QuickLinks -- Click here to rapidly navigate through this document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K/A
(Amendment No. 1)

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                             TO                              .

COMMISSION FILE NUMBER: 0-24509

ALLEGIANCE TELECOM, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE (State of Incorporation)	75-2721491 (IRS Employer Identification No.)
9201 NORTH CENTRAL EXPRESSWAY DALLAS, TEXAS (Address of Principal Executive Offices)	75231 (Zip Code)

(214) 261-7100
Registrant's Telephone Number, Including Area Code

Securities Registered Pursuant to Section 12(b) of the Act:
NONE

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that it was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

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

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

        The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant as of June 28, 2002 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $158.6 million. Shares of common stock held by each executive officer and director have been excluded since those persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

        The registrant has 124,778,137 number of shares of common stock outstanding as of March 26, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement for the annual meeting of stockholders for the fiscal year ended December 31, 2002, which will be filed with the SEC by April 30, 2003, are incorporated by reference into Part III of this Form 10-K.

EXPLANATORY NOTE

        Allegiance Telecom, Inc. is amending its Form 10-K to correct certain portions of Item 8 [Consolidated Financial Statements and Supplementary Data] and Item 15 [Exhibits, Financial Statement Schedules and Reports on Form 8-K] of its Form 10-K filed with the Securities and Exchange Commission on March 31, 2003. Specifically, this amendment corrects (1) the number of shares of common stock authorized as set forth in the Allegiance Telecom, Inc. and Subsidiaries Consolidated Balance Sheets as of December 31, 2002 and 2001 and (b) Footnotes 2, 3, 4, 9 and 13 in the Allegiance Telecom, Inc. and Subsidiaries Notes to Consolidated Financial Statements. Allegiance Telecom, Inc. is not restating its consolidated financial statements under this amendment. This amendment amends only the items of the Form 10-K specified and does not otherwise update the disclosures in the Form 10-K as originally filed and does not reflect events occurring after the original filing of the Form 10-K.

1

PART II

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Independent Auditors' Report

The Board of Directors
Allegiance Telecom, Inc.:

        We have audited the consolidated balance sheet of Allegiance Telecom, Inc. and subsidiaries as of December 31, 2002, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedule. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. The 2001 and 2000 consolidated financial statements and financial statement schedule of the Company as listed in the accompanying index were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedule in their report dated February 19, 2002.

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

        In our opinion, the 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allegiance Telecom, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        The accompanying 2002 consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations and is dependant on additional external financing to meet current debt repayment requirements which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        Also, as discussed in Note 4 to the consolidated financial statements, Allegiance Telecom, Inc., in 2002 adopted the provisions of Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."

KPMG LLP

Dallas, Texas
March 3, 2003

F-1

        This is a copy of the audit report previously issued by Arthur Andersen LLP in connection with Allegiance Telecom, Inc.'s 2001 consolidated financial statements previously filed on Form 10-K. This audit report has not been reissued by Arthur Andersen LLP in connection with this filing on Form 10-K.

Report of Independent Public Accountants

To the Board of Directors and Stockholders of Allegiance Telecom, Inc.:

        We have audited the accompanying consolidated balance sheets of Allegiance Telecom, Inc. (a Delaware corporation) and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2001, 2000, and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allegiance Telecom, Inc. and its subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000, and 1999, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Dallas, Texas
February 19, 2002

F-2

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2002 and 2001

(in thousands, except share and per share data)

		2002			2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	253,311		$	374,084
Short-term investments			30,955			25,232
Accounts receivable (net of allowance for doubtful accounts of $14,485 and $29,621, respectively)			153,196			141,684
Prepaid expenses and other current assets			18,916			25,406
	Total current assets		456,378			566,406
PROPERTY AND EQUIPMENT:
Property and equipment			1,516,175			1,366,710
Accumulated depreciation			(592,069	)		(350,460	)
	Property and equipment, net		924,106			1,016,250
DEFERRED DEBT ISSUANCE COSTS (net of accumulated amortization of $15,031 and $11,870, respectively)			15,879			19,039
LONG-TERM INVESTMENTS, RESTRICTED			881			954
GOODWILL (net of accumulated amortization of $83,252 as of December 31, 2001)			—			107,468
OTHER ASSETS, net			43,974			64,726
	Total assets	$	1,441,218		$	1,774,843
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable		$	59,282		$	50,386
Accrued liabilities and other current liabilities			124,444			85,968
Current portion of long-term debt			561,532			3,120
	Total current liabilities		745,258			139,474
LONG-TERM DEBT			639,691			1,013,184
OTHER LONG-TERM LIABILITIES			12,545			14,109
COMMITMENTS AND CONTINGENCIES (see Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 31, 2002 and 2001			—			—
Common stock, $.01 par value, 750,000,000 shares authorized, 125,157,605 and 115,542,354 shares issued and 124,830,110 and 115,214,859 shares outstanding at December 31, 2002 and 2001, respectively			1,251			1,155
Additional paid-in capital			1,808,690			1,801,366
Common stock in treasury, at cost, 327,495 shares at December 31, 2002 and 2001			(45	)		(45	)
Common stock warrants			1,857			1,877
Deferred compensation			(5,149	)		(6,067	)
Accumulated deficit			(1,762,880	)		(1,190,210	)
	Total stockholders' equity		43,724			608,076
	Total liabilities and stockholders' equity	$	1,441,218		$	1,774,843

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

F-3

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2002, 2001 and 2000

(in thousands, except share and per share data)

		2002			2001			2000
REVENUES		$	770,982		$	516,888		$	285,227
OPERATING EXPENSES:
Network			404,444			251,734			150,718
Selling, general and administrative			438,158			377,387			252,368
Depreciation and amortization			282,143			256,685			130,826
Management ownership allocation charge			—			175			6,480
Non-cash deferred compensation			2,726			4,126			10,127
Goodwill impairment charge			114,722			—			—
	Total operating expenses		1,242,193			890,107			550,519
Loss from operations			(471,211	)		(373,219	)		(265,292	)
OTHER INCOME (EXPENSE):
Interest income			6,594			15,665			56,969
Interest expense			(108,053	)		(74,259	)		(69,244	)
	Total other income (expense)		(101,459	)		(58,594	)		(12,275	)
NET LOSS APPLICABLE TO COMMON STOCK		$	(572,670	)	$	(431,813	)	$	(277,567	)
NET LOSS PER SHARE, basic and diluted		$	(4.88	)	$	(3.82	)	$	(2.58	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, basic and diluted			117,349,242			113,115,871			107,773,112

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

F-4

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the years ended December 31, 2002, 2001 and 2000

(in thousands, except share and per share data)

		Preferred Stock			Common Stock							Treasury Stock											Deferred Management Ownership Allocation Charge
		Number of Shares	Amount		Number of Shares		Amount		Additional Paid-In Capital			Number of Shares		Amount			Common Stock Warrants			Deferred Compensation						Accumulated Deficit			Total
Balance, December 31, 1999		—	$	—	97,459,677		$	975	$	940,120		(37,968	)	$	(5	)	$	3,719		$	(13,573	)	$	(6,790	)	$	(480,830	)	$	443,616
	Issue of stock under the Employee Stock Purchase Plan (see Note 13)	—		—	109,727			1		4,408		—			—			—			—			—			—			4,409
	Acquisition of treasury stock	—		—	—			—		—		(289,527	)		(40	)		—			—			—			—			(40	)
	Exercise of employee stock options	—		—	700,820			7		4,763		—			—			—			—			—			—			4,770
	Stock split	—		—	(577	)		—		(52	)	—			—			—			—			—			—			(52	)
	Conversion of common stock warrants	—		—	205,331			2		1,841		—			—			(1,842	)		—			—			—			1
	Secondary offering of common stock	—		—	10,703,109			107		719,568		—			—			—			—			—			—			719,675
	Common stock issued for business acquisitions	—		—	1,214,027			12		44,159		—			—			—			—			—			—			44,171
	Common stock options issued for business acquisitions	—		—	—			—		3,852		—			—			—			(957	)		—			—			2,895
	Deferred compensation	—		—	—			—		11,993		—			—			—			(12,128	)		135			—			—
	Amortization of deferred compensation	—		—	—			—		—		—			—			—			10,127			6,480			—			16,607
	Net loss	—		—	—			—		—		—			—			—			—			—			(277,567	)		(277,567	)
Balance, December 31, 2000		—	$	—	110,392,114		$	1,104	$	1,730,652		(327,495	)	$	(45	)	$	1,877		$	(16,531	)	$	(175	)	$	(758,397	)	$	958,485
	Issue of stock under the Employee Stock Purchase Plan (see Note 13)	—		—	672,337			6		4,910		—			—			—			—			—			—			4,916
	Exercise of employee stock options	—		—	376,151			4		2,197		—			—			—			—			—			—			2,201
	Common stock issued for business acquisitions	—		—	4,101,752			41		69,698		—			—			—			—			—			—			69,739
	Deferred compensation	—		—	—			—		(6,213	)	—			—			—			6,213			—			—			—
	Amortization of deferred compensation	—		—	—			—		—		—			—			—			4,251			175			—			4,426
	Other	—		—	—			—		122		—			—			—			—			—			—			122
	Net loss	—		—	—			—		—		—			—			—			—			—			(431,813	)		(431,813	)
Balance, December 31, 2001		—	$	—	115,542,354		$	1,155	$	1,801,366		(327,495	)	$	(45	)	$	1,877		$	(6,067	)	$	—		$	(1,190,210	)	$	608,076
	Issue of stock under the Employee Stock Purchase Plan (see Note 13)	—		—	2,474,042			25		3,862		—			—			—			—			—			—			3,887
	Issue of restricted stock (see Note 13)	—		—	6,495,120			65		(65	)	—			—			—			—			—			—			—
	Exercise of employee stock options	—		—	85,175			1		22		—			—			—			—			—			—			23
	Conversion of common stock warrants	—		—	2,188			—		20		—			—			(20	)		—			—			—			—
	Common stock issued for business acquisitions	—		—	558,726			5		1,673		—			—			—			—			—			—			1,678
	Deferred compensation	—		—	—			—		1,808		—			—			—			(1,808	)		—			—			—
	Amortization of deferred compensation	—		—	—			—		—		—			—			—			2,726			—			—			2,726
	Other	—		—	—			—		4		—			—			—			—			—			—			4
	Net loss	—		—	—			—		—		—			—			—			—			—			(572,670	)		(572,670	)
Balance, December 31, 2002		—	$	—	125,157,605		$	1,251	$	1,808,690		(327,495	)	$	(45	)	$	1,857		$	(5,149	)	$	—		$	(1,762,880	)	$	43,724

