• 3Q02 Revenues of $219.5 Million, Resulting in Annual Increase of 62.5 Percent
• 22 of 36 Markets Pre-Overhead EBITDA1 Positive in 3Q02
• Negotiations in Progress with Senior Secured Lenders to Revise Covenants to Reflect Operating the Company to Achieve Free Cash Flow Positive from Operations in 2003
• 3Q02 EBITDA Loss of $13.0 Million and Capital Spending of $28.2 Million, Resulting in Cash Burn from Operations of $41.2 Million, Reduction of 35.2 Percent from 2Q02 and 64.1 Percent from 3Q01
• Nine-Month 2002 Cash Burn from Operations of $166.3 Million Reflecting 58.8 Percent Reduction from First 9 Months of 2001
• Completion of IP Backbone Merge; NexGen OneSM Consolidates Traffic and Improves Efficiency
• $311.0 Million Cash On Hand End of 3Q02

DALLAS, October 29, 2002 -- Allegiance Telecom, Inc. (Nasdaq: ALGX), an integrated communications provider (ICP), today announced results for its third quarter 2002. Allegiance reported third quarter revenues of $219.5 million, an increase of 19.0 percent compared with 2Q02 and 62.5 percent compared with 3Q01. EBITDA1 (earnings before interest, taxes, depreciation and amortization, excluding noncash deferred compensation expenses) loss margins also improved sequentially to 5.9 percent, with a consolidated EBITDA loss of $13.0 million for 3Q02. Allegiance posted positive EBITDA of $1.1 million in September and is anticipating positive EBITDA and continued reductions in cash burn from operations in 4Q02.

"As we have previously disclosed, Allegiance Telecom is in negotiations with its senior secured lenders to revise the covenants that were negotiated in late 1999. We and our lenders have agreed in concept that value will be maximized by shifting our operational focus from continued high top line growth to achieving positive free cash flow from operations2 sometime during the first half of 2003, with a goal of generating positive free cash flow from operations for the entire calendar year 2003," said Royce J. Holland, chairman and CEO of Allegiance Telecom. "We began the process of achieving these objectives by paring back unprofitable and marginal operations and reducing SG&A expenses in the third quarter. The early results of these moves were reflected in September operating results as weachieved positive EBITDA for the first time in our five-year history, despite the negative impacts to revenue associated with this 'weeding out' process as well as from the FCC-mandated reductions in inter-carrier compensation rates and the contract termination of a wholesale customer. These moves also facilitated a significant reduction in capital expenses in 3Q02 with anticipated further reductions in capital spending and cash burn from operations in the fourth quarter 2002," said Holland.

Holland added that although Allegiance and its senior secured lenders have agreed in concept on the optimum method for operating the Company, the parties are still negotiating the details of a revised covenant package to support this plan.

"Negotiations are ongoing to replace the covenants with those that provide the Company with incentive to maximize the generation of free cash flow, although I cannot provide assurances of completing a successful negotiation at this time," said Holland. "We believe that the acquisition of the STFI (Shared Technologies Fairchild Inc.) customer premise equipment maintenance and provisioning operations in the second quarter has provided us the flexibility to begin optimizing our core business operations to reduce cash burn, while at the same time providing the option to alter course and renew our focus on meeting the existing bank covenants if negotiations are unsuccessful. If negotiations are successful, we will accelerate this transition toward free cash flow generation," he said.

Financial and Operational Highlights
As a result of Allegiance's transition from rapid revenue growth to a plan geared toward reducing cash burn from operations and achieving positive free cash flow from operations in 2003, the Company reduced the number of field sales teams in 3Q02. The retail sales teams are focused on selling higher end products such as integrated access. Allegiance also completed the sales fulfillment of its current Genuity contract during the quarter and will no longer be installing additional lines under this contract. Net lines installed during the quarter totaled 143,100 lines, a figure representing a 34.1 percent increase from 2Q02 and a 5.1 percent increase from 3Q01. With the completion of the installation of new lines under the Genuity contract and the continued effort to reduce its sales force, targeting marketing efforts to improve productivity and profitability, the Company expects that future net line installs could be materially lower.

