September 28, 2000 and incorporated herein by reference.
		(11)	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-10402), filed with the Commission on May 5, 1999 and incorporated herein by reference.
		(12)	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-70769), filed with the Commission on January 19, 1999 and incorporated herein by reference.
	(b)	Not applicable.
	(d)	(1)	Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.6 of Allegiance Telecom's Registration Statement on Form S-1 (File No. 333-53475).
		(2)	First Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.7 of Allegiance Telecom's Form 10-K for the fiscal year ended December 31, 1998.
		(3)	Second Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.8 of Allegiance Telecom's Form 10-K for the fiscal year ended December 31, 1999.
		(4)	Third Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.9 of Allegiance Telecom's Form 10-K for the fiscal year ended December 31, 2000.
		(5)	Fourth Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.10 of Allegiance Telecom's Form 10-K for the fiscal year ended December 31, 2001.
		(6)	Form of Restricted Stock Agreement pursuant to the 1998 Stock Incentive Plan.
	(g)	Not applicable.
	(h)	Not applicable.
Item 13.    Information Required by Schedule 13E-3.
	(a)	Not applicable.

SIGNATURE

        After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Schedule TO is true, complete and correct.

	ALLEGIANCE TELECOM, INC.
	/s/  ROYCE J. HOLLAND Royce J. Holland Chairman of the Board and Chief Executive Officer
Date: April 26, 2002

INDEX TO EXHIBITS

Exhibit Number		Description
(a)(1)	—	Offer to Exchange, April 26, 2002.
(a)(2)	—	Form of Letter of Transmittal.
(a)(3)	—	Form of Notice to Eligible Option Holders.
(a)(4)	—	Form of Notice to Tendering Option Holders.
(a)(5)	—	Form of Notice of Deferral.
(a)(6)	—	Allegiance Telecom, Inc. Annual Report on Form 10-K for fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission (the "Commission") on April 1, 2002 and incorporated herein by reference.
(a)(7)	—	Allegiance Telecom, Inc. Amendment to its Annual Report on Form 10-K/A for fiscal year ended December 31, 2001, filed with the Commission on April 9, 2002 and incorporated herein by reference.
(a)(8)	—	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-86260), filed with the Commission on April 15, 2002 and incorporated herein by reference.
(a)(9)	—	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-60486), filed with the Commission on May 9, 2001 and incorporated herein by reference.
(a)(10)	—	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-46866), filed with the Commission on September 28, 2000 and incorporated herein by reference.
(a)(11)	—	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-10402), filed with the Commission on May 5, 1999 and incorporated herein by reference.
(a)(12)	—	Allegiance Telecom, Inc. Registration Statement on Form S-8 (File No. 333-70769), filed with the Commission on January 19, 1999 and incorporated herein by reference.
(d)(1)	—	Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.6 of the Company's Registration Statement on Form S-1 (File No. 333-53475).
(d)(2)	—	First Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.7 of its Form 10-K for the fiscal year ended December 31, 1998.
(d)(3)	—	Second Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.8 of its Form 10-K for the fiscal year ended December 31, 1999.
(d)(4)	—	Third Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.9 of its Form 10-K for the fiscal year ended December 31, 2000.
(d)(5)	—	Fourth Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, incorporated by reference to Exhibit 10.10 of its Form 10-K for the fiscal year ended December 31, 2001.
(d)(6)	—	Form of Restricted Stock Agreement under the 1998 Stock Incentive Plan.

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SIGNATURE
INDEX TO EXHIBITS

EX-99.(A)(1)

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Exhibit (a)(1)

ALLEGIANCE TELECOM, INC.

OFFER TO EXCHANGE
CERTAIN OUTSTANDING OPTIONS
FOR RESTRICTED STOCK

THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12 MIDNIGHT, CENTRAL
STANDARD TIME, ON MAY 24, 2002 UNLESS THE OFFER IS EXTENDED.

        Allegiance Telecom, Inc., which is referred to in this Offer to Exchange as "we," "us," or "Allegiance Telecom," is offering its current vice presidents (other than city vice presidents), senior vice presidents, executive vice president and board members (collectively, the "Participants") the opportunity to exchange any or all of the unexercised options held by them (whether vested or unvested) that have an exercise price of $5.50 or greater (excluding outperform stock options) (the "Eligible Options") under our 1998 Stock Incentive Plan, as amended (the "Plan") for newly issued shares of our common stock (the "Restricted Stock"). Certain stock options granted on October 15, 2001 to our senior vice presidents and executive vice president are not included in this Offer and are not "Eligible Options." For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, we will issue three shares of Restricted Stock. You will not be required to pay for the shares of Restricted Stock granted to you. Your consideration for the shares of Restricted Stock will be in the form of Eligible Options that you tender. However, as described in more detail in this Offer to Exchange, the vesting of your Restricted Stock will generally result in your recognition of taxable income. You may tender none, all or one or more of your Eligible Options.

        We are making this offer upon the terms and subject to the conditions set forth in this Offer to Exchange and in the related Letter of Transmittal (which together, as they may be amended or supplemented from time to time, constitute the "Offer").

        This Offer is not conditioned upon a minimum number of options being tendered. This Offer is subject to the conditions described in section 6 of this Offer to Exchange.

        If you tender options for exchange as described in this Offer, we will issue you Restricted Stock under the Plan. However, the shares of Restricted Stock will not actually be issued until you (a) sign the applicable Restricted Stock agreement and (b) the shares of Restricted Stock are vested in accordance with the terms set forth in your Restricted Stock agreement. Regardless of the vesting schedule of the options that you tender to us, 34% of the Restricted Stock issued to you will vest on September 30, 2002, with an additional 8.25% vesting on the last day of each quarter following that date (each such vesting date is referred to as a "Vesting Date"), assuming that you meet the requirements for vesting specified in your Restricted Stock agreement. Until it vests, the Restricted Stock will be held in our custody and will be subject to certain forfeiture provisions and transfer restrictions set forth in your Restricted Stock agreement. At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002), you may deliver written notice to us (in the form attached as Exhibit (a)(5) or such other form that we may approve of from time to time) setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); if you elect to defer, no stock certificates representing shares of common stock will be delivered to you until the date of the event specified in your deferral notice.

1

In general, the vesting of your Restricted Stock will result in your recognition of taxable income, and you must provide us with payment of the applicable federal and state income and employment withholding taxes before we deliver to you the stock certificates for your Restricted Stock, by cash payment or other arrangement agreed upon between you and us.

        As of March 31, 2002, options to purchase 4,992,565 shares of our common stock were Eligible Options. Assuming that all Participants surrender all of their Eligible Options for exchange, we would issue approximately 3,744,424 shares of Restricted Stock, or approximately 3.1% of our total shares outstanding following that issuance.

        All options accepted by us pursuant to this Offer will be cancelled. Following the cancellation, the shares formerly issuable upon exercise of the cancelled options will be available for reissuance under the Plan either as (a) Restricted Stock pursuant to the Offer or (b) other awards as allowed under the Plan.

        Shares of our common stock are quoted on the Nasdaq National Market under the symbol "ALGX." On April 24, 2002, the last reported sale price of the common stock on the Nasdaq National Market was $2.09 per share. We recommend that you obtain current market quotations for our common stock before deciding whether to tender your options.

        If you have any questions about this Offer, would like additional copies of the Offer to Exchange or the Letter of Transmittal or need additional assistance, please contact Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130).

IMPORTANT

        If you wish to tender your options for exchange, you must complete and sign the Letter of Transmittal in accordance with its instructions, and deliver (by mail, fax or other paper delivery method) it and any other required documents to Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130).

        We are not making this Offer to, nor will we accept any tender of options from or on behalf of, option holders in any jurisdiction in which the Offer or the acceptance of any tender of options would not be in compliance with the laws of such jurisdiction. However, we may, at our discretion, take any actions necessary for us to make this Offer to option holders in any such jurisdiction.

Although our Board of Directors has approved this Offer, neither we nor our Board of Directors makes any recommendation as to whether you should tender or refrain from tendering your options for exchange. You must make your own decision whether to tender your options.

We have not authorized any person to make any recommendation on our behalf as to whether you should tender or refrain from tendering your options pursuant to the Offer. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to give you any information or to make any representation in connection with this Offer other than the information and representations contained in this document or in the related Letter of Transmittal. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us.

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TABLE OF CONTENTS

			Page
SUMMARY TERM SHEET			4
THE OFFER			11
	1.	Number of Shares of Restricted Stock; Expiration Date.	11
	2.	Purpose of the Offer.	12
	3.	Procedures for Tendering Options.	12
	4.	Withdrawal Rights.	13
	5.	Acceptance of Options for Exchange and Issuance of Restricted Stock.	13
	6.	Conditions of the Offer.	14
	7.	Price Range of Common Stock Underlying the Options.	15
	8.	Source and Amount of Consideration; Terms of Restricted Stock.	16
	9.	Information Concerning Allegiance Telecom, Inc.	18
	10.	Interests of Directors and Officers; Transactions and Arrangements Concerning the Options.	19
	11.	Status of Options Acquired by Us in the Offer; Accounting Consequences of the Offer.	19
	12.	Legal Matters; Regulatory Approvals.	19
	13.	Material Federal Income Tax Consequences.	19
	14.	Extension of Offer; Termination; Amendment.	21
	15.	Fees and Expenses.	22
	16.	Additional Information.	22
	17.	Miscellaneous.	23
SCHEDULE A			A-1

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SUMMARY TERM SHEET

        The following are answers to some of the questions that you may have about this Offer. We urge you to carefully read the remainder of this Offer to Exchange and the accompanying Letter of Transmittal because the information in this summary and in the introduction preceding this summary is not complete and may not contain all of the information that is important to you. Additional important information is contained in the remainder of this Offer to Exchange and the Letter of Transmittal. We have included references to the relevant sections of this Offer to Exchange where you can find more complete descriptions of the topics in this summary.

Why are you making the Offer?

        Many of our outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price of our common stock. We believe these options are not sufficiently effective in retaining and providing incentives to the Participants. By making this offer to exchange outstanding options for shares of Restricted Stock, we intend to provide the Participants with the benefit of holding our common stock which we believe, over time will have a greater potential to increase in value, and thereby provide them with better incentives to maximize stockholder value. (Section 2)

To whom are you making the Offer?

        We are making this Offer to our current vice presidents (other than city vice presidents), senior vice presidents, executive vice president and board members (the "Participants"). We have already granted additional stock options to our city vice presidents and to our employees below the level of vice president at prices that are much closer to the current market price of our stock. Thus, these employees are not participating in this Offer. In addition, we are individually negotiating for the exchange of certain stock options granted on October 15, 2001, at an exercise price of $5.79 per share, for shares of Restricted Stock, with the recipients of those grants who are our senior vice presidents, executive vice president, executive vice president of corporate development/chief financial officer, chief operating officer/president and chief executive officer. Those option grants are not a part of this Offer. (Section 1)

What securities are you offering to exchange?

        We are offering Participants the opportunity to exchange any or all of the unexercised stock options to purchase shares of our common stock held by them (whether vested or unvested) that have an exercise price of $5.50 or greater (excluding outperform stock options) (the "Eligible Options"). Certain stock options granted on October 15, 2001 to our senior vice presidents and executive vice president are not included in this Offer and are not "Eligible Options." (Section 1)

May I tender options that I have already exercised?

        This Offer only pertains to stock options, and does not apply in any way to shares purchased upon the exercise of stock options. If you have exercised a stock option, that option is no longer outstanding and is therefore not subject to this Offer.

May I tender unvested options?

        Yes. You may tender your Eligible Options whether or not they are vested.

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Do I have a choice as to which options to tender?

        You may tender any, all or none of your Eligible Options. You are not required to accept the Offer. If you choose to tender any Eligible Options for exchange, you may choose to tender one option and not tender another. You may not tender any fraction of an Eligible Option (for example, you may not tender ¹/2 of an Eligible Option). If you choose to tender any Eligible Options for exchange, you will be required to indicate in the Letter of Transmittal, the particular option grants you are tendering. For example, if you have received two Eligible Options, you may choose to tender neither of these Eligible Options, both of these Eligible Options, or one of these Eligible Options. (Section 5)

What is Restricted Stock?

        Unlike stock options, where the option holder has only a right to purchase shares of our common stock at a certain price, when you receive Restricted Stock, you will become a holder of actual shares of our common stock, issued at no additional cost to you (there are, however, tax consequences). These shares are considered "restricted" because they will be subject to forfeiture and restrictions on transfer until the restrictions lapse, at which time the shares "vest". The forfeiture and transfer restrictions will be set forth in a Restricted Stock agreement entered into between you and us. Once shares of Restricted Stock have vested and are distributed to you, those shares will be yours to hold, transfer or sell as you desire, subject to applicable securities laws and payment of withholding taxes.

How many shares of Restricted Stock will I receive in exchange for my tendered options?

        For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, we will issue three shares of Restricted Stock. We will not issue fractional shares of Restricted Stock. All shares of Restricted Stock will be issued under the Plan. The shares of Restricted Stock will be subject to the terms and conditions of the Plan and a Restricted Stock agreement between you and us. (Section 8)

What are the conditions to the Offer?

        The Offer is not conditioned upon a minimum aggregate number of options being tendered by the Participants as a group. The Offer is subject to a number of conditions, including the conditions described in section 6.

Are there any eligibility requirements I must satisfy after the expiration date of the Offer to receive the Restricted Stock?

        To receive Restricted Stock, you must (i) sign and return to us the Restricted Stock agreement, (ii) remain our employee or a board member from the date that you tender your options through the date the Restricted Stock vests and (iii) provide us with payment of the federal and state income and employment withholding taxes to which you become subject upon either the vesting of your Restricted Stock or at the time your Restricted Stock is awarded if you make an election under Section 83(b) of the Internal Revenue Code, by cash payment or other arrangement agreed upon between you and us.