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

F-5

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2002, 2001 and 2000

(in thousands, except share and per share data)

			2002			2001			2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss			$	(572,670	)	$	(431,813	)	$	(277,567	)
Adjustments to reconcile net loss to cash used in operating activities —
	Depreciation and amortization			282,143			256,685			130,826
	Provision for uncollectible accounts receivable			66,224			41,600			25,914
	Accretion of investments			(320	)		(2,806	)		(5,387	)
	Accretion of Series B and 127/8% notes			48,567			43,320			38,645
	Amortization of deferred debt issuance costs			3,161			4,822			10,293
	Amortization of management ownership allocation charge and deferred compensation			2,726			4,301			16,607
	Goodwill impairment charge			114,722			—			—
	Changes in assets and liabilities, net of effects of acquisitions—
		Increase in accounts receivable		(36,942	)		(80,122	)		(88,391	)
		(Increase) decrease in prepaid expenses and other current assets		13,253			(18,836	)		(2,283	)
		Increase in other assets		(14,522	)		(10,818	)		(690	)
		Increase (decrease) in accounts payable		3,500			(35,094	)		31,429
		Increase in accrued liabilities and other current liabilities		21,870			13,125			18,052
	Net cash used in operating activities			(68,288	)		(215,636	)		(102,552	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment				(129,896	)		(364,396	)		(430,817	)
Capitalized interest				(6,138	)		(16,858	)		(14,366	)
Purchases of subsidiaries, net of cash acquired				(28,478	)		(28,887	)		(63,808	)
Purchases of investments				(82,532	)		(283,926	)		(329,884	)
Proceeds from sale of investments				77,202			536,183			122,167
	Net cash used in investing activities			(169,842	)		(157,884	)		(716,708	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under the credit facilities				135,300			350,000			—
Payment under credit facilities				(15,000	)		—			—
Proceeds from issuance of common stock, net				3,910			7,117			728,855
Deferred debt issuance costs				—			(151	)		(12,334	)
Purchase of treasury stock				—			—			(40	)
Payments on capital lease obligations				(6,853	)		(5,634	)		(3,300	)
Other				—			169			(52	)
	Net cash provided by financing activities			117,357			351,501			713,129
DECREASE IN CASH AND CASH EQUIVALENTS				(120,773	)		(22,019	)		(106,131	)
CASH AND CASH EQUIVALENTS, beginning of period				374,084			396,103			502,234
CASH AND CASH EQUIVALENTS, end of period			$	253,311		$	374,084		$	396,103
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest				59,099			42,250			34,605
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Assets acquired under capital lease obligations				25,032			47,516			14,511
Fair value of assets acquired in business acquisitions				51,319			84,052			38,056
Liabilities assumed in business acquisitions				25,221			28,351			19,074
Common stock issued for business acquisitions (558,726, 4,101,752 and 1,214,027 shares, respectively)				1,678			69,739			44,171
Common stock options issued for business acquisitions (182,324 shares in 2000)				—			—			2,895

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

F-6

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000

(dollars in thousands, except share and per share data)

1.     General:

        Allegiance Telecom, Inc. is a facilities-based national local exchange carrier that provides integrated telecommunications services to business, government and other institutional users in major metropolitan areas across the United States of America. Allegiance Telecom, Inc. was incorporated on April 22, 1997, as a Delaware corporation, and it and its subsidiaries are generally referred to herein as the "Company."

        The Company offers services in 36 of the largest metropolitan areas in the United States of America as follows: Atlanta, Austin, Baltimore, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Fort Lauderdale, Fort Worth, Houston, Long Island, Los Angeles, Miami, Minneapolis/St. Paul, New York City, Northern New Jersey, Oakland, Ontario/Riverside, Orange County, Philadelphia, Phoenix, Pittsburgh, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco, San Jose, Seattle, Tampa, Washington, D.C., West Palm Beach/Boca Raton and White Plains.

2.     Going Concern:

        The consolidated financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business. However, as a result of recurring operating losses and debt reduction requirements as stipulated by an interim amendment to the Company's senior secured credit facilities, such realization of assets and satisfaction of liabilities are subject to uncertainty.

        The interim amendment requires the Company to reduce total debt to no more than $645,000 by April 30, 2003 (see Note 7). The Company has been evaluating possible recapitalization transactions and pursuing numerous financial and negotiated strategic alternatives to reduce total indebtedness.

        If the Company cannot reduce debt to the required levels by April 30, 2003, it will be in default under the senior secured credit facilities. If any such default occurs, the Company's senior lenders would have the right to request immediate repayment of all senior debt, in which case, the Company's noteholders would then have the right to request immediate repayment of the outstanding notes. If any of these events occur, it would have a material adverse effect and it may result in a foreclosure proceeding or a voluntary or involuntary bankruptcy proceeding. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        Under the terms of the Company's senior secured credit facilities, the Company is required to deliver an unqualified audit report to its senior lenders. As such, if the Company does not receive a waiver from its senior lenders or if it is unable to cure this breach within 30 days, there will be an event of default under the senior secured credit facilities.

3.     Summary of Significant Accounting Policies:

        Consolidation.    The accompanying financial statements include the accounts of Allegiance Telecom, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

F-7

        Cash and Cash Equivalents.    The Company includes as cash and cash equivalents, cash, marketable securities and commercial paper with maturities of three months or less at the date of purchase.

        Short-Term Investments.    Short-term investments consist primarily of commercial paper with original maturities between three and 12 months at the date of purchase. Such short-term investments are carried at their accreted value, which approximates fair value. Short-term investments are held to maturity and unrealized gains and losses are not significant at December 31, 2002.

        Prepaid Expenses and Other Current Assets.    Prepaid expenses and other current assets consist of prepaid services, prepaid rent, prepaid insurance and refundable deposits. Prepayments are expensed on a straight-line basis over the corresponding life of the underlying agreements.

        Financial Instruments.    The carrying value of the Company's cash, short-term investments, accounts receivable and accounts payable approximates their fair value. At December 31, 2002, the Company's 11³/4% senior discount notes due 2008, 12⁷/8% senior discount notes due 2008 and senior secured credit facilities were all trading at values below their carrying value. The carrying value of these debt instruments in the Company's consolidated financial statements is significantly higher than their fair value.

        Property and Equipment.    Property and equipment includes network equipment, land, leasehold improvements, software, office equipment, furniture and fixtures and construction-in-progress. These assets are stated at cost, which includes direct costs and capitalized interest and are depreciated over their respective useful lives using the straight-line method. During the years ended December 31, 2002, 2001 and 2000, $6,138, $16,858 and $14,366, respectively, of interest expense was capitalized related to network construction-in-progress. Repair and maintenance costs are expensed as incurred.

        Property and equipment at December 31, 2002 and 2001, consisted of the following:

		2002			2001			Useful Lives (in years)
Network equipment		$	1,148,583		$	869,011		2-20
Land			9,365			9,164		—
Leasehold improvements			145,713			134,618		7-10
Software			125,229			114,553		3
Office equipment and other			46,991			36,824		2-5
Furniture and fixtures			21,334			17,715		7
Property and equipment, in service			1,497,215			1,181,885
Less: Accumulated depreciation			(592,069	)		(350,460	)
	Property and equipment, in service, net		905,146			831,425
Construction-in-progress			18,960			184,825
	Property and equipment, net	$	924,106		$	1,016,250

        Impairment of Long-Lived Assets.    The Company reviews the carrying values of property and equipment and intangible assets for impairment whenever current events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present, the Company analyzes the projected undiscounted cash flows associated with property and

F-8

equipment and intangible assets to determine the fair value of these assets. If the assets are determined to be impaired, a loss is recorded in the amount that the carrying value of the assets exceeds their fair value.

        The Company performed an analysis comparing estimated future cash flows to the carrying value of its property and equipment and intangible assets at December 31, 2002. This analysis did not indicate that an impairment exists as of December 31, 2002.