The Company continues to see improved productivity and efficiency as it focuses its business on profitability. In 3Q02, the Company's revenue per employee rose to a record level of $199,000. This represents an increase of $29,900 or approximately 17.7 percent over the revenue per employee for the prior quarter of $169,100 and an increase of $60,800 or approximately 44.0 percent over the revenue per employee for 3Q01 of $138,200. "We are pleased with these increases in efficiency and plan to continue to pursue greater productivity in all areas of the Company," said Dan Yost, Allegiance Telecom president and chief operating officer.

Revenue increased 19.0 percent from 2Q02 to $219.5 million in the third quarter, an annual growth rate of approximately 62.5 percent. Although revenue growth was strong in Allegiance's core end user business, this growth was offset by the (1) the elimination of unprofitable resale, (2) the paring back of unprofitable or marginally profitable business units and the reduction in revenue from the termination of a wholesale customer as discussed above, (3) normal churn plus added churn caused by service disruptions (as discussed below) caused by the rapid migration of T-1 customers from the Intermedia Business Internet (IBI) and legacy Allegiance Internet backbones to the Allegiance NexGen One SM backbone, and (4) FCC-mandated reductions in inter-carrier compensation rates. Revenue generated by the STFI customer premise equipment and provisioning businesses was largely responsible for offsetting these reductions.

Reflecting the Company's focus on making progress toward positive free cash flow, cash burn from operations was reduced to $41.2 million, a decrease of 35.2 percent from the second quarter and a drop of 64.1 percent from 3Q01. For the nine months ending September 30, Allegiance experienced a decline in cash burn from operations of 58.8 percent in 2002 from the same nine-month period in 2001. This decline accelerated in September as Allegiance began to realize the cash flow benefits of the activities during July and August in reorienting the operations focus from rapid growth toward cash flow generation.

As discussed in previous quarterly results, reducing customer churn is a top priority for the Company, especially in Allegiance's smaller unbundled loop customer base. During the third quarter, Allegiance completed system interface upgrades linking the provisioning system to the Abiliti and Singl.eView billing systems for all classes of customers and all products (except resale) for new installations as well disconnects. The Singl.eView billing system was in service for 24 of the Allegiance markets at the end of 3Q02, with the balance scheduled for completion by mid-November 2002. For the reasons discussed above, continued progress in reducing normal churn was offset by the elimination of unprofitable customers and the increase in T-1 customer churn due to service disruptions during the migration of Internet customers to the NexGen One backbone. This resulted in an increase in the overall churn rate from 2.4 percent per month in 2Q02 to 2.8 percent in 3Q02.

"Having Allegiance's billing system in lockstep with our provisioning system will help immensely in our continuing effort to reduce customer churn percentages," said Tony Parella, Allegiance Telecom president of telecom and retail services. "Any changes made in provisioning will be automatically reflected in the billing system, producing more timely and accurate bills," he said.

"Allegiance Telecom continued to reduce cash consumed in the quarter, using approximately $43.0 million of its cash and short-term investments during the third quarter to fund its operations and capital expenditures, to service debt and to account for changes in working capital which were favorable in 3Q02," said Thomas M. Lord, Allegiance executive vice president of corporate development and chief financial officer. "Our EBITDA loss of $13.0 million and capital expenditures of $28.2 million represent the lowest level of cash consumed since the Company began operations," he said. "We expect this trend to continue demonstrating sequential and year over year improvement, with EBITDA on a consolidated basis having turned positive. Beginning in 2003, capital expenditures are mainly dependent on success-based expenditures and maintenance. We expect capital spending to continue to be at or below these levels. This improvement in cash burn from operations is also consistent with our discussions with our senior secured lenders regarding potential amendments to our bank covenants," said Lord.

"The third quarter also included a timely payment by Genuity, Inc. under our long-term Integrated Network Solution contract with them. Genuity is our largest customer and we are working with them to maintain this important customer relationship as they continue to work through their financial restructuring process," added Lord.

"At September 30, 2002, Allegiance had approximately $311.0 million of cash and short-term investments. This figure also demonstrates the important reduction in Allegiance Telecom's quarterly cash consumption," said Lord.

