ALLEGIANCE TELECOM INC, DEF 14A, 2000-04-12

ALLEGIANCE TELECOM INC
DEF 14A, 2000-04-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[X] Definitive Proxy Statement Commission Only (as permitted by
[ ] Definitive Additional Materials Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule 14a-12
</TABLE>

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

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:
N/A
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(2) Aggregate number of securities to which transaction applies:
N/A
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
N/A
-----------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:
N/A
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(5) Total fee paid:
N/A
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:
N/A
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2

ALLEGIANCE TELECOM, INC.
1950 N. STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207

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

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

DATE: May 10, 2000
TIME: 11:00 a.m., local time
PLACE: INFOMART
1950 N. Stemmons Freeway
Dallas, Texas 75207

To Our Stockholders:

We invite you to attend our 2000 annual meeting of stockholders to consider and
vote upon the following:

1. ELECTION OF DIRECTORS. To elect four Class II directors, each for a term of
three years;

2. RATIFICATION OF INDEPENDENT AUDITORS. To ratify the appointment of Arthur
Anderson LLP as our independent public accountants for fiscal year 2000; and

3. OTHER BUSINESS. To transact any other business that may properly be brought
before the meeting.

YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE
EACH OF THESE PROPOSALS. THE ABOVE ITEMS OF BUSINESS ARE DISCUSSED
IN MORE DETAIL IN THE PROXY STATEMENT ACCOMPANYING THIS NOTICE.

This notice of annual meeting of stockholders, the proxy statement, the proxy
card and Allegiance's 1999 Annual Report is being sent on or about April 12,
2000 to those persons who are entitled to vote at the 2000 annual meeting of
stockholders. If you were a stockholder of record at the close of business on
April 5, 2000, you may vote at the 2000 annual meeting of stockholders.

Your vote is important. Whether or not you plan to attend the annual meeting in
person, and regardless of the number of shares you own, please vote (1) by
completing, signing, dating and returning the enclosed proxy card promptly in
the enclosed envelope, (2) by calling the toll-free number listed in the proxy
card or (3) via the Internet as indicated in the proxy card. This will ensure
that your shares are voted as you wish and that a quorum will be present.

By order of the Board of Directors,

/s/ MARK B. TRESNOWSKI

Mark B. Tresnowski
Senior Vice President, General Counsel
and
Secretary

April 12, 2000
<PAGE> 3

MAILED TO STOCKHOLDERS
ON OR ABOUT APRIL 12,
2000

ALLEGIANCE TELECOM, INC.

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

PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 10, 2000

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT VOTING.......................... 1
Why did you send me this proxy statement?................. 1
How many votes do I have?................................. 1
How do I vote?............................................ 1
If my shares are held in "street name" by my broker, will
my broker vote my shares for me?....................... 1
Can I change my vote or revoke my proxy?.................. 2
Will there by any matters voted upon at the Annual Meeting
other than those specified in the Notice of Annual
Meeting?............................................... 2
How are votes counted?.................................... 2
How are proxies being solicited and who pays for the
solicitation of proxies?............................... 2
Can I access future annual reports and proxy statements
electronically?........................................ 3
Who can help answer my other questions?................... 3

INFORMATION ABOUT ALLEGIANCE'S DIRECTORS AND EXECUTIVE
OFFICERS.................................................. 4
Who are Allegiance's Directors and Executive Officers?.... 4
About the Board of Directors and its Committees........... 8
Compensation Committee Interlocks and Insider
Participation.......................................... 9
Compensation of Directors................................. 9
Compensation of Executive Officers........................ 9
Report on Executive Compensation.......................... 11
Executive Agreements...................................... 13
Security Ownership of Certain Beneficial Owners and
Management............................................. 15
Certain Relationships and Related Transactions............ 17
Section 16(a) Beneficial Ownership Reporting Compliance... 20
Common Stock Performance.................................. 21

DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD............ 22
PROPOSAL 1: Election of Directors......................... 22
PROPOSAL 2: Ratification of Appointment of Independent
Public Accountants..................................... 22
Other Matters............................................. 23

INFORMATION ABOUT SUBMITTING STOCKHOLDER PROPOSALS.......... 23

OTHER INFORMATION........................................... 23
</TABLE>
<PAGE> 4

QUESTIONS AND ANSWERS ABOUT VOTING

Q: WHY DID YOU SEND ME THIS PROXY STATEMENT?
A: This proxy statement is being sent to you because Allegiance's board of
directors is soliciting your proxy to vote at the 2000 annual meeting of
stockholders (the "Annual Meeting"). This proxy statement provides
information that should be helpful to you in deciding how to vote on the
matters to be voted on at the Annual Meeting.

Stockholders of record as of the close of business on April 5, 2000 are
entitled to vote. This proxy statement and the proxy card are being sent
to stockholders on or about April 12, 2000.

Q: HOW MANY VOTES DO I HAVE?
A: Each share of Allegiance common stock that you own on April 5, 2000
entitles you to one vote.

Q: HOW DO I VOTE?
A: You can vote on matters presented at the Annual Meeting in any of the
following ways:

1. You can go to www.eproxyvote.com/algx to vote by proxy via the
Internet,

2. You can call 1-877-779-8683 (toll-free) to vote by proxy via
telephone,

3. You can vote by filling out, signing and dating your proxy card and
returning it in the enclosed envelope, or

4. You can attend the Annual Meeting and vote in person.

Stockholders may save Allegiance expense by voting their shares over the
telephone or on the Internet. Stockholders will be required to provide
the company number and control number contained on their proxy cards. In
addition to the instructions that appear on the enclosed proxy card,
step-by-step instructions will be provided by recorded telephone message
or at the designated Web site on the Internet.

To submit a written proxy by mail, you should complete, sign and mail
the enclosed proxy card in accordance with its instructions. If you
properly fill out your proxy card and send it to us in time to vote,
your shares will be voted as you have directed. If you do not specify a
choice on your properly executed proxy card, the shares represented by
your proxy card will be voted FOR the election of all nominees to the
board of directors, FOR the ratification of the appointment of Arthur
Andersen LLP as Allegiance's independent public accountants for the 2000
fiscal year and in the proxy holders' best judgment as to any other
business raised at the Annual Meeting. If you "withhold" your vote for
any of the board nominees, this will be counted as a vote AGAINST that
nominee.

If you attend the Annual Meeting, we will give you a ballot when you
arrive to vote in person

Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE
MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote. Most beneficial owners whose stock is held in street name
receive voting instruction forms from their banks, brokers or other
agents, rather than Allegiance's proxy card. Beneficial owners may also
be able to vote by telephone or the Internet. They should follow the
instructions on the form they receive from their bank, broker, or other
agent.

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Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY?
A: You can change your vote at any time before your proxy is voted at the
Annual Meeting. You can do this in one of the following ways:

1. You can send a written notice stating that you would like to revoke
your proxy to Allegiance's Secretary at the following address:

Allegiance Telecom, Inc.
4 Westbrook Corporate Center, Suite 400
Westchester, IL 60154
Attn: Mark B. Tresnowski

2. You can complete and submit a new proxy card.

3. You can cast a later vote using the Internet or telephone voting
procedures.

4. You can attend the Annual Meeting and vote in person. Simply
attending this meeting, however, will not revoke your proxy. If you
have instructed a broker to vote your shares, you must follow the
directions you received from your broker to change your vote.

Q: WILL THERE BE ANY MATTERS VOTED UPON AT THE ANNUAL MEETING OTHER THAN
THOSE SPECIFIED IN THE NOTICE OF ANNUAL MEETING?
A: Allegiance's management does not know of any matters other than those
discussed in this proxy statement that will be presented at the Annual
Meeting.

Q: HOW ARE VOTES COUNTED?
A: Stockholders of record of Allegiance's common stock as of the close of
business on April 5, 2000, are entitled to vote at the Annual Meeting.

As of April 5, 2000, there were 108,166,056 shares of common stock
issued and outstanding. The presence in person or by proxy of a majority
of the shares of common stock outstanding will constitute a quorum for
the transaction of business.

Each share of common stock is entitled to one vote on each matter to
come before the Annual Meeting. There is no cumulative voting.

Under Delaware law, if you have returned a valid proxy or attend the
meeting in person, but abstain from voting, your stock will nevertheless
be treated as present and entitled to vote. Your stock therefore will be
counted in determining the existence of a quorum and, even though you
have abstained from voting, will have the effect of a vote against any
matter requiring the affirmative vote of a majority of the shares
present and entitled to vote at the Annual Meeting, such as the
ratification of the appointment of Arthur Andersen LLP as Allegiance's
independent public accountants for 2000.

Under Delaware law, broker "non-votes" are also counted for purposes of
determining whether a quorum is present, but are not counted in
determining whether a matter requiring a majority of the shares present
and entitled to vote has been approved or whether a plurality of the
vote of the shares present and entitled to vote has been cast.

Stockholders' votes will be tabulated by the First Chicago Trust Company
of New York, a division of EquiServe, our transfer agent, who will act
as inspectors of election for the Annual Meeting.

Q: HOW ARE PROXIES BEING SOLICITED AND WHO PAYS FOR THE SOLICITATION OF
PROXIES?
A: Initially, Allegiance will solicit proxies by mail. Allegiance's
directors, officers and employees may also solicit proxies in person or
by telephone without additional compensation. Allegiance will pay all
expenses of solicitation of proxies.

In addition, arrangements will also be made with certain banking
institutions, brokerage firms, custodians, trustees, nominees and
fiduciaries for forwarding solicitation materials and communi-

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cating with the beneficial owners of shares held of record by such
persons. Allegiance will reimburse such persons for their reasonable
expenses incurred relating to such actions. Allegiance has also engaged
Corporate Investor Communications, Inc. to assist in communicating with
these institutions.