        Deferred Debt Issuance Costs.    Deferred debt issuance costs include costs incurred by the Company in raising debt proceeds. These costs are amortized to interest expense over the life of the related debt.

        Goodwill and Other Intangible Assets.    Goodwill represents the excess of purchase price over the fair value of net assets of acquired businesses. Goodwill related to businesses acquired prior to June 30, 2001 was amortized on a straight-line basis over an estimated useful life of three years through December 31, 2001. Subsequent to that date, goodwill has not been amortized, but is assessed for impairment at least annually.

        The impairment testing is performed at a reporting unit level. The goodwill impairment testing has two steps. The first step identifies potential impairment by comparing the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the second step is not necessary. If the carrying value of the reporting unit exceeds its fair value, the second step is performed to calculate the possible impairment loss by comparing the implied fair value of goodwill to the carrying value. If the implied fair value of goodwill is less than the carrying value, a write-down is recorded. The fair value of each reporting unit is determined based on combinations of both the income and market valuation approaches.

        Intangible assets are included in other assets and consist primarily of acquired customer lists with definite useful lives. These intangible assets are amortized on a straight-line basis over their estimated useful lives, generally ranging from one to three years.

        Restricted Investments.    Long-term restricted investments include certificates of deposit held as collateral for letters of credit issued on behalf of the Company.

        Revenue Recognition.    Revenues for voice, data and other services to end users are recognized in the month in which the service is provided. Amounts invoiced and collected in advance of services provided are recorded as deferred revenue and are recognized as revenue over the period that the services are provided (see Note 6 for amounts of deferred revenue). Revenues for carrier interconnection, access and reciprocal compensation are recognized in the month in which the service is provided, except when realization of these revenues is not reasonably assured. The ability of competitive local exchange carriers (such as the Company) to earn local reciprocal compensation revenues and access revenues is the subject of numerous regulatory and legal challenges. Until these issues are ultimately resolved, the Company's policy is to recognize this revenue only when realization is reasonably assured.

        For customer premise equipment contracts, revenue is recognized using the percentage-of-completion method, based on the percentage which incurred contract costs to date bear to total estimated contract costs after giving effect to the most recent estimates of total cost. Risks relating to delivery, usage, productivity and other factors are considered in the estimation process. The

F-9

effect of changes to total estimated contract revenue and costs is recognized in the period such changes are determined. Provisions for estimated losses on individual contracts are made in the period in which the loss first becomes apparent.

        In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101), which provides additional guidance on revenue recognition as well as criteria for when revenue is realized and earned and related costs are incurred. The Company adopted SAB 101 on October 1, 2000. The adoption of SAB 101 did not have a material effect on the Company's results of operations.

        Network Expenses.    Network expense is recognized in the month in which the service is utilized. Accruals for unbilled leased network facilities, network access charges, and equipment colocation charges are based on circuit counts, estimated usage, and active colocation sites. Additionally, accrued network expense includes charges invoiced by carriers which are probable network expenses but have not yet been paid due to rate or volume disputes with other carriers. Network expenses do not include an allocation of depreciation or amortization expense.

        Stock Splits.    On February 28, 2000, the Company effected a three-for-two stock split in the form of a 50% stock dividend. All references to the number of common shares and per share amounts have been restated to reflect the stock split for all periods presented.

        Stock Based Compensation.    At December 31, 2002, the Company had three stock-based compensation plans, the 1997 Nonqualified Stock Option Plan, the 1998 Stock Incentive Plan and the Employee Stock Discount Purchase Plan (see Note 13). The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and the related interpretations in accounting for the Company's plans. Fixed stock option awards with pro-rata vesting are recognized as expense using the straight-line method over the vesting period.

        Had compensation cost for the Company's plans been determined based on the fair value of the stock options as of the grant dates for awards under the plans consistent with the method prescribed in Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the Company's net loss applicable to common stock and net loss per share would have increased to the pro forma amounts indicated below. The Company utilized the following assumptions in calculating the estimated fair value of each stock option on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants:

	2002		2001		2000
Dividend yield	—	%	—	%	—	%
Expected volatility	123.0	%	115.7	%	109.9	%
Expected life	3.0		3.7		4.4
Risk-free interest rate	3.32	%	4.27	%	5.83	%

F-10

	2002			2001			2000
Reported net loss	$	(572,670	)	$	(431,813	)	$	(277,567	)
Add: stock-based employee compensation expense included in reported net income		2,726			4,126			10,127
Deduct: stock-based employee compensation expense determined under fair value method for all awards		(61,880	)		(212,384	)		(129,939	)
Pro forma net loss	$	(631,824	)	$	(640,071	)	$	(397,379	)
Net loss per share, basic and diluted—as reported	$	(4.88	)	$	(3.82	)	$	(2.58	)
Net loss per share, basic and diluted—pro forma	$	(5.38	)	$	(5.66	)	$	(3.69	)

        Treasury Stock.    Treasury stock transactions are accounted for using the cost method.

        Loss Per Share.    The Company calculates net loss per share under the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share."

        The securities listed below were not included in the computation of diluted loss per share, as the effect from the conversion would be antidilutive.

	2002	2001	2000
Common Stock Warrants	205,785	207,973	207,973
1997 Nonqualified Stock Option Plan	475,224	531,196	791,122
1998 Stock Incentive Plan	15,607,460	24,666,776	20,392,248
Employee Stock Discount Purchase Plan	56,839	432,250	82,270

        Income Taxes.    Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

        Segment Reporting.    The Company operates its business as a single segment, providing integrated telecommunications services. This segment includes all services offered by the Company, including local voice service, long distance service, data services, and customer premise equipment sales and maintenance services. These services have similar network operations and are sold through similar sales channels to the same targeted customer base. The Company manages these services as a single segment and prepares and reviews financial results on this single segment.

        Use of Estimates in Financial Statements.    The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure

F-11

of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company continually evaluates its estimates, including those related to revenue recognition, accounts receivable, network expenses and impairment of long-lived assets. The Company bases its estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

        Recent Accounting Pronouncements.    In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The adoption of this statement did not have a material effect on the financial condition or results of operations of the Company.

        In August 2001, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. Adoption of this statement is required for fiscal years beginning after December 15, 2001. The adoption of this statement did not have a material effect on the financial condition or results of operations of the Company.

        In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. Adoption of this statement is required for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The adoption of this statement is not expected to have a material effect on the financial condition or results of operations of the Company.

        In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure." This statement provides alternative methods of transition to entities that adopt the fair value method of accounting for stock-based employee compensation. The statement also requires expanded disclosure of pro-forma fair value stock compensation information for all companies regardless of whether an entity adopts the fair value method of accounting for stock based compensation. These disclosures are generally required for fiscal years ending after December 15, 2002 and have been included in the notes to the Company's consolidated financial statements.

        In November 2002, the Financial Accounting Standards Board's Emerging Issues Task Force reached a consensus on EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect EITF Issue No. 00-21 to have a material effect on its financial condition or results of operations.

F-12

4.     Business Combinations:

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

        In June 2001, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." This statement (1) requires that goodwill balances no longer be amortized but rather assessed for impairment at least annually and (2) expands the classifications of other intangible assets and provides guidance for estimating the expected useful lives of these assets.

        The table below shows the impact of the amortization recognized in prior years for intangibles that are no longer amortized after the adoption of Statement of Financial Accounting Standards No. 142:

		2002			2001			2000
					(unaudited)
Reported net loss		$	(572,670	)	$	(431,813	)	$	(277,567	)
Add back: Goodwill amortization			—			55,227			22,279
Add back: Acquired workforce amortization			—			1,181			401
Adjusted net loss		$	(572,670	)	$	(375,405	)	$	(254,887	)
Basic and diluted net loss per share:
	Reported net loss per share	$	(4.88	)	$	(3.82	)	$	(2.58	)
	Goodwill amortization		—			0.49			0.21
	Acquired workforce amortization		—			0.01			—
	Adjusted net loss per share	$	(4.88	)	$	(3.32	)	$	(2.37	)

        The Company is required to assess the value of goodwill under the provisions of Statement of Financial Accounting Standards No. 142. The Company identified one reporting unit, as defined in Statement of Financial Accounting Standards No. 142. As outlined in the authoritative literature, the assessment of whether goodwill has been impaired is based on the Company's estimate of the fair value of the reporting unit using a model which considers both a discounted future cash flow analysis and market capitalization data. Upon adoption of Statement of Financial Accounting Standards No. 142 on January 1, 2002, there was no indication of an impairment in the Company's goodwill intangible.

F-13

        During the six months ended June 30, 2002, the market capitalization of the Company remained at a level well below its book value. As this decline in the market capitalization indicates that a potential impairment in the value of goodwill exists, management performed an interim valuation as of June 30, 2002 using a valuation model which considers both a discounted future cash flow analysis and market capitalization data. A final valuation was performed by an independent valuation services company. This valuation indicated that an impairment of goodwill existed as of June 30, 2002. Accordingly, the Company recorded a charge of $114,722 during 2002, reflecting the amount of impairment as of June 30, 2002 to eliminate the enterprise goodwill intangible.

