July Access Line Sales Growth Results in Approximately $19 Million Annual Run Rate

DALLAS, TEXAS, August 3, 1998 - Allegiance Telecom, Inc. (Nasdaq: ALGX), a competitive local exchange carrier (CLEC), today announced results for its second quarter of 1998. Allegiance reported revenues of $1.2 million, an increase of 500% over 1Q98 revenues of $0.2 million. Lines sold as well as lines installed continued to exceed plan, with lines sold increasing from 4,700 in 1Q98 to 16,400 lines in 2Q98. Lines installed also showed rapid growth, with lines installed increasing from 3,000 in 1Q98 to 8,000 in 2Q98. Bookings through July 1998 resulted in an annualized recurring revenue run rate of approximately $19 million.

"Allegiance Telecom, Inc. is pleased to be able to report its first ever operating results as a public entity," said Royce J. Holland, chairman and CEO of Allegiance. "Our second quarter was highlighted by the rapid deployment of our networks and the significant demand for our products and services by business customers. These trends accelerated in July. As of July 31, we have achieved collocation in 22 incumbent local exchange carrier central offices and sold approximately 30,000 access lines. Our addressable market has increased by a factor of over 30 for the past four months."

Network Rollout

Network rollout is proceeding on track, with three markets operational (Atlanta, Dallas and New York) at the end of the quarter and a fourth market, Fort Worth, operational in July. Other markets scheduled for operation in 1998 include Boston, Chicago, Los Angeles, Northern New Jersey and San Francisco, with the Washington, D.C. metropolitan area scheduled to begin operation in the first quarter of 1999.

"Times sure have changed in the telecommunications industry since the passage of the Telecommunications Act of 1996," said Holland. "When I was at MFS, our plan called for knocking down a regulatory barrier each month. Beginning in the second half of the year, our plan calls for us to turn up approximately a market per month."

Allegiance also saw strong gains in its addressable market. As of today, the Company is collocated in 22 central offices for unbundled loops and has access to an additional 11 central offices for T1 hub service. This represents an addressable market of approximately 857,000 local access lines. In addition, Allegiance has filed applications for collocation in over 100 additional central offices.

At the end of 2Q98, Allegiance had three switches in operation in Atlanta, Dallas and New York. Allegiance is in the process of installing switches in Chicago and Los Angeles, with switches being fabricated for San Francisco, Boston and Washington, D.C.

Data and Internet Services Rollout

Allegiance's data and Internet services, which includes Internet access, web hosting, web page design and frame relay, are rolling out on schedule. Atlanta, Chicago, Dallas, Fort Worth and New York will have these services available by year-end. Allegiance has begun the build out of its data nodes and networks. Allegiance has chosen to use Cisco routers, Nortel remote access servers and Ascend frame relay switches in its networks.

Financial and Operational Highlights

Allegiance has had significant success in its sales efforts, with lines sold increasing from 4,700 in 1Q98 to 16,400 lines in 2Q98. Lines installed also showed rapid growth, with lines installed increasing from 3,000 in 1Q98 to 8,000 in 2Q98. Annualized billable monthly recurring revenue for June 1998 was approximately $7 million.

Sales for the month of July 1998 were 9,000 access lines and new installations totaled 3,800 lines for the month. These bookings resulted in an annualized recurring revenue run rate of approximately $19 million. Total booked sales run rate at the end of July was over 30,000 lines.

Recruitment of the Company's sales force is on track. Sales force, including managers grew to 96 people, out of a total Allegiance employee base of 256, as of June 30, 1998. Allegiance believes that one of the keys to achieving its goals is the capturing and retaining of customers through a direct sales force.

Allegiance continues to use its capital to support the development of new markets, resulting in a second quarter EBITDA (earnings before interest, taxes, depreciation and amortization, excluding non-cash deferred compensation expenses) loss of $8.2 million and capital expenditures of $13.8 million.

Accelerated Migration to Facilities-Based Services

Allegiance began selling service in Dallas in late January 1998 with initial provisioning of customer orders using ILEC resale. In the first quarter, the Company sold 4,700 lines, of which only 5% were initially provisioned "on switch." As switches were brought on stream and collocations achieved in Dallas, New York and Atlanta, the proportion of circuits initially provisioned on Allegiance facilities has accelerated dramatically. In the second quarter, of 16,400 lines sold, fifty-one percent are being initially provisioned "on switch." This trend continued to accelerate. In July, of the 9,000 lines sold, 83% are initially being provisioned "on switch."

Allegiance also began conversion of orders initially provisioned using ILEC resale to Allegiance facilities in July as additional collocations were implemented. Conversions should be largely complete by the end of 1998.