Q: CAN I ACCESS FUTURE ANNUAL REPORTS AND PROXY STATEMENTS ELECTRONICALLY?
A: Most stockholders can elect to view future annual reports and proxy
statements over the Internet instead of receiving paper copies in the
mail. If you are a stockholder of record, you can choose this option and
save Allegiance the cost of producing and mailing these documents by
following the instructions provided in the enclosed proxy card. If you
want to take advantage of this electronic delivery service, you must
have access to an e-mail account and the Internet as well as an internet
browser. If you choose to view future annual reports and proxy
statements over the Internet, you will be notified by e-mail as to how
to access them on the Internet. You will continue to receive
Allegiance's annual reports and proxy statements electronically so long
as your account remains active or until you cancel your enrollment. You
are free to cancel enrollment at any time by accessing
www.econsent.com/algx on the Internet. If you hold your Allegiance stock
through a bank, broker or other agent, please refer to the information
provided by that entity for instructions on how to elect to view future
annual reports and proxy statements over the Internet.

Q: WHO CAN HELP ANSWER MY OTHER QUESTIONS?
A: If you have more questions about voting or wish to obtain another proxy
card, you should contact:

Andrew Albrecht
Director of Investor Relations
Allegiance Telecom, Inc.
3500 Piedmont Road, Suite 340
Atlanta, Georgia 30305
Phone: (404) 760-4881
Fax: (404) 812-4633
Email: [email protected]

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INFORMATION ABOUT ALLEGIANCE'S DIRECTORS AND EXECUTIVE OFFICERS

WHO ARE ALLEGIANCE'S DIRECTORS AND EXECUTIVE OFFICERS?

The following sets forth certain information regarding Allegiance's executive
officers, other key employees and board of directors, as of March 31, 2000.

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Royce J. Holland.................. 51 Chairman of the Board and Chief
Executive Officer
C. Daniel Yost.................... 51 President and Chief Operating
Officer and Director
Thomas M. Lord.................... 43 Executive Vice President of
Corporate Development, Chief
Financial Officer and Director
Dana A. Crowne.................... 39 Senior Vice President and Chief
Technology Officer
Ted Gilmore....................... 48 Senior Vice President of Marketing
Curtis Gray....................... 51 Senior Vice President of
Operations and Engineering
Stephen N. Holland................ 48 Senior Vice President of Research
Patricia E. Koide................. 51 Senior Vice President of Human
Resources, Real Estate, Facilities
and Administration
Gregg A. Long..................... 46 Senior Vice President of Quality
and Audit
G. Clay Myers..................... 40 Senior Vice President, Finance and
Accounting
Anthony J. Parella................ 40 Senior Vice President of Field
Sales and Customer Care and
Director
Jerrold Sklar..................... 40 Senior Vice President of
Operational Support Systems and
Customer Implementation
Mark B. Tresnowski................ 40 Senior Vice President, General
Counsel and Secretary
James E. Crawford, III............ 54 Director
John B. Ehrenkranz................ 34 Director
Paul J. Finnegan.................. 46 Director
Richard D. Frisbie................ 50 Director
Alan E. Goldberg.................. 45 Director
Reed E. Hundt..................... 51 Director
James N. Perry, Jr. .............. 39 Director
Dino Vendetti..................... 37 Director
</TABLE>

Royce J. Holland, Allegiance's Chairman of the Board and Chief Executive
Officer, has more than 25 years of experience in the telecommunications,
independent power and engineering/construction industries. Prior to founding
Allegiance in April 1997, Mr. Holland was one of several co-founders of MFS
Communications, where he served as President and Chief Operating Officer from
April 1990 until

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September 1996 and as Vice Chairman from September 1996 to February 1997. In
January 1993, Mr. Holland was appointed by President George Bush to the National
Security Telecommunications Advisory Committee. Mr. Holland served as the
Chairman of the Association for Local Telecommunications Services, the industry
trade organization for the competitive local telephone sector from December 1998
to January 2000. In November 1999, Mr. Holland was appointed by Texas Governor
George W. Bush to the Texas (Electronic) E-Government Task Force. Mr. Holland
also presently serves on the board of directors of CSG Systems, a publicly
traded billing services company, ChoiceOne Communications Inc., a publicly
traded CLEC that may compete with Allegiance and CompleTel Europe, N.V., a
publicly traded European facilities-based CLEC. Mr. Holland's brother, Stephen
N. Holland, is employed as Allegiance's Senior Vice President of Research.

C. Daniel Yost, who joined Allegiance as President and Chief Operating Officer
in February 1998, was elected to Allegiance's board of directors in March 1998.
Mr. Yost has more than 26 years of experience in the telecommunications
industry. From July 1997 until he joined Allegiance, Mr. Yost was the President
and Chief Operating Officer for U.S. Operations of Netcom On-Line Communications
Services, Inc., a leading Internet service provider. Mr. Yost served as the
President, Southwest Region of AT&T Wireless Services, Inc. from June 1994 to
July 1997. Prior to that, from July 1991 to June 1994, Mr. Yost was the
President, Southwest Region of McCaw Cellular Communications/LIN Broadcasting.
Mr. Yost presently serves on the board of directors of ADC Telecommunications
Inc., a publicly traded global supplier of transmission and networking systems
for telecommunications networks, Ace Cash Express Inc., a publicly traded
provider of retail financial services and DSET Corporation, a publicly traded
provider of operational support systems gateway products for the global
telecommunications industry.

Thomas M. Lord, a co-founder and director of Allegiance and its Executive Vice
President of Corporate Development and Chief Financial Officer, is responsible
for overseeing Allegiance's mergers and acquisitions, corporate finance and
investor relations functions. Mr. Lord is an 18-year veteran in investment
banking, securities research and portfolio management, including serving as a
managing director of Bear, Stearns & Co. Inc. from January 1986 to December
1996. In the five-year period ending December 1996, Mr. Lord oversaw 43
different transactions valued in excess of $6.2 billion for the
telecommunications, information services and technology industries.

Dana A. Crowne, Allegiance's Senior Vice President and Chief Technology Officer,
joined Allegiance in August 1997 as its Senior Vice President and Chief
Engineer. Prior to joining Allegiance, Mr. Crowne held various management
positions at MFS Communications from the time of its founding in 1988, where his
responsibilities included providing engineering support and overseeing budgets
for the construction of MFS Communications' networks. Mr. Crowne ultimately
became Vice President, Network Optimization for MFS Communications from January
1996 to May 1997 and managed the company's network expenses and planning and its
domestic engineering functions. Prior to joining MFS Communications, Mr. Crowne
designed and installed fiber optic transmission systems for Morrison-Knudsen and
served as a consultant on the construction of private telecommunications
networks with JW Reed and Associates.

Ted Gilmore joined Allegiance as its Senior Vice President of Marketing in
January 2000. Prior to joining Allegiance, Mr. Gilmore was Vice President Sales
for Allied Riser Communications overseeing sales, distribution strategies and
market implementation for the company's Internet/data services. Mr. Gilmore
previously served in a number of senior management positions with GTE from
September 1987 to November 1998, including Vice President and General Manager,
Ethnic and International Sales and Marketing for GTE Communications Corp; Vice
President and General Manager of GTE Professional Services Incorporated; and
Director Distribution Channels and Manager Market Strategy for GTE Telephone
Operations. Mr. Gilmore held sales and marketing management positions with
IBM/Rolm Corporation from 1983 to 1987, and Burroughs Corporation from 1973 to
1983.

Curtis Gray joined Allegiance as its Senior Vice President of Network Operations
and Engineering in January 2000. Prior to joining Allegiance, from January 1994
to December 1999, Mr. Gray served as Vice President, Enhanced Data Services, at
MCI WorldCom. Mr. Gray was responsible for operations and

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technical support of MCI WorldCom's Commercial Global Data Networks, Customer
Collocation, Customer Engineering/Project Management and various Internet
service provider and competitive local exchange carrier initiatives. From
November 1991 to January 1994, Mr. Gray was with WilTel (subsequently purchased
by LDDS which became the WorldCom entity) where he had responsibilities for
Customer Engineering Support, ATM Commercialization, Data Laboratory Services,
Customer Collocation and specific focus on service and support for Internet
service providers. He has previously served in executive roles in engineering
and consulting companies focusing on communication network performance analysis,
design, implementation and operation.

Stephen N. Holland, Allegiance's Senior Vice President of Research, joined
Allegiance in September 1997 as its Senior Vice President and Chief Information
Officer. Prior to that time, Mr. Holland held several senior level positions
involving management of or consulting on information systems, accounting,
taxation and finance. Mr. Holland's experience includes serving as Practice
Manager and Information Technology Consultant for Oracle Corporation from June
1995 to September 1997, as Chief Financial Officer of Petrosurance Casualty Co.
from September 1992 to June 1995, as Manager of Business Development for
Electronic Data Systems, and as a partner of Price Waterhouse. Mr. Holland's
brother, Royce J. Holland, presently serves as Allegiance's Chairman of the
Board and Chief Executive Officer.

Patricia E. Koide has been Allegiance's Senior Vice President of Human
Resources, Real Estate, Facilities and Administration since August 1997. Before
then, Ms. Koide was Vice President of Corporate Services, Facilities and
Administration for WorldCom from March 1997 to August 1997. Ms. Koide also held
various management positions within MFS Communications and its subsidiaries
since 1989, including Senior Vice President of Facilities, Administration and
Purchasing for MFS Communications North America from 1996 to 1997, Senior Vice
President of Human Resources, Facilities and Administration for MFS
Communications Telecom from 1994 to 1996, and Vice President of Human Resources
and Administration for MFS Communications North America from 1989 to 1993. Prior
to MFS Communications, Ms. Koide was with Sprint for eight years where she
managed the company's human resources, real estate and facilities for the
Midwest.

Gregg A. Long, Allegiance's Senior Vice President of Quality and Audit, joined
Allegiance in September 1997 as its Senior Vice President of Regulatory and
Development. Mr. Long spent 11 years at Destec Energy, Inc. as Project
Development Manager -- Partnership Vice President and Director. In that
position, he was responsible for the development of gas-fired power plants from
conceptual stages through project financing. Prior to joining Destec, Mr. Long
was Manager of Project Finance at Morrison-Knudsen, where he was responsible for
analyzing and arranging finance packages for various industrial, mining and
civil projects and also served as financial consultant and analyst.