        The changes in the carrying value of goodwill during the year ended December 31, 2002 are as follows:

Balance as of December 31, 2001	$	107,468
Reclassification of acquired workforce		1,731
Final purchase price adjustments		5,523
Impairment charge		(114,722	)
Balance at December 31, 2002	$	—

Business Acquisitions

        On June 17, 2002, the Company purchased substantially all of the assets of WorldCom's customer premise equipment sales and WorldCom's customer premise equipment maintenance businesses, known in the industry as "Shared Technologies Fairchild" or "Shared Technologies." The Company acquired these businesses for a cash purchase price of $30,000 and assumption of specified liabilities. The excess of purchase price over the fair value of the net assets acquired was recorded as goodwill of $3,902. The acquisition was accounted for using the purchase method, and accordingly, the net assets and results of operations of Shared Technologies have been included in the Company's consolidated financial statements since the date of acquisition. Included in the Company's financial statements were $78,705 of revenues and $47,853 of network expenses related to the Shared Technologies businesses for the year ended December 31, 2002.

        The following table summarizes the estimated fair value of the assets acquired and liabilities assumed related to the Shared Technologies business:

Current assets		$	46,494
Property and equipment			4,733
Other Assets			92
Goodwill			3,902
	Total assets acquired		55,221
Current liabilities			25,221
	Total liabilities assumed		25,221
Net assets acquired		$	30,000

        The following presents the unaudited pro forma results of the Company for the years ended December 31, 2002 and 2001, as if the acquisition of the Shared Technologies businesses had been consummated at the beginning of each of the periods presented. The pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had

F-14

the acquisitions occurred at the beginning of the periods presented or the results which may occur in the future.

	2002			2001
	(unaudited)
Revenue	$	849,081		$	645,312
Net loss		(571,274	)		(498,147	)
Net loss per share, basic and diluted		(4.87	)		(4.40	)

        Additionally, during the year ended December 31, 2002, the Company paid contingent consideration totaling $1,928, consisting of $250 in cash and 558,726 shares of its common stock as provided in the merger agreements with Jump.Net, Inc. (acquired in 2000) and Coast to Coast Telecommunications, Inc. (acquired in 2001). The consideration paid during 2002 was included in accrued liabilities at December 31, 2001. There is no additional consideration payable under any of the Company's acquisition agreements.

        During the year ended December 31, 2001, the Company paid contingent consideration totaling $17,858, consisting of $13,988 in cash, of which $2,362 was included in accrued liabilities at December 31, 2000, and 407,250 shares of the Company's common stock as provided in the merger agreements with the following businesses acquired during 2001 and 2000: InterAccess Co., Virtualis Systems, Inc., Jump.Net, Inc., CTSnet and Adgrafix Corporation. There is no additional consideration payable under these acquisition agreements.

        During the year ended December 31, 2001, the Company acquired the stock of Adgrafix Corporation, an Internet-based, web hosting applications specialist, and Coast to Coast Telecommunications, Inc., a provider of local and long-distance telecommunications services. The Company also acquired certain assets of HarvardNet, Inc., an Internet-based, web hosting applications specialist, and Intermedia Business Internet, a Tier 1 Internet service provider. The Company acquired these entities for an aggregate purchase price of $92,602, consisting of $17,651 in cash and 3,694,502 shares of the Company's common stock. The excess of purchase price over the fair value of the net assets acquired was recorded as goodwill of $34,896.

        During the year ended December 31, 2000, the Company acquired the following four regional Internet service providers: CONNECTnet Internet Network Services, InterAccess Co., CTSnet, a division of Datel Systems Incorporated, and Jump.Net, Inc. In addition, during 2000, the Company acquired Virtualis Systems, Inc., an Internet-based, web hosting applications specialist.

        In connection with its integration plan for the acquired businesses, the Company recorded additional goodwill to establish reserves for certain costs, including the termination of acquired redundant network elements, closure of acquired duplicate facilities, and severance of certain employees. If the Company does not utilize the full extent of the established reserves for their intended purposes, the reserves will be reversed and will be included as an extraordinary item in the Company's consolidated financial statements since goodwill has been fully impaired.

        Each of the acquisitions discussed above were accounted for using the purchase method of accounting. Accordingly, the net assets and results of operations of the acquired companies have been included in the Company's consolidated financial statements since the acquisition dates. The purchase price of the acquisitions was allocated to assets acquired, including identified intangible assets, and liabilities assumed, based on their respective estimated fair values at acquisition. The Company's purchase price allocation of the acquisition made in 2002 is preliminary, subject to post-acquisition due diligence of the acquired entity, and may be adjusted as additional information is obtained. During the years ended December 31, 2002 and 2001, immaterial adjustments were made to the purchase price allocation of the entities acquired in 2001 and 2000.

F-15

5.     Other Assets:

        Other assets consisted of the following:

		2002			2001
Acquired customer lists		$	62,800		$	62,800
Acquired workforce intangibles			—			3,348
Long-term deposits			17,030			4,040
Equipment pending deployment			8,688			6,827
Other			5,645			6,231
Total other assets			94,163			83,246
Less: Accumulated amortization			(50,189	)		(18,520	)
	Other assets, net	$	43,974		$	64,726

        On January 1, 2002, the Company reclassified the value of the acquired workforce intangibles and related accumulated amortization to goodwill in accordance with Statement of Financial Accounting Standards No. 142. (See Note 4)

        The acquired intangibles are being amortized over their estimated useful lives of one to three years using the straight-line method. Amortization expense related to intangible assets totaled $33,386 and $13,235 during the years ended December 31, 2002 and 2001, respectively. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2002 is as follows:

2003	$	10,301
2004		2,310
Total	$	12,611

        Long-term deposits include a $10,800 prepayment to AT&T for long-distance services. Equipment pending deployment consists of equipment purchased and being staged for deployment in the Company's network. This equipment will be classified as property and equipment when it is deployed.

6.     Accrued Liabilities and Other Current Liabilities:

        Accrued liabilities and other current liabilities consisted of the following:

		2002		2001
Accrued employee compensation and benefits		$	11,824	$	10,314
Accrued network expenses			52,643		40,313
Business acquisition costs			10,502		15,657
Accrued taxes			10,051		8,171
Accrued interest expense			4,154		4,103
Deferred revenue			29,009		3,088
Other			6,261		4,322
	Accrued liabilities and other current liabilities	$	124,444	$	85,968

        Business acquisition costs primarily included reserves for termination of acquired redundant network elements and closure of acquired duplicate facilities (See Note 4)

F-16

7.     Long-Term Debt:

        Long-term debt consisted of the following:

		2002		2001
Series B 113/4% notes, face amount $445,000 due February 15, 2008; effective interest rate of 12.21%; at accreted value		$	433,974	$	385,765
127/8% senior notes, face amount $205,000 due May 15, 2008; effective interest rate of 13.24%; at accreted value			202,210		201,852
Senior secured credit facilities, variable interest rate			470,300		350,000
Capital lease obligations (see Note 8)			94,739		78,687
Total debt			1,201,223		1,016,304
Less: current portion of long-term debt			561,532		3,120
	Long-term debt	$	639,691	$	1,013,184

        The approximate annual debt maturities for the five years subsequent to December 31, 2002, are as follows:

2003		$	556,223
2004			82,060
2005			145,590
2006			242,650
2007			—
Thereafter			93,777
	Total	$	1,120,300

        2003 long-term debt maturities include a reduction in debt as required by the Company's interim agreement with its senior bank creditors, as discussed below.

        Series B 11³/4% Notes Due 2008.    On February 3, 1998, the Company raised gross proceeds of approximately $250,477 in an offering of 445,000 units, each of which consists of one 11³/4% senior discount note due 2008 of the Company and one redeemable warrant to purchase approximately 2.19 shares of common stock at an exercise price of $.01 per share, subject to certain antidilution provisions. Of the gross proceeds, $242,294 was allocated to the 11³/4% notes and $8,184 was allocated to the redeemable warrants. The redeemable warrants became exercisable in connection with the Company's initial public offering (see Note 9) in July 1998.

        A registration statement on Form S-4 (File No. 333-49013) registering the 11³/4% notes, and offering to exchange any and all of the outstanding 11³/4% notes for Series B 11³/4% notes due 2008, was declared effective by the Securities and Exchange Commission on May 22, 1998. This exchange offer terminated on June 23, 1998, after substantially all of the outstanding 11³/4% notes were exchanged. The terms and conditions of the Series B notes are identical to those of the 11³/4% notes in all material respects.

        The Series B notes have a principal amount at maturity of $445,000 and an effective interest rate of 12.21%. The Series B notes are unsecured and mature on February 15, 2008. Commencing August 15, 2003, interest on such notes is payable in cash at the rate of 11³/4% per annum on February 15 and August 15 of each year. From and after February 15, 2003, interest on the Series B notes will be payable semi-annually in cash at the rate of 11³/4% per annum. The Company is required to make an offer to purchase the redeemable warrants for cash at the relevant value upon the occurrence of a repurchase event, as defined in the applicable warrant agreement.

F-17

        Through March 31, 1999, the Company was recognizing the potential future redemption value of the redeemable warrants by recording accretion of the redeemable warrants to their estimated fair market value at February 3, 2008, using the effective interest method.

        Effective April 1, 1999, the Company determined that accreting the redeemable warrants to a future potential redemption value was no longer applicable, as the redemption of the redeemable warrants for cash is no longer beyond the control of the Company, and the redemption date and amount are not reasonably determinable. Accordingly, the accreted value of the redeemable warrants at April 1, 1999, was reclassified to stockholders' equity as common stock warrants, and no further accretion will be recorded. If a repurchase event occurs in the future or becomes probable, the Company will adjust the warrants to the estimated redemption value at that time.

