• 4Q02 Revenues of $204.9 Million, Resulting in 2002 Annual Revenue of $771.0 Million
• 4Q02 EBITDA Loss of $15.7 Million and Capital Spending of $19.0 Million, Resulting in Cash Burn from Operations of $34.7 Million, Reduction of 15.8 Percent from 3Q02 and 52.5 Percent from 4Q01
• Total Cash Burn from Operations for 2002 of $201.0 Million, a reduction of $275.6 Million from 2001, an Annual Reduction of 57.8 Percent
• $284.3 Million Cash On Hand End of 4Q02 versus $311.0 Million at beginning of quarter

DALLAS, March 3, 2003 -- Allegiance Telecom, Inc. (Nasdaq: ALGX), a national local exchange carrier (NLEC), today announced results for its fourth quarter and year-end 2002. Allegiance reported fourth quarter revenues of $204.9 million, a decrease of 6.7 percent compared with 3Q02 and an increase of 35.0 percent compared with 4Q01, and full-year revenue of $771.0 million, an increase of 49.2 percent compared with 2001. Excluding the revenue impact of the Company's customer premise equipment (CPE) provisioning and maintenance business, which had 4Q02 revenue of $33.0 million versus $40.3 million in 3Q02, revenue for 4Q02 declined by $7.3 million from the third quarter, a reduction of 3.3 percent. EBITDA¹ loss margin for the fourth quarter was 7.7 percent, with a consolidated EBITDA loss of $15.7 million for 4Q02. Allegiance Telecom also reported it achieved adjusted free cash flow from operations of ($33.4) million, representing compliance with its senior secured credit facility covenants level of ($34.0) million.

For the year ending December 31, 2002, Allegiance Telecom had an EBITDA loss of $71.6 million, a 36.2 percent decrease from 2001. Capital expenditures for 2002 totaled $129.4 million versus $364.4 million in 2001, a reduction of 64.5 percent.

"During the fourth quarter, Allegiance Telecom reoriented its focus from rapid top line growth to a goal of moving rapidly to free cash flow positive which is targeted to occur by mid-2003," said Royce J. Holland, Allegiance chairman and chief executive officer. "Along with our interim agreement with senior bank creditors announced in late November 2002, our focus has shifted dramatically to an operating mode more appropriate in the continuing poor capital markets environment. We also continue to work with our bankers on a permanent amendment to the credit facilities reflecting a focus on generating cash rather than high revenue growth."

Holland said many of the actions taken in the fourth quarter to refocus the Company's operations resulted in the Company's first sequential quarterly revenue downtick (excluding the revenue impact from Allegiance's CPE business) of $7.3 million. Holland further indicated that these actions included:

• Reduction of field sales teams from a high of 128 in the first half of 2002 to 66 at year-end.
• Focus on selling the Company's most profitable products and in areas with excess network capacity.
• Phase out of unprofitable and marginally profitable products.
• Substantial progress on a major effort to improve its collectability of its accounts receivable, resulting in a reduction of receivables aged more than 90 days for the Company's retail telecom services products from $25.9 million in August 2002 to approximately $7.0 million at year-end. With the completion of the rollout of the Singl.eView billing system with its superior accounts receivable management tools, the reductions realized can be sustained.
• In conjunction with the reduction in accounts receivable, credit standards were tightened for new customers.
• Negotiated settlements with major carriers regarding disputes over intercarrier compensation and increased revenue reserves for a number of financially ailing CLECS with respect to intercarrier compensation.

"The result of all this activity was a significant hit to revenue in 4Q02 as well as bad debt expense of about $17.7 million, which resulted in a larger than expected EBITDA loss," Holland said. "The benefits of our efforts in the fourth quarter should be reflected in lower churn and bad debt expense and a resumption of double digit revenue growth during 2003."

Allegiance is simultaneously pursuing financial and strategic negotiated alternatives to reduce its total indebtedness, which under the terms of the interim amendment must be reduced from the current $1.2 billion level to $645 million by April 30, 2003. This debt reduction could include the issuance of new equity or equity derivative securities for cash to retire outstanding debt, the use of cash to retire outstanding debt or the issuance of equity or equity derivative securities or debt securities in exchange for outstanding debt. If this debt reduction has not been consummated prior to the issuance of the 2002 audit report by KPMG LLP, Allegiance Telecom's independent accountants, and in a manner that provides the Company with sufficient available cash to fund operations for at least the next 12 months, Allegiance has been informed by KPMG LLP that the report will contain a "going concern" qualification.

Operational and Financial Highlights

The Company continues to see improved productivity and efficiency as it focuses its business on profitability. In 4Q02, the Company's revenue per employee surged to a record level of $204,600, an increase of $5,600 or approximately 2.8 percent over the revenue per employee for 3Q02 of $199,000 and an increase of $54,400 or approximately 36.2 percent over the revenue per employee for 4Q01 of $150,200. "Continued gains in efficiency and productivity indicate our programs to enhance efficiency are working well," said Dan Yost, Allegiance Telecom president and chief operating officer.

Reflecting the Company's focus on making progress toward positive free cash flow, cash burn from operations was reduced to $34.7 million, a decrease of 15.8 percent from the third quarter and a drop of 52.5 percent from 4Q01. Allegiance experienced a decline in cash burn from operations of 57.8 percent in 2002 compared with 2001.

"The implementation of our new consolidated billing system, completed in November 2002, that works in concert with our customer provisioning systems has bolstered our initiative to minimize customer churn percentages," said Tony Parella, Allegiance Telecom president of telecom and retail services. "We ended 2002 with an automated system for tracking disconnects, giving us a much better handle on churn statistics, and the lowest level of billing disputes and bad debt in the history of our retail operations. For 2003, we are in a much better position to serve and retain our customers."

"Allegiance Telecom continued to dramatically reduce cash consumed in the quarter, using approximately $26.7 million of its cash and short-term investments during the fourth quarter to fund its operations and capital expenditures, to service debt and to account for changes in working capital which were favorable in 4Q02," said Thomas M. Lord, Allegiance executive vice president of corporate development and chief financial officer. "This improvement in cash burn from operations is consistent with our bank covenants. While the EBITDA loss sets us back in terms of our trend towards positive cash flow from operations, investors should understand that to a great extent it reflects the shift in the fourth quarter from our historic high octane revenue growth mode to our current managed growth, cash preservation mode."

Corporate Background

Allegiance Telecom is a facilities-based national local exchange carrier 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 limited to, 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 September 30, 2002. 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.

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.