G. Clay Myers joined Allegiance as its Senior Vice President, Finance and
Accounting in December 1999. Prior to joining Allegiance, Mr. Myers was the Vice
President, Finance, Chief Financial Officer and Treasurer of PageMart Wireless,
Inc. Prior to joining PageMart, Mr. Myers was Senior Operations Manager for Dell
Computer Corporation from 1991 to 1993 and was with Ernst & Young, LLP from 1982
to 1991. Mr. Myers is a certified public accountant.

Anthony J. Parella, Allegiance's Senior Vice President of Field Sales and
Customer Care since October 1999, joined Allegiance as its Regional Vice
President -- Central Division in August 1997 and later became its National Vice
President of Field Sales in August 1998. Mr. Parella has more than 10 years of
experience in the telecommunications industry. Mr. Parella became a member of
Allegiance's board of directors in December 1999. Prior to joining Allegiance,
Mr. Parella was Vice President and General Manager for MFS Intelenet, Inc., an
operating unit of MFS Communications, from February 1994 to January 1997, where
he was responsible for the company's sales and operations in Texas. Mr. Parella
also served as Director of Commercial Sales for Sprint from 1991 to January
1994.

Jerrold Sklar, Allegiance's Senior Vice President of Operation Support Systems
and Customer Implementation, joined Allegiance in January of 1998 as its Vice
President of Marketing, and has more than 17 years of experience in the
telecommunications industry. Prior to joining Allegiance, Mr. Sklar served as
Director of Strategic Sales and Director of Field Support for the Managed
Services Division of
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<PAGE> 10

Octel Communications Corporation (now Lucent Technologies) from October 1992 to
December 1997. Prior to that time, Mr. Sklar managed the OEM sales channel for
VMX, Inc. from October 1989 to October 1992. Additionally Mr. Sklar held various
Sales and Sales Management positions with long distance carrier, Sprint from
July 1982 to September 1989.

Mark B. Tresnowski became Allegiance's Senior Vice President and General Counsel
in February 1999. Mr. Tresnowski has been Allegiance's Secretary since September
1997. Mr. Tresnowski practiced law at Kirkland & Ellis for 13 years and was a
partner of that firm from October 1992 to January 1999. In private practice, Mr.
Tresnowski specialized in private and public financings, mergers and
acquisitions and securities law.

James E. Crawford, III, who was elected to Allegiance's board of directors in
August 1997, is a general partner of Frontenac Company, a Chicago-based private
equity investing firm, where he specializes in investing in companies in the
telecommunications and technology industries. Mr. Crawford also presently serves
on the boards of directors of Focal Communications Corporation, a publicly
traded CLEC that competes with Allegiance, as well as of Optika Incorporated, a
publicly traded imaging software document company, and Input Software
Incorporated, a publicly traded document imaging software company.

John B. Ehrenkranz, who was elected to Allegiance's board of directors in March
1998, is a Managing Director of Morgan Stanley & Co. Incorporated where he has
been employed since 1987. Mr. Ehrenkranz also presently serves on the board of
directors of ChoiceOne Communications, Inc., a publicly traded CLEC that may
compete with Allegiance. Mr. Ehrenkranz is also a Managing Director of Morgan
Stanley Dean Witter Capital Partners.

Paul J. Finnegan, who was elected to Allegiance's board of directors in August
1997, is a managing director of Madison Dearborn Partners, Inc., a Chicago-based
private equity investing firm, where he specializes in investing in companies in
the telecommunications industry. Mr. Finnegan also presently serves on the board
of directors of Focal Communications Corporation, a publicly traded CLEC that
competes with Allegiance in certain markets and CompleTel Europe, N.V., a
publicly traded European facilities-based CLEC.

Richard D. Frisbie, who was elected to Allegiance's board of directors in August
1997, is a Managing Partner of Battery Partners IV, LLC which is the general
partner of Battery Venture IV, a Boston-based private equity investing firm,
where he specializes in investing in companies in the telecommunications
industry. Mr. Frisbie also presently serves on the board of directors of Focal
Communications Corporation, a publicly traded CLEC that competes with Allegiance
in certain markets.

Alan E. Goldberg was elected to Allegiance's board of directors in March 1999.
Mr. Goldberg has been Chairman, CEO and Director of Morgan Stanley Dean Witter
Capital Partners since February 1998. Prior to that time, he was co-head of MSDW
Capital Partners. He has been a Managing Director of Morgan Stanley & Co.
Incorporated since January 1988. Mr. Goldberg also serves as a director of
Catalytica, Inc., Smurfit-Stone Container Corporation, Equant, N.V., a provider
of international data network services, and several private companies.

Reed E. Hundt was elected to Allegiance's board of directors in March 1998. Mr.
Hundt served as chairman of the Federal Communications Commission from 1993 to
1997. He currently serves as chairman of The Forum on Communications and Society
at The Aspen Institute, is a senior advisor on information industries to
McKinsey & Company, a worldwide management consulting firm, and a special
advisor to Madison Dearborn Partners, Inc., a Chicago-based private equity
investing firm. Mr. Hundt is a venture partner at Benchmark Capital, a venture
capital firm and a principal of Charles Ross Partners, LLC, a consulting firm.
Mr. Hundt also presently serves on the boards of directors of Novell, Inc., a
publicly traded network software and Internet solutions provider, NorthPoint
Communications Group, Inc., a publicly traded CLEC that competes with Allegiance
in certain markets and Phone.Com, Inc., a publicly traded software provider for
wireless telephones. Prior to joining the FCC, Mr. Hundt was a partner at Latham
& Watkins, an international law firm.

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James N. Perry, Jr., who was elected to Allegiance's board of directors in
August 1997, is a managing director of Madison Dearborn Partners, Inc., a
Chicago-based private equity investing firm, where he specializes in investing
in companies in the telecommunications industry. Mr. Perry also presently serves
on the boards of directors of Focal Communications Corporation, a publicly
traded CLEC that competes with Allegiance in certain markets, Omnipoint
Corporation, a publicly traded PCS provider, Clearnet Communications, a Canadian
publicly traded PCS and enhanced specialized mobile radio company and CompleTel
Europe, N.V., a publicly traded European facilities-based CLEC.

Dino J. Vendetti was appointed to Allegiance's board of directors in October
1999. Mr. Vendetti has managed investments in the telecommunications, cable and
data networking industries for Vulcan Ventures Incorporated since May 1998. From
August 1997 until joining Vulcan Ventures, Mr. Vendetti was Vice President and
Research Analyst at Dain Rauscher covering the telecommunications industry. From
July 1996 to April 1997, Mr. Vendetti was Vice President of Product Management
at Metawave Communications Corporation. From October 1994 to July 1996, Mr.
Vendetti served as Director of Business Development and Product Management for
Qualcomm, Inc., where he was responsible for the global infrastructure product
line. Mr. Vendetti also presently serves on the board of directors of NorthPoint
Communications Group, Inc., a publicly traded CLEC that competes with Allegiance
in certain markets.

Allegiance's senior executive officers are elected annually by the board of
directors at its first meeting held after each annual meeting of stockholders or
as soon thereafter as convenient.

ABOUT THE BOARD OF DIRECTORS AND ITS COMMITTEES.

Board

Allegiance's by-laws provide that the number of directors shall be determined by
resolution of the board of directors. The board currently consists of 12
directors. Allegiance's by-laws provide that its directors will be elected by
plurality vote of Allegiance's stockholders, without cumulative voting. No
director may be removed from office without cause and without the vote of the
holders of a majority of the outstanding voting stock.

The board of directors is divided into three classes, as nearly equal in number
as possible, with each director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. Messrs. Frisbie, Lord,
Vendetti and Yost are Class II directors whose terms expire at the Annual
Meeting. Messrs. Goldberg, Holland, Hundt and Perry are Class III directors
whose terms expire at the 2001 annual meeting of Allegiance's stockholders.
Messrs. Crawford, Ehrenkranz, Finnegan and Parella are Class I directors whose
terms expire at the 2002 annual meeting of Allegiance's stockholders. At each
annual meeting of Allegiance's stockholders, successors to the class of
directors whose term expires at such meeting will be elected to serve for
three-year terms and until their successors are elected and qualified. In
February 2000, Paul D. Carbery resigned as a Class I director and at such time,
the board appointed James E. Crawford, previously a Class II director, to fill
the Class I vacancy created by Mr. Carbery's resignation.

During the fiscal year ended December 31, 1999, the board of directors met six
times and acted by written consent five times. During the fiscal year ended
December 31, 1999, all of the directors attended at least 75% of the total of
all meetings of the board of directors and any committee on which he served,
except for Alan Goldberg.

See also "Certain Relationships and Related Transactions" below for a discussion
of the voting agreements concerning Allegiance's board of directors.

8
<PAGE> 12

Board Committees

The board of directors currently has three committees:

- Executive Committee

- Audit Committee

- Compensation Committee

The Executive Committee is currently comprised of Messrs. Crawford, Goldberg,
Holland, Perry and Vendetti. The Executive Committee is authorized, subject to
certain limitations, to exercise all of the powers of the board of directors
during periods between board meetings. During the fiscal year ended December 31,
1999, the Executive Committee did not meet.

The Audit Committee is currently comprised of Messrs. Ehrenkranz, Finnegan and
Hundt. The Audit Committee is responsible for making recommendations to the
board of directors regarding the selection of independent auditors, reviewing
the results and scope of the audit and other services provided by Allegiance's
independent accountants and reviewing and evaluating Allegiance's audit and
control functions and year 2000 issues. During the fiscal year ended December
31, 1999, the Audit Committee met twice.

The Compensation Committee is currently comprised of Messrs. Crawford, Frisbie,
Goldberg, Perry and Vendetti. The primary purpose and this Committee's
responsibilities are described in the "Report on Executive Compensation" section
in this proxy statement. During the fiscal year ended December 31, 1999, the
Compensation Committee met twice and acted by written consent once. Royce J.
Holland resigned from this Committee in 1999.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.