        Under the terms of the Series B notes, the Company may redeem these notes at certain times and in certain amounts. Upon a change of control, as defined, the Company is required to make an offer to purchase the 11³/4% notes at a purchase price of 101% of the accreted value thereof together with accrued interest, if any.

        12⁷/8% Senior Notes Due 2008.    On July 7, 1998, the Company raised approximately $200,919 of gross proceeds from the sale of its 12⁷/8% senior discount notes due 2008 of which approximately $69,033 was used to purchase U.S. government securities, which were placed in a pledged account to secure and fund the first six scheduled payments of interest on the notes.

        The 12⁷/8% notes have a principal amount at maturity of $205,000 and an effective interest rate of 13.24%. The 12⁷/8% notes are unsecured and mature on May 15, 2008. Interest on the 12⁷/8% notes is payable semi-annually in cash at the rate of 12⁷/8% per annum on May 15 and November 15 of each year. As of December 31, 2002 and 2001, the Company has recorded accrued interest associated with the 12⁷/8% notes of $3,299 and $3,299, respectively, which is included in other current liabilities.

        Under the terms of the 12⁷/8% notes, the Company may redeem these notes at certain times and in certain amounts. Upon a change of control, as defined, the Company is required to make an offer to purchase the 12⁷/8% notes at a purchase price of 101% of the principal amount thereof, together with accrued interest, if any.

        The Series B notes and 12⁷/8% notes contain certain restrictive covenants that, among other things, limit the ability of the Company to incur indebtedness, create liens, engage in sale-leaseback transactions, pay dividends or make distributions in respect to their capital stock, redeem capital stock, make investments or certain other restricted payments, sell assets, issue or sell stock of certain subsidiaries, engage in transactions with stockholders or affiliates or effect a consolidation or merger. The Company was in compliance with all such restrictive covenants at December 31, 2002.

        Senior Secured Credit Facilities.    In February 2000, the Company closed on $500,000 of senior secured credit facilities (Credit Facilities). The Credit Facilities consist of a $350,000 seven-year revolving credit facility and a $150,000 two-year delayed draw term loan facility. Interest is generally the London Interbank Offered Rate (LIBOR) plus 4.50%. The blended borrowing rate on outstanding borrowings at December 31, 2002 is 5.77% and will remain fixed until June 26, 2003.

        The Credit Facilities are secured by (1) the capital stock of Allegiance Telecom Company Worldwide (which stock is owned by the Company's parent holding company, Allegiance Telecom, Inc.) and (2) all of the assets of Allegiance Telecom Company Worldwide, including the capital stock owned by that entity in each of its subsidiaries.

F-18

        As of December 31, 2002, there were $324,800 and $145,500 of borrowings outstanding under the seven-year revolving credit facility and the two-year delayed draw term loan facility, respectively, all of which are classified as long-term debt. The revolving credit facility will be permanently reduced in accordance with its amortization schedule as follows: 20% in 2004 (a pro-rata amount each quarter), 30% in 2005 (a pro-rata amount each quarter) and 50% in 2006 (a pro-rata amount each quarter). Principal amounts of the delayed draw term loan are to be repaid as follows: 20% in 2004 (pro-rata payments to be made quarterly), 30% in 2005 (pro-rata payments to be made quarterly) and 50% in 2006 (pro-rata payments to be made quarterly).

        The Credit Facilities carry certain restrictive and financial covenants that, among other things, limit the Company's ability to incur indebtedness, create liens, engage in sale-leaseback transactions, pay dividends or make distributions in respect of capital stock, redeem capital stock, make investments or certain other restricted payments, sell assets, issue or sell stock of certain subsidiaries, engage in transactions with stockholders or affiliates, effect a consolidation or merger and require the Company to maintain certain operating and financial performance measures.

        On November 27, 2002, the Company reached an agreement with its senior bank creditors regarding modifications to the Credit Facilities. Under this agreement, the Company obtained a waiver of all existing financial covenants through April 30, 2003 and replaced those covenants during this period with a free cash flow from operations covenant (EBITDA less capital expenditures) and a total leverage covenant. Under this interim amendment, the Company cannot permit its consolidated total debt to exceed at any time (i) $1,275,000 from November 27, 2002 through April 29, 2003 and (ii) $645,000 thereafter. Under the terms of the interim amendment, the Company repaid $15,000 of the Credit Facilities, which was applied to the initial amortization of the facility scheduled to begin in 2004. The Company was in compliance with interim period covenants at December 31, 2002.

        A permanent amendment to the Credit Facilities must be in place prior to the April 30, 2003 waiver expiration. In conjunction with the negotiation of this permanent amendment, the Company has been evaluating possible recapitalization transactions and pursuing numerous financial and negotiated strategic alternatives to reduce total indebtedness.

        Under the terms of the Credit Facilities, the Company is required to deliver an unqualified audit report to its senior lenders. The Company received an audit report that is modified to express substantial doubt about the Company's ability to continue as a going concern. As such, if the Company does not receive a waiver from its senior lenders or if it is unable to cure this breach within 30 days, there will be an event of default under the Credit Facilities. An event of default under the Credit Facilities could cause all amounts outstanding under the Credit Facilities to become immediately due and payable. If they become immediately due and payable, the Company's bondholders may also accelerate the payment of outstanding amounts due under the Series B notes and the 12⁷/8% notes. No adjustment that might result from the potential impact of these acceleration events is reflected in the debt maturity table above.

8.     Leases:

        The Company has entered into various capital lease agreements, with expirations through 2022, covering dedicated optical fiber capacity and certain equipment. Assets and future obligations related to capital leases are included in the accompanying consolidated balance sheet in property and equipment and long-term debt, respectively. Depreciation of assets held under capital leases is included in depreciation and amortization expense.

        The Company has entered into various operating lease agreements, with expirations through 2015, for network facilities, office space and equipment. Rent expense on operating leases for the years ended December 31, 2002, 2001 and 2000, was $34,600, $31,765 and $16,950, respectively.

F-19

        Future minimum lease obligations for all non-cancelable capital and operating lease agreements with initial or remaining terms of one year or more at December 31, 2002 are as follows:

Years ending December 31,		Capital Leases			Operating Leases
2003		$	14,046		$	30,545
2004			13,456			28,693
2005			12,601			27,533
2006			12,658			25,300
2007			10,353			23,299
Thereafter			108,652			68,322
	Total minimum future lease payments		171,766		$	203,692
Amount representing interest			(77,027	)
Present value of minimum lease payments			94,739
Current portion			(5,309	)
	Long-term capital lease obligations	$	89,430

        Certain operating and capital lease agreements contain renewal and purchase options at the end of the initial lease terms.

9.     Capitalization:

        Preferred Stock.    In connection with the Company's initial public offering, the Company authorized 1,000,000 shares of preferred stock with a $.01 par value. At December 31, 2002 and 2001, no shares of preferred stock were issued and outstanding.

        Common Stock.    On February 2, 2000, the Company raised $693,000 of gross proceeds from the sale of the Company's common stock. The Company sold 9,900,000 shares at a price of $70 per share. Net proceeds from this offering were $665,562. On February 29, 2000, the underwriters of this offering exercised an option to purchase an additional 803,109 shares of common stock, providing an additional $56,218 gross proceeds and $54,113 net proceeds to the Company.

        On February 28, 2000, a three-for-two stock split of the Company's common stock was effected in the form of a 50% stock dividend to shareholders of record on February 18, 2000. Par value remained unchanged at $.01 per share. All references to the number of common shares and per share amounts have been restated to reflect the stock split for all periods presented.

        At December 31, 2002 and 2001, 125,157,605 and 115,542,354 shares were issued and 124,830,110 and 115,214,859 were outstanding, respectively. Of the authorized but unissued common stock, 25,758,718 shares were reserved for issuance upon exercise of stock options issued under the Company's stock option, stock incentive and stock purchase plans (see Note 13) and 205,851 shares were reserved for issuance, sale and delivery upon the exercise of warrants (see Note 7) at December 31, 2002.

        Warrants.    During 2002, 1,000 warrants, formerly referred to as redeemable warrants (see Note 7), were exercised to purchase 2,188 shares of common stock. Fractional shares are not issued, cash payments are made in lieu thereof, according to the terms of the warrant agreement. No warrants were exercised during 2001. At December 31, 2002 and 2001, 94,031 and 95,031 warrants, respectively, were outstanding. The warrants will expire on February 3, 2008.

        Deferred Compensation.    During 1998 and 1997, certain management investors acquired membership units of Allegiance Telecom, LLC at amounts less than the estimated fair market value of

F-20

the membership units, consequently, the Company recognized deferred compensation of $10,090 and $978 at December 31, 1998 and 1997, respectively, of which $41, $2,726 and $2,767 was amortized to expense during the periods ended December 31, 2002, 2001 and 2000, respectively. In connection with the initial public offering, the redeemable preferred stock was converted into common stock and Allegiance Telecom, LLC was dissolved. The deferred compensation charge is amortized based upon the period over which the Company has the right to repurchase certain of the securities (at the lower of fair market value or the price paid by the employee) in the event the management investor's employment with the Company is terminated. Deferred compensation also includes stock options granted at an exercise price less than market value, stock options subject to variable plan accounting, and restricted stock issued to management employees (see Note 13).