        If you do not accept the Offer with respect to any particular Eligible Options, you generally will continue to be able to exercise such Eligible Options as provided in your option documents.

What happens if, after I tender my options, I cease to be an employee or a board member?

        If you cease to be our employee or a board member for any reason prior to expiration of this Offer, you may withdraw your tendered options and exercise them to the extent provided in your option documents. However, in that event, you will not receive a grant of Restricted Stock. If you cease to be our employee or board member for any reason after your tendered options are accepted and cancelled, you will receive the portion of your Restricted Stock that has vested prior to the end of your

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employment or board membership, but you will not receive the unvested portion of your Restricted Stock. If you cease to be our employee or board member because of your permanent physical disability or death, your unvested Restricted Stock will become vested Restricted Stock upon your termination date. Once your tendered options have been accepted and cancelled, you will have no rights with respect to those options, and they will not be reissued and returned to you for any reason. This Offer does not change the "at-will" nature of your employment with us, and your employment may be terminated by us or by you at any time, including prior to you being issued or vesting in the Restricted Stock, for any reason, with or without cause.

When will my Restricted Stock vest?

        34% of the Restricted Stock will vest on September 30, 2002 and an additional 8.25% of the Restricted Stock will vest on the last day of each quarter following that date, provided that you remain our employee or board member on such dates (each such date is referred to as a "Vesting Date"). The shares of Restricted Stock will be held in our custody until they vest. The Restricted Stock agreement also provides for accelerated vesting upon death, permanent physical disability, or upon certain events happening in connection with a "change in control" (as defined in the Restricted Stock agreement). (Section 8)

When will I receive my Restricted Stock?

        The scheduled expiration date of the Offer is May 24, 2002, and we expect to accept and cancel all tendered options on that date, unless we extend the Offer. After expiration of the Offer and acceptance and cancellation of tendered options, we will forward a Restricted Stock agreement to you. You must properly execute the Restricted Stock agreement and return it to us. Upon our receipt of the executed Restricted Stock agreement, we will issue the Restricted Stock to you. However, you will not receive a stock certificate for your Restricted Stock until after it has vested. Prior to vesting, the Restricted Stock will be held in our custody. (Section 5)

        Once the Restricted Stock has vested, you will be entitled to receive the stock certificate for your shares once you provide for the payment to us of the federal and state income and employment withholding taxes to which you become subject as a result of the vesting of your Restricted Stock, if you have not made an election under Section 83(b) of the Internal Revenue Code, by cash payment or other arrangement agreed upon between you and us. If you make an election under Section 83(b) of the Internal Revenue Code, you must provide for payment of federal and state employment and income withholding taxes at the time you deliver your executed Restricted Stock agreement. (Section 13)

        At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002), you may deliver written notice to us (in the form attached as Exhibit (a)(5) or such other form that we may approve of from time to time) setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); if you elect to defer, no stock certificates representing shares of common stock will be delivered to you until the date of the event specified in your deferral notice. Your decision to defer the distribution of stock certificates is irrevocable. Notwithstanding a deferral of the distribution of Restricted Stock, such stock will be distributed promptly after a public announcement of a "change in control" (as defined in the form of Restricted Stock agreement attached as Exhibit (d)(6)) or after termination of your employment for any reason. Until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares. (Section 13)

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Why would I want to defer the distribution of my stock certificates?

        If you elect to defer receipt of any portion of your Restricted Stock in accordance with the terms of your Restricted Stock agreement, we will report your income, and withhold income and employment taxes, on the basis that you recognize income on the date on which that portion of your Restricted Stock is distributed to you (as opposed to the Vesting Date for that portion). Your income will be an amount equal to the fair market value of that portion of the Restricted Stock on the date it is distributed to you. Accordingly, you will be required to pay the income and employment withholding taxes pertaining to that portion of your Restricted Stock on the date it is distributed to you. Thus, if you want to defer your taxes beyond a Vesting Date, you can do so by making a deferral election. You should realize, however, that the deferral election cannot be changed so you will have to bear the risk that our stock price may go down between the Vesting Date and the date on which your deferral ends. (Section 13)

The calculation of the tax impact of electing to defer receipt of your stock certificates for Restricted Stock is complicated and we advise you to get tax advice from your own advisor prior to making such an election. One of the reasons this calculation is complicated is that if you do not make a deferral election and thereby get taxed on the Vesting Date, the future appreciation in the Restricted Stock that vested will be at capital gain tax rates, not ordinary income tax rates. Thus, you have to factor in the difference between those rates and your assumptions about our stock appreciation in the future as well as other factors in order to make an informed decision about deferring distribution of your stock certificates.

What do I have to pay to get Restricted Stock?

        You will not be required to pay for the shares of Restricted Stock granted to you. Your consideration for the shares of Restricted Stock will be in the form of Eligible Options that you tender. However, there are tax consequences as described in more detail below and in the Offer to Exchange.

        You will recognize taxable income each time a portion of your Restricted Stock vests, equal to the fair market value of such portion of your Restricted Stock at the time it vests, unless you made an election under Section 83(b) of the Internal Revenue Code or (subject to the discussion contained under section 13 below, titled "Material Federal Income Tax Consequences") an election to defer the receipt of such portion of your Restricted Stock. If you make an election under Section 83(b) of the Internal Revenue Code, you will recognize immediately taxable income at the time of the award, equal to the fair market value of all of your Restricted Stock at such time (even though your shares have not vested and are subject to forfeiture). Given that none of your Restricted Stock will be vested on the date of the award, you would need to have funds available apart from your Restricted Stock with which to pay the tax that would be due on the award date, if you make an election under Section 83(b). (Section 13)

        As discussed above, if you elect to defer receipt of any portion of your Restricted Stock in accordance with the terms of your Restricted Stock agreement, we will report your income and withhold income and employment taxes, on the basis that you recognize income on the date on which that portion of your Restricted Stock is distributed to you (as opposed to the Vesting Date for that portion), in an amount equal to the fair market value of that portion of the Restricted Stock on the date it is distributed to you. You should be aware that no income deferral will result from an election to defer receipt of shares of Restricted Stock for which you have made a Section 83(b) election. We recommend that you consult with your tax advisor prior to making an election to defer receipt of any of your shares of Restricted Stock. You will need to make the payments to us of the federal and state income and employment withholding taxes to which you become subject when you recognize such taxable income, by cash payment or other arrangement agreed upon between you and us. You will not receive the stock certificate for your vested shares until you provide for the payment to us of the

7

federal and state income and employment withholding taxes to which you become subject as a result of such income, by cash payment or other arrangement agreed upon between you and us. (Section 13)

Under what circumstances will I forfeit the Restricted Stock I receive in this Offer?

        You will forfeit the unvested portion of the Restricted Stock received in exchange for your tendered options if you cease to be our employee or board member for any reason. Note that if you cease to be our employee or board member because of your permanent physical disability or death, your unvested Restricted Stock will become vested Restricted Stock upon your termination date. (Section 8)

What are the other restrictions on the Restricted Stock?

        No Restricted Stock will actually be issued to you until you sign the applicable Restricted Stock agreement and return it to us. The Restricted Stock that will then be issued to you will be subject to certain forfeiture provisions and transfer restrictions contained in your Restricted Stock agreement. Your Restricted Stock may not be sold or transferred in any manner until that stock vests. Accordingly, the stock certificate for the unvested portion of your Restricted Stock will be held in our custody while it remains unvested and subject to forfeiture. Until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares. (Section 8)

As your Restricted Stock vests, you will recognize taxable income on each vesting date equal to the fair market value of the portion of your shares that vest at that time if you do not make an election under Section 83(b) of the Internal Revenue Code or (subject to the discussion contained under section 13 below, titled "Material Federal Income Taxes Consequences") an election to defer the receipt of such portion of your Restricted Stock. If you do make an election under Section 83(b) of the Internal Revenue Code, you will recognize taxable income at the time of the award, equal to the fair market value of all of your Restricted Stock at such time (even though your shares have not vested and are subject to forfeiture). (Section 13)

Am I entitled to exercise any rights of ownership of the Restricted Stock prior to vesting?

        Once you sign the Restricted Stock agreement and return it to us, you will have rights to stock dividends and other similar distributions with respect to the Restricted Stock issued to you pursuant to the Offer, even though the stock certificate is held in our custody until you vest in your Restricted Stock. However, until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares. (Section 8)

What happens if Allegiance Telecom, Inc. is acquired?

        If we are acquired prior to expiration of the Offer, you may withdraw your tendered options and have the rights afforded you under your existing option agreements.

        For our senior vice presidents, executive vice president and board members, unvested shares of Restricted Stock will vest in full upon the consummation of a "change in control" after the issuance of Restricted Stock. For our vice presidents, unvested shares of Restricted Stock will vest in full if there is a "change in control" (as defined in the Restricted Stock agreement) and such person's employment is terminated (other than a termination for "cause") upon such change in control or at any time during the 2-year period after such change in control occurs. (Section 8)

        Notwithstanding a deferral of the distribution of Restricted Stock under the terms of the Restricted Stock agreement, all shares of vested Restricted Stock will be distributed promptly after a public announcement of a change in control or after termination of your employment for any reason.

8

Will I have to pay taxes if I exchange my options in the Offer?

        You will not be required under current law to recognize income for federal income tax purposes until the time the Restricted Stock issued to you begins to vest, in the absence of an election under Section 83(b) of the Internal Revenue Code or (subject to the discussion contained under section 13 below, titled "Material Federal Income Tax Consequences") an election to defer receipt of shares of Restricted Stock. The amount of such income will be equal to the fair market value of the portion of your Restricted Stock that vests on each Vesting Date, and you must provide for the payment to us of the federal and state income and employment withholding taxes to which you become subject as a result of such income, by cash payment or other arrangement agreed upon between you and us. We will generally be allowed a business expense deduction for the amount of the taxable income recognized by you at the time your Restricted Stock vests. We recommend that you consult with your own tax advisor to determine the tax consequences of tendering options pursuant to the Offer.

        Alternatively, if you make an election under Section 83(b) of the Internal Revenue Code to be taxed on the fair market value of your unvested Restricted Stock at the time it is issued to you, you will recognize immediately taxable income with respect to the value of all shares of Restricted Stock at such time and you will be required to pay the income and employment withholding taxes pertaining to the Restricted Stock on the date of issuance. If you cease to be our employee or board member for any reason, you would not receive the unvested Restricted Stock, although you would have already paid taxes on those unvested shares. A Section 83(b) election must be filed no later than the date that is thirty (30) days after the date the Restricted Stock is issued to you.

        On the other hand, if you elect to defer receipt of any portion of your Restricted Stock in accordance with the terms of your Restricted Stock agreement, we will report your income, and withhold income and employment taxes, on the basis that you recognize income on the date on which that portion of your Restricted Stock is distributed to you (as opposed to the Vesting Date for that portion), in an amount equal to the fair market value of that portion of the Restricted Stock on the date it is distributed to you. Accordingly, you will be required to pay the income and employment withholding taxes pertaining to that portion of your Restricted Stock on the date it is distributed to you.

You should be aware that no income deferral will result from an election to defer receipt of shares of Restricted Stock for which you have made a Section 83(b) election. We recommend that you consult with your tax advisor prior to making an election to defer receipt of any of your shares of Restricted Stock.

        By way of example, assume that you are issued 600 shares of Restricted Stock in cancellation of your options under the program. Assume further that:

•

the options are cancelled on May 24, 2002, the scheduled expiration date of the Offer, and shortly thereafter you sign the Restricted Stock agreement and your Restricted Stock is issued on May 25, 2002;



•

you continue to be our employee through September 30, 2004 and vest in all of the Restricted Stock;



•

on May 25, 2002, the date of issuance of the Restricted Stock, the value of your shares is $10 per share; on September 30, 2002, the date that 34% of your Restricted Stock vests, the value of your shares is $12 per share and on the immediately following Vesting Date (i.e., December 31, 2002), the value of your shares is $15 per share; and



•

you do not make an election under Section 83(b) of the Internal Revenue Code to be taxed on unvested Restricted Stock or an election to defer the receipt of the portions of the Restricted Stock that vest on September 30, 2002 and December 31, 2002.

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Accordingly, you would recognize taxable income in the amount of $2,448 (600 shares × .34 × $12/share) on September 30, 2002, the date of vesting of 34% of your Restricted Stock, and of $742.50 (600 shares × .0825 × $15/share) on December 31, 2002, and you would have to provide us with payment on those dates of the applicable federal and state income and employment withholding taxes on that income, by cash payment or other arrangement agreed upon between you and us.

        If you were to make an election under Section 83(b) of the Internal Revenue Code, you would recognize $6,000 (600 shares × $10/share) of taxable income on the date the Restricted Stock is issued to you, and you would have to provide us with payment on that date of the applicable federal and state income and employment withholding taxes on that income, by cash payment or other arrangement agreed upon between you and us. (Section 13)

When does the Offer expire? Can the Offer be extended, and if so, how will I be notified if it is extended?

        The Offer expires on May 24, 2002, at 12 midnight, Central Standard Time, unless we extend it. Although we do not currently intend to do so, we may, in our discretion, extend the Offer at any time. If the Offer is extended, we will make a public announcement of the extension no later than 9:00 a.m., Central Standard Time, on the next business day following the previously scheduled expiration of the Offer period. (Section 14)

How do I tender my options?

        If you decide to tender your options, you must deliver, before 12 midnight, Central Standard Time, on May 24, 2002, a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal to Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130). (Section 3)

        If we extend the Offer beyond that time, you must deliver these documents before the extended expiration of the Offer. We reserve the right to reject any or all tenders of options that we determine are not in appropriate form or that we determine are unlawful to accept. Otherwise, we intend to accept properly and timely tendered options that are not validly withdrawn. Subject to our rights to extend, terminate and amend the Offer, we currently expect that we will accept all such properly tendered options promptly after the expiration of the Offer. (Section 3)

During what period of time may I withdraw previously tendered options?