The board of directors has established a Compensation Committee, which is
responsible for decisions regarding salaries, incentive compensation, stock
option grants and other matters regarding executive officers and key employees
of Allegiance. No current member of the Compensation Committee is an Allegiance
employee.

COMPENSATION OF DIRECTORS.

Allegiance reimburses the members of its board of directors for their reasonable
out-of-pocket expenses incurred in connection with attending board or committee
meetings. Additionally, Allegiance is obligated to maintain its present level of
directors' and officers' insurance. Members of Allegiance's board of directors
generally receive no other compensation for services provided as a director or
as a member of any board committee. However, in March 1998, prior to Reed E.
Hundt joining the board of directors, Allegiance issued to Mr. Hundt, options to
purchase 75,934 shares of common stock and 75,934 shares of common stock to
Charles Ross Partners, LLC, of which Mr. Hundt is a member. The options were
issued with an exercise price of $1.6467 per share. 66.67% of such options are
currently vested and an additional 8.34% of such options will vest every three
months after March 13, 2000, until March 13, 2001, when all such options become
exercisable. Additionally, on December 8, 1999, each of Reed E. Hundt and Dino
Vendetti were granted options to purchase 37,500 shares of Allegiance common
stock, at an exercise price of $50.0025 per share. 33.33% of such options vest
on December 8, 2000, and an additional 8.34% of such options will vest every
three months after that date, until December 8, 2002, when all such options
become exercisable. These option and shares numbers have been adjusted to
reflect the 3-for-2 stock split, in the form of a 50% stock dividend, of
Allegiance's common stock effected February 28, 2000.

COMPENSATION OF EXECUTIVE OFFICERS.

Summary of Executive Compensation

The following table sets forth certain summary information for the years ended
December 31, 1999, 1998 and 1997, concerning the compensation paid and awarded
to (a) Allegiance's Chief Executive Officer and

9
<PAGE> 13

(b) the four other executive officers of Allegiance who, based on salary and
bonus compensation from Allegiance, were the most highly compensated officers of
Allegiance for the year ended December 31, 1999 (such five executive officers,
the "Named Executive Officers"). The share numbers have been adjusted to reflect
the 3-for-2 stock split, in the form of a 50% stock dividend, of Allegiance's
common stock effected February 28, 2000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(#)
- --------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Royce J. Holland........................................ 1999 $225,100 $150,000 $-- --
Chairman of the Board and 1998 $206,928 $150,000 $-- --
Chief Executive Officer 1997 $ 72,308 $ -- $-- --
C. Daniel Yost.......................................... 1999 $225,000 $150,000 $-- --
President and Chief Operating 1998 $194,742 $100,000 $-- --
Officer 1997 -- $ -- $-- --
Thomas M. Lord.......................................... 1999 $200,000 $150,000 $-- --
Executive Vice President of 1998 $179,850 $150,000 $-- --
Corporate Development and 1997 $ 63,942 $ -- $-- --
Chief Financial Officer
Mark B. Tresnowski...................................... 1999 $184,616 $80,000 $-- 495,000
Senior Vice President, General 1998 -- $ -- $-- --
Counsel and Secretary 1997 -- $ -- $-- --
Anthony J. Parella...................................... 1999 $150,803 $80,000 $-- 300,000
Senior Vice President of Field 1998 $133,691 $60,000
Sales and Customer Care 1997 $ 45,192 $ -- $-- --
</TABLE>

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

(1) Includes perquisites and other benefits paid to the executive officer in
excess of 10% of the total annual salary and bonus received by such
executive officer during the last fiscal year.

Decisions concerning the compensation of Allegiance's Chief Executive Officer
and each of the other senior executive officers of Allegiance is determined by
its Compensation Committee.

Option Grants in Last Fiscal Year

The following table sets forth information concerning the award of stock options
to the Named Executive Officers during fiscal 1999. The numbers have been
adjusted to reflect the 3-for-2 stock split, in the form of a 50% stock
dividend, of Allegiance's common stock effected February 28, 2000.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS MARKET STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE VALUE AT OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE GRANT EXPIRATION ------------------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE DATE 5%($) 10%($)
- ---- ------------- ------------- --------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Royce J. Holland........ -- -- -- -- -- -- --
C. Daniel Yost.......... -- -- -- -- -- -- --
Thomas M. Lord.......... -- -- -- -- -- -- --
Mark B. Tresnowski...... 495,000 7.52% $ .6667 $15.9591 2/1/2005 $10,256,410 $13,664,880
Anthony J. Parella...... 300,000 4.56% $35.0850 $35.0850 10/1/2005 $ 3,579,677 $ 8,121,065
</TABLE>

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

(1) Mark Tresnowski was granted 495,000 options on February 1, 1999. 33.33% of
such options vested on February 1, 2000, with 2.78% vesting each month after
February 1, 2000. Tony Parella was granted 300,000 options on October 1,
1999. 33.00% of such options vest on October 1, 2000, with 2.75% vesting
each month after October 1, 2000.

10
<PAGE> 14

(2) These assumed rates of appreciation are provided in order to comply with the
requirements of the SEC and do not represent Allegiance's expectation as to
the actual rate of appreciation of the common stock. The actual value of the
options will depend on the performance of Allegiance's common stock, and may
be greater or less than the amounts shown, and will also depend on
optionee's continued employment through the vesting period.

Exercise of Stock Options and Fiscal Year-End Option Values

The following table sets forth information concerning the exercise of stock
options by the Named Executive Officers during fiscal 1999 and the fiscal
year-end value of unexercised options. The numbers have been adjusted to reflect
the 3-for-2 stock split, in the form of a 50% stock dividend, of Allegiance's
common stock effected February 28, 2000.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
SHARES DECEMBER 31, 1999(#) DECEMBER 31, 1999(1)
ACQUIRED ON ------------------------------- -----------------------------
NAME EXERCISE(#) VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- --------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Royce J. Holland............. -- -- -- -- -- --
C. Daniel Yost............... -- -- -- -- -- --
Thomas M. Lord............... -- -- -- -- -- --
Mark B. Tresnowski........... -- -- -- 495,000 -- $30,113,969
Anthony J. Parella........... -- -- -- 300,000 -- $ 7,925,400
</TABLE>

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

(1) The value of unexercised in-the-money options (i.e., options that had a
positive spread between the exercise price and the fair market value of the
common stock) as of December 31, 1999, is based on the December 31, 1999
closing price of $61.5030 per share of common stock as reported on the
Nasdaq National Market.

REPORT ON EXECUTIVE COMPENSATION.

Compensation Philosophy

The Compensation Committee makes recommendations to the board of directors with
respect to Allegiance's general compensation and employee stock ownership
policies and practices. The Compensation Committee also determines the
compensation to be paid to Allegiance's Chief Executive Officer and each of its
other senior executive officers. None of Allegiance's executive officers has an
employment agreement that provides for a specified salary, bonus, severance or
other cash payment. Thus, all of Allegiance's executive compensation decisions
are made solely in the discretion of the Compensation Committee, subject to
review and approval by the full board of directors.

Allegiance is a leading competitive telecommunications provider pursuing an
aggressive growth strategy. As a result, Allegiance's approach to executive
compensation, as implemented by the Compensation Committee, has been designed to
provide a competitive compensation program that will enable Allegiance to
attract, motivate, reward and retain individuals who possess the necessary level
of skill, experience and dedication. Allegiance's compensation policies are
based on the principle that each executive's financial rewards should be aligned
with the financial interests of Allegiance's stockholders. The Compensation
Committee believes that the best way to ensure this alignment is to provide
executive officers with the potential for significant equity ownership.

Compensation payments in excess of $1 million to Allegiance's Chief Executive
Officer or the other four most highly compensated executive officers are subject
to a limitation on deductibility for Allegiance under Section 162(m) of the
Internal Revenue Code, as amended. Certain performance-based compensation is not
subject to the limitation on deductibility. The Compensation Committee does not
expect cash compensation for 1999 to its Chief Executive Officer or any other
executive officer to be in excess of $1 million. For fiscal 1999, the
compensation paid to any one of Allegiance's executive officers was well below
$1 million. Allegiance intends to maintain the qualification of its incentive
stock plans for the performance-based exception to the $1 million limitation on
deductibility of compensation payments.

11
<PAGE> 15

Annual Salaries

Base salaries for Allegiance's executive officers are determined by evaluating
the responsibilities associated with the position held and the experience of the
individual, and by reference to the competitive marketplace for management
talent, including a comparison of base salaries for comparable positions at
comparable companies within Allegiance's industry. Adjustments in salary and
performance-based bonuses in addition to base salary are determined by
evaluating:

- the competitive marketplace,

- Allegiance's performance,

- the performance of the executive officer, particularly with respect to
such officer's ability to manage Allegiance's rapid growth, and

- any increased responsibilities assumed by the executive officer.

All base salary determinations take into account the level of each executive's
ownership of Allegiance stock and the incentive provided by such ownership and
the vesting associated with it. To evaluate the competitive marketplace,
Allegiance retained on behalf of the Compensation Committee, a benefits
consulting firm that conducted a comprehensive survey of compensation and
benefits provided in the communication industry. Based on such survey, the
Compensation Committee determined that Allegiance salaries and bonuses are
generally at the level paid by Allegiance's competitors.

Annual Bonuses

Allegiance considers the payment of cash bonuses as an important component of
the incentive compensation provided to each of its executive officers. Bonus
targets for each such executive are set annually by the Compensation Committee
at the beginning of each year. One-half of any potential bonus is payable based
upon the level of Allegiance's achievement of its strategic and operating goals
and the other half based upon the level of personal achievement by the
individual executive officer.

