• 2Q02 Revenues of $184.4 Million, Resulting in Annual Increase of 48.7 Percent
• 20 Markets Pre-Overhead EBITDA1 Positive in 2Q02
• Approximately $10 Million Improvement in EBITDA from 1Q02 with EBITDA Loss Margin Reduced to 6.4 Percent in 2Q02 from 13.4 Percent in 1Q02 (before giving effect to charges related primarily to WorldCom exposure in 2Q02)
• 14 New Colocations for a Total of 829, Addressing Approximately 21.63 Million Business Lines "On-Switch"
• Record Gross Number of New Installs With Net Installs of 106,700 Lines including Disconnection of 58,000 Qwest Wholesale Lines
• $354.0 Million Cash On Hand End of 2Q02
• 2Q02 Capital Expenditures of $42.4 Million, Reduction of 63 Percent From 2Q01
• Acquisition of Customer Premise Equipment (CPE) Provisioning and CPE Maintenance Businesses from WorldCom
• Draw Down of $135 Million in Funds Under Senior Credit Facility

DALLAS, July 30, 2002 -- Allegiance Telecom, Inc. (Nasdaq: ALGX), an integrated communications provider (ICP), today announced results for its second quarter 2002. Allegiance reported second quarter revenues of $184.4 million, an increase of 13.8 percent compared with 1Q02 and 48.7 percent compared with 2Q01. EBITDA1 (earnings before interest, taxes, depreciation and amortization, excluding noncash deferred compensation expenses and goodwill impairment charge) loss margins also improved significantly to 6.4 percent, with a consolidated EBITDA loss of $11.8 million for 2Q02 before giving effect to an additional $9.3 million expense primarily relating to Allegiance's exposure to WorldCom and certain other financially troubled carriers. The Company also took a noncash charge of $110.8 million for the estimated impairment of goodwill pursuant to the requirements of Statement of Financial Accounting Standards (SFAS) 142.

"The second quarter marked a major inflection point in our continued path to profitability," said Royce J. Holland, chairman and CEO of Allegiance Telecom. "For the past 15 quarters while we were building out our 36 markets, Allegiance operated at a controlled cash burn rate with quarterly EBITDA losses ranging from approximately $22 million to $32 million. Excluding the $9.3 million principally related to a provision to reserve potential exposure to WorldCom and other distressed carriers, Allegiance Telecom saw an EBITDA improvement of almost $10 million in the second quarter 2002 compared to the first quarter of 2002. We expect to see the same dramatic improvement in the third quarter and expect to turn EBITDA positive late in the quarter," he said. "I am also pleased that Allegiance accomplished this while achieving top line organic growth of approximately 11 percent over the first quarter, not counting the small contribution from the acquisition of the CPE and service businesses from WorldCom. A significant contributor to this dramatic improvement in revenue growth is a reduction in churn in our retail customer base," said Holland.

36-City Network
Allegiance Telecom's U.S. markets include: 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 CA, Orange County, Philadelphia, Phoenix, Pittsburgh, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco, San Jose, Seattle, Tampa, Washington D.C., West Palm Beach/Boca Raton and White Plains, NY.

Allegiance Telecom increased its addressable market during 2Q02, adding 14 new colocations. At the end of June, the Company was colocated in 829 central offices for unbundled loops, representing an addressable "on-switch" market of approximately 21.63 million local business access lines.

Allegiance has 31 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 & West Palm Beach/Boca Raton, Minneapolis/St. Paul, New York & Long Island & White Plains (2), Northern New Jersey, Orange County & Ontario/Riverside, Pittsburgh, Philadelphia, Phoenix, Portland, Sacramento, St. Louis, San Antonio, San Diego, San Francisco & Oakland, San Jose, Seattle, Tampa and Washington, DC

Financial and Operational Highlights
Allegiance Telecom's line sales remained strong with 210,000 lines sold in 2Q02, equal to the 210,000 lines sold in 1Q02 and an increase of 9.4 percent compared with 2Q01. Net lines installed during the quarter totaled 106,700, negatively impacted by the termination by Qwest Communications of service on approximately 58,000 managed modem port lines. Allegiance Telecom had anticipated this termination and has incorporated the termination of these lines into its outlook for the remainder of 2002. Average revenue per line increased to $51.54 in 2Q02, up from $50.16 in 1Q02 and from $50.08 in 4Q01.

As discussed in the first quarter 2002 results, reducing customer churn, especially in Allegiance's smaller unbundled loop customer base, is a top priority for the Company. Excluding the impact of the 58,000 Qwest wholesale lines, the overall churn rate was 2.4 percent, compared with a churn rate of 2.7 percent in 1Q02.

This improvement is primarily the result of four initiatives: (1) Implementation of electronic interfaces linking the order management, provisioning, and billing systems for unbundled loop customers to eliminate the manual entry of installation and disconnect data into multiple systems; (2) Implementation of electronic bonding with the ILECs for trouble ticket management in 16 markets; (3) Improvements in the billing dispute resolution and collection processes; and (4) A growing percentage of larger integrated access customers under longer term contracts and a continuing reduction of the number of resale customers.