        You may withdraw your tendered options at any time before 12 midnight, Central Standard Time, on May 24, 2002. If we extend the Offer beyond that time, you may withdraw your tendered options at any time until the extended expiration of the Offer. To withdraw tendered options, you must deliver to us a written notice of withdrawal (by mail, fax or other paper delivery method) with the required information while you still have the right to withdraw the tendered options. Once you have withdrawn options, you may re-tender options only by again following the delivery procedures described in this Offer. (Section 4)

What do you think of the Offer?

        Although our Board of Directors has approved this Offer, neither we nor our Board of Directors makes any recommendation as to whether you should tender or refrain from tendering your options. You must make your own decision whether to tender options. (Section 2)

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Who can I talk to if I have questions about the Offer?

        For additional information or assistance, you should contact:

Lisa Sutter
Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, Texas 75231
(telephone: (469) 259-2848, facsimile: (469) 259-9130)

THE OFFER

1.    Number of Shares of Restricted Stock; Expiration Date.

        Upon the terms and subject to the conditions of the Offer, we will exchange, for Restricted Stock to be issued under the Plan, all Eligible Options that are properly tendered by our current vice presidents (other than city vice presidents), senior vice presidents, executive vice president and board members (such persons, collectively referred to as the "Participants") and not validly withdrawn in accordance with section 4 before the "Expiration Date," as defined below. "Eligible Options" are any and all of the unexercised stock options (whether vested or unvested) that have an exercise price of $5.50 or greater (excluding outperform stock options), held by the Participants that are outstanding under the Plan. We are individually negotiating for the exchange of certain stock options granted on October 15, 2001, at an exercise price of $5.79 per share, for shares of Restricted Stock, with the recipients of those grants who are our senior vice presidents, executive vice president, executive vice president of corporate development/chief financial officer, chief operating officer/president and chief executive officer. As a result, those option grants are not a part of this Offer and are not "Eligible Options."

        For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, we will issue three shares of Restricted Stock. No fractional shares of Restricted Stock will be issued. The number of shares of Restricted Stock will be rounded up for amounts of 0.5 and greater and will be rounded down for amounts below 0.5. The following are a few examples:

•

if you tender 100 shares of common stock issuable under Eligible Options and we accept those 100 Eligible Options for cancellation and exchange, we will issue 75 shares of Restricted Stock to you.



•

If you tender 75 shares of common stock issuable under Eligible Options and we accept those 75 Eligible Options for cancellation and exchange, we will issue 56 shares of Restricted Stock to you.



•

if you tender 50 shares of common stock issuable under Eligible Options and we accept those 50 Eligible Options for cancellation and exchange, we will issue 38 shares of Restricted Stock to you.

        The Restricted Stock will be issued under the same Plan. The Restricted Stock will be issued promptly after the date your tendered options are accepted and cancelled and upon your return to us of a properly executed Restricted Stock agreement.

If you cease to be an employee or a member of the Board of Directors of our company for any reason prior to the date the unvested portion of your Restricted Stock vests, you will not receive that portion of your Restricted Stock or any other consideration in exchange for your tendered options.

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        If you tender options for exchange, we will issue you Restricted Stock under the Plan pursuant to a Restricted Stock agreement. Regardless of the current vesting schedule of your options, 34% of the Restricted Stock will vest on September 30, 2002, and an additional 8.25% of the Restricted Stock will vest on the last day of each quarter following that date, provided that you remain our employee or board member on each such date. At each time of such vesting, unless you make an election under Section 83(b) of the Internal Revenue Code or (subject to the discussion contained under section 13 below, titled "Material Federal Income Tax Consequences") elect to defer receipt of the shares that vest, you will recognize taxable income equal to the fair market value of the shares that vest on the date they vest, and, before we deliver certificates for those vested shares to you, you must provide for the payment to us of the federal and state income and employment withholding taxes to which you become subject as a result of such income, by cash payment or other arrangement agreed upon between you and us. If you make an election under Section 83(b) of the Internal Revenue Code, you will immediately recognize taxable income equal to the fair market value of all of your Restricted Stock on the date it is issued to you, even though it has not vested. If you make an election under Section 83(b) of the Internal Revenue Code, you must provide for payment to us of the federal and state income and employment withholding taxes to which you become subject as a result of your election at the same time as you deliver your executed Restricted Stock agreement.

        The term "Expiration Date" means 12 midnight, Central Standard Time, on May 24, 2002 unless and until we, in our discretion, have extended the period of time during which the Offer will remain open, in which event the term "Expiration Date" refers to the latest time and date at which the Offer, as so extended, expires. See section 14 for a description of our rights to extend, delay, terminate and amend the Offer, and section 6 for a description of conditions to the Offer.

2.    Purpose of the Offer.

        We are making this Offer for employee incentive purposes and to further our corporate goals. Many of our outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price of our common stock. We believe these options are not sufficiently effective in retaining and providing incentives to the Participants. By making this Offer we intend to maximize stockholder value by creating better incentives for, and thus increasing retention of, the Participants.

Neither we nor our Board of Directors makes any recommendation as to whether you should tender your options, nor have we authorized any person to make any such recommendation. You are urged to evaluate carefully all of the information in this Offer to Exchange and to consult your own investment, legal and tax advisors. You must make your own decision whether to tender your options for exchange, taking into account your own personal circumstances and preferences.

3.    Procedures for Tendering Options.

        Proper Tender of Options.    To validly tender your options pursuant to the Offer, you must, in accordance with the terms of the Letter of Transmittal, properly complete, duly execute and deliver (by mail, fax or other paper delivery method) the Letter of Transmittal, along with any other required documents to Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130). We must receive all of the required documents before the Expiration Date.

        The method of delivery of all documents, including letters of transmittal and any other required documents, is at your own election, risk and cost. We will only accept paper delivery, and therefore delivery by e-mail will not be accepted. If delivery is by mail, we recommend that you use registered mail with return receipt requested and properly insure your package. If delivery is by fax, we

12

recommend that you send the original documents to us. In all cases, you should allow sufficient time to ensure timely delivery.

Determination of Validity; Rejection of Options; Waiver of Defects; No Obligation to Give Notice of Defects. We will determine, in our discretion, all questions as to form of documents and the validity, form, eligibility (including time of receipt), and acceptance of any tender of options, and all questions as to the number of shares subject to Eligible Options or to be issued as Restricted Stock. Our determination of these matters will be final and binding on all parties. We reserve the right to reject any or all tenders of options that we determine do not comply with the conditions of this Offer, that we determine are not in appropriate form or that we determine are unlawful to accept. Otherwise, we will accept properly and timely tendered options that are not validly withdrawn. We also reserve the right to waive any of the conditions of the Offer or any defect or irregularity in any tender with respect to any particular options or any particular option holder. No tender of options will be deemed to have been properly made until all defects or irregularities have been cured by the tendering option holder or waived by us. Neither we nor any other person is obligated to give notice of any defects or irregularities in tenders, nor will anyone incur any liability for failure to give any such notice.

        Our Acceptance Constitutes an Agreement.    Your tender of options pursuant to the procedures described above constitutes your acceptance of the terms and conditions of the Offer. Our acceptance for exchange of your options tendered by you pursuant to the Offer will constitute a binding agreement between us and you upon the terms and subject to the conditions of the Offer.

        Subject to our rights to extend, terminate and amend the Offer, we currently expect that we will accept all properly tendered options that have not been validly withdrawn promptly after the expiration of the Offer.

4.    Withdrawal Rights.

        You may only withdraw your tendered options in accordance with the provisions of this section 4. You may withdraw your tendered options at any time before 12 midnight, Central Standard Time, on May 24, 2002. If we extend the Offer beyond that time, you may withdraw your tendered options at any time until the extended expiration of the Offer. In addition, unless we accept your tendered options for exchange before 12 midnight, Central Standard Time, on May 24, 2002, you may withdraw your tendered options at any time after the expiration of forty (40) business days from the date of commencement of this Offer until they are accepted and cancelled.

        To validly withdraw tendered options, you must deliver to us, at the address set forth on the back cover of this Offer to Exchange, a written notice of withdrawal (by mail, fax or other paper delivery method) with the required information, while you still have the right to withdraw the tendered options. The notice of withdrawal must specify the name of the option holder who tendered the options to be withdrawn, the grant date, exercise price and the number of options to be withdrawn. You may withdraw some or all of your tendered options. The notice of withdrawal must be executed by the option holder who tendered the options to be withdrawn exactly as such option holder's name appears on the option agreement or agreements evidencing such options. If the signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or another person acting in a fiduciary or representative capacity, the signer's full title and proper evidence of the authority of such person to act in such capacity must be indicated on the notice of withdrawal.

        You may not rescind any withdrawal, and any options you withdraw will thereafter be deemed not properly tendered for purposes of the Offer, unless you properly re-tender those options before the Expiration Date by following the procedures described in section 3 above.

        Neither we nor any other person is obligated to give notice of any defects or irregularities in any notice of withdrawal, nor will anyone incur any liability for failure to give any such notice. We will

13

determine, in our discretion, all questions as to the form and validity, including time of receipt, of notices of withdrawal. Our determination of these matters will be final and binding.

5.    Acceptance of Options for Exchange and Issuance of Restricted Stock.

        Upon the terms and subject to the conditions of this Offer and as promptly as practicable following the Expiration Date, we will accept Eligible Options for exchange and cancellation if properly tendered and not validly withdrawn before the Expiration Date. The Restricted Stock will be issued under the same Plan. Your Restricted Stock will be issued upon your return to us of a properly executed Restricted Stock agreement. The stock certificates representing your shares of Restricted Stock will be held in our custody until such time as your Restricted Stock vests. At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002), you may deliver written notice to us (in the form attached as Exhibit (a)(5) or such other form that we may approve of from time to time) setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); if you elect to defer, no certificates representing shares of common stock will be delivered to you until the date of the event specified in such deferral notice. Your decision to defer the distribution of stock certificates is irrevocable. Notwithstanding a deferral of the distribution of Restricted Stock, all vested Restricted Stock will be distributed promptly after a public announcement of a change in control (as defined in the form of Restricted Stock agreement attached as Exhibit (d)(6)) or after termination of your employment for any reason. Until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares.

If you cease to be an employee or a member of the Board of Directors of our company for any reason after the date that you tender your options but before the date that the unvested portion of your Restricted Stock vests, you will not receive that portion of your Restricted Stock in exchange for your tendered options. You also will not receive any consideration for your tendered options if you are not an employee or a member of the Board of Directors of our company on the date of issuance and as a result are not issued any Restricted Stock. This Offer does not change the "at-will" nature of your employment with us, and your employment may be terminated by us or you at any time, including prior to you being issued or vesting in the Restricted Stock, for any reason with or without cause.

        You are not required to accept the Offer. If you choose to tender any Eligible Options for exchange, you may choose to tender one option and not tender another. For example, if you have received two Eligible Options, you may choose to tender neither of these Eligible Options, both of these Eligible Options, or one of these Eligible Options. If you choose to tender any options for exchange, you will be required to indicate in the Letter of Transmittal the particular option grants you are tendering.

        For purposes of the Offer, we will be deemed to have accepted options that are validly tendered and not properly withdrawn as, if and when we give oral or written notice to the option holders of our acceptance for exchange of such options, which notice may be by press release or e-mail. Subject to our rights to extend, terminate and amend the Offer, we currently expect that we will accept, promptly after the expiration of the Offer, all properly tendered options that are not validly withdrawn. Promptly after we accept and cancel tendered options, we will send each tendering option holder a letter indicating the number of shares subject to the options that we have accepted and cancelled, the number of shares of Restricted Stock that will be issued to the option holder, and the amount of any required federal and state income and withholding taxes if the tendering option holder will make an election under Section 83(b) of the Internal Revenue Code.

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6.    Conditions of the Offer.

        Notwithstanding any other provision of the Offer, we will not be required to accept any options tendered to us, and we may terminate or amend the Offer, or postpone our acceptance and cancellation of any options tendered to us, in each case, subject to Rule 13e-4(f)(5) under the Securities Exchange Act, if at any time on or after April 26, 2002 and prior to the Expiration Date any of the following events has occurred, or has been determined by us to have occurred:

        (a)  there shall have been threatened or instituted or be pending any action or proceeding by any government agency, authority or tribunal or any other person, before any court, authority, agency or tribunal that directly or indirectly challenges the making of the Offer, the acquisition of some or all of the tendered options pursuant to the Offer, the issuance of Restricted Stock, or otherwise relates in any manner to the Offer or that, in our reasonable judgment, could materially and adversely affect the business, condition (financial or other), income, operations or prospects of our company or otherwise materially impair in any way the contemplated future conduct of our business or materially impair the contemplated benefits of the Offer to us;

        (b)  there shall have been any action threatened, pending or taken, or approval withheld, or any statute, rule, regulation, judgment, order or injunction threatened, proposed, enacted, amended or deemed to be applicable to the Offer or us, by any court or any authority, agency or tribunal that, in our reasonable judgment, would or might directly or indirectly:

(1)

make the acceptance for exchange of, or issuance of Restricted Stock for, some or all of the tendered options illegal or otherwise restrict or prohibit consummation of the Offer or otherwise relates in any manner to the Offer;



(2)

delay or restrict our ability, or render us unable, to accept for exchange, or issue Restricted Stock for, some or all of the tendered options;



(3)

materially impair the benefits we hope to receive as a result of the Offer; or



(4)

materially and adversely affect our business, condition (financial or other), income, operations or prospects or otherwise materially impair in any way the contemplated future conduct of our business or materially impair the contemplated benefits of the Offer to us;

        (c)  there shall have occurred any change in generally accepted accounting principles or interpretations thereof which could or would materially and adversely affect the manner in which we are required for financial accounting purposes to account for the Offer; or

        (d)  any circumstances, changes or events shall have occurred in our business, condition (financial or other), assets, income, operations, prospects or stock price or ownership that, in our reasonable judgment, is or may be material to us or that makes it inadvisable for us to proceed with the Offer.