Integration of IP Backbone Networks
During the third quarter, Allegiance Telecom completed the migration of customers from the former IBI backbone (formerly known as Digex, acquired at the end of 2001) and from the legacy Allegiance Internet backbone to Allegiance's next generation Tier I network, known as NexGen One. Through this combination, an achievement that involved reconfiguring hundreds of routers, switches and other networking components, the Company has greatly improved the performance and economy of its Internet backbone.

This logical reconfiguration was one of the largest network migrations to occur in a relatively short timeframe -- in comparison, other projects of this scope have occurred over a large number of months or even years. The motivating factor for the rapid execution of this project was the expiration of an expensive legacy network capacity contract that would have required renewal at legacy rates for one year if the migration had not been completed on time. As a result, Allegiance has been realizing significant network expense savings for its Internet traffic beginning in the fourth quarter. Migrating large volumes of traffic from multiple backbones in a short time frame did come at a cost however, in the form of a number of regional network outages -- several of which impacted a number of Allegiance's T-1 customers' ability to access the Internet for several hours. As a result, the Company experienced an increase in T-1 customer churn during the third quarter.

"The newly unified NexGen One has increased capacity and reduced latency, and its enhanced peering points with other Tier I providers reduces Allegiance's network expense. Capital expenditures for NexGen were approximately $35 million," said Yost. "As a result of the integration, Allegiance has already seen world class performance from the network in the last month in terms of a dramatic reduction in latency network-wide, improved packet delivery and greater availability of the backbone. Unfortunately, we did experience some short-term difficulties in the form of service interruptions during the transition and increased customer churn to achieve significant long term gains in performance and network expenses," he said.

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 (before corporate overhead allocation). At the end of 2000, 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 of 2001. 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, Washington, D.C. and Oakland reached this status in 2Q02, and Seattle and Minneapolis/St. Paul achieved the important distinction during 3Q02 to bring Allegiance's total to 22 pre-overhead EBITDA positive markets.

As described previously, the termination of a wholesale customer in conjunction with an expected decline in carrier access rates and reciprocal compensation eliminated recurring revenue in Allegiance's original 18 markets. Furthermore, the bulk of eliminated resale lines occurred in these markets. As a result of these events, revenues, gross margin and pre-overhead EBITDA declined sequentially from 2Q02 to 3Q02. Allegiance expects this trend to reverse itself in 4Q02 and regain momentum in all financial and operational metrics. As high margin integrated access devices (IADs) replace resale and wholesale revenue streams, and with lower churn rates for these product sets, Allegiance sees a return to expected profit and growth rates consistent with our success in these markets.

More information on the performance of these early markets is included in the financials attachment of this 3Q02 news release.

Corporate Background
Allegiance Telecom is a facilities-based integrated communications provider headquartered in Dallas, Texas. As the leader in competitive local service for medium and small businesses, Allegiance offers "One source for business telecom(tm)"- a complete telecommunications package, including local, long distance, international calling, high-speed data transmission and Internet services and a full suite of customer premise communications equipment and service offerings. Allegiance serves 36 major metropolitan areas in the U.S. with its single source approach. Allegiance's common stock is traded on the Nasdaq National Market under the symbol ALGX.

Certain statements in this press release constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward- looking statements be subject to the safe harbors created thereby. The words "believes," "expects," "estimates," "anticipates," "plans," "will be", "should" and "forecasts" and similar words or expressions identify forward-looking statements made by or on behalf of the Company. These forward-looking statements were derived using numerous assumptions and are subject to many uncertainties and factors that may cause the actual results of the Company to be materially different from those stated in such forward-looking statements. Examples of such uncertainties and factors include, but are not limitedto, the Company's ability to timely and effectively provision new customers; the Company's ability to retain existing customers; the Company's ability to obtain additional financing should it be necessary to do so; the Company's ability to develop and maintain efficient billing, customer service and information systems; and technological, regulatory or other developments in the industry and general economy that might adversely affect the Company. Additional factors are set forth in the Company's SEC reports, including but not limited to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2002. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on it behalf, whether as a result of new information, future events or otherwise.

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.

² Free cash flow from operations is defined as EBITDA minus capital expenditures.