One Millionth Line Installed; Revenues, Sales, Installations and EBITDA On Track With Pre-Release

• 3Q01 Revenues of $135.1 Million - Increased by 8.9 Percent Compared with 2Q01 and 68.9 Percent Compared with 3Q00
• New Installs of 136,200 Lines and New Orders of 182,000 Lines
• Total Lines in Service Increases to 1,005,900
• 14 Markets Pre-Overhead EBITDA Positive in 3Q01, Driving Overall Company Adjusted EBITDA Loss Margin from 22.7 Percent in 2Q01 to 19.6 Percent in 3Q01
• 32 New Colocations for a Total of 772, Addressing Approximately 19.85 Million Business Lines "On-Switch"
• White Plains, N.Y. and Ontario/Riverside, Calif. Service Initiated -- Allegiance Telecom's 33rd and 34th Markets
• $350 Million Credit Draw Takes Advantage of Favorable, Historically Low Interest Rates
• Allegiance Now Has 14 Markets with Facilities-Based Metropolitan Fiber Rings Operational

DALLAS, October 23, 2001 -- Allegiance Telecom, Inc. (Nasdaq: ALGX), an integrated communications provider (ICP), announced third quarter 2001 revenues of $135.1 million, an increase of 8.9 percent as compared with 2Q01 and 68.9 percent compared with 3Q00. Allegiance Telecom sold 182,000 new lines in 3Q01, consistent with plan. Lines installed for 3Q01 totaled 136,200. With the installation of its one millionth line during the quarter, Allegiance Telecom now has an installed base of 1,005,900 lines; 91 percent of them are "on-switch."

"While the tragic events of September 11 had a one time impact on September and October growth, Allegiance Telecom met or exceeded all metrics we set forth in our pre-release issued on September 26th . Significant growth in revenues, installations and adjusted EBITDA were achieved during a difficult third quarter for the U.S. economy," said Royce J. Holland, chairman and CEO of Allegiance Telecom. "Our continued progress toward profitability, despite challenging economic conditions, showcases the soundness of the Allegiance business model."

With the addition of two new markets (White Plains, N.Y. in July and Ontario/Riverside, Calif. in August), Allegiance Telecom's network rollout proceeded according to plan. The Company had 34 markets operational at the end of 3Q01 including Atlanta, Austin, Baltimore, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Fort Lauderdale, Fort Worth, Houston, Long Island, Los Angeles, Miami, Minneapolis/St. Paul, New York, Northern New Jersey, Oakland, Ontario/Riverside, Orange County, Philadelphia, Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco, San Jose, Seattle, Tampa, Washington, D.C. and White Plains. Two additional markets, Pittsburgh and West Palm Beach, Fla., are expected to become operational during the fourth quarter 2001, completing Allegiance's planned total of 36 markets.

Allegiance Telecom's strong gains in its addressable market continued during the third quarter, with the addition of 32 new colocations. At the end of September, the Company was colocated in 772 central offices for unbundled loops, representing an addressable "on-switch" market of approximately 19.85 million local business access lines.

Allegiance has 30 telecommunications switches in operation, supporting the following markets: Atlanta, Austin, Baltimore, Boston, Chicago, Cleveland, Dallas & Fort Worth (2), Denver, Detroit, Houston, Los Angeles, Miami & Ft. Lauderdale, Minneapolis & St. Paul, New York & Long Island & White Plains (2), Northern New Jersey, Orange County & Ontario/Riverside, Philadelphia, Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco & Oakland, San Jose, Seattle, Tampa and Washington, D.C.

Allegiance Telecom line sales held steady during the quarter, with 182,000 lines sold in 3Q01, an increase of 34.3 percent compared with 3Q00. Lines installed showed modest improvement, with the milestone of Allegiance's one millionth installed line occurring during 3Q01. Lines installed increased from 135,800 in 2Q01 to 136,200 in 3Q01, a 0.3 percent increase in new installs compared to 2Q01 and an increase of 48.2 percent over 3Q00.

For the third quarter ended September 30, 2001, Allegiance Telecom had consolidated revenues of $135.1 million, an increase of 8.9 percent as compared with 2Q01 and an increase of 68.9 percent over 3Q00. Allegiance continues to use its capital to support the development of new and existing markets, resulting in a third quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization, excluding management ownership allocation charge and non-cash deferred compensation expenses) loss of $26.4 million and capital expenditures of $88.4 million. Allegiance Telecom maintained its drive to profitability with adjusted EBITDA loss as a percentage of revenue for the quarter at 19.6 percent, compared with 22.7 percent in 2Q01 and 39.6 percent for 3Q00.

"Allegiance capitalized on some favorable buying opportunities in the latter part of the third quarter, resulting in an acceleration of capital expenditures from the fourth quarter to the third quarter," said Dan Yost, president and chief operating officer of Allegiance Telecom. " We expect capex in 4Q01 to decline dramatically with our capex budget for 2001 remaining unchanged at about $365 million."

Gross margin for 3Q01 was 51.4 percent, up from 51.0 percent in 2Q01 and from 47.7 percent in 3Q00.

Taking advantage of historic, 40-year lows in interest rates, Allegiance Telecom drew $350 million from its 27-member senior credit syndicate on September 17, 2001, one of the first major funding transactions to occur since the terrorist attacks on the United States. Allegiance elected to draw down its $150 million delayed draw term loan due December 31, 2006 and a $200 million revolving loan, also due on December 31, 2006. $150 million remains undrawn in Allegiance's $500 million credit facility.