        The conditions to the Offer are for our benefit. We may assert them in our discretion regardless of the circumstances giving rise to them prior to the Expiration Date. We may waive them, in whole or in part, at any time and from time to time prior to the Expiration Date, in our discretion, whether or not we waive any other condition to the Offer. Our failure at any time to exercise any of these rights will not be deemed a waiver of any such rights. The waiver of any of these rights with respect to particular facts and circumstances will not be deemed a waiver with respect to any other facts and circumstances. Any determination we make concerning the events described in this section 6 will be final and binding upon all persons.

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7.    Price Range of Common Stock Underlying the Options.

        There is no established trading market for stock options granted under the Plan.

        Our common stock is quoted on the Nasdaq National Market under the symbol "ALGX." The following table shows, for the periods indicated, the high and low sales prices per share of our common stock as reported by the Nasdaq National Market.

Quarter Ended	High		Low
06/30/02 (through April 24, 2002)	$	2.9100	$	2.0700
03/31/02		9.6000		1.8800
12/31/01		9.8500		2.7400
09/30/01		15.8000		2.8000
06/30/01		22.1000		8.5000
03/31/01		40.0000		12.4375
12/31/00		41.5000		12.8125
09/30/00		77.8750		32.7500
06/30/00		80.2500		45.0000
03/31/00		110.0800		60.6700

        On April 24, 2002, the last reported sale price of our common stock, as reported by the Nasdaq National Market, was $2.09.

        Our stock price has been, and in the future may be, highly volatile and could continue to decline. The trading price of our common stock has fluctuated widely in the past and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many companies, and that have often been unrelated or disproportionate to the operating performance of these companies. We recommend that you obtain current market quotations for our common stock before deciding whether to tender your options.

8.    Source and Amount of Consideration; Terms of Restricted Stock.

        Consideration.    The Restricted Stock to be issued in exchange for Eligible Options properly tendered and accepted for exchange and cancellation by us will be issued under the Plan. For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, we will issue three shares of Restricted Stock. No fractional shares of Restricted Stock will be issued. The number of shares of Restricted Stock will be rounded up for amounts of 0.5 and greater and will be rounded down for amounts below 0.5. However, no Restricted Stock will actually be issued until you sign a Restricted Stock agreement and returns it to us.

        If we receive and accept tenders of all Eligible Options, we will issue approximately 3,744,424 shares of Restricted Stock. If all Eligible Options are properly tendered and accepted and cancelled, the shares of Restricted Stock to be issued will equal approximately 3.1% of the total shares of our common stock outstanding following that issuance. Shares of common stock subject to all tendered Eligible Options that are accepted and cancelled will, after such cancellation, be available for regrant and issuance under the Plan, and may provide some of the necessary shares reserved under the Plan in order to issue shares of Restricted Stock that is part of this Offer.

        Terms of Restricted Stock.    The following description of the terms of the Restricted Stock is a summary and is not complete. The description is subject to, and qualified in its entirety by reference to, all provisions of the Plan and the form of Restricted Stock agreement. Complete information about the Plan and the Restricted Stock agreement is included in the 1998 Stock Incentive Plan, as amended, and the form of Restricted Stock agreement, respectively. The 1998 Stock Incentive Plan has been filed as

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Exhibit 10.6 to our Registration Statement on Form S-1, filed with the U.S. Securities and Exchange Commission on May 22, 1998. The First Amendment to the 1998 Stock Incentive Plan has been filed as Exhibit 10.7 to our Form 10-K for the period ended December 31, 1998, filed with the U.S. Securities and Exchange Commission on March 30, 1999. The Second Amendment to the 1998 Stock Incentive Plan has been filed as Exhibit 10.8 to our Form 10-K for the period ended December 31, 1999, filed with the U.S. Securities and Exchange Commission on March 29, 2000. The Third Amendment to the 1998 Stock Incentive Plan has been filed as Exhibit 10.9 to our Form 10-K for the period ended December 31, 2000, filed with the U.S. Securities and Exchange Commission on March 30, 2001. The Fourth Amendment to the 1998 Stock Incentive Plan has been filed as Exhibit 10.10 to our Form 10-K for the period ended December 31, 2001, filed with the U.S. Securities and Exchange Commission on April 1, 2002. The form of Restricted Stock agreement has been filed with the U.S. Securities and Exchange Commission as an exhibit to the Schedule TO.

        Please contact us as follows: Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130), to receive a copy of the Plan or the Restricted Stock agreement. We will promptly furnish you with copies of these documents at our expense.

        General.    Awards of Restricted Stock under the Plan may be made to certain of our employees and board members. As of December 31, 2001, 25,429,108 shares of our common stock were reserved for issuance under the Plan.

        The Restricted Stock issued under the Plan and pursuant to the Offer will be evidenced by a Restricted Stock agreement between us and each option holder whose tendered options in the Offer are accepted and cancelled. The Restricted Stock agreement will contain the vesting provisions and other restrictions applicable to the Restricted Stock to be issued to each such option holder. The shares of Restricted Stock will be subject to forfeiture and other restrictions until the shares vest. These restrictions include prohibitions against sale, assignment, transfer, conveyance, pledge, hypothecation or gift.

        Once you sign the Restricted Stock agreement and return it to us, we will issue in your name the number of shares of Restricted Stock that you are entitled to receive in connection with the Offer. Until the shares have vested in accordance with the Restricted Stock agreement, we will hold the certificates representing the unvested portion of your restricted shares in our custody. After you have provided for the payment to us any required federal and state income and withholding taxes with respect to the vested portion of the Restricted Stock, by cash payment or other arrangement agreed upon between you and us, we will deliver to you the stock certificates representing the vested portion of the Restricted Stock issued to you pursuant to the Offer. Until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares.

        Vesting; Forfeiture.    Regardless of the current vesting schedule of the options that you tender to us in the Offer, 34% of the Restricted Stock will vest on September 30, 2002 and an additional 8.25% of the Restricted Stock will vest on the last day of each quarter following that date, provided that you remain our employee or board member on such dates. In addition, the unvested portion of your Restricted Stock will vest in full on the date you cease to be an employee or a member of the Board of Directors of our company by reason of death or permanent physical disability (as determined by us in our sole discretion). The unvested portion of the Restricted Stock will be subject to forfeiture if your employment is terminated by us for any other reason or if you resign your employment with our company for any other reason.

        Deferral.    At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002),

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you may deliver written notice to us (in the form attached as Exhibit (a)(5) or such other form that we may approve of from time to time) setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); if you elect to defer, no certificates representing shares of common stock will be delivered to you until the date of the event specified in such deferral notice. Your decision to defer the distribution of stock certificates is irrevocable. Notwithstanding a deferral of the distribution of Restricted Stock, all vested Restricted Stock will be distributed promptly after a public announcement of a "change in control" (as defined in the form of Restricted Stock Agreement attached as Exhibit (d)(6)) or after termination of your employment for any reason. Until shares of vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares.

        Acceleration.    For Participants who are vice presidents, unvested shares of Restricted Stock will vest in full if there is a "change in control" and such person's employment is terminated (other than a termination for "cause") upon such change in control or at any time during the 2-year period after such change in control occurs. For Participants who are senior vice presidents, executive vice president or board members, all unvested shares of Restricted Stock will vest immediately following the consummation of a "change in control." Under the Restricted Stock agreement, a "change in control" occurs if: (i) certain persons or groups, as those terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act, are or become the beneficial owner (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of our securities representing 50% or more of the combined voting power of our then outstanding securities, (ii) during any consecutive two year period, individuals who at the beginning of such period constitute the members of our Board of Directors, as well as any individuals whose election by the Board of Directors or nomination for election by our stockholders was approved by at least two-thirds of the directors who were directors at the beginning of such period or whose election was previously so approved, cease for any reason to be a majority of the members of our Board of Directors, (iii) our stockholders approve a merger or consolidation of us with any other corporation, other than a merger or consolidation where (A) all or a portion of our securities outstanding before the merger continue to represent more than 50% of the voting power of the combined entity or (B) our existence is not affected and our chief executive officer and all of our directors (who must constitute the majority of the directors of the combined entity) retain their positions, or (iv) our stockholders approve a complete liquidation of us or an agreement for the sale or disposition of all or substantially all of our assets, other than sales to certain persons.

        Withholding.    We will be entitled, if necessary or desirable, to withhold from you from any amounts due and payable by us to you, the amount of any withholding or other tax due with respect to the Restricted Stock. The following provisions are included in the Restricted Stock agreement:

(i)

As a condition of receiving any vested Restricted Stock, you authorize us to sell, on each Vesting Date (or shortly thereafter), the number of vested Restricted Stock that we deem necessary to satisfy the applicable withholding taxes; and



(ii)

you agree that the proceeds received from the sale of vested Restricted Stock will be used to satisfy the withholding taxes and, accordingly, you authorize our brokers or other agents to pay such proceeds to us for such purpose. You understand that to the extent that the proceeds obtained by such sale exceeds the amount necessary to satisfy the withholding or other taxes, such excess proceeds shall be distributed to you.

9.    Information Concerning Allegiance Telecom, Inc.

        General.    We are a leading competitive provider of telecommunications services to small and medium- sized businesses in major metropolitan areas across the United States. We offer an integrated set of telecommunication services including local, long distance, data and a full suite of Internet

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services. We are incorporated in Delaware. Our principal executive offices are located at 9201 North Central Expressway, Dallas, Texas 75231, and our telephone number is (214) 261-7100.

        Financial Information.    The Tender Offer Statement on Schedule TO that we filed with the SEC in connection with this Offer incorporates certain financial information about us included in our annual report on Form 10-K for the fiscal year ended December 31, 2001 which has been filed with the SEC. Because you may be interested in reviewing this information, we suggest that you obtain copies of these documents. Please see section 16 below for more information on how to obtain these filings.

10.  Interests of Directors and Officers; Transactions and Arrangements Concerning the Options.

        A list of our directors and executive officers is attached to this Offer to Exchange as Schedule A. As of March 31, 2002, our executive officers and directors as a group beneficially owned options to purchase a total of 6,533,974 shares of our common stock, which represented approximately 27.33% of the shares subject to all options outstanding as of that date. For information with respect to the beneficial ownership by our directors and officers of options to purchase our common stock, please refer to our proxy statement filed with the U.S. Securities and Exchange Commission.

        Other than periodic purchases of our common stock pursuant to our Employee Stock Discount Purchase Plan and ordinary course grants of stock options to employees and directors and stock option exercises by employees and directors, there have been no transactions in options to purchase our common stock or in our common stock that were effected during the past 60 days by Allegiance Telecom, Inc. or, to our knowledge, by any current executive officer, director, affiliate or subsidiary of Allegiance Telecom, Inc.

11.  Status of Options Acquired by Us in the Offer; Accounting Consequences of the Offer.

        All tendered options that are accepted for exchange will be cancelled. All shares subject to options that are accepted and cancelled will be available, after such cancellation, for regrant or issuance under the Plan, and may fund part of the share reserve under the Plan necessary to issue shares of Restricted Stock that is part of this Offer.

        We will recognize compensation expense for the replacement of fixed stock option awards with Restricted Stock. The compensation cost is measured as the quoted market price of the stock on the measurement date. The compensation cost will be recognized as an expense in accordance with the Restricted Stock vesting provisions. The compensation cost will be allocated 34% on September 30, 2002 and an additional 8.25% each quarter thereafter, to expense.

12.  Legal Matters; Regulatory Approvals.

        We are not aware of any license or regulatory permit that appears to be material to our business and that might be adversely affected by our exchange of options and our grant of Restricted Stock as contemplated by the Offer, or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the acquisition or ownership of our Restricted Stock as contemplated herein. Should any such approval or other action be required, we presently contemplate that we will seek such approval or take such other action. We are unable to predict whether we may determine that we are required to delay the acceptance of options for exchange pending the outcome of any such matter. We cannot assure you that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions, or that the failure to obtain any such approval or other action might not result in adverse consequences to our business. Our obligation under the Offer to accept tendered options for exchange and cancellation and to issue Restricted Stock for tendered options is subject to conditions, including the conditions described in section 6 above.

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13.  Material Federal Income Tax Consequences.

        The following is a general summary of the material United States federal income tax consequences of the exchange of options pursuant to the Offer. This discussion is based on the Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, Treasury Regulations thereunder and administrative and judicial interpretations thereof as of the date of the Offer, all of which are subject to change, possibly on a retroactive basis. This summary does not discuss any taxes other than United States federal income taxes, nor does it discuss all of the United States federal income tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to be applicable in all respects to all categories of option holders.

        Issuance of Restricted Stock.    If you do not make an election under Section 83(b) of the Code (a "Section 83(b) election"), then (subject to the discussion below regarding an election to defer receipt of Restricted Stock), you will recognize taxable income each time a portion of your Restricted Stock vests. The amount of such taxable income will equal the fair market value of the portion of your Restricted Stock that vests on that date, and you must provide for the payment to us of the federal and state income and employment withholding taxes to which you become subject as a result of recognizing such income, by cash payment or other arrangement agreed upon between you and us.

        If you may make a Section 83(b) election with respect to your Restricted Stock, then you will recognize taxable income at the time of the award equal to the fair market value of all your Restricted Stock at that time, and you must provide for the payment to us of the federal and state income and employment withholding taxes to which you are subject as a result of recognizing such income, by cash payment or other arrangement agreed upon between you and us. A Section 83(b) election must be made within thirty (30) days after the date the Restricted Stock is awarded to you. Should you subsequently forfeit any portion of the Restricted Stock because you cease to be an employee or a member of the Board of Directors of our company for any reason before a Vesting Date, then you will not be able to recover the taxes you paid with respect to your unvested Restricted Stock or to claim any deduction for those taxes.