"We implemented a number of process improvements and system automations late in the first quarter and during the second quarter to reduce churn," said Dan Yost, Allegiance's president and "In 3Q02, we plan to continue the implementation of the Singl.eView by ADC billing system for new customers for most of our markets, with the implementation complete for all markets by November. Concurrent with this, Allegiance will activate an electronic interface linking Singl.eView with the rest of the systems for integrated access and other T-1 based customers. Even though we are encouraged with the progress made in reducing churn, we are not satisfied and expect continued improvement in the third quarter," said Yost.

"The number of net installs for integrated access and other T-1 delivered voice and data services continues to exceed the net installs for unbundled network element (UNE) loop services. This represents a significant positive trend; integrated access continues as Allegiance Telecom's fastest growing product, continuing to make rapid gains in terms of our base of lines," said Tony Parella, president, telecom and retail services, for Allegiance Telecom. Parella also noted that Allegiance has established electronic bonding for trouble tickets with the incumbent carrier in 16 markets, creating a smoother, more accurate workflow to resolve problems.

Before giving effect to the provision related primarily to WorldCom and other distressed carriers, EBITDA loss as a percent of revenue for the second quarter 2002 was 6.4 percent versus 13.4 percent in 1Q02 and 22.7 percent for 2Q01. Capital expenditures were $42.4 million in 2Q02, which is a 63 percent reduction compared to 2Q01.

"Allegiance Telecom significantly controlled its cash burn in the quarter, using approximately $82.3 million of its cash and short-term investments during the second quarter to fund its operations, capital expenditures and service its indebtedness," said Thomas M. Lord, Allegiance executive vice president of corporate development and chief financial officer. "For the first half of 2002, cash burn totaled $149.6 million, a reduction of 53 percent from the first half of 2001. We expect to see further significant improvement in the last half of 2002," he said.

We have also drawn down our $150 million senior revolving credit facility, with $135 million funded to date. Three of our twenty-six senior lenders have not yet funded and we are engaged in discussions with them to respond to their requests for additional information. At June 30, 2002, after giving effect to this funding, Allegiance had approximately $354.0 million of cash and short-term investments. This figure reflects the considerable decline in Allegiance Telecom's quarterly cash consumption," said Lord.

"We remain confident in our ability to remain in compliance with our senior credit facility for the remainder of this year and beyond," Lord continued. "In our view, the primary financial covenants are the requirement to achieve gross revenue of $200 million and $220 million in the third and fourth quarters of 2002, respectively, and the requirement to maintain a ratio of senior secured debt to annualized consolidated EBITDA (i.e., the EBITDA for any quarter multiplied by four) of 5.0 to 1.0 for the first quarter of 2003; 4.0 to 1.0 for the second quarter of 2003; and 3.0 to 1.0 for the third quarter of 2003 and all quarters thereafter. We believe we are on plan to achieve these levels of performance. Our senior lenders, however, have asked us to engage in discussions with a view toward modifying our senior credit facility to place a greater emphasis on profitability and cash preservation, with less emphasis on growth while also strengthening some of the restricted covenants in the facility. We have begun these discussions, but do not plan to entertain any request to reduce the size of our credit facility or otherwise materially limit the availability of funds under the facility."

Acquisition of WorldCom Customer Premise Equipment Businesses
In mid June, Allegiance Telecom, Inc. finalized its acquisition of WorldCom, Inc.'s customer premise equipment (CPE) provisioning business and its CPE maintenance business. The aggregate purchase price was $30 million in cash. Together, these businesses represent one of the largest providers of CPE maintenance service and one of the largest CPE distributors in the US, with more than 5,000 customers nationwide in more than 7,000 locations. The businesses operate in 34 major US markets, 25 of which are also served by Allegiance.

The acquisition of these businesses accelerates Allegiance's emphasis on integrated service offerings to businesses using state-of-the-art CPE. It also strategically enhances Allegiance's growing national accounts business as nationwide or regional customers seek "One source for business telecom(tm)." With these transactions, Allegiance now offers a truly complete communications solution to corporate customers, including local and long distance voice, and Internet access services, now bolstered by a full suite of customer premise communications equipment and service offerings.

Early Markets Continue To Demonstrate Move Toward Profitability
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 were 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, while Northern New Jersey and Denver joined the club in 4Q01. This year, Detroit and Phoenix, became pre-overhead EBITDA positive during 1Q02, and Washington, DC and Oakland reached this status in 2Q02 to bring Allegiance's total to 20 pre-overhead EBITDA positive markets.

More information on the performance of these markets is included in the financials attachment of this 2Q02 news release.

Regulatory Certifications
Allegiance Telecom is certificated to provide local exchange services in 24 states and Washington DC, 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.

Corporate Background
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 36 US markets. Allegiance's common stock is traded on the NASDAQ National Market under the symbol ALGX.

¹ EBITDA means earnings before deducting interest, taxes, depreciation, amortization, non-cash deferred compensation expenses and goodwill impairment charge and is not derived pursuant to generally accepted accounting principles, and therefore should not be construed as an alternative to operating income (loss), as an alternative to cash flows from operating activities, or as a measure of liquidity.