        Deferred Management Ownership Allocation Charge.    On July 7, 1998, in connection with the initial public offering, certain venture capital investors and certain management investors owned 95.0% and 5.0%, respectively, of the ownership interests of Allegiance Telecom, LLC, which owned substantially all of the Company's outstanding capital stock. As a result of the successful initial public offering, Allegiance Telecom, LLC was dissolved and its assets (which consisted almost entirely of such capital stock) were distributed to the venture capital investors and management investors in accordance with the Allegiance Telecom, LLC's limited liability company agreement. This agreement provided that the equity allocation between the venture capital investors and the management investors be 66.7% and 33.3%, respectively, based upon the valuation implied by the initial public offering. The Company recorded the increase in the value of the assets of Allegiance Telecom, LLC allocated to the management investors as a $193,537 increase in additional paid-in capital, of which $122,476 was recorded as a noncash, nonrecurring charge to operating expenses and $71,061 was recorded as a deferred management ownership allocation charge. The deferred charge was amortized at $175 and $6,480 as of December 31, 2001 and 2000, and was fully amortized as of March 31, 2001. The Company repurchased 289,527 shares from terminated management investors during 2000. A remaining deferred charge of $135 related to these shares was reversed to additional paid-in-capital upon the repurchase of the shares.

10.   Related Parties:

        During 2002, the Company incurred approximately $450 in legal fees to a law firm in which a member of the Company's board of directors is a senior partner.

        During 2001, the Company loaned $4,200 to a director and executive vice president of the Company under a full recourse promissory note. The note is payable in full on April 4, 2004. The outstanding balance accrues interest at 2.73% per annum, which was the November 2001 applicable federal rate, and interest is payable when this note is due. In the event the executive resigns or is terminated by Allegiance for cause, this note will become immediately due and payable. The note is included in other long-term assets in the accompanying consolidated balance sheet.

        During 2001, the Company incurred $351 in charges for company business travel on an airplane owned and operated by a company that is wholly-owned by a director and executive vice president of the Company. The air travel rate charged for use of the airplane was at least as favorable as the rate charged by private aircraft owners unaffiliated with the Company. No such payments were made during 2002.

11.   Commitments and Contingencies:

        In April 2000, the Company executed a master procurement agreement with Lucent Technologies Inc. for a broad range of advanced telecommunications equipment, software and services. This agreement contains a three-year $350,000 purchase commitment. In July 2001, this agreement was amended to extend the term to six years. Under the amended agreement, the Company must complete

F-21

purchases totaling $100,000 by December 31, 2000, an aggregate of $160,000 of purchases by September 30, 2001, an aggregate of $210,000 by December 31, 2002, an aggregate of $257,000 by December 31, 2003, an aggregate of $304,000 by December 31, 2004, and the full $350,000 of aggregate purchases on or before December 31, 2005. In 2002, Lucent waived $50,000 of the $210,000 purchase commitment for 2002 in exchange for a purchase commitment by the Company of approximately $13,100 of telecommunications equipment.

        The Company purchased the $13,100 of telecommunications equipment and has satisfied the purchase commitment for 2002. As of December 31, 2002, the remaining commitment under this agreement is approximately $123,800. The agreement provides that, subject to certain conditions, if the Company does not meet the required purchase milestones, the Company will be required to provide cash settlement in an amount equal to the shortfall. During the term of the contract, such shortfall payments may be applied to future purchases in the next succeeding year. Given the change in focus in the Company's business to achieving profitability, the Company is in the process of renegotiating this contract with Lucent. There can be no assurance that the Company will be successful in completing the renegotiation.

12.   Federal Income Taxes:

        The Company accounts for income tax under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events which have been recognized in the Company's financial statements. The Company had approximately $1,344,311 and $877,794 of net operating loss carryforwards for federal income tax purposes at December 31, 2002 and 2001, respectively. The net operating loss carryforwards will begin to expire in the years 2012 through 2019 if not previously utilized. The Company has recorded a valuation allowance equal to the net deferred tax assets at December 31, 2002 and 2001, due to the uncertainty of future operating results. The valuation allowance will be reduced at such time as management is able to determine that the realization of the deferred tax assets is more likely than not to occur. Generally, reductions in the valuation allowance will reduce future provisions for income tax expense. Reductions in the valuation allowance related to tax deductions for employee stock option exercises will reduce the Company's additional paid-in capital.

F-22

        The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2002 and 2001 are presented below:

			2002			2001
Deferred tax assets:
	Net operating loss carryforward		$	539,357		$	327,417
	Start-up costs capitalized for tax purposes			643			1,069
	Amortization of intangibles			16,287			—
	Allowance for doubtful accounts			6,327			15,797
	Accrued liabilities and other			6,557			21,975
	Amortization of original issue discount			71,109			51,906
		Total gross deferred tax assets		640,280			418,164
	Less valuation allowance			(556,959	)		(342,394	)
		Net deferred tax assets	$	83,321		$	75,770
Deferred tax liabilities:
	Depreciation		$	(83,321	)	$	(71,919	)
	Amortization of intangibles			—			(3,851	)
		Total gross deferred tax liabilities		(83,321	)		(75,770	)
Net deferred tax asset			$	—		$	—

        Amortization of the original issue discount on the Series B notes and the 12⁷/8% notes as interest expense is not deductible in the income tax return until paid. Amortization of goodwill created in a stock acquisition is not deductible in the Company's income tax return; therefore, the effective income tax rate differs from the statutory rate.

        Under existing income tax law, all operating expenses incurred prior to commencing principal operations and expansion into new markets are capitalized and amortized over a five-year period for tax purposes.

        A reconciliation of the Company's effective tax rate and the U.S. federal and state tax rate is as follows:

	2002
Statutory U.S. federal rate	(35	)%
State income taxes, net of federal benefit	(3	)%
Valuation allowance for deferred taxes	32	%
Goodwill and other identifiable intangibles	6	%
	—	%

13.   Stock Option/Stock Incentive/Stock Purchase Plans:

        1997 Nonqualified Stock Option Plan And 1998 Stock Incentive Plan.    Under the 1997 stock option plan, the Company granted stock options to key employees, a director and a consultant of the Company for an aggregate of 1,580,321 shares of common stock. The Company will not grant stock options for any additional shares under the 1997 stock option plan.

F-23

        Under the 1998 stock incentive plan, the Company may grant stock options to certain employees, directors, advisors and consultants of the Company. The 1998 stock incentive plan provides for issuance of the following types of incentive awards: stock options, stock appreciation rights, restricted stock, performance grants and other types of awards that the Compensation Committee of the Board of Directors deems consistent with the purposes of the 1998 stock incentive plan. The Company has 24,857,402 shares of common stock reserved for issuance under the 1998 stock incentive plan at December 31, 2002.

        Stock options granted under both plans generally have a term of six years and vest over a three-year period and the Compensation Committee of the Board of Directors administers both option plans.

        A summary of the status of the 1997 stock option plan as of December 31, 2002, 2001 and 2000 is presented in the table below:

	December 31, 2002				December 31, 2001				December 31, 2000
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period	531,196		$	1.80	745,172		$	1.80	1,098,155		$	1.79
Granted	—			—	—			—	—			—
Exercised	(8,532	)		1.65	(213,300	)		1.80	(334,216	)		1.76
Forfeited	(47,440	)		1.69	(676	)		2.27	(18,767	)		1.88
Outstanding, end of period	475,224			1.82	531,196			1.80	745,172			1.80
Options exercisable at period-end	475,224				531,196				595,660

        The following table sets forth the range of exercise prices and weighted average remaining contractual life at December 31, 2002 under the 1997 stock option plan:

	Stock Options Outstanding				Stock Options Exercisable
Range of Exercise Price	Number of Shares	Weighted Average Contractual Life	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$1.65 - 2.31	475,224	1.2	$	1.82	475,224	$	1.82

F-24

        A summary of the status of the 1998 stock incentive plan as of December 31, 2002, 2001 and 2000 is presented in the table below:

	December 31, 2002					December 31, 2001					December 31, 2000
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		24,615,855		$	15.34		20,383,461		$	29.79		6,428,376		$	26.68
Granted		6,681,803			1.40		14,189,571			7.50		16,557,703			33.33
Exercised		(76,586	)		0.12		(161,733	)		11.17		(366,604	)		11.47
Forfeited		(15,613,612	)		11.77		(9,795,444	)		34.14		(2,236,014	)		50.07
Outstanding, end of period		15,607,460			12.72		24,615,855			15.34		20,383,461			29.79
Options exercisable at period-end		7,643,110					7,102,039					2,179,551
Weighted average fair value of options granted	$	1.04				$	5.73				$	25.83

        The following table sets forth the exercise prices and weighted average remaining contractual life at December 31, 2002 under the 1998 stock incentive plan:

	Stock Options Outstanding				Stock Options Exercisable
Range of Exercise Prices	Number of Shares	Weighted Average Contractual Life	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price
$0.55 - 0.78	1,843,061	5.5	$	0.65	638,171	$	0.63
$0.90 - 1.17	3,097,848	5.4	$	1.15	0
$1.94 - 2.31	288,286	5.2	$	2.08	0
$3.01 - 3.01	3,283,683	4.6	$	3.01	1,852,333	$	3.01
$4.94 - 6.72	591,820	4.2	$	5.90	234,685	$	5.79
$7.79 - 11.10	670,642	3.7	$	9.90	391,496	$	9.70
$11.79 - 17.67	3,066,671	3.4	$	14.29	2,354,487	$	14.36
$19.13 - 21.25	337,119	3.9	$	19.70	205,555	$	19.69
$33.25 - 49.00	1,226,391	2.9	$	38.54	987,895	$	37.88
$54.44 - 71.06	1,201,939	3.0	$	65.70	978,488	$	65.46
	15,607,460				7,643,110

        As the estimated fair market value of the Company's common stock (as implied by the initial public offering price) exceeded the exercise price of certain stock options granted during 1998 and 1997, the Company recognized deferred compensation of $7,635 and $2,031 at December 31, 1998 and 1997, respectively, of which $423 and $2,889 was amortized to expense during the years ended December 31, 2001 and 2000, respectively.