Best-of-Breed Back Office Systems

Unburdened by existing legacy operational support systems (OSS), Allegiance has acquired and integrated back office systems to facilitate a smooth, efficient order management, provisioning, installation, trouble management, billing and collection, and customer service process. Allegiance is currently using MetaSolv Software for order management and customer provisioning, Lucent's ConnectVu for switch provisioning, and Intertech for billing. nt local exchange carriers still have about 98% market share," said Dan Yost, president and COO of Allegiance Telecom, Inc. "I feel that our state-of-the-art, integrated systems are the key to our success in signing up business customers and will be even more crucial to our long-term success as we open additional markets and increase our volume of access line installations."

The Company is actively working toward "electronic bonding" between the Allegiance OSS and those of the incumbent local exchange carrier (ILEC), which would permit creation of service requests on-line and real-time monitoring of the provisioning and installation process. Allegiance believes that these back office systems will provide it with a significant competitive advantage in terms of cost, processing large order volumes and customer service, as compared to companies using legacy systems.

A major accomplishment in this area for the quarter was the implementation of permanent local number portability (LNP) in New York with Bell Atlantic and in Texas with Southwestern Bell. The Company recently chose DSET Corporation's Service Order Administration Gateway for LNP implementation.

"Having full-fledged permanent local number portability at this early stage positions Allegiance to take advantage of the tremendous market opportunity available to qualified CLECs," said Holland. "Allegiance is now well positioned to process more orders simultaneously and will further improve that ability with the establishment of electronic bonding with one or more ILECs later this year."

Permanent LNP is an important issue to CLECs like Allegiance because it helps to make the transition from one service provider to another seamless. It also enhances Allegiance's product offerings because customers no longer have to face the inconveniences of the industry's temporary (interim) number portability approach of remote call forwarding (which limits the number of enhanced features that customers may obtain).

Regulatory Certifications

Massachusetts recently became the seventh state where Allegiance is certified to provide competitive local exchange services. Others include California, Georgia, Illinois, New York, Maryland and Texas. Allegiance currently has applications for CLEC authority pending in the District of Columbia and New Jersey.

Financing Update

The Company's initial public offering occurred on July 1, 1998 with Allegiance offering 10 million shares at $15 per share. Concurrent with the initial public offering, Allegiance offered 12 7/8% senior notes that resulted in net proceeds to the Company of approximately $125 million. Subsequent to completion of both offerings, the Company had approximately $500 million in cash, cash equivalents and short-term investments to fund its ongoing operations and the development of its networks.

"Allegiance's cash position of approximately $500 million leaves the Company very well capitalized for the rapid build-out and ramp-up of its national network," said Thomas M. Lord, executive vice president of corporate development and CFO of Allegiance Telecom. "Given that we have been in operation for less than 12 months, we believe our financings to date leave Allegiance in a very favorable financial position compared to other CLECs."

To reflect these financing activities, the Company has shown the proforma effect as of June 30, 1998 for the initial public offering, the 12 7/8% senior notes offering, the deferred management ownership allocation charges, the stock split and the conversion of redeemable cumulative convertible preferred stock into common stock, all of which are discussed in more detail in the footnotes to the attached consolidated balance sheet.

Corporate Background

Allegiance Telecom, Inc. was founded in April 1997 by a management team led by Royce J. Holland, the former president and COO of MFS Communications Company, Inc., and Thomas M. Lord, former managing director of Bear, Stearns & Co. Inc., where he specialized in the telecommunications, information services and technology industries. Earlier this year, Dan Yost, former president and COO of NETCOM On-Line Communication Services, Inc., joined Allegiance as its president and COO.

The Company believes that the Telecommunications Act of 1996, by opening the local exchange market to competition, has created an attractive opportunity for new facilities-based CLECs like Allegiance.

Allegiance offers businesses a complete package of telecommunications services, including local, long distance, international calling, high-speed data transmission and Internet services. Allegiance is targeting 24 major metropolitan areas in the U.S. with its "one-stop shopping" approach.

Certain statements in this press release constitute "forward-looking statements" within the meaning of federal securities laws, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. The words "believes", "expects", "estimates", "anticipates" and "will be" and similar words or expressions identify forward-looking statements made by or on behalf of the Company. These forward-looking statements reflect the Company's views as of the date they are made with respect to future events and financial performance, but are subject to many uncertainties and factors which may cause the actual results of the Company to be materially different from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties and factors include, but are not limited to, whether and when the Company will obtain necessary regulatory approvals and interconnection agreements. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.