        If you do not make a Section 83(b) election with respect to your Restricted Stock and you elect to defer receipt of any portion of your Restricted Stock (which election must generally be made more than six (6) months prior to the date such portion vests), we will report your income, and withhold income and employment taxes, on the basis that you recognize income on the date on which that portion of your Restricted Stock is distributed to you (as opposed to the vesting date for that portion), in an amount equal to the fair market value of that portion of the Restricted Stock on the date it is distributed to you. Accordingly, you will be required to pay the income and employment withholding taxes pertaining to that portion of your Restricted Stock on the date it is distributed to you. You should be aware that the Internal Revenue Service ("IRS") may take the position (in the event of an audit) that you are required to recognize taxable income as your Restricted Stock vests (in accordance with the rules set forth above in the second paragraph of this section 13) without regard to your election to defer the receipt of any shares of Restricted Stock. In addition, you should be aware that no income deferral will result from an election to defer receipt of shares of Restricted Stock for which you have made a Section 83(b) election. We recommend that you consult with your tax advisor to determine the tax consequences of making an election to defer the receipt of any portion of your Restricted Stock.

        We will generally be allowed a business expense deduction for the amount of the taxable income recognized by you in connection with the issuance, vesting, or distribution of your Restricted Stock.

        Subsequent Sale of Restricted Stock.    Upon a sale or other taxable disposition of the Restricted Stock, you will recognize a taxable capital gain equal to the amount realized upon the sale or disposition of the shares less the fair market value of those shares at the time you recognized taxable income with respect to those shares. A capital loss will result to the extent the amount realized upon

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such sale is less than such fair market value. The gain or loss will be long-term if the shares are held for more than one (1) year prior to the sale.

        The capital gain holding period for shares of Restricted Stock will start either (i) at the time the shares of Restricted Stock vest, if no Section 83(b) election is filed at the time the Restricted Stock is awarded and no election is made to defer receipt of those shares of Restricted Stock, (ii) at the time of the award of Restricted Stock, if you file the Section 83(b) election within 30 days after the date of the award, or (iii) at the time the shares are distributed to you if you elected to defer receipt of such shares more than six (6) months prior to the date those shares vested (or if you elected to defer receipt of such shares prior to June 30, 2002 with respect to the first Vesting Date of September 30, 2002), provided that, if you recognize taxable income with respect to those shares at the time the shares vest notwithstanding an election to defer receipt of the shares (i.e., as a result of an IRS assertion that the deferral election should be disregarded for purposes of determining the tax consequences of the vesting of those shares), then your holding period in those shares will be determined under the rule set forth in clause (i) above.

We recommend that you consult your own tax advisor with respect to the federal, state and local tax consequences of participating in the Offer. Additionally, if you choose not to exchange all your Eligible Options, we also recommend that you consult with your own tax advisor to determine the tax consequences applicable to the exercise of the Eligible Options that you do not exchange and to the subsequent sale of the common stock purchased under those options.

14.  Extension of Offer; Termination; Amendment.

        We expressly reserve the right, in our discretion, at any time and from time to time, and regardless of whether or not any event set forth in section 6 above has occurred or is deemed by us to have occurred, to extend the period of time during which the Offer is open and thereby delay the acceptance for exchange and cancellation of any options by giving oral or written notice of such extension to the option holders and making a public announcement thereof.

        We also expressly reserve the right, in our reasonable judgment, prior to the Expiration Date to terminate or amend the Offer and to postpone our acceptance and cancellation of any tendered options upon the occurrence of any of the conditions specified in section 6 above, by giving oral or written notice of such termination or postponement to the option holders and making a public announcement thereof. Our reservation of the right to delay our acceptance and cancellation of options tendered for exchange is limited by Rule 13e-4(f)(5) promulgated under the Securities Exchange Act, which requires us to pay the consideration offered or return the options tendered promptly after termination or withdrawal of a tender Offer.

        Subject to compliance with applicable law, we further reserve the right, in our discretion, and regardless of whether any event set forth in section 6 above has occurred or is deemed by us to have occurred, to amend the Offer in any respect, including, without limitation, by decreasing or increasing the consideration offered in the Offer to option holders or by decreasing or increasing the number of options being sought in the Offer.

        Amendments to the Offer may be made at any time and from time to time by public announcement of the amendment. In the case of an extension, the amendment will be issued no later than 9:00 a.m., Central Standard Time, on the next business day after the last previously scheduled or announced Expiration Date. Any public announcement made pursuant to the Offer will be disseminated promptly to option holders in a manner reasonably designated to inform option holders of such change, for example, by press release.

        If we materially change the terms of the Offer or the information concerning the Offer, or if we waive a material condition of the Offer, we will extend the Offer to the extent required by

21

Rules 13e-4(d)(2) and 13e-4(e)(3) under the Securities Exchange Act. These rules require that the minimum period during which an Offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in price or a change in percentage of securities sought, will depend on the facts and circumstances, including the relative materiality of such terms or information. If we decide to take any of the following actions, we will publish notice of such action and extend the Offer for a period of ten (10) business days after the date of such publication:

(a)

(1)    we increase or decrease the amount of consideration offered for the options;

(2)    we increase or decrease the number of options eligible to be tendered in the Offer; and

(b)

the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth business day from, and including, the date that notice of such increase or decrease is first published, sent or given in the manner specified in this section 14.

15.  Fees and Expenses.

        We will not pay any fees or commissions to any broker, dealer or other person for soliciting tenders of options pursuant to this Offer to Exchange.

16.  Additional Information.

        We have filed with the SEC a Tender Offer Statement on Schedule TO, of which this Offer to Exchange is a part, with respect to the Offer. This Offer to Exchange does not contain all of the information contained in the Schedule TO or the exhibits to the Schedule TO. We recommend that you review the Schedule TO, including its exhibits, and the following materials which we have filed with the SEC before making a decision on whether to tender your options:

        (a)  our annual report on Form 10-K for our fiscal year ended December 31, 2001, filed with the SEC on April 1, 2002 and as amended by the Form 10-K/A, filed with the SEC on April 9, 2002;

        (b)  the description of our common stock included in our registration statement on Form S-1, which was filed with the SEC on May 22, 1998, including any amendments or reports we file for the purpose of updating that description; and

        (c)  our registration statements on Form S-8 (File Nos. 333-70769, 333-46866, 333-60486 and 333-86260), filed with the SEC on January 19, 1999, September 28, 2000, May 9, 2001 and April 15, 2002, respectively.

        The SEC file number for the filings referenced in paragraph (a) above is 0-24509. These filings, our other annual, quarterly and current reports, our proxy statements and our other SEC filings may be examined, and copies may be obtained, at the following SEC public reference rooms:

450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549 500 West Madison Street
Suite 1400
Chicago, Illinois 60661

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        You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. Our SEC filings are also available to the public on the SEC's Internet site at http://www.sec.gov. Our common stock is quoted on the Nasdaq National Market under the symbol "ALGX."

        We will also provide without charge to each person to whom a copy of this Offer to Exchange is delivered, upon the written or oral request of any such person, a copy of any or all of the documents to which we have referred you, other than exhibits to such documents (unless such exhibits are specifically incorporated by reference into such documents). Requests should be directed to:

Lisa Sutter
Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, Texas 75231
(telephone: (469) 259-2848, facsimile: (469) 259-9130)

        As you read the foregoing documents, you may find some inconsistencies in information from one document to another. If you find inconsistencies between the documents, or between a document and this Offer to Exchange, you should rely on the statements made in the most recent document.

        The information contained in this Offer to Exchange about Allegiance Telecom, Inc. should be read together with the information contained in the documents to which we have referred you.

17.  Miscellaneous.

        This Offer to Exchange and our SEC reports referred to above include "forward-looking statements". When used in this Offer to Exchange, the words "anticipate," "believe," "estimate," expect," "intend" and "plan" as they relate to our company or our management are intended to identify these forward-looking statements. All statements by us regarding our expected future financial position and operating results, our business strategy, our financing plans and expected capital requirements, forecasted trends relating to our services or the markets in which we operate and similar matters are forward-looking statements. The documents that we have filed with the SEC, including our annual report on Form 10-K filed on April 1, 2002, discuss some of the risks that could cause our actual results to differ from those contained or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

        We are not aware of any jurisdiction where the making of the Offer is not in compliance with applicable law. If we become aware of any jurisdiction where the making of the Offer is not in compliance with any valid applicable law, we will make a good faith effort to comply with such law. If, after such good faith effort, we cannot comply with such law, the Offer will not be made to, nor will tenders be accepted from or on behalf of, the option holders residing in such jurisdiction.

We have not authorized any person to make any recommendation on our behalf as to whether you should tender or refrain from tendering your options pursuant to the Offer. You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to give you any information or to make any representations in connection with the Offer other than the information and representations contained in this document or in the related Letter of Transmittal. If anyone makes any recommendation or representation to you or gives you any information, you must not rely upon that recommendation, representation or information as having been authorized by us.

April 26, 2002
ALLEGIANCE TELECOM, INC.

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SCHEDULE A

INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF
ALLEGIANCE TELECOM, INC.

        The directors and executive officers of Allegiance Telecom, Inc. and their positions and offices as of March 31, 2002, are set forth in the following table:

Name	Position and Offices Held
Royce J. Holland	Chairman of the Board and Chief Executive Officer
C. Daniel Yost	President, Chief Operating Officer and Director
Thomas M. Lord	Executive Vice President, Chief Financial Officer and Director
G. Clay Myers	Senior Vice President of Finance and Accounting
Mark B. Tresnowski	Senior Vice President, General Counsel and Secretary
Anthony J. Parella	Executive Vice President and Director
James E. Crawford, III	Director
John B. Ehrenkranz	Director
Paul J. Finnegan	Director
Richard D. Frisbie	Director
Howard I. Hoffen	Director
Reed E. Hundt	Director
Andrew D. Lipman	Director
James N. Perry, Jr.	Director

        The address of each director and executive officer is: c/o Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231.

A-1

OFFER TO EXCHANGE

CERTAIN OUTSTANDING STOCK OPTIONS

FOR

RESTRICTED STOCK OF

ALLEGIANCE TELECOM, INC.

         Any questions or requests for assistance or additional copies of any documents referred to in the Offer to Exchange may be directed to:

Lisa Sutter
Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, Texas 75231
(telephone: (469) 259-2848, facsimile: (469) 259-9130)

April 26, 2002

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ALLEGIANCE TELECOM, INC. OFFER TO EXCHANGE CERTAIN OUTSTANDING OPTIONS FOR RESTRICTED STOCK
IMPORTANT
TABLE OF CONTENTS
SUMMARY TERM SHEET
THE OFFER
SCHEDULE A INFORMATION CONCERNING THE DIRECTORS AND EXECUTIVE OFFICERS OF ALLEGIANCE TELECOM, INC.
OFFER TO EXCHANGE CERTAIN OUTSTANDING STOCK OPTIONS FOR RESTRICTED STOCK OF ALLEGIANCE TELECOM, INC.
Lisa Sutter Allegiance Telecom, Inc. 9201 North Central Expressway Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130)
April 26, 2002

EX-99.(A)(2)

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Exhibit (a)(2)

Letter of Transmittal
To Tender Certain Options To Purchase Shares of Common Stock
For Restricted Stock
Pursuant to the Offer to Exchange Dated April 26, 2002

The Offer and Withdrawal Rights Expire at
12 Midnight, Central Standard Time, on May 24, 2002,
Unless the Offer is Extended

To:
Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, Texas 75231
Attn: Lisa Sutter
(telephone) (469) 259-2848
(facsimile) (469) 259-9130

Delivery of this Letter of Transmittal to an address other than as set forth above or transmission via facsimile to a number other than as set forth above or transmission via e-mail will not constitute a valid delivery.

Pursuant to the terms and subject to the conditions of the Offer to Exchange dated April 26, 2002, and this Letter of Transmittal, I hereby tender the following options ("Options") to purchase shares of Allegiance Telecom, Inc. common stock, par value $.01 per share that are outstanding under the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, as amended (the "Plan").

NOTE: To validly tender such Options, you must complete the following table according to instructions 2 and 3 on page [    ] of this Letter of Transmittal.

Grant Date of
Options (a)
Total Number of
Options Granted
on this Date (b)
Number of Options
to be
Tendered (c)

(a)

List each Option on a separate line even if more than one Option agreement was issued on the same grant date.

(b)

Provide the total number of Options that remain outstanding (i.e., number of unexercised Options) in this column.

(c)

Options must be tendered in whole (no fractional amounts).

To Allegiance Telecom, Inc.:

        Upon the terms and subject to the conditions set forth in the Offer to Exchange dated April 26, 2002 (the "Offer to Exchange"), my receipt of which I hereby acknowledge, and in this Letter of Transmittal (this "Letter" which, together with the Offer to Exchange, as they may be amended from time to time, constitutes the "Offer"), I hereby tender to Allegiance Telecom, Inc., a Delaware corporation (the "Company"), the options to purchase shares of common stock, par value $.01 per share, of the Company (the "Common Stock") specified in the table on page 1 of this Letter (the "Options"), in exchange for shares of "Restricted Stock." All capitalized terms used in this Letter but not defined shall have the meaning given to them in the Offer to Exchange. In particular, the term "Eligible Options" shall have the meaning given to the term "Eligible Options" in the Offer to Exchange.

        Subject to the terms and conditions of the Offer, I will receive three (3) shares of Restricted Stock for every four (4) shares issuable upon exercise of Eligible Options that I tender and that are accepted by the Company for exchange and cancellation. I understand that all shares of Restricted Stock will be issued under the Plan. The Restricted Stock will be subject to the terms and conditions set forth in the Plan and a Restricted Stock agreement between the Company and me. I also understand that, before the stock certificates representing the Restricted Stock will be delivered to me, I must provide for the payment to the Company of the applicable federal and state income and withholding taxes with respect to the vested shares of Restricted Stock, by cash payment or other arrangement agreed upon between the Company and me.