Compensation of Chief Executive Officer

In the case of the Chief Executive Officer's cash compensation, the Compensation
Committee accepted the recommendation of Royce Holland. The Compensation
Committee and Mr. Holland acknowledged that his salary and bonus compensation
continue to be substantially below that paid to chief executive officers of many
other companies in the telecommunications industry carrying on businesses
similar to those of Allegiance. The Compensation Committee believes that Mr.
Holland's stock ownership and the vesting requirements associated with it, as
well as Mr. Holland's personal commitment to lead Allegiance in the pursuit of
its growth strategy, provide Mr. Holland with significant incentive to remain
with Allegiance. The Compensation Committee, however, will evaluate Mr.
Holland's compensation and stock ownership incentives annually with a view
towards retaining his leadership and is likely to consider providing additional
incentive or other compensation in 2000 as Mr. Holland's equity in Allegiance
becomes fully vested.

Founders' Stock and Allegiance Stock Plans

Allegiance's founding management team, consisting of 26 of the executives now
employed by Allegiance, invested in Allegiance and today beneficially own in the
aggregate approximately 16,500,000 shares of common stock, or approximately
15.3% of the total shares outstanding as of March 31, 2000. These shares are all
subject to vesting based on length of service. All of these shares were at least
75% vested as of March 31, 2000 and will be 100% vested on or after August 13,
2000. This founders' stock, together with Allegiance's option plans and employee
stock discount purchase plan, contribute to Allegiance's ability to attract and
retain the best available personnel. It is the philosophy of the Compensation
Committee to tie a significant portion of an executive's total opportunity for
financial gain to increases in the value of

12
<PAGE> 16

Allegiance's common stock. The Compensation Committee believes that employees
who are owners of Allegiance will focus on its long-term success and on building
stockholder value.

All employees, including executive officers, of Allegiance and its subsidiaries
are eligible for grants of stock options. During each fiscal year, the
Compensation Committee authorizes the grant of stock options to employees,
including executive officers, who are recommended by management as being in a
position to continue to contribute to Allegiance's growth and profitability. The
number of options granted to a particular employee is based on management's
assessment of his or her performance and contribution.

Compensation Committee,

James N. Perry, Jr., Director and Committee Chairman
James E. Crawford, III, Director
Richard D. Frisbie, Director
Dino Vendetti, Director

EXECUTIVE AGREEMENTS.

Royce J. Holland Executive Agreement

In August 1997, Allegiance, Allegiance Telecom, LLC, and Royce Holland entered
into an Executive Purchase Agreement, a Securityholders Agreement and a
Registration Agreement. The Registration Agreement was amended and restated on
September 13, 1999. In December 1999, Allegiance and Royce Holland amended and
restated the Executive Purchase Agreement. These agreements include, among
others, the following terms:

Vesting. Mr. Holland's Allegiance common stock is currently 80% vested and
the remaining 20% will vest on August 13, 2000. Vesting will be accelerated 100%
in the event of Mr. Holland's death or disability, and 100% upon a qualified
sale of Allegiance where at least 50% of the consideration for such sale is cash
or marketable securities.

Repurchase of Securities. If Mr. Holland's employment is terminated for any
reason other than a termination by Allegiance without cause, Allegiance will
have the right to repurchase all unvested Holland executive securities at the
lesser of fair market value and original cost.

Restrictions on Transfer; Holdback and "Drag Along" Agreements. The Holland
executive securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of Allegiance's securities
and provisions requiring the holder of such shares to approve and, if requested
by Allegiance, sell its shares in any sale of Allegiance that is approved by the
board.

Terms of Employment. Mr. Holland is an "at will" employee of Allegiance
and, thus, may be terminated by Allegiance at any time and for any reason. Mr.
Holland is not entitled to receive any severance payments upon any such
termination.

Noncompetition and Nonsolicitation Agreements. During the noncompete period
defined below, Mr. Holland may not hire or attempt to induce any employee of
Allegiance to leave Allegiance's employ, nor attempt to induce any customer or
other business relation of Allegiance to cease doing business with Allegiance,
nor in any other way interfere with Allegiance's relationships with its
employees, customers, and other business relations. Also, during this noncompete
period, Mr. Holland may not participate in any business engaged in the provision
of competitive local exchange telecommunications services in any metropolitan
statistical area in which Allegiance is engaged in business or has at any time
had an approved business plan to engage in business. The noncompete period in
this agreement is the period of employment and the one year following
termination of employment for any reason, but terminates immediately upon a
qualified sale of Allegiance.

Gross-Up for Excise Taxes. In addition, the Executive Purchase Agreement
contains a "gross-up" provision pursuant to which any payment, which would be
subject to certain excise taxes occurring as a result of such agreement, would
include an additional gross-up payment resulting in the executive retaining an
additional amount equal to these excise taxes.

13
<PAGE> 17

C. Daniel Yost Executive Agreement

In January 1998, Allegiance, Allegiance Telecom, LLC, and Dan Yost entered into
an Executive Purchase Agreement, a Securityholders Agreement and a Registration
Agreement. The Registration Agreement was amended and restated on September 13,
1999. In December 1999, Allegiance and Dan Yost amended and restated the
Executive Purchase Agreement, containing the same terms as those described above
for Royce Holland.

Thomas M. Lord Executive Agreement

In August 1997, Allegiance, Allegiance Telecom, LLC, and Tom Lord entered into
an Executive Purchase Agreement, a Securityholders Agreement and a Registration
Agreement. The Registration Agreement was amended and restated on September 13,
1999. In December 1999, Allegiance and Tom Lord amended and restated the
Executive Purchase Agreement, containing the same terms as those described above
for Royce Holland.

Anthony J. Parella Executive Agreement

In August 1997, Allegiance, Allegiance Telecom, LLC and Tony Parella entered
into an Executive Purchase Agreement, a Securityholders Agreement and a
Registration Agreement. The Registration Agreement was amended and restated on
September 13, 1999. These agreements include, among others, the following terms:

Vesting. Mr. Parella's Allegiance common stock is currently 75% vested,
with 25% vesting on August 13, 2000. Vesting will be accelerated 100% in the
event of Mr. Parella's death or disability, and 100% upon a qualified sale of
Allegiance where at least 50% of the consideration for such sale is cash or
marketable securities.

Repurchase of Securities. If Mr. Parella's employment is terminated for any
reason, Allegiance will have the right to repurchase all such executive's
unvested executive securities at the lesser of fair market value and original
cost.

Restrictions on Transfer; Holdback and "Drag Along" Agreements. The
executive securities are subject to various restrictions on transferability,
holdback periods in the event of a public offering of Allegiance's securities
and provisions requiring the holder of such shares to approve and, if requested
by Allegiance, sell its shares in any sale of Allegiance that is approved by the
board.

Terms of Employment. Mr. Parella is an "at will" employee of Allegiance
and, thus, may be terminated by Allegiance at any time and for any reason. Mr.
Parella is not entitled to receive any severance payments upon any such
termination.

Mark B. Tresnowski and Anthony J. Parella Stock Option Agreements

Mark Tresnowski was granted 495,000 options on February 1, 1999. 33.33% of such
options vested on February 1, 2000, with 2.78% vesting each month after February
1, 2000. Mr. Tresnowski was granted 150,000 options on January 1, 2000, at an
exercise price per share of $61.5030. 33.00% of such options vest on January 1,
2001, with 2.75% vesting each month after January 1, 2001. Tony Parella was
granted 300,000 options on October 1, 1999. 33.00% of such options vest on
October 1, 2000, with 2.75% vesting each month after October 1, 2000. The share
numbers herein have been adjusted to reflect the 3-for-2 stock split, in the
form of a 50% stock dividend, of Allegiance's common stock effected February 28,
2000.

These stock option agreements provide that upon the consummation of a Change in
Control, if such executive is still employed by Allegiance immediately prior to
such consummation, all unvested options become vested options. A "Change in
Control" is defined as any of the following events: (i) if any "person" or
"group" as those terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, other than any employee benefit plan of Allegiance or a
trustee or other administrator or fiduciary holding securities under an employee
benefit plan of Allegiance ("Exempt Person"), is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or
indirectly, of securities of Allegiance representing 50% or more of the combined
voting power of Allegiance's then

14
<PAGE> 18

outstanding securities; or (ii) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors of Allegiance and any new directors whose election by the Board or
nomination for election by Allegiance's stockholders was approved by at least
two-thirds of the directors then still in office who either were directors at
the beginning of the period or whose election was previously so approved, cease
for any reason to constitute a majority thereof; or (iii) the stockholders of
Allegiance approve a merger or consolidation of Allegiance with any other
corporation, other than a merger or consolidation (A) which would result in all
or a portion of the voting securities of Allegiance outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) more than 50% of
the combined voting power of the voting securities of Allegiance or such
surviving entity outstanding immediately after such merger or consolidation or
(B) by which the corporate existence of Allegiance is not affected and following
which Allegiance's chief executive officer and directors retain their positions
with Allegiance (and constitute at least a majority of the Board); or (iv) the
stockholders of Allegiance approve a plan of complete liquidation of Allegiance
or an agreement for the sale or disposition by Allegiance of all or
substantially all Allegiance's assets, other than a sale to an Exempt Person.

In addition, these agreements contain a "gross-up" provision pursuant to which
any payment, which would be subject to certain excise taxes occurring as a
result of this Agreement, would include an additional gross-up payment resulting
in the executive retaining an additional amount equal to these excise taxes.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information regarding the beneficial
ownership of the outstanding common stock of Allegiance as of March 24, 2000 by:

- each of the directors,

- each of the Named Executive Officers,

- all directors and executive officers as a group, and

- each owner known by Allegiance to own beneficially more than 5% of its
outstanding common stock.