"Drawing on the credit facility provided Allegiance with a tremendous opportunity to lock in attractive interest rates to continue to fund our business plan," said Thomas M. Lord, Allegiance Telecom executive vice president of corporate development and chief financial officer. "Drawing funds in mid-September at an initial interest rate of 6.28 percent allowed us to take full advantage of the significant interest rate cuts implemented by the Federal Reserve this year."

"We remain comfortable with the covenants in the form in which they were set when this facility was established in February 2000. Allegiance has not sought to amend these covenants in any respect," Lord said. "The $350 million is being invested in short term Treasury securities, consistent with our cash investment policies. During the fourth quarter, we expect to effectively lock in our borrowing cost by using hedging techniques to move the floating rate debt to a fixed rate basis."

"Due to the acceleration of capex to take advantage of significant savings in equipment purchases, Allegiance Telecom used approximately $125 million of its cash and short-term investments during the third quarter to further expand its operations, capital expenditures related to switching platforms, colocations, construction of its SONET fiber networks and its data network -- which supports the Company's product suite of local, long distance, data and Internet services -- and net interest expense," said Lord. "As a result, we expect cash burn to decline significantly in the fourth quarter due to much lower captial expenses and continuing EBITDA improvement. At September 30, 2001, Allegiance had an undrawn committed credit facility of $150 million and more than $537 million of cash and short-term investments. We believe that this liquidity fully funds Allegiance's 36-market business plan," he said.

To demonstrate its progress toward profitability, Allegiance Telecom began reporting operating results in 4Q00 for nine of its markets that began service in 1998 or early 1999 that became pre- overhead EBITDA positive during the fourth quarter (before corporate overhead allocation). These nine markets are Dallas, New York, Atlanta, Fort Worth, Chicago, Los Angeles, San Francisco, Boston and Houston. In the first quarter of 2001, Philadelphia and San Diego turned pre-overhead EBITDA positive, as did Baltimore and San Jose during the second quarter. During 3Q01, Orange County became pre-overhead EBITDA positive, bringing Allegiance's total to 14 pre-overhead EBITDA positive markets.

In 3Q01, the nine early markets continued to show growth and margin improvements. New line installations were 45,900 lines, resulting in an improvement of 9.5 percent compared with 2Q01. Lines installed in these nine markets now total 528,600, an increase of 67.0 percent compared to 3Q00 installed base of 316,600 lines. Revenue rose to $71.2 million, an increase of 7.3 percent compared with 2Q01 and 33.7 percent more than 3Q00. Gross margin improved to 61.3 percent of revenue. Pre-overhead EBITDA was a positive $20.1 million, increasing sequentially 15.7 percent from 2Q01. This $20.1 million represents a pre-overhead EBITDA margin of 28.2 percent versus 17.1 percent for 3Q00.

"The steady performance of these nine markets, especially when measured by revenue growth and pre-overhead EBITDA margin improvement, spotlights the solid foundation of Allegiance Telecom's business plan" said Holland. "Allegiance Telecom's steady growth continues, lowering consolidated adjusted EBITDA loss margin from 22.7 percent in 2Q01 to 19.6 percent in 3Q01. We expect additional markets to turn pre-overhead EBITDA positive during the fourth quarter of 2001 and overall company adjusted EBITDA loss margins should continue to diminish, setting up Allegiance to turn EBITDA positive during 2002."

During 3Q01, Allegiance continued upgrading its network with the lighting of metropolitan fiber rings. To date, 14 Allegiance markets (Austin, Chicago, Dallas, Denver, Ft. Worth, Houston, New York, Northern New Jersey, Philadelphia, Portland, St. Louis, Seattle, Washington, D.C. and White Plains) are now served by fiber. These rings provide improved network capacity, operational efficiency, improved financial margins and route redundancy, further increasing the reliability of the Allegiance network. During the remainder of the year, additional rings will be lit in 7 more Allegiance markets, with a year-end total of 21 markets served by fiber rings.

The Company is upgrading its long-haul capacity network and is replacing leased DS-3 connections with the faster, more efficient OC-48 lambdas linking its largest markets across the country. This transition, initiated in the third quarter, is expected to be complete by the end of 2001.

The Company is also continuing in the process of lighting its fully redundant intercity fiber rings in the Northeast corridor linking its markets in Boston, New York, Long Island, Northern New Jersey, Philadelphia, Baltimore and Washington D.C. with a seamless, high capacity network. This transport capacity will enhance Allegiance's capability to provide integrated solutions and improve the company's ability to establish peering agreements as well as improving margins.

Allegiance Telecom is certificated to provide local exchange services in 24 states and Washington D.C., including Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Minnesota, New Jersey, New York, Maryland, Massachusetts, Michigan, Missouri, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Virginia, Washington State and Wisconsin.

Based in Dallas, Allegiance Telecom is a facilities-based integrated communications provider (ICP) offering businesses a complete package of telecommunications services, including local, long distance, international calling, high-speed data transmission and Internet services. Allegiance is currently operational in 34 U.S. markets including: Atlanta, Austin, Baltimore, Boston, Chicago, Cleveland, Dallas, Denver, Detroit, Fort Lauderdale, Fort Worth, Houston, Long Island, Los Angeles, Miami, Minneapolis/St.Paul, New York, Northern New Jersey, Oakland, Ontario/Riverside, Orange County, Philadelphia, Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco, San Jose, Seattle, Tampa, Washington D.C. and White Plains, N.Y. The Company is targeting a total of 36 major metropolitan areas.

Allegiance's common stock is traded on the Nasdaq National Market under the symbol ALGX.