        I have listed each Option that I am tendering on page 1 of this Letter. I also understand that I may not tender any shares of Common Stock that I own, including any Common Stock I own as a result of exercising options granted to me, whether or not those shares have vested.

        Subject to, and effective upon, the Company's acceptance for exchange of the Options tendered herewith in accordance with the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), I hereby sell, assign and transfer to, or upon the order of, the Company all right, title and interest in and to all of the Options that I am tendering hereby. I hereby agree that I shall have no further right or entitlement to purchase any shares of Common Stock under the tendered Options that are accepted by the Company for cancellation or any other rights or entitlements under those cancelled options. I acknowledge that the Company has advised me to consult with my own advisors as to the consequences of participating or not participating in the Offer. I agree that this Letter is an amendment to the option agreement or agreements to which the Options I am tendering hereby are subject.

        I hereby represent and warrant that I have full power and authority to tender the Options tendered hereby and that, when and to the extent such Options are accepted for exchange by the Company, such Options will be free and clear of all security interests, liens, restrictions, charges, encumbrances, conditional sales agreements or other obligations relating to the sale or transfer thereof, other than pursuant to the applicable option agreement, and such Options will not be subject to any adverse claims. Upon request, I will execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange of the Options I am tendering hereby.

        All authority herein conferred or agreed to be conferred shall not be affected by, and shall survive, my death or incapacity, and all of my obligations hereunder shall be binding upon my heirs, personal representatives, successors and assigns. Except as stated in the Offer, this tender is irrevocable.

        By execution hereof, I understand that tenders of Options pursuant to the procedure described in section 3 of the Offer to Exchange and in the instructions to this Letter will constitute my acceptance of the terms and conditions of the Offer. The Company's acceptance for exchange of Options tendered pursuant to the Offer will constitute a binding agreement between the Company and me upon the terms and subject to the conditions of the Offer.

        I acknowledge that (1) the Restricted Stock will not actually be issued until I execute and return to the Company the Restricted Stock agreement that will be forwarded to me as soon as practicable after the date the Options tendered hereby are accepted for exchange and cancelled, which will set forth the

forfeiture provisions and transfer restrictions that will govern the Restricted Stock and (2) the stock certificate for the issued but unvested Restricted Stock will be held in the custody of the Company while the Restricted Stock remains unvested and subject to forfeiture. I understand that I have certain rights to "defer" the distribution of vested shares as described in the Restricted Stock agreement.

        I understand and agree that when the unvested portion of the Restricted Stock subsequently vests, the stock certificate for the vested Restricted Stock will not be delivered to me until I provide for the payment to the Company of any required federal and state income and employment withholding taxes to which I become subject upon the vesting of my Restricted Stock, by cash payment or other arrangement agreed upon between you and us. I understand and agree that if I make an election under Section 83(b) of the Internal Revenue Code, I must provide for payment of any required federal and state income and employment withholding taxes at the time of issuance. I also acknowledge that, if I cease to be an employee or a member of the Board of Directors of the Company for any reason after the date I tender Options but before the date the Restricted Stock vests, I will not be eligible to receive unvested shares of the Restricted Stock.

        The name and social security number of the registered holder of the Options tendered hereby appear below exactly as they appear on the option agreement or agreements representing such Options. In the appropriate boxes of the table, I have listed for each Option the grant date, and the number of outstanding Options (i.e., unexercised), and the number of Options being tendered. Subject to the terms and conditions of the Offer, I understand that (1) I may tender all, some or none of my Eligible Options outstanding under the Plan, (2) for each Eligible Option that I tender, I must tender the entire Option (i.e., no fractional Options), and (3) I am not required to tender any Options in the Offer. I also understand that all of such Options properly tendered prior to the "Expiration Date" (as defined in the following sentence) and not properly withdrawn will be exchanged for Restricted Stock, upon the terms and subject to the conditions of the Offer, including the conditions described in sections 1 and 6 of the Offer to Exchange. The term "Expiration Date" means 12 midnight, Central Standard Time, on May 24, 2002, unless and until the Company, in its discretion, has extended the period of time during which the Offer will remain open, in which event the term "Expiration Date" refers to the latest time and date at which the Offer, as so extended, expires.

        I recognize that, under certain circumstances set forth in the Offer to Exchange, the Company may terminate or amend the Offer and postpone its acceptance and cancellation of any Options tendered for exchange. In any such event, I understand that the Options delivered herewith but not accepted for exchange will be returned to me at the address indicated below.

The Offer is not being made to (nor will tenders of Options be accepted from or on behalf of) holders in any jurisdiction in which the making or acceptance of the Offer would not be in compliance with the laws of such jurisdiction.

(Remainder of this page intentionally left blank.)

I have read, understand and agree to all of the terms and conditions of the Offer.

(See Instructions 1 and 4)

        Please complete and sign the following exactly as your name appears on the option agreement or agreements evidencing the Options. If the signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or another person acting in a fiduciary or representative capacity, please set forth the signer's full title and include with this Letter proper evidence of the authority of such person to act in such capacity.

SIGNATURE OF HOLDER

/s/
	(Signature of Holder or Authorized Signatory)

Date:		, 2002
Name:
	(Please Print)
Capacity:
Home Address:
	(Please include ZIP code)

Home Telephone No. (with area code):

Work Telephone No. (with area code):

Email Address:

Tax ID/ Social Security No.:

INSTRUCTIONS

FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER

1.    Delivery of Letter of Transmittal.    A properly completed and duly executed original of this Letter (or a facsimile thereof), and any other documents required by this Letter, must be received by us at our address or at our facsimile number set forth on the front cover of this Letter on or before the Expiration Date.

The method by which you deliver any required documents is at your option, risk and expense, and the delivery will be deemed made only when actually received by us. If you elect to deliver your documents by mail, we recommend that you use registered mail with return receipt requested and that you properly insure the documents. If delivery is by fax, we recommend that you send the original documents to us. In all cases, you should allow sufficient time to ensure timely delivery. We will not accept delivery by e-mail.

        Tenders of Options made pursuant to the Offer may be withdrawn at any time prior to the Expiration Date. If the Offer is extended by us beyond that time, you may withdraw your tendered Options at any time until the extended expiration of the Offer. In addition, unless we accept your tendered Options before 12 midnight, Central Standard Time, on May 24, 2002, you may withdraw your tendered Options at any time after the expiration of forty (40) business days from the date of commencement of this Offer until they are accepted for exchange. To withdraw tendered Options you must deliver a written notice of withdrawal, or a facsimile thereof, with the required information to us while you still have the right to withdraw the tendered Options. The notice of withdrawal must identify with particularity the Options to be withdrawn. Withdrawals may not be rescinded and any Options withdrawn will thereafter be deemed not properly tendered for purposes of the Offer unless such withdrawn Options are properly re-tendered prior to the Expiration Date by following the procedures described above.

        We will not accept any alternative, conditional or contingent tenders. All tendering Option Holders, by execution of this Letter (or a facsimile of it), waive any right to receive any notice of the acceptance of their tender, except as provided for in the Offer to Exchange.

2.    Inadequate Space.    If the space provided herein is inadequate, the information requested by the first table in this Letter regarding the Options to be tendered should be provided on a separate schedule attached hereto.

3.    Tenders.    If you intend to tender Options pursuant to the Offer, you must complete the table on page 1 of this Letter by providing the following information for each Option that you intend to tender: grant date, total number of Options outstanding (i.e., unexercised) and number of Options being tendered. You may tender all, some or none of your Eligible Options. For each Eligible Option that you tender, you must tender the entire Option (i.e., no fractional Options).

4.    Signatures on This Letter of Transmittal.    If this Letter is signed by the holder of the Options, the signature must correspond with the name as written on the face of the option agreement or agreements to which the Options are subject without alteration, enlargement or any change whatsoever.

        If this Letter is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to us of the authority of such person so to act must be submitted with this Letter.

5.    Requests for Assistance or Additional Copies.    Any questions or requests for assistance, as well as requests for additional copies of the Offer to Exchange or this Letter may be directed to Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130). Copies will be furnished promptly at our expense.

6.    Irregularities.    We will determine, in its discretion, all questions as to form of documents and the validity, form, eligibility (including time of receipt), and acceptance of any tender of options, and all

questions as to the number of shares subject to Eligible Options or to be issued as Restricted Stock. Our determination of these matters will be final and binding on all parties. We reserve the right to reject any or all tenders of Options that we determine do not comply with the conditions of the Offer, not to be in proper form or the acceptance of which to be unlawful. We also reserve the right to waive any of the conditions of the Offer or any defect or irregularity in the tender with respect to any particular Options or any particular option holder, and our interpretation of the terms of the Offer (including these instructions) will be final and binding on all parties. No tender of Options will be deemed to be properly made until all defects and irregularities have been cured by the tendering option holder or waived by us. Unless waived, any defects or irregularities in connection with tenders must be cured within such time as we shall determine. Neither we nor any other person is or will be obligated to give notice of any defects or irregularities in tenders, and no person will incur any liability for failure to give any such notice.

Important: this Letter (or a facsimile copy hereof) together with all other required documents must be received by us on or prior to the Expiration Date.

7.    Important Tax Information.    You should refer to section 13 of the Offer to Exchange, which contains important tax information.

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Letter of Transmittal To Tender Certain Options To Purchase Shares of Common Stock For Restricted Stock Pursuant to the Offer to Exchange Dated April 26, 2002
SIGNATURE OF HOLDER
INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER

EX-99.(A)(3)

Exhibit (a)(3)

Dear                                                          :

        I am happy to announce that Allegiance Telecom, Inc. will offer to exchange any and all of the unexercised stock options (whether vested or unvested) that have an exercise price of $5.50 or greater (excluding outperform stock options) that you hold under our 1998 Stock Incentive Plan, as amended (the "Plan"), for restricted shares of our common stock (the "Restricted Stock").

        For every four shares of common stock issuable under Eligible Options that are tendered and accepted for exchange and cancellation, three shares of Restricted Stock will be issued, as more fully described in an "Offer to Exchange" and a related "Letter of Transmittal" which are enclosed with this letter. We will issue the Restricted Stock as soon as practicable after we accept and cancel the tendered options and receive an executed Restricted Stock agreement from you as described in the Offer to Exchange and Letter of Transmittal. You may tender (surrender) to us, all or some of your Eligible Options in exchange for Restricted Stock, subject to the terms and conditions of the Offer to Exchange and Letter of Transmittal. You also have the right to choose not to tender any of your options.

        If you cease to be an employee or a member of the Board of Directors of our company for any reason after the date you tender options but before the date that all of the Restricted Stock has vested, you will not receive the unvested portion of the Restricted Stock. If you do not remain our employee or board member for the required periods, you will not receive the unvested portion of the Restricted Stock, and you will not receive any other consideration for the options tendered by you and cancelled by us.

        The Restricted Stock will be subject to the terms and conditions of the Plan and a Restricted Stock agreement between you and us. The Restricted Stock will vest according to the following schedule: 34% of the Restricted Stock will vest on September 30, 2002 and an additional 8.25% of the Restricted Stock will vest on the last day of each quarter following that date, provided you remain employed by us through those dates. You will receive your vested shares after you provide us with payment of the federal and state income and employment withholding taxes to which you become subject at the time your Restricted Stock vests, by cash payment or other arrangement agreed upon between you and us. If you will make an election under Section 83(b) of the Internal Revenue Code, you must provide for payment of any required federal and state income and employment withholding taxes at the time you deliver your executed Restricted Stock agreement.

Our Board of Directors makes no recommendation as to whether you should tender or refrain from tendering your options in the offer. You must make your own decision whether to tender your options.

        Our offer is being made under the terms and subject to the conditions of the Offer to Exchange and related Letter of Transmittal enclosed with this letter. You should carefully read the entire Offer to Exchange and Letter of Transmittal before you decide whether to tender all or any portion of your options. A tender of options involves risks which are discussed in the Offer to Exchange. To tender options, you will be required to properly complete and return to us the Letter of Transmittal and any other documents specified in that letter by the Expiration Date of our offer.

        If you have any questions about the offer, please call Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130).

        We thank you for your continued efforts on behalf of Allegiance Telecom, Inc.

Sincerely,

Royce J. Holland
Chairman of the Board and Chief Executive Officer

EX-99.(A)(4)

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Exhibit (a)(4)

Dear                                                          :

        On behalf of Allegiance Telecom, Inc., I am writing to provide you with the results of our recent Offer to Exchange (the "Offer") any or all of the unexercised stock options (whether vested or unvested) held by our current vice presidents (other than city vice presidents), senior vice presidents, executive vice president and board members and that have an exercise price of $5.50 or greater (excluding outperform stock options) (the "Eligible Options") that are outstanding under the Allegiance Telecom, Inc. 1998 Stock Incentive Plan, as amended (the "Plan"), for restricted shares of common stock that we will issue under the Plan (the "Restricted Stock"). All capitalized terms used in this letter which are not defined herein have the meanings given to those terms in the Letter of Transmittal accompanying our Offer to Exchange dated April 24, 2002.

        The Offer expired at 12 midnight, Central Standard Time, on May 24, 2002. Promptly following the expiration of the Offer and pursuant to the terms and conditions of the Offer, we accepted for exchange, Eligible Options tendered to us for a total of [                        ] shares of common stock and cancelled all such Eligible Options.

        We have accepted for exchange and cancelled the number of Eligible Options tendered by you as set forth on Attachment A to this letter. In accordance with the terms and subject to the conditions of the Offer, you will have the right to receive three (3) shares of Restricted Stock for every four (4) shares of common stock issuable under Eligible Options accepted for exchange and cancelled as set forth on Attachment A.

        The Restricted Stock will be subject to the terms and conditions of the Plan and a Restricted Stock agreement between you and us. In accordance with the terms of the Offer, in order to be issued Restricted Stock, you must sign and return to us the Restricted Stock agreement enclosed with this letter. The Restricted Stock will be issued following our receipt of your signed agreement, but the stock certificate for the issued Restricted Stock will be held in our custody until it vests. 34% of the Restricted Stock will vest on September 30, 2002 and an additional 8.25% of the Restricted Stock will vest on the last day of each quarter following that date, provided that you remain employed by us through those dates.