        In February 1999, the Company granted employee stock options under the 1998 stock incentive plan with an exercise price below market value at the date of grant. A deferred compensation charge of $6,807 was recognized, and $189, $2,269 and $2,269 was amortized to expense in the years ended December 31, 2002, 2001 and 2000, respectively.

        During 2000, the Company recognized a deferred compensation charge of $957 as a result of an exchange of unvested stock options of acquired businesses (see Note 4) for employee stock options under the Company's 1998 stock incentive plan. $313, $313 and $96 was amortized to expense in the years ended December 31, 2002, 2001 and 2000, respectively.

F-25

        In November 2000, the Company granted non-qualified, outperform stock options to certain key employees under the 1998 stock incentive plan. These outperform options are notated as such due to the nature of the options in which the ultimate number and exercise price of the options are dependent on the performance of the Company's stock price relative to the performance of the NASDAQ 100 Index. As the number of options and the exercise price were not fixed at the date of grant, the Company accounts for these stock options using variable plan accounting under APB No. 25. This accounting will require the Company to measure and record compensation ratably from the date of grant until the options are exercised. The outperform stock options vest in equal quarterly amounts through November 2001 and generally expire on March 31, 2003. If the Company's exchange-traded stock price outperforms the NASDAQ 100 Index on a go-forward basis, it is possible that the Company could have material compensation charges in future periods related to unexercised outperform stock options. At December 31, 2000, the Company recorded a deferred compensation charge of $12,128 and compensation expense of $2,106 through that date. During 2001, this charge and all related expenses were reversed due to downward movement in the market price of the Company's common stock. No additional expense related to the outperform stock options was recognized during 2002.

        During 2001 and 2002, the Company cancelled certain outstanding stock options, which caused grants made to the same employees within six months of these cancellations to be subject to variable plan accounting under APB No. 25. At December 31, 2002 and 2001, the deferred compensation charge related to these options was $31 and $5,288, respectively, and the Company had recorded compensation expense of $22 and $0, respectively through those dates. The deferred compensation charge will be amortized to expense over the vesting period of the stock options, and will continually be adjusted based on the market price of the Company's common stock.

        During 2002, the Company issued 3,461,120 shares of restricted stock to certain management employees in exchange for stock options held by such employees that had an exercise price of five dollars and fifty cents or more at a ratio of three shares of restricted stock for every four shares issuable pursuant to such stock options. In addition, during 2002, the Company issued 2,920,000 shares of restricted stock to certain senior executives in exchange for stock options issued to such executives on October 15, 2001, at a ratio of four shares for every five shares issuable pursuant to such stock options. These restricted shares were issued at no cost to the employees; therefore, the Company recognized deferred compensation of $6,509 based on the market value of the stock at the date of issuance. The deferred compensation charge will be amortized to expense over the three-year vesting period of the restricted stock. $1,605 was amortized to expense in the year ended December 31, 2002.

        Employee Stock Discount Purchase Plan.    The Company's stock discount purchase plan is intended to give employees a convenient means of purchasing shares of the Company's common stock through payroll deductions. Each participating employee's contributions will be used to purchase shares for the employee's share account as promptly as practicable after each calendar quarter. The cost per share will be 85% of the lower of the closing price of the Company's common stock on the Nasdaq National Market on the first or the last day of the calendar quarter. The Company has 56,839 shares of common stock reserved for issuance under the stock purchase plan at December 31, 2002. During 2002 and 2001, 2,474,042 and 672,337 shares, respectively, were issued under the stock purchase plan for proceeds of $3,887 and $4,916, respectively. As of December 31, 2002, participants have contributed $32, which will be used to purchase the remaining 56,839 shares in January 2003. The Compensation Committee of the Board of Directors administers the stock purchase plan.

14.   Long-Term Sales Contract:

        Effective in 2000, and amended in 2000, 2001 and 2002, the Company executed a long-term contract to provide an integrated network solution and certain services to Genuity Solutions Inc., a network service provider and operator of a nationwide Internet network. The contract was established specifically to support Genuity's customer contracts, including that with America Online. This contract

F-26

establishes Genuity as the Company's largest customer. Total revenues from Genuity for the years ended December 31, 2002, 2001 and 2000 were $90,342, $46,780 and $22,274, respectively. The contract term expires on December 31, 2006. Under this agreement, Genuity committed to pay an aggregate of $563,010 over the term of the contract, subject to the Company's performance under the contract and the other terms and conditions of the contract. The contract contains specific provisions that decrease Genuity's purchase commitment, including but not limited to, Genuity experiencing a business downturn. The agreement also provides that if the Company receives a going concern qualification or experiences an event of default as defined under the Credit Facilities, (a) Genuity may exercise an option to purchase all of the dedicated assets and infrastructure used by the Company to provide the integrated network solution to Genuity and (b) Genuity would still be required to continue to purchase certain services from the Company for the remainder of the term of the agreement. If Genuity exercises its option, Genuity would be required to pay (1) for the dedicated assets, the remaining undepreciated value of the dedicated assets and (2) for the certain services, the remaining overall value of the agreement less the amounts paid to purchase the dedicated assets and infrastructure.

        On November 27, 2002, Genuity and Level 3 Communications announced that the two companies reached a definitive agreement in which Level 3 would acquire substantially all of Genuity's assets and operations and assume a significant portion of Genuity's existing long-term operating agreements. To facilitate the transaction, Genuity filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code. The consummation of Level 3's purchase of this Genuity contract was announced on February 4, 2003.

15.   Quarterly Financial Data (Unaudited):

        The following table summarizes results for each of the four quarters in the years ended December 31, 2002 and 2001:

		First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Year
Year ended December 31, 2002:
	Revenues	$	162,095		$	184,437		$	219,539		$	204,911		$	770,982
	Gross profit		80,017			89,114			101,242			96,165			366,538
	Net loss		(112,590	)		(226,815	)		(113,110	)		(120,155	)		(572,670	)
	Net loss per share, basic and diluted		(0.97	)		(1.94	)		(0.97	)		(1.00	)		(4.88	)
Year ended December 31, 2001:
	Revenues	$	105,874		$	124,059		$	135,137		$	151,818		$	516,888
	Gross profit		54,646			63,258			69,423			77,827			265,154
	Net loss		(96,340	)		(103,338	)		(106,537	)		(125,598	)		(431,813	)
	Net loss per share, basic and diluted		(0.87	)		(0.92	)		(0.94	)		(1.09	)		(3.82	)

F-27

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1)	Financial Statements (located on pages F-1 through F-27 of this report).
	—	Independent Auditors' Report.
	—	Report of Independent Public Accountants.
	—	Consolidated Balance Sheets as of December 31, 2002 and 2001.
	—	Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000.
	—	Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000.
	—	Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000.
	—	Notes to Consolidated Financial Statements.
(a)(2)	Financial Statement Schedules:
	—	Report of Independent Public Accountants on Financial Statement Schedule is located on page S-1 of this report.
	—	Valuation and Qualifying Accounts for the years ended December 31, 2002, 2001 and 2000 is located on page S-2 of this report.
(a)(3)	The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index starting on page E-1 of this report.
(b)	Reports on Form 8-K
	—	Allegiance Telecom, Inc. filed a Form 8-K on November 27, 2002, which reported under Item 5 an amendment to its Credit and Guaranty Agreement and the issuance of a press release relating to that amendment.

F-28

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 2, 2003.

