• New Installs of 14,900 Lines; 73% Were "On-Switch"
• Total Lines in Service Increases to 25,900
• 44 New Collocations for a Total of 51
• 3 New Markets in Service for a Total of 6
• 86% of New Lines Sold Were "On-Switch"
• Sales Run Rate of 43,000 Lines--$28M Annual Run Rate

DALLAS, TEXAS, October 27, 1998 - Allegiance Telecom, Inc. (Nasdaq: ALGX), a competitive local exchange carrier (CLEC), today announced results for its third quarter of 1998. Allegiance reported revenues of $2.8 million, an increase of 133% over 2Q98 revenues of $1.2 million. Lines sold as well as lines installed continued to exceed plan, with new lines sold increasing from 16,400 in 2Q98 to 22,300 lines in 3Q98-86% of the new lines sold were "on-switch." Lines installed also showed rapid growth, with new lines installed increasing from 8,000 in 2Q98 to 14,900 in 3Q98-73% of the new installs were "on-switch." Bookings through September 1998 resulted in an annualized recurring revenue run rate of approximately $28 million.

"With 18 of our markets and our nationwide data network being fully funded to free cash flow positive as a result of our equity and debt offerings in the first half of the year, we were able to fully focus on the execution of our business plan in the third quarter," said Royce J. Holland, chairman and CEO of Allegiance Telecom, Inc. "We are pleased to report that the results of that execution are excellent. In the third quarter, we doubled the number of markets served and added 44 new central office collocations, thus increasing our addressable 'on-switch' market by a factor of almost six. We are planning to continue to add a market a month and rapidly add additional collocations.

"We also more than doubled the cumulative number of lines sold and lines installed during the quarter. Even more significant, the vast majority of new sales and installs were 'on-switch,' as we continue to phase out our resale.

"Significant progress was also made in the automation, synchronization and scalability of our back office systems to accommodate our rapidly increasing addressable market and market penetration. Progress continues to be made on our strategic initiative of establishing a nationwide template for electronic bonding of Operations Support Systems (OSS) with the Incumbent Local Exchange Carriers (ILECs)."

Network Rollout
Network rollout is proceeding on track, with six markets operational (Atlanta, Chicago, Dallas, Fort Worth, Los Angeles and New York) - Chicago, Fort Worth and Los Angeles were brought on-line this quarter. Other markets scheduled for operation in 1998 include Boston, Oakland and San Francisco, with eight additional markets scheduled to begin operation in the first eight months of 1999.

Allegiance also saw strong gains in its addressable market. As of today, the Company is collocated in 51 central offices for unbundled loops and has access to an additional 3 central offices for T1 hub service. This represents an addressable "on-switch" market of 2,029,896 local business access lines, an increase of 467% from 2Q98. In addition, Allegiance has 159 collocations that are "works-in-process."

At the end of 3Q98, Allegiance had 5 switches in operation, supporting the following markets: Atlanta, Chicago, Dallas/Fort Worth, Los Angeles and New York. Allegiance is in the process of installing switches in San Francisco and Boston, with switches being fabricated for Houston, Philadelphia and Washington, D.C.

Financial and Operational Highlights
Allegiance again had significant success in its sales efforts, with lines sold increasing from 16,400 in 2Q98 to 22,300 lines in 3Q98, an increase of 36% over 2Q98. Lines installed also showed rapid growth, with lines installed increasing from 8,000 in 2Q98 to 14,900 in 3Q98, an increase of 86% over 2Q98. Bookings through September 1998 resulted in an annualized recurring revenue run rate of approximately $28 million.

Recruitment of the Company's sales force is on track. Sales force, including managers grew to 195 people, out of a total Allegiance employee base of 462, as of September 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 third quarter EBITDA (earnings before interest, taxes, depreciation and amortization, excluding management ownership allocation charge and non-cash deferred compensation expenses) loss of $13.4 million and capital expenditures of $42.1 million.

Progress of "On Switch" Services
As switches are brought on stream and collocations achieved, the proportion of circuits initially provisioned on Allegiance facilities accelerated dramatically-73% of the new installs were "on switch," compared to 17% in 2Q98. In the third quarter, of the 22,300 lines sold, 86% were "on switch," compared to 51% in 2Q98. Likewise, of the cumulative, year-to-date lines installed, 47% were "on switch" at the end of the third quarter, compared to 12% in 2Q98. In addition, 64% of the cumulative, year-to-date lines sold were "on switch," compared to 41% in 2Q98.

Data and Internet Services Rollout
Allegiance made strides in the third quarter in the rollout of its data network--the Asynchronous Transfer Mode (ATM) network backbone is up and running between New York, Atlanta, Chicago, Dallas, Fort Worth and Los Angeles. In the third quarter, the Company also completed the build-out of its Network Operations Center (NOC) in Dallas, which handles the monitoring of its voice and data networks. Allegiance is also on track to begin rolling out some of its data and Internet services in the fourth quarter.

Best-of-Breed Back Office Systems
The Company began production testing to implement electronic bonding between the Allegiance and Bell Atlantic Operations Support Systems in New York. Allegiance believes that achieving electronic bonding will provide it with a significant competitive advantage in terms of installation efficiencies, ability to process large order volumes, ability to support customer service, and significantly improved installation intervals, as compared to companies using legacy systems. Allegiance has begun preliminary discussions with other ILECs to establish a national template for electronic bonding.

Allegiance continued to make progress in implementing permanent local number portability (LNP) this quarter--the Company achieved LNP in Texas, Illinois, Georgia and California. Currently, all Allegiance networks use LNP, not remote call forwarding. 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
Allegiance is certified to provide competitive local exchange services in eight states, including California, Georgia, Illinois, New Jersey, New York, Maryland, Massachusetts and Texas. Allegiance currently has applications for CLEC authority pending in the District of Columbia and Virginia. The Company is awaiting the final order for certification in Pennsylvania.

Financing Update
During the third quarter, Allegiance used cash on-hand and short-term investments to further fund its capital expenditures related to switching platforms, collocations and its data network to support the Company's product suite of local, long distance, data and Internet services. According to Thomas M. Lord, executive vice president of corporate development and chief financial officer, "Allegiance's strong cash and liquidity position allowed it to aggressively deploy capital to fund its targeted market per month roll-out. At the end of the quarter, the Company had cash balances and short-term investments of $455.0 million. This excludes our restricted investment of $69.9 million associated with the Company's 12-7/8% senior note offering. The Company ended the quarter at approximately $9 per share in terms of cash and liquidity. Allegiance estimates that this liquidity is adequate to pre-fund 18 of its 24 markets and its data network to free cash flow positive."

This quarter included non-cash charges of $160.5 million related to the management ownership allocation associated with the Company's initial public offering. The Company will be expensing the balance over the remaining three years on a quarterly basis, with this quarter's charge representing the majority of the amount to be amortized.

Additionally, Allegiance has just begun initiatives associated with raising further capital for the remaining six cities that are not currently funded by the Company's cash balances. Allegiance intends to enter into negotiations with a variety of potential lending sources, including commercial banks, equipment vendors and leasing organizations.

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.

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. The Company's web address is: www.allegiancetele.com.

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, the extent to which the Company can achieve "electronic bonding" with ILECs, the Company's ability to timely and effectively provision new customers and the Company's continued access to necessary capital. 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.