        The certificates representing your vested shares will not actually be delivered to you until you provide us with payment of the federal and state income and employment withholding taxes to which you become subject as a result of the vesting of your Restricted Stock, by cash payment or other arrangement agreed upon between you and us. If you have decided to make an election under Section 83(b) of the Internal Revenue Code, you must provide for payment of federal and state employment and withholding taxes at this time. At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002), you may deliver written notice to us setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); in such event, no certificates representing shares of common stock will be delivered to you until the date of the event specified in such deferral notice.

        In accordance with the terms of the Offer, in order to receive the unvested portion of the Restricted Stock, you must remain our employee or board member from the date you tendered options through the dates the Restricted Stock vests. If you do not remain an employee or a member of the Board of Directors of our company for the required periods, you will not receive any Restricted Stock, as the case may be, and you will not receive any other consideration for the Eligible Options tendered by you and cancelled by us.

        If you have any questions about your rights in connection with the grant of Restricted Stock, please call Lisa Sutter, Allegiance Telecom, Inc., 9201 North Central Expressway, Dallas, Texas 75231 (telephone: (469) 259-2848, facsimile: (469) 259-9130).

	Sincerely,
	Royce J. Holland Chairman of the Board and Chief Executive Officer
Attachment

ATTACHMENT A

ELIGIBLE OPTIONS ACCEPTED FOR EXCHANGE AND CANCELLED

OPTION GRANT DATE	NO. OF OPTIONS
TOTAL
NUMBER OF SHARES OF RESTRICTED STOCK TO BE ISSUED

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ATTACHMENT A ELIGIBLE OPTIONS ACCEPTED FOR EXCHANGE AND CANCELLED

EX-99.(A)(5)

Exhibit (a)(5)

[Dated at least six (6) months prior to a Vesting Date;
for the first Vesting Date of September 30, 2002, dated any time prior to June 30, 2002]

Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, TX 75231
Attn: Lisa Sutter, Stock Option Department
Fax: 469/259-9130

Pursuant to section 2(e) of that certain Restricted Stock Agreement dated as of            , 2002, I hereby elect to defer the distribution of            shares of Vested Restricted Shares (the "Deferral Shares") which may vest on                        , until (any such date to which the shares are deferred, the "Deferral Date") [select option and fill in blanks]:

o        the earlier of (i) [date] and (ii) such time as the trading price of the Allegiance Telecom, Inc. common stock on Nasdaq equals $            [such stock price must be at least 20% higher than the closing price prior to the date of this deferral election]; or

o        [date].

I understand that if I elect to defer distribution of stock certificates, no stock certificates representing the Deferral Shares will be delivered to me until the Deferral Date. I understand that my deferral is irrevocable and that I may make a deferral election once with respect to a particular vesting date. However, I also understand that the Restricted Stock Agreement referred to above has provisions that may "accelerate" the delivery of stock certificates in limited circumstances, notwithstanding my election to defer.

This originally signed letter will be forwarded to Lisa Sutter.

Sincerely,

[Printed name and signature of employee]

EX-99.(D)(6)

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Exhibit (d)(6)

ALLEGIANCE TELECOM, INC. FORM OF RESTRICTED STOCK AGREEMENT PURSUANT
TO THE 1998 STOCK INCENTIVE PLAN, AS AMENDED

        This Restricted Stock Agreement (this "Agreement") is made and entered into as of the date of award indicated below (the "Award Date") by and between Allegiance Telecom, Inc., a Delaware corporation ("we" or the "Company"), and the person named below as participant ("you" or the "Participant"). All capitalized terms used in this Agreement shall have the meaning assigned to them in Paragraph 4 of this Agreement.

        WHEREAS, Participant is an employee of the Company; and

        WHEREAS, pursuant to that certain offer to exchange options for restricted stock (the "Offer"), the Board of Directors of the Company (the "Board") and/or the committee of the Board administering the Company's 1998 Stock Incentive Plan (as this plan may be amended from time to time according to its terms, the "Plan") has approved the award to Participant of shares of the common stock, $.01 par value per share, of the Company (the "Common Stock"), on the terms and conditions set forth herein;

        NOW, THEREFORE, in consideration of the mutual promises made herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

        1.    Award Certain Terms and Conditions.

                (a)    Number of Shares Awarded—Purchase Price.    The Company hereby awards to you, and you hereby accepts, as of the Award Date, in consideration of the cancellation of options to purchase Common Stock pursuant to the Offer and that certain Letter of Transmittal from you, the number of shares of Common Stock indicated below (the "Restricted Shares"). Concurrently with the delivery of this Agreement, you shall deliver a duly executed blank Assignment Separate from Certificate (in the form attached as Exhibit I) with respect to the Restricted Shares.

        Participant:

        Award Date:

        Number of Restricted Shares Awarded:

                (b)    You are Bound by the Plan.    A copy of the Plan is attached to this Agreement. When you sign this Agreement, you will be deemed to have completely and carefully reviewed this Agreement and the Plan and we therefore advise you to do so before you sign. When you sign this Agreement, you agree to be bound by all of the terms of the Plan and this Agreement with respect to the Restricted Shares.

                (c)    You are Bound by all of the Company's Policies.    As consideration for the award of Restricted Shares hereunder, you agree that you have signed and that you will continue to be bound by (i) all Company policies, including but not limited to, the Company's Anti-Slamming and Anti-Cramming policy, as such policies may be updated from time to time and (ii) the Company's Agreement to Protect Intellectual Property. The Anti-Slamming and Anti-Cramming policy and the Agreement to Protect Intellectual Property is specifically incorporated herein by reference, as if fully stated in this Agreement.

                (d)    Retention of Company's Rights.    When you sign this Agreement, you will also be deemed to agree that nothing in this Agreement or in the fact that we have awarded you the Restricted Shares (i) entitles you to remain employed by the Company for any period of time or to continue to receive your present (or any other) rate of compensation, (ii) affect our right to terminate your employment at any time and for any reason, (iii) give you the right to be selected at any time for future awards of

Restricted Shares or option grants, or (iv) provide for any adjustment to the number of Restricted Shares upon the occurrence of any events except as described in Paragraph 3 below.

                (e)    Binding Agreement; Noncontravention.    You represent and warrant to the Company that this Agreement constitutes the legal, valid and binding obligation of you, enforceable in accordance with its terms, and your execution, delivery and performance of this Agreement does not and shall not conflict with, violate or cause a breach of any agreement, contract or instrument to which you are a party or any judgment, order or decree to which you are subject.

        2.    Vesting of Restricted Shares.

                (a)    Vesting Schedule.    You shall acquire a vested interest in the Restricted Shares as set forth in the following table:

Vesting Date	Cumulative percentage of Restricted Shares Vested on Such Vesting Date
Award Date	0%
September 30, 2002	34.00%
December 31, 2002	42.25%
March 31, 2003	50.50%
June 30, 2003	58.75%
September 30, 2003	67.00%
December 31, 2003	75.25%
March 31, 2004	83.50%
June 30, 2004	91.75%
September 30, 2004	100%

Notwithstanding the foregoing sentence, and except as otherwise provided herein, the above described vesting shall cease and no Unvested Restricted Shares (as defined below) shall vest after the date on which your employment with the Company terminates for any reason (the "Termination Date"). Restricted Shares which have become vested pursuant to the terms of this Agreement are referred to herein as "Vested Restricted Shares," and all other Restricted Shares are referred to herein as "Unvested Restricted Shares."

                (b)For SVPs, EVP and Board members: Acceleration of Vesting upon a Change in Control.    Upon the consummation of a Change in Control, if you are still employed by the Company immediately prior to such consummation, all Unvested Restricted Shares shall become Vested Restricted Shares.

                        For VPs: Acceleration of Vesting upon Discharge after a Change in Control. If there is a Change in Control and your employment is terminated by the Company (including its successors) (other than a termination for Cause) upon such Change in Control or at any time during the 2-year period after such Change in Control occurs, all of your Unvested Restricted Shares will become Vested Restricted Shares on the Termination Date. For purposes of this paragraph (b) "terminated by the Company" means either you have been fired or otherwise terminated by the Company or you have elected to resign within 90 days after any of the following:

(i)

a material reduction in your total compensation (which will include salary, bonus, commission structure or stock options and other equity-based compensation) without your written consent (it being understood that a change in the form or measure of compensation such as a change from salary-based to commission-based compensation, or a rearrangement of your compensation package to include a different combination of salary, bonus, commission, options, and/or incentive equity, will not by itself constitute such a material reduction),

(ii)

a relocation of your place of employment to a site at least 100 miles away from your employment site immediately before the Change in Control without your written consent, or



(iii)

a material reduction in your job authority and responsibilities without your written consent.

                (c)    Acceleration upon Death or Disability.    All Unvested Restricted Shares shall become Vested Restricted Shares upon the Termination Date if your employment with the Company terminates because of your death or permanent physical disability (as determined by the Committee in its sole discretion).

                (d)    Custody.    The Company (or its representatives) shall have the right to hold the Unvested Restricted Shares in custody until those shares have vested in accordance with the Vesting Schedule and until such time as you have paid the Company the federal and state income and employment withholding taxes to which you become subject as a result of the vesting of your Restricted Shares, by cash payment or other arrangement agreed upon between you and us. If you decide to make an election under Section 83(b) of the Internal Revenue Code, you must provide for payment of federal and state employment and withholding taxes at this time.

                (e)    Deferral of Receipt of Shares.    At any time prior to the date which is at least six (6) months prior to any Vesting Date (and with respect to the first Vesting Date of September 30, 2002, at any time prior to June 30, 2002), you may deliver written notice to the Company (in the form attached as Exhibit III or such other form as approved by the Committee) setting forth your election to defer the distribution of all or any portion of the Restricted Stock that may vest on such Vesting Date (if any); in such event, no certificates representing shares of Common Stock will be delivered to you until the date of the event specified in such written notice. Your decision to defer the distribution of stock certificates is irrevocable. Notwithstanding a deferral of the distribution of the Common Stock hereunder, all Common Stock that is vested Restricted Stock will be distributed promptly after a public announcement of a Change in Control or after termination of your employment for any reason. Until shares of Common Stock that is vested Restricted Stock are distributed to you, you will not have any voting rights or rights to cash dividends with respect to such shares.

                (f)    Cancellation of Shares.    If requested by the Company, you or the holder of Unvested Restricted Shares forfeited pursuant to Paragraph 2(a) shall deliver to the Company any certificates therefor; provided, however, that if Participant forfeits shares as provided in Paragraph 2(a), then from and after such time, you or the holder of such shares shall no longer have any rights as a holder of such shares and the Company shall be deemed the owner and holder of such shares, whether or not the certificates therefor have been delivered to Company as required by this Agreement.

                (g)    Withholding of Taxes.    We will be entitled, if necessary or desirable, to withhold from you from any amounts due and payable by us to you, the amount of any withholding or other tax due with respect to the issuance, vesting or distribution of the Restricted Shares, and we may defer the issuance or distribution of these shares unless you agree to indemnify us of this withholding obligation to our satisfaction. In order to satisfy all withholding and other taxes due hereunder, you agree to the following:

(i)

As a condition of receiving any Vested Restricted Shares, you authorize the Company to sell, on each Vesting Date (or shortly thereafter), the number of Vested Restricted Shares that the Company deems necessary to satisfy the applicable withholding taxes;



(ii)

you agree that the proceeds received from the sale of Vested Restricted Shares pursuant to this Paragraph 2(g) will be used to satisfy the withholding taxes and, accordingly, you hereby authorize the Company's brokers or other agents to pay such proceeds to the Company for such purpose. You understand that to the extent that the proceeds obtained by such sale exceeds the amount necessary to satisfy the withholding or other taxes, such excess proceeds shall be distributed to you; and

(iii)

you acknowledge and agree that, in the event that there is not a market in the Common Stock, the Company will have the right to make other arrangements to satisfy the withholding or other taxes due hereunder.

        3.    Restrictions on Transfer of Restricted Shares.

                (a)    Retention of Restricted Shares.    You cannot sell, transfer, assign, pledge, hypothecate, or otherwise dispose of (whether with or without consideration and whether voluntarily or involuntarily or by operation of law) any interest in any Restricted Shares (a "Transfer" of Restricted Shares), except (i) to your "family members" as defined in and in accordance with the General Instructions to Form S-8 (in which case the restrictions set forth in the Plan and in this Agreement will continue to apply to such Restricted Shares after such Transfer and such permitted transferees of such Restricted Shares will have agreed in writing to be bound by the provisions of this Agreement with respect to such Restricted Shares) or (ii) in exchange for other Restricted Shares as described below (each such transfer a "Permitted Transfer").

                (b)    Holdback Agreement.    You will not effect any public sale or distribution of any equity securities of the Company, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and the 90-day period commencing on the effective date of any underwritten registration of the Company's securities, unless the Company otherwise agrees.

                (c)    Transfers in Violation of Agreement.    Any Transfer or attempted Transfer of any Restricted Shares in violation of any provision of this Agreement will be void, and the Company will not record any such purported Transfer on its books or treat any purported transferee of such Restricted Shares as the owner thereof for any purpose.

                (d)    Adjustments.    In the event of any merger, consolidation, reorganization, recapitalization, stock dividend, stock split, combination of shares, exchange of shares, change in corporate structure, or other change in the shares of Common Stock, the Committee may in its discretion make such adjustments in the number and type of Restricted Shares specified herein as it determines to be appropriate and equitable (and such adjustment will in no event be considered an amendment or modification of the Plan or of this Agreement). The issuance by the Company of shares of stock of any class, or options or securities exercisable or convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale, or upon the exercise of rights or warrants to subscribe therefor, or upon exercise or conversion of other securities, will not affect, and no adjustment by reason thereof will be made with respect to, the Restricted Shares.