ALLEGIANCE TELECOM, INC.
By:	/s/  MARK B. TRESNOWSKI Mark B. Tresnowski, Executive Vice President, General Counsel and Secretary

INDEX TO EXHIBITS

EXHIBIT NO.	DESCRIPTION
3.1	Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to Allegiance Telecom, Inc.'s Form 10-Q for the period ended June 30, 1998).
3.2	Certificate of Correction to Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.2 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1998).
3.3	Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 4.1 to Allegiance Telecom, Inc.'s Form 10-Q for the period ended September 30, 2001).
3.4	Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.2 to Allegiance Telecom, Inc.'s Form 10-Q for the period ended June 30, 1998).
4.1	Indenture, dated as of July 7, 1998, by and between Allegiance Telecom, Inc. and The Bank of New York, as trustee (including the Form of Notes) (incorporated herein by reference to Exhibit 4.1 to Allegiance Telecom, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 333-69543).
4.2	Indenture, dated as of February 3, 1998, by and between Allegiance Telecom, Inc. and The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.2 to Allegiance Telecom, Inc.'s Registration Statement on Form S-4, as amended, Registration No. 333-49013 (the "Form S-4 Registration Statement")).
4.3	Form of 113/4% Senior Discount Notes (incorporated herein by reference to Exhibit 4.3 to the Form S-4 Registration Statement).
4.4	Collateral Pledge and Security Agreement, dated as of July 7, 1998, by and between Allegiance Telecom, Inc. and The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4 to Allegiance Telecom, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 333-69543).
10.1	Stock Purchase Agreement, dated August 13, 1997, between Allegiance Telecom LLC and Allegiance Telecom, Inc. (incorporated herein by reference to Exhibit 10.1 to the Form S-4 Registration Statement).
10.2	Termination of Board Voting Agreements, dated February 14, 2003, among Allegiance Telecom, Inc., Royce J. Holland, the Royce J. Holland Family Limited Partnership, Thomas Lord (individually and on behalf of Brian Lord and Colin Lord), Victoria Lord, C. Daniel Yost, Anthony Parella, Frontenac VII Limited Partnership, Frontenac Masters VII Limited Partnership, Madison Dearborn Capital Partners II, L.P., Morgan Stanley Capital Partners III,  L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital Investors, L.P.
10.3	Securityholders Agreement, dated August 13, 1997, among Allegiance Telecom LLC, Allegiance Telecom, Inc. and certain venture fund and management investors (incorporated herein by reference to Exhibit 10.2 to the Form S-4 Registration Statement).
10.4	Amended and Restated Registration Agreement, dated September 13, 1999, among certain stockholders and Allegiance Telecom, Inc. (incorporated herein by reference to Exhibit 99.4 to Allegiance Telecom, Inc.'s Form 8-K filed with the SEC on September 22, 1999).

E-1

10.5	Warrant Registration Rights Agreement, dated as of January 29, 1998, by and among Allegiance Telecom, Inc. and Morgan Stanley & Co. Incorporated, Salomon Brothers Inc, Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, as initial purchasers of the 113/4% Senior Discount Notes (incorporated herein by reference to Exhibit 10.11 to the Form S-4 Registration Statement).
10.6	Warrant Agreement, dated February 3, 1998, by and between Allegiance Telecom, Inc. and The Bank of New York, as Warrant Agent (including the form of the Warrant Certificate) (incorporated herein by reference to Exhibit 10.9 to the Form S-4 Registration Statement).
+10.7	Allegiance Telecom, Inc. 1997 Nonqualified Stock Option Plan (incorporated herein by reference to Exhibit 10.4 to the Form S-4 Registration Statement).
+10.8	Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.6 to Allegiance Telecom, Inc.'s Registration Statement on Form S-1, as amended, Registration No. 333-53479).
+10.9	First Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.7 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1998).
+10.10	Second Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.8 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1999).
+10.11	Third Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.9 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2000).
+10.12	Fourth Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.10 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2001).
+10.13	Fifth Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan (incorporated herein by reference to Exhibit 4.12 to Allegiance Telecom, Inc.'s Form S-8 filed with the SEC on July 8, 2002).
+10.14	Sixth Amendment to the Allegiance Telecom, Inc. 1998 Stock Incentive Plan.
+10.15	Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance Telecom, Inc. and Royce J. Holland (incorporated herein by reference to Exhibit 10.9 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1999).
+10.16	Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance Telecom, Inc. and Thomas M. Lord (incorporated herein by reference to Exhibit 10.10 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1999).
+10.17	Amended and Restated Executive Purchase Agreement, dated December 13, 1999, between Allegiance Telecom, Inc. and C. Daniel Yost (incorporated herein by reference to Exhibit 10.11 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1999).

E-2

+10.18	Form of Executive Purchase Agreement among Allegiance Telecom LLC, Allegiance Telecom, Inc. and each of certain management investors (incorporated herein by reference to Exhibit 10.8 to the Form S-4 Registration Statement).
10.19	Secured Promissory Note of G. Clay Myers dated December 6, 1999 and Amended and Restated Pledge Agreement between G. Clay Myers and Allegiance Telecom, Inc. dated June 7, 2001 (incorporated herein by reference to Exhibit 10.15 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2001).
10.20	Full Recourse Promissory Note of Anthony J. Parella dated November 1, 2001 and Pledge Agreement between Anthony J. Parella and Allegiance Telecom Company Worldwide dated November 1, 2001 (incorporated herein by reference to Exhibit 10.16 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2001).
+10.21	Form of Restricted Stock Agreement dated June 7, 2002, between Allegiance Telecom, Inc. and each of Royce Holland, Dan Yost, Tom Lord, Tony Parella, Mark Tresnowski and other senior officers.
+10.22	Form of Amendment No. 1 to Allegiance Telecom, Inc. Restricted Stock Agreement dated November 5, 2002, between Allegiance Telecom, Inc. and each of Royce Holland, Dan Yost, Tom Lord, Tony Parella, Mark Tresnowski and other senior officers.
+10.23	Form of Amendment No. 2 to Allegiance Telecom, Inc. Restricted Stock Agreement dated February 24, 2003, between Allegiance Telecom, Inc. and each of Royce Holland, Dan Yost, Tom Lord, Tony Parella, Mark Tresnowski and other senior officers.
+10.24	Form of Restricted Stock Agreement dated June 7, 2002, between Allegiance Telecom, Inc. and each of Tony Parella, Mark Tresnowski and other officers.
+10.25	Form of Restricted Stock Agreement dated June 7, 2002, between Allegiance Telecom, Inc. and each of Reed Hundt and Andrew Lipman.
+10.26	Form of Amendment No. 1 to Allegiance Telecom, Inc. Restricted Stock Agreement dated September 12, 2002, between Allegiance Telecom, Inc. and each of Reed Hundt, Andrew Lipman, Tony Parella, Mark Tresnowski and other officers.
+10.27	Form of Amendment No. 2 to Allegiance Telecom, Inc. Restricted Stock Agreement dated February 28, 2003, between Allegiance Telecom, Inc. and each of Reed Hundt, Andrew Lipman, Tony Parella, Mark Tresnowski and other officers.
10.28	Form of Indemnification Agreement by and between Allegiance Telecom, Inc. and its directors and officers (incorporated herein by reference to Exhibit 10.13 to the Form S-1 Registration Statement).
10.29	Master Procurement Agreement, dated April 28, 2000 between Allegiance Telecom, Inc. and Lucent Technologies Inc. (incorporated herein by reference to Exhibit 10.15 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2000).

E-3

10.30	Credit and Guaranty Agreement, dated February 15, 2000, among Allegiance Telecom, Inc., Allegiance Telecom Company Worldwide, certain subsidiaries of Allegiance Telecom, Inc., various lenders, Goldman Sachs Credit Partners L.P., a Syndication Agent and Sole Lead Arranger, Toronto Dominion (Texas), Inc., as Administrative Agent, and BankBoston, N.A. and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agents (incorporated herein by reference to Exhibit 10.16 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 1999).
10.31	First Amendment, dated November 27, 2002, among Allegiance Telecom, Inc., Allegiance Telecom Company Worldwide, certain subsidiaries of Allegiance Telecom, Inc., various lenders, Goldman Sachs Credit Partners L.P., as Syndication Agent and Sole Lead Arranger, General Electric Capital Corporation (as successor in interest to Toronto Dominion (Texas), Inc.), as Administrative Agent, and BankBoston, N.A. and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agents (incorporated herein by reference to Exhibit 99.2 to Allegiance Telecom, Inc.'s Form 8-K filed with the SEC on November 27, 2002).
10.32	Integrated Network Solution Purchase Agreement, between Allegiance Telecom Company Worldwide and Genuity Solutions Inc., dated July 24, 2000, as amended by Amendment One to Integrated Network Solution Purchase Agreement dated September 29, 2000, Amendment Two to Integrated Network Solution Purchase Agreement dated December 29, 2000 and Amendment Three to Integrated Network Solution Purchase Agreement dated December 31, 2001 (incorporated herein by reference to Exhibit 10.21 to Allegiance Telecom, Inc.'s Form 10-K for the period ended December 31, 2001).
10.33	Amendment Four to Integrated Network Solution Purchase Agreement dated August 21, 2002 (incorporated herein by reference to Exhibit 10.1 to Allegiance Telecom, Inc.'s Form 10-Q for the period ended September 30, 2002).
11.1	Statement Regarding Computation of Per Share Earnings (Loss) for the year ended December 31, 2002.
11.2	Statement Regarding Computation of Per Share Earnings (Loss) for the year ended December 31, 2001.
11.3	Statement Regarding Computation of Per Share Earnings (Loss) for the year ended December 31, 2000.
21.1	Subsidiaries of Allegiance Telecom, Inc.
*23.1	Consent of KPMG LLP.
24.1	Power of Attorney (included in the signature page to this report).
*31.1	Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2	Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

E-4

*32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

Filed in this Form 10-K/A. All other exhibits that are not incorporated herein by reference were previously filed with the Form 10-K filed with the Securities and Exchange Commission on March 31, 2003.

+

Management contract or compensatory plan or arrangement.

E-5

QuickLinks

PART II

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

SIGNATURES
INDEX TO EXHIBITS