Beneficial ownership of less than one percent is indicated by an asterisk. The
percentages specified below are based on 108,100,404 shares of common stock
outstanding as of March 24, 2000. Shares subject to options exercisable within
60 days of such date are considered for the purpose of determining the percent
of the class held by the holder of such options, but not for the purpose of
computing the percentage held by others. Unless otherwise noted, the address for
each director and executive officer of Allegiance is c/o Allegiance Telecom,
Inc., 1950 Stemmons Freeway, Suite 3026, Dallas, Texas 75207.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER CLASS
- ------------------------------------ ----------- -----------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Royce J. Holland(1)......................................... 5,863,082 5.42%
C. Daniel Yost.............................................. 2,186,919 2.02%
Thomas M. Lord(2)........................................... 2,418,284 2.24%
Anthony J. Parella(3)....................................... 450,740 *
Mark B. Tresnowski(4)....................................... 211,066 *
James E. Crawford, III(5)(6)................................ 1,263,720 1.17%
John B. Ehrenkranz(7)....................................... -- --
Paul J. Finnegan(8)......................................... -- --
Richard D. Frisbie(9)....................................... 271,335 *
Alan E. Goldberg(10)........................................ -- --
Reed E. Hundt(11)........................................... 59,760 *
</TABLE>

15
<PAGE> 19

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER CLASS
- ------------------------------------ ----------- -----------
<S> <C> <C>
James N. Perry, Jr.(8)...................................... -- --
Dino Vendetti(12)........................................... 2,250 *
All directors and executive officers as a group (13
persons).................................................. 12,685,892 11.74%

OTHER 5% OWNERS:
Morgan Stanley Dean Witter Capital Partners(13)............. 15,453,371 14.30%
Madison Dearborn Capital Partners II, L.P................... 7,736,418 7.16%
Vulcan Ventures Incorporated................................ 6,000,000 5.55%
Jennison Associates LLC(14)................................. 6,633,450 6.14%
Putnam Investments, Inc.(15)................................ 9,665,322 8.94%
</TABLE>

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

* Denotes less than one percent.

(1) Includes 2,910,828 shares of common stock owned by the Royce J. Holland
Family Limited Partnership, of which Royce J. Holland is the sole general
partner, 1,500 shares of common stock owned by Mr. Holland's wife, 3,900
shares of common stock held by Mr. Holland as custodian for his children,
as to which 3,900 shares Mr. Holland disclaims beneficial ownership.
5,821,657 of the shares of common stock owned by Mr. Holland and the Royce
J. Holland Family Limited Partnership are subject to vesting, with 80% of
such shares of common stock having vested and an additional 20% vesting on
August 13, 2000.

(2) Includes 1,209,142 shares of common stock owned by Mr. Lord's wife and
children. All of the shares of common stock owned by Mr. Lord and his
family are subject to vesting with 80% of such shares of common stock
having vested and an additional 20% vesting on August 13, 2000.

(3) Mr. Parella owns 450,739 shares of common stock. In addition, Mr. Parella
has options to acquire an additional 300,000 shares of common stock at an
exercise price per share of $35.0850, with 33.00% vesting on October 1,
2000, and 2.75% vesting each month thereafter.

(4) Includes options to acquire 178,744 shares of common stock that have vested
as of March 1, 2000 and an additional 27,522 shares that vest within 60
days. Mr. Tresnowski has options to acquire an additional 288,734 shares of
common stock at an exercise price per share of $.6667. In addition, Mr.
Tresnowski was granted options to acquire an additional 150,000 shares of
common stock at an exercise price per share of $61.5030, with 33.00%
vesting on January 1, 2001, and 2.75% vesting each month thereafter. See
discussion above regarding "Executive Agreements".

(5) 1,232,744 shares of common stock shown are owned by Frontenac VII Limited
Partnership and Frontenac Masters VII Limited Partnership. Messrs. Carbery
and Crawford are members of Frontenac Company, VII, L.L.C., the general
partner of Frontenac VII Limited Partnership and Frontenac Masters VII
Limited Partnership and their address is c/o Frontenac Company, 135 S.
LaSalle Street, Suite 3800, Chicago, IL 60603. They disclaim beneficial
ownership of these shares of common stock, except to the extent of their
pecuniary interest.

(6) Includes 150 shares of common stock owned by Mr. Crawford's son, and 900
shares held by Mr. Crawford as custodian for his son, as to which 1,050
shares Mr. Crawford disclaims beneficial ownership.

(7) Mr. Ehrenkranz is a Managing Director of Morgan Stanley Dean Witter Capital
Partners, the managing member of the general partner of the funds described
in footnote (13) below and their address is c/o Morgan Stanley Dean Witter
Capital Partners, 1221 Avenue of the Americas, New York, NY 10020.

(8) Messrs. Finnegan and Perry are managing directors of Madison Dearborn
Partners, Inc., the general partner of the general partner of Madison
Dearborn Capital Partners II, L.P. and their address is c/o Madison
Dearborn Partners, Inc., Three First National Plaza, Suite 3800, Chicago,
IL 60602.

16
<PAGE> 20

(9) 235,766 shares of common stock shown are owned by Battery Ventures IV, L.P.
and 35,569 shares of common stock are owned by Battery Investment Partners
IV, LLC. Mr. Frisbie is a member manager of Battery Partners IV, LLC, the
general partner of Battery Ventures IV, L.P. and a member manager of
Battery Investment Partners IV, LLC and his address is c/o Battery
Ventures, 20 William Street, Wellesley, MA 02181. He disclaims beneficial
ownership of these shares of common stock except to the extent of his
pecuniary interest.

(10) Mr. Goldberg is Chairman, CEO and Director of Morgan Stanley Dean Witter
Capital Partners, the managing member of the general partner of the funds
described in footnote (13) below and their address is c/o Morgan Stanley
Dean Witter Capital Partners, 1221 Avenue of the Americas, New York, NY
10020.

(11) In March 1998, Mr. Hundt was issued options to acquire 75,935 shares of
common stock, with an exercise price per share of $1.6467. 66.67% of such
options are currently vested, and an additional 8.34% of such options will
vest on each of June 13, 2000, September 13, 2000, December 13, 2000 and
March 13, 2001, when all such options become exercisable. In December 1999,
Mr. Hundt was issued options to acquire 37,500 shares of common stock, at
an exercise price per share of $50.0025. One-third of these options vest on
December 8, 2000, with 8.34% vesting every three months thereafter.

(12) In December 1999, Mr. Vendetti was issued options to acquire 37,500 shares
of common stock, at an exercise price per share of $50.0025. One-third of
these options vest on December 8, 2000, with 8.34% vesting every three
months thereafter.

(13) These shares of common stock are owned by Morgan Stanley Capital Partners
III, L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital
Investors, L.P.

(14) Of these shares, Jennison Associates LLC, a registered investment adviser
("Jennison"), has sole voting power as to 6,258,750 shares and shared
dispositive power as to 6,633,450 shares. Jennison is a wholly-owned
subsidiary of The Prudential Insurance Company of America. Jennison's
address is 466 Lexington Avenue, New York, New York 10017. Information is
as of February 10, 2000 and is derived from SEC filings.

(15) Of these shares, Putnam Investments, Inc., a registered investment adviser
("Putnam"), has shared voting power as to 209,986 shares and shared
dispositive power as to 9,665,322 shares. Putnam is a wholly-owned
subsidiary of Marsh & McLennan Companies, Inc. Putnam's address is One Post
Office Square, Boston, Massachusetts 02109. Information is as of February
17, 2000 and is derived from SEC filings.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Limited Liability Company Agreement

On August 13, 1997, Allegiance's original fund and management investors entered
into a limited liability company agreement in order to govern the affairs of
Allegiance Telecom, LLC, which immediately prior to Allegiance's initial public
offering of its common stock, held the one outstanding share of Allegiance's
common stock and substantially all of the outstanding shares of Allegiance's
preferred stock.

Upon consummation of Allegiance's initial public offering of common stock,
Allegiance Telecom, LLC dissolved and its assets, which consisted almost
entirely of Allegiance stock, were distributed to these fund investors and
management investors in accordance with its limited liability company agreement.
Under the terms of this agreement, the equity allocation between the fund
investors and the management investors could range between 95.0%/5.0% and
66.7%/33.3% based upon the valuation of Allegiance's common stock implied by the
initial public offering of common stock. Based upon the valuation of
Allegiance's common stock implied by the initial public offering of common
stock, the equity allocation was 66.7% to the fund investors and 33.3% to the
management investors.

17
<PAGE> 21

Securityholders Agreement

Registration Agreement

Allegiance, Madison Dearborn Capital Partners II, LP, Morgan Stanley Capital
Partners III, LP, MSCP III 892 Investors, LP, Morgan Stanley Capital Investors,
LP, Frontenac VII Limited Partnership, Frontenac Masters VII Limited
Partnership, Battery Ventures IV, LP, Battery Investment Partners IV, LLC,
Vulcan Ventures Incorporated, Royce J. Holland, Thomas M. Lord, Anthony J.
Parella and certain other stockholders listed therein are parties to an Amended
and Restated Registration Agreement dated as of September 13, 1999. Each of
Morgan Stanley Capital Partners, Madison Dearborn Capital Partners, and
Frontenac Company is entitled to demand two long-form registrations, such as
registration on Form S-1, and unlimited short-form registrations, such as
registration on Form S-3, and Battery Ventures is entitled to demand one
long-form registration and unlimited short-form registrations. At any time after
September 13, 2000, Vulcan Ventures is entitled to demand one long-form
registration and two short-form registrations with respect to the shares
purchased by Vulcan under that certain Common Stock Purchase and Option
Agreement. In addition, the stockholders party to the registration agreement may
"piggyback" on primary or secondary registered public offerings of Allegiance's
securities. Allegiance has agreed to pay the registration expenses in connection
with these demand and "piggyback" registrations. Each stockholder party to this
registration agreement is subject to holdback restrictions in the event of a
public offering of Allegiance securities.

Allegiance, Morgan Stanley & Co. Incorporated, Salomon Brothers Inc, Bear
Stearns & Co. Inc. and Donaldson Lufkin & Jenrette Securities Corporation are
parties to a Warrant Registration Rights Agreement dated as of February 3, 1998.
Allegiance has filed a shelf registration statement with respect to the issuance
of the common stock issuable upon exercise of the redeemable warrants; such
shelf registration statement has been declared effective by the SEC. Allegiance
is required to maintain the effectiveness of such registration statement until
all redeemable warrants have expired or been exercised. Allegiance is required
to pay the expenses associated with such registration.