        Without limitation of the foregoing, in the event of any merger, consolidation or other reorganization in which the Company is not the surviving or continuing corporation or in which a Change in Control is to occur, all of the Company's obligations regarding Restricted Shares granted hereunder and that are outstanding on the date of such event will, on such terms as may be approved by the Committee prior to such event, be assumed by the surviving or continuing corporation or canceled in exchange for property (including cash).

        4.    Definitions.

        "Change in Control" means the occurrence of one of the following events:

(i)

if any "person" or "group" as those terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act, other than an Exempt Person, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company's then outstanding securities; or



(ii)

during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company (the "Board") and any new directors whose election by the Board or nomination for election by the Company's stockholders was approved by at least two-thirds of the directors then still in office who

either were directors at the beginning of the period or whose election was previously so approved, cease for any reason to constitute a majority thereof; or

(iii)

the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (A) which would result in all or a portion of the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (B) by which the corporate existence of the Company is not affected and following which the Company's chief executive officer and directors retain their positions with the Company (and constitute at least a majority of the Board); or



(iv)

the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets, other than a sale to an Exempt Person.

        "Code" means the Internal Revenue Code of 1986, as amended, and any successor statute.

        "Committee" means the Compensation Committee of the Board. The membership of the Committee will be constituted so as to comply at all times with the applicable requirements of Rule 16b-3 under the Securities Exchange Act and Section 162(m) of the Code.

        "Common Stock" means the Common Stock, par value $.01 per share, of the Company, and any other shares into which such stock may be changed by reason of a recapitalization, reorganization, merger, consolidation or any other change in the corporate structure or capital stock of the Company.

        "Company" means Allegiance Telecom, Inc., a Delaware corporation, and (except to the extent the context requires otherwise) any "subsidiary corporation" of Allegiance Telecom, Inc., as such term is defined in Section 424(f) of the Code.

        "Exempt Person" means any employee benefit plan of the Company or a trustee or other administrator or fiduciary holding securities under an employee benefit plan of the Company.

        "Fair Market Value" of a share of Common Stock of the Company means, as of the date in question, the officially-quoted closing selling price of the stock (or if no selling price is quoted, the bid price) on the principal securities exchange on which the Common Stock is then listed for trading (including for this purpose the Nasdaq National Market) (the "Market") for the date in question or, if the Common Stock is not then listed or quoted in the Market, the Fair Market Value will be the fair value of the Common Stock determined in good faith by the Board; provided, however, that when Restricted Shares upon vesting are immediately sold in the open market, the net sale price received may be used to determine the Fair Market Value of any shares used to pay the exercise price or withholding taxes and to compute the withholding taxes.

        "Owner" shall mean Participant and all subsequent holders of the Restricted Shares who derive their chain of ownership through a Permitted Transfer from participant.

        "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof.

        "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended, or any similar federal law then in force.

        5.    Miscellaneous Provisions.

                (a)    Mandatory Arbitration.    Subject to Paragraph (g) below, all claims, disputes, controversies or other matters in question arising under or relating to this Agreement (collectively, "Disputes") will, if

unable to be resolved within 10 days of preliminary negotiation between you and the Company, be resolved through binding arbitration in accordance with the commercial arbitration rules and practices of the American Arbitration Association. Such arbitration will be in Dallas, Texas, or such other place as is mutually agreeable to you and the Company. The cost of each arbitration proceeding, including without limitation the arbitrator's compensation and expenses, hearing room charges, court reporter transcript charges, reasonable attorney fees and expenses, etc., will be allocated among the parties based upon the percentage which the portion of the contested amount in such Dispute not awarded to each party bears to the amount actually contested by such party. The parties hereto agree that, subject to Paragraph (g) below, mandatory arbitration under this Paragraph 5(a) will be the sole and exclusive remedy for resolving and remedying all Disputes hereunder.

                (b)    Severability.    Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

                (c)    Complete Agreement.    This Agreement and the Plan embody the complete agreement and understanding among the parties and supersede and preempt any prior under-standings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way.

                (d)    Counterparts.    This Agreement may be executed in separate counterparts, none of which need contain the signature of more than one party hereto but each of which will be deemed to be an original and all of which taken together will constitute one and the same agreement.

                (e)    Successors and Assigns.    Except as otherwise provided herein, this Agreement will bind the parties hereto and their respective successors and assigns and will inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns whether so expressed or not.

                (f)    Choice of Law.    All questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits hereto will be governed by the internal law, and not the law of conflicts, of the State of Delaware.

                (g)    Equitable Remedies.    You and we agree and acknowledge that money damages would not be an adequate remedy if you or any other holder of Restricted Shares were to breach any of the provisions of Paragraph 3 hereof, and that the Company (or any third-party beneficiary hereof) may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of Paragraph 3 of this Agreement.

                (h)    Amendment, Modification, or Waiver.    The provisions of this Agreement may be amended, modified, or waived only with the prior written consent of the Company and either you or a majority (based on the number of Restricted Shares held) of the Participants negatively affected by a similar amendment made to their Restricted Stock Agreement.

                (i)    Business Days.    If any time period for giving notice or taking action hereunder expires on a day which is a Saturday, Sunday or legal holiday in the State of Illinois, the time period will be automatically extended to the business day immediately following such Saturday, Sunday or holiday.

                (j)    Notices.    All notices, demands or other communications to be given or delivered under or by reason of the provisions of this Agreement will be in writing and will be deemed to have been given when (a) delivered personally to the recipient, (b) telecopied to the recipient (with hard copy sent to the recipient by reputable overnight courier service (charges prepaid) that same day) if telecopied before 5:00 p.m. Chicago, Illinois time on a business day, and otherwise on the next business day, or (c) one business day after being sent to the recipient by reputable overnight courier service (charges prepaid). Such notices, demands and other communications will be sent to the following Persons at the following addresses:

To the Company:

Allegiance Telecom, Inc.
Attn: Lisa Sutter
9201 North Central Expressway
Dallas, TX 75231
Telephone: (469) 259-2848
Telecopy: (469) 259-9130

To You: at the address listed in the Company's records.

or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party. Notwithstanding anything herein to the contrary, the Company may provide you with written notice by sending you an email or posting information applicable to this Agreement and/or Plan on the Company's Intranet site.

                (k)    Descriptive Headings; Interpretation.    The descriptive headings of this Agreement are inserted for convenience only and do not constitute a substantive part of this Agreement. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular forms of nouns, pronouns, and verbs shall include the plural and vice versa. Reference to any agreement, document, or instrument means such agreement, document, or instrument as amended or otherwise modified from time to time in accordance with the terms thereof, and if applicable hereof. The use of the words "include" or "including" in this Agreement shall be by way of example rather than by limitation. The use of the words "or," "either" or "any" shall not be exclusive.

                (l)    Delivery by Facsimile.    This Agreement and any amendments hereto to the extent signed and delivered by means of a facsimile machine, will be treated in all manner and respects as an original agreement and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party, each other party hereto will reexecute original forms thereof and deliver them to all other parties. No party hereto will raise the use of a facsimile machine to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine as a defense to the formation or enforceability of a contract and each such party forever waives any such defense.

                (m)    Excise Tax.    If either (a) it is determined by the Internal Revenue Service or any other applicable governmental agency that any payment or distribution of any type to or for your benefit pursuant to this Agreement by the Company, any Person who acquires ownership or effective control of the Company, or ownership of a substantial portion of the assets of the Company (within the meaning of section 280G of the Code and the regulations thereunder) or any affiliate of such Person (the "Total Payments") would be subject to the excise tax imposed by section 4999 of the Code or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest and penalties, are collectively referred to as the "Excise Tax"), or (b) the Company or any such Person withholds any portion of such payment or distribution or otherwise seeks to reduce your benefits under this Agreement on account of the Excise Tax, then the Company and such Person shall be jointly and severally obligated to pay you an additional payment (a "Gross-Up Payment") in an amount such that, after payment by you of all federal, state and local taxes (including any interest or penalties imposed with respect to such taxes), including any Excise Tax, imposed upon the Gross-Up Payment, you retain

an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. The Company and such Person shall be obligated to pay all of your costs (including reasonable attorney fees and expenses) incurred in enforcing their obligations under this Paragraph 5(m).

                (n)    Taxable Income and Section 83(b) Election.    Under Section 83 of the Internal Revenue Code of 1986, as amended (the "Code"), the excess of the Fair Market Value of the Restricted Shares on the date any forfeiture restrictions applicable to such shares lapse over the purchase price paid for those shares will be reportable as ordinary income on the lapse date (absent a deferral election pursuant to Paragraph 2(e) above). For this purpose, the term "forfeiture restrictions" includes the restrictions set forth in Paragraphs 2 and 3 above. Participant may elect under Code Section 83(b) to be taxed at the time the Restricted Shares are awarded pursuant to this paragraph, rather than when and as such Restricted Shares vest and cease to be subject to such forfeiture restrictions. Such election must be filed with the Internal Revenue Service within thirty (30) days after the date of this Agreement. The form for making this election is attached as Exhibit II. Participant understands that failure to make this filing within the applicable thirty (30) day period will result in the recognition of ordinary income as the forfeiture restrictions lapse. Participant acknowledges that it is Participant's sole responsibility, and not the Company's, to file a timely election under Code Section 83(b), even if Participant requests the Company or its representatives to make this filing on his or her behalf.

        IN WITNESS WHEREOF, the parties hereto have executed this Restricted Stock Agreement on the date first written above.

ALLEGIANCE TELECOM, INC.

By:

Name:  Royce J. Holland
Title:    Chief Executive Officer

PARTICIPANT

Name:

EXHIBIT I

ASSIGNMENT SEPARATE FROM CERTIFICATE

        FOR VALUE RECEIVED                                    hereby sell(s), assign(s) and transfer(s) unto Allegiance Telecom, Inc. (the "Company"),                         (      ) shares of the Common Stock of the Company standing in his or her name on the books of the Company represented by Certificate No.                        herewith and do(es) hereby irrevocably constitute and appoint                         Attorney to transfer the said stock on the books of the Company with full power of substitution in the premises.

        Dated:                         

        Signature                                                      

        INSTRUCTION: Please do not fill in any blanks other than the signature line. Please sign exactly as you would like your name to appear on the issued stock certificate. The purpose of this assignment is to enable the company to re-acquire the Restricted Shares upon forfeiture without requiring additional signatures on the part of the Participant.

EXHIBIT II

ELECTION TO INCLUDE RESTRICTED STOCK IN GROSS INCOME
PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE

        On [                        ,      ], the undersigned acquired shares of restricted stock (the "Restricted Stock") of Allegiance Telecom, Inc., a Delaware corporation.

        Therefore, pursuant to Code §83(b) and Treasury Regulation §1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Restricted Stock, to report as taxable income for the calendar year 200    the excess (if any) of the value of the Restricted Stock on [                                      ] over the purchase price thereof.

        The following information is supplied in accordance with Treasury Regulation §1.83-2(e):

        1.    The name, address and social security number of the undersigned:

[Name][Address][SSN]

        2.    A description of the property with respect to which the election is being made:            shares of common stock of Allegiance Telecom, Inc., a Delaware corporation.

        3.    The date on which the Restricted Stock was acquired: [                                      ] The taxable year for which such election is made: 200    .

        4.    The restrictions to which the property is subject: 34% of the Restricted Stock will vest on September 30, 2002 and the remaining amount will vest in eight equal quarterly installments thereafter.

        5.    The fair market value on [                        ,            ] of the property with respect to which the election is being made, determined without regard to any lapse restrictions and in accordance with Revenue Procedure 23-27: [                        ]

        6.    The amount paid and to be paid for such property: $[            ].

* * * * *

        A copy of this election is being furnished to Allegiance Telecom, Inc. pursuant to Treasury Regulation § 1.83-2(e)(7). A copy of this election will be submitted with the 200      federal income tax return of the undersigned pursuant to Treasury Regulation § 1.83-2(c).

        Dated: [                                      ]

EXHIBIT III

[Dated at least six (6) months prior to a Vesting Date;
for the first Vesting Date of September 30, 2002, dated any time prior to June 30, 2002]

Allegiance Telecom, Inc.
9201 North Central Expressway
Dallas, TX 75231
Attn: Lisa Sutter, Stock Option Department
Fax: 469/259-9130

Pursuant to section 2(e) of that certain Restricted Stock Agreement dated as of            , 2002, I hereby elect to defer the distribution of            shares of Vested Restricted Shares (the "Deferral Shares") which may vest on                        , until (any such date to which the shares are deferred, the "Deferral Date") [select option and fill in blanks]:

        o    the earlier of (i) [date] and (ii) such time as the trading price of the Allegiance Telecom, Inc. common stock on Nasdaq equals $              [such stock price must be at least 20% higher than the closing price prior to the date of this deferral election]; or

        o    [date].

I understand that if I elect to defer distribution of stock certificates, no stock certificates representing the Deferral Shares will be delivered to me until the Deferral Date. I understand that my deferral is irrevocable and that I may make a deferral election once with respect to a particular vesting date. However, I also understand that the Restricted Stock Agreement referred to above has provisions that may "accelerate" the delivery of stock certificates in limited circumstances, notwithstanding my election to defer.

This originally signed letter will be forwarded to Lisa Sutter.

Sincerely,

[Printed name and signature of employee]

QuickLinks

EXHIBIT I ASSIGNMENT SEPARATE FROM CERTIFICATE
EXHIBIT II ELECTION TO INCLUDE RESTRICTED STOCK IN GROSS INCOME PURSUANT TO SECTION 83(b) OF THE INTERNAL REVENUE CODE
EXHIBIT III [Dated at least six (6) months prior to a Vesting Date; for the first Vesting Date of September 30, 2002, dated any time prior to June 30, 2002]