Voting Agreements

Allegiance, Madison Dearborn Capital Partners II, LP, Morgan Stanley Capital
Partners III, LP, MSCP III 892 Investors, LP, Morgan Stanley Capital Investors,
LP, Frontenac VII Limited Partnership, Frontenac Masters VII Limited
Partnership, Battery Ventures IV, LP, Battery Investment Partners IV, LLC, Royce
J. Holland, Thomas M. Lord, Anthony J. Parella and certain other stockholders
listed therein are parties to an Stock Purchase Agreement dated as of August 13,
1997. The parties to such agreement have each agreed to vote all of their shares
in such a manner as to elect the following persons to serve as directors:
Madison Dearborn Capital Partners, Morgan Stanley funds, and Frontenac funds
each have the right to designate two directors; Battery Ventures has the right
to designate one director; Allegiance's Chief Executive Officer has the right to
serve as a director; the management investors have the right to designate three
directors; and the final two directorships may be filled by representatives
designated by the fund investors and acceptable to the management investors. In
the event Madison Dearborn Capital Partners II, LP's beneficial ownership of
common stock is less than 30% but equal to or greater than 15% of its original
investment, it will be entitled to designate one director instead of two; in the
event that its beneficial ownership of common stock is less than 15% of its
original investment, it will
18
<PAGE> 22

not have a right to designate a director to the board. In the event the Morgan
Stanley funds' beneficial ownership of common stock is less than 30% but equal
to or greater than 15% of their original investment, they will be entitled to
designate one director instead of two; in the event its beneficial ownership of
common stock is less than 15% of their original investment, they will not have a
right to designate a director to the board. As a result of Frontenac funds'
current beneficial stock ownership, the Frontenac funds no longer have a right
to designate any directors to the board. As a result of Battery funds' current
beneficial stock ownership, the Battery funds no longer have a right to
designate a director to the board.

Allegiance and Vulcan Ventures are parties to an Investors Agreement dated as of
September 13, 1999. Allegiance agreed to use its best efforts to cause (a) one
designee nominated by Vulcan Ventures to be appointed to the board of Allegiance
Telecom, for so long as Vulcan Ventures continues to hold at least 1.8 million
shares (as adjusted for stock dividends, stock splits and other
recapitalizations) of Allegiance Telecom common stock, and (b) two designees
nominated by Vulcan Ventures to be appointed to the Board, for so long as Vulcan
continues to hold at least 6 million shares (in each case as adjusted for stock
dividends, stock splits and other recapitalizations) of such stock. This right
to designate a director is not assignable by Vulcan Ventures.

Investors Agreement

Allegiance and Vulcan Ventures are parties to an Investors Agreement dated as of
September 13, 1999. Vulcan Ventures has agreed with Allegiance Telecom not to
offer, sell, transfer or otherwise dispose of any of the Investor Shares (as
such term is defined in the Investors Agreement) prior to September 13, 2000
without the prior written consent of the Board; provided that Vulcan Ventures
may pledge such shares and transfer such shares to and among its affiliates and
provided that such restriction on transfers shall terminate upon and with
respect to the consummation of a "Sale of Allegiance" (as such term is defined
in the Investors Agreement).

During the "Standstill Period," Vulcan Ventures has agreed that it and its
affiliates and associates will not, directly or indirectly, among other things:
(i) acquire any of the voting securities (or securities convertible or
exchangeable into or exercisable for any voting securities) of Allegiance
Telecom or any of its subsidiaries or other affiliates, (ii) acquire any assets
of Allegiance Telecom or any of its subsidiaries or other affiliates, or (iii)
participate in any tender offer, exchange offer, merger, business combination or
other extraordinary transaction involving Allegiance Telecom or any of its
subsidiaries or other affiliates; provided that with respect to the foregoing
clauses (i) through (iii), Vulcan Ventures may take any of such actions within
60 days after another person that is not an affiliate or associate of Vulcan
Ventures has made a publicly announced proposal to take any such action that
would result in a "Sale of Allegiance" (as such term is defined in the Investors
Agreement), so long as Vulcan's actions are not in concert with such other
person. Notwithstanding the foregoing, Vulcan Ventures and its affiliates and
associates may acquire ownership of Allegiance Telecom's securities such that
Vulcan Ventures and its affiliates and associates would own, directly or
indirectly, not more than 20% of Allegiance Telecom's then outstanding voting
securities. In addition, during the Standstill Period, Vulcan Ventures has
agreed that it and its affiliates and associates will not, directly or
indirectly, among other things: (i) become a member of a group with respect to
the common stock or other equity securities or assets of Allegiance Telecom;
(ii) call or seek to call any special meeting of or initiate a stockholder vote
or action by written consent of Allegiance's stockholders; (iii) participate in
any "solicitation" of "proxies" to vote, or seek to influence any person or
entity with respect to Allegiance Telecom in opposition to any matter which has
been recommended by the Board or in favor of any matter which has not been
approved by the Board; or (iv) enter into any discussions, negotiations,
arrangements or understandings with any third party with respect to any of the
foregoing. "Standstill Period" means the period beginning on September 13, 1999
and ending upon the first to occur of (i) the closing of a "Sale of Allegiance"
(as such term is defined in the Investors Agreement) or (ii) the date after
September 13, 2002 on which Vulcan has not for 180 days had a representative
serving on the Board (and has waived or otherwise lost its rights hereunder to
have such a representative).

19
<PAGE> 23

Indebtedness of Management

In connection with the employment of G. Clay Myers, Mr. Myers borrowed $250,000
from Allegiance on December 6, 1999. Mr. Myers issued a promissory note payable
to Allegiance for this amount, which note is payable on December 6, 2002. Such
note accrues interest at a rate of 5.74%, payable when the note is due. In the
event Mr. Myers' resigns or is terminated by Allegiance for "cause" (as such
term is defined in the note), then the note will become immediately due and
payable. The note is secured by a pledge of Mr. Myers' Allegiance stock options.

Other

Morgan Stanley & Co. Incorporated, an affiliate of Morgan Stanley Capital
Partners, one of the fund investors, acted as a placement agent in connection
with Allegiance's offering of its 11 3/4% senior discount notes due 2008 and
redeemable warrants and received fees of approximately $4.4 million. Morgan
Stanley & Co. Incorporated was one of the underwriters in Allegiance's initial
public offering of common stock and 12 7/8% senior notes due 2008 offering and
received fees of approximately $6.9 million in connection with such offerings.
Morgan Stanley & Co. Incorporated was one of the underwriters in Allegiance's
April 1999 common stock offering and received fees of approximately $4.0 million
in connection with such offering.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Allegiance's directors, executive officers and persons who own more than 10% of
its common stock, to file with the SEC initial reports of ownership and reports
of changes in ownership of common stock and other equity securities of
Allegiance. Such persons are also required by SEC regulations to furnish
Allegiance with copies of all Section 16(a) reports they file. Based on written
representations received from such persons, Allegiance believes that each of its
executive officers, directors and greater than 10% owners complied with all
Section 16(a) filing requirements applicable to them during 1999.

20
<PAGE> 24

COMMON STOCK PERFORMANCE.

The graphs below shall not be deemed incorporated by reference by any general
statement incorporating by reference this proxy statement into any filing under
the Securities Act of 1933 or under the Securities Exchange Act of 1934, except
to the extent Allegiance specifically incorporates this information by
reference, and shall not be deemed filed under such Acts.

The graphs below set forth comparative information regarding Allegiance's total
stockholder return from July 1, 1998 (the date the common stock of Allegiance
commenced public trading) through December 31, 1999 (the end of fiscal 1999).
The graph assumes the investment of $100 on July 1, 1998 in Allegiance's common
stock, the Peer Group Index and the Nasdaq Composite Index, and assumes
dividends are reinvested. Past financial performance should not be considered to
be a reliable indicator of future performance, and investors should not use
historical trends to anticipate results or trends in future periods.

[PERFORMANCE GRAPH]

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
7/01/98 9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allegiance Telecom, Inc. 100.00 60.91 88.18 181.82 399.09 382.73 670.91
Peer Group Index(1) 100.00 60.07 70.10 93.33 118.10 123.28 178.49
Nasdaq Composite Index 100.00 88.49 113.86 127.09 139.34 142.42 208.55
</TABLE>

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

(1) The industry peer group consists of competitive local exchange carriers with
common stock registered under the Securities Exchange Act of 1934 and traded
on a U.S. stock exchange or quoted on the Nasdaq Stock Market, and consists
of: e.spire Communications, Inc.; GST Telecommunications, Inc.; ICG
Communications, Inc.; Intermedia Communications Inc.; McLeodUSA
Incorporated; NEXTLINK Communications, Inc.; Teligent, Inc.; US LEC Corp.;
and WinStar Communications, Inc.

21
<PAGE> 25

DISCUSSION OF PROPOSALS RECOMMENDED BY THE BOARD

PROPOSAL 1: ELECTION OF DIRECTORS

The board has nominated the following four persons for election to the board at
the Annual Meeting:

Richard D. Frisbie
Thomas M. Lord
Dino Vendetti
C. Daniel Yost

Directors who are elected at the Annual Meeting will serve until the annual
meeting of stockholders to be held in 2003 or until their successors are elected
and qualified. The nominees have each indicated that they are willing to be
elected and to serve. In the event that any nominee is unable to serve or is
otherwise unavailable for election, which is not now contemplated, the current
board may or may not select a substitute nominee. If a substitute nominee is
selected, all proxies will be voted for the person selected. If a substitute
nominee is not selected, all proxies will be voted for the election of the
remaining nominees. Proxies will not be voted for a greater number of persons
than the number of nominees named.

Directors will be elected by a plurality of the shares present and voting at the
meeting. In other words, the four nominees receiving the largest number of votes
will be elected to the board of directors.

Unless it is specified in the proxy card, it is the intention of the persons
named in the proxy to vote the shares represented by each properly executed
proxy for the election as directors of Messrs. Frisbie, Lord, Vendetti and Yost.

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

YOUR BOARD OF DIRECTORS RECOMMENDS A

VOTE FOR ELECTION OF ALL NOMINEES AS DIRECTORS

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

PROPOSAL 2: RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS

Arthur Andersen LLP has audited the consolidated financial statements of
Allegiance each year since its inception in April 1997. Stockholder ratification
of this proposal is not required to be voted upon by the stockholders. However,
Allegiance's board is submitting this proposal to its stockholders for
ratification as a matter of good corporate practice. If the stockholders do not
ratify the selection of Arthur Andersen LLP by a majority vote, the board will
reconsider whether or not to retain Arthur Andersen LLP, although the board
would not be required to select different independent public accountants for
Allegiance. Even if this proposal is ratified, the board of directors in its
discretion may direct the appointment of a different independent accountant at
any time during the year if the board of directors determines that such a change
would be in the best interests of Allegiance and its stockholders.

Representatives of Arthur Andersen LLP will be present at the Annual Meeting
with the opportunity to make a statement if they desire to do so, and will be
available to respond to appropriate questions.

Approval of the proposal to ratify the appointment of Arthur Andersen LLP
requires the affirmative vote of a majority of the shares present and entitled
to vote at the Annual Meeting.

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

YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE FOR

RATIFICATION OF THE APPOINTMENT OF ARTHUR ANDERSEN LLP

AS ALLEGIANCE'S INDEPENDENT PUBLIC ACCOUNTANTS

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

22
<PAGE> 26

OTHER MATTERS

It is not presently expected that any matters other than those discussed in this
proxy statement will be brought before the Annual Meeting. If any other matters
are properly presented at the Annual Meeting for consideration, the persons
named in the enclosed proxy card will have the discretion to vote on those
matters.

INFORMATION ABOUT SUBMITTING STOCKHOLDER PROPOSALS

Stockholder proposals for inclusion in proxy materials for Allegiance's annual
meeting of stockholders to be held in 2001 should be addressed to Allegiance's
Secretary at its offices at 1950 Stemmons Freeway, Suite 3026, Dallas, Texas
75207. Such proposals must be received by Allegiance on or before December 13,
2000.

If a stockholder, rather than placing a proposal in Allegiance's proxy as
discussed above, commences his or her own proxy solicitation for the 2001 annual
meeting of stockholders or seeks to nominate a candidate for election or
proposes business for consideration at such meeting, the stockholder must give
timely written notice to Allegiance's Secretary. To be timely, a stockholder's
notice must:

- be delivered to or mailed and received at Allegiance's principal
executive offices in Dallas, Texas,

- not less than 60 days nor more than 90 days prior to the meeting, and

- meet certain other requirements as set forth in Allegiance's by-laws.

However, in the event that less than 70 days' notice or prior public
announcement is given or made to stockholders, notice must be given by the
stockholder not later than the close of business on the tenth day following the
date which such notice was mailed or such public announcement was made.
Allegiance's proxy related to the annual meeting of stockholders to be held in
2001 will give discretionary voting authority to the proxy holders to vote with
respect to any such proposal that is received by Allegiance outside of these
dates. Any stockholder interested in making such a nomination or proposal should
obtain a copy of Allegiance's by-laws. Allegiance has filed these by-laws with
the SEC.

OTHER INFORMATION

Allegiance's 1999 Annual Report for the fiscal year ended December 31, 1999 was
mailed to stockholders prior to or together with the mailing of this proxy
statement. Stockholders who wish to order additional copies of the 1999 Annual
Report may obtain additional copies by writing to: Andrew Albrecht, Director of
Investor Relations, Allegiance Telecom, Inc., 3500 Piedmont Road, Suite 340,
Atlanta, Georgia 30305, telephone number (404) 760-4881, facsimile number (404)
812-4633, email: [email protected].

Allegiance is required to file an annual report on Form 10-K for the fiscal year
ended December 31, 1999 with the SEC. Stockholders may obtain, free of charge, a
copy of Allegiance's annual report on Form 10-K by writing to: Andrew Albrecht,
Director of Investor Relations, Allegiance Telecom, Inc., 3500 Piedmont Road,
Suite 340, Atlanta, Georgia 30305, telephone number (404) 760-4881, facsimile
number (404) 812-4633, email: [email protected]. Allegiance will provide
copies of the exhibits to the Form 10-K upon payment of a reasonable fee.

A list of all stockholders entitled to vote at the Annual Meeting will be open
for examination by any stockholder for any purpose germane to the Annual Meeting
during ordinary business hours for a period of 10 days before the Annual Meeting
at Allegiance's offices located at: (a) 1950 Stemmons Freeway, Suite 3026,
Dallas, Texas 75207 and (b) 4 Westbrook Corporate Center, Suite 400,
Westchester, Illinois 60154.

23
<PAGE> 27
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

ALLEGIANCE TELECOM, INC.

ANNUAL MEETING OF STOCKHOLDERS
MAY 10, 2000

R The undersigned hereby appoints G. Clay Myers, Mark B. Tresnowski and Annie
S. Terry, or either of them, with full power of substitution, as proxies to
O represent the undersigned at the Annual Meeting of Stockholders of
Allegiance Telecom, Inc., to be held in the INFOMART, 1950 N. Stemmons
X Freeway, Dallas, Texas 75207, on Wednesday, May 10, 2000, at 11:00 a.m.,
local time and at any adjournment(s) thereof, and to vote all shares of
y stock which the undersigned may be entitled to vote at said meeting with
respect to the proposals as set forth in the Proxy Statement, and in their
discretion, upon any other matters that may properly come before the
meeting.

You are encouraged to specify your choices by marking the appropriate
boxes, SEE REVERSE SIDE, but you need not mark any boxes if you wish to
vote in accordance with the Board of Directors' recommendations. To vote by
telephone or Internet, please see the reverse of this card. To vote by
mail, please sign and date this card on the reverse and mail promptly in
the enclosed postage pre-paid envelope.

------------
SEE REVERSE
SIDE
------------

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

o FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL o

HOW TO RECEIVE FUTURE ANNUAL REPORTS AND PROXY
STATEMENTS ON-LINE

You may receive future Allegiance Telecom, Inc. Annual Reports and
Proxy Statements on-line over the Internet by submitting your consent to
Allegiance Telecom. This will save Allegiance Telecom postage and printing
expenses and provide information to you faster. If you are a registered
stockholder and you wish to consent to Internet delivery of future Annual
Reports and Proxy Statements, follow the instructions set forth below.

o Log onto the Internet and go to web site: http://www.econsent.com/algx
(if you are voting your shares this year using the Internet, you can
link to this web site directly from the web site where you vote your
shares).

o You will be asked to consent to Internet delivery of annual meeting
materials and provide your e-mail address and account number. Your
account number is the 10 digit hyphenated number located above your
name on this proxy card.

If you are not a registered stockholder and you wish to consent to
Internet delivery of future Annual Reports and Proxy Statements, please contact
your bank, broker or other agent and inquire about the availability of such
option for you.

If you consent, your account will be so noted and, when the Allegiance
Telecom 2000 Annual Report and the Proxy Statement for the 2001 Annual Meeting
of Stockholders become available, you will be notified by e-mail as to how to
access them on the Internet.

If you do elect to receive your Allegiance Telecom materials over the
Internet, you can still request paper copies by reregistering on the Internet
site above, or by contacting Allegiance Telecom, Inc. at 3500 Piedmont Road,
Suite 340, Atlanta, Georgia 30305, Attention: Investor Relations.

<PAGE> 28

PLEASE MARK YOUR 3339
[X] VOTES AS IN THIS
EXAMPLE.

<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
UNLESS YOU INDICATE OTHERWISE, THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS.

DIRECTORS RECOMMEND A VOTE FOR ALL NOMINEES IN PROPOSAL 1 AND FOR PROPOSAL 2.

FOR WITHHELD FOR AGAINST ABSTAIN
1. Election of 4 [ ] [ ] Nominees: 2. Ratify [ ] [ ] [ ]
Directors. 01. Richard D. Frisbie appointment of
02. Thomas M. Lord independent
03. Dino Vendetti accountants.
04. C. Daniel Yost
For all except the following nominee(s):

- ----------------------------------------- Please date and sign here exactly as name
appears hereon. When signing as attorney,
executor, administrator, trustee, guardian or
other fiduciary, give full title. If stock is
in the name of: (1) a corporation, an
authorized officer should sign; (2) a
partnership, an authorized officer should
sign in the partnership name; (3) two or
more persons, each should sign.

PLEASE COMPLETE, SIGN, DATE AND RETURN THIS
PROXY PROMPTLY USING THE ENCLOSED POSTAGE
PREPAID ENVELOPE.

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

---------------------------------------------
SIGNATURE(S) DATE

- -----------------------------------------------------------------------------------------------------------------------------------
o FOLD AND DETACH HERE IF YOU ARE RETURNING YOUR VOTED PROXY CARD BY MAIL o
</TABLE>

ALLEGIANCE TELECOM, INC. ANNUAL MEETING -- MAY 10, 2000

Now Offering Telephone or Internet Voting Services--Fast and Convenient!

VOTE BY TELEPHONE (1-877-779-8683)

o Call toll-free 1-877-779-8683.

o Follow the simple recorded instructions.

o When prompted for your "Voter Control Number," enter the series of numbers
printed in the box above using your touch-tone telephone.

VOTE BY INTERNET (www.eproxyvote.com/algx)

o Stockholders with Internet access may go to http://www.eproxyvote.com/algx.

o Follow the simple on-line instructions.

o When prompted for your "Voter Control Number," enter the series of numbers
printed in the box above.

- --------------------------------------------------------------------------------
Telephone or Internet voting authorizes the named proxies to represent you at
the meeting in the same manner as if you completed, signed, dated and
mailed your proxy card.
IF YOU VOTE BY TELEPHONE OR INTERNET, DO NOT MAIL YOUR PROXY CARD.
- --------------------------------------------------------------------------------