---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q/AAmendment No. 1

|ý                                             |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|--------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the Quarterly Period Ended June 30, 2003.
|or                                           
|o                                             |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to           
|Commission file number 0-24509               

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Allegiance Telecom, Inc.(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction
of incorporation or organization) |  | 75-2721491(IRS Employer Identification No.)
|---------------------------------------------------------------------- |  | -------------------------------------------

9201 North Central Expressway
Dallas, Texas 75231(Address of principal executive offices) (Zip Code)

(214) 261-7100(Registrant's telephone number, including area code)

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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes ý No o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act). Yes o No ý

As
of August 11, 2003, the registrant has 124,742,246 shares of common stock, par value $0.01 per share outstanding.

---

---

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EXPLANATORY NOTE

Allegiance Telecom, Inc. is amending its Form 10-Q for the quarterly period ended June 30, 2003 (the
"Form 10-Q"), to correct certain amounts in Part I, Item 1 [Financial Statements] of its Form 10-Q filed with the Securities and
Exchange Commission on August 19, 2003. Specifically, this Amendment No. 1 corrects the following classification and typographical errors in the Condensed Consolidated Statements of Cash
Flows for the six months ended June 30, 2003:

|                                                                         |  | Amount as previously
reported in the
Company's Form 10-Q
filed August 19, 2003 |   | Corrected amount, as
reported in this
Amendment No. 1 to the
Company's Form 10-Q |     
|------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------ | - | -------------------------------------------------------------------------------- | ----
|Increase (decrease) in accrued liabilities and other current liabilities |  | (65,259                                                                        | ) | (60,658                                                                          | )(1)
|Net cash used in operating activities before reorganization items        |  | (149,067                                                                       | ) | (144,466                                                                         | )(2)
|Net cash (used in) provided by operating activities                      |  | 1,206,471                                                                      |   | 1,211,072                                                                        | (2) 
|Reclassification of debt subject to compromise                           |  | (1,194,891                                                                     | ) | (1,199,494                                                                       | )(1)
|Net cash (used in) provided by financing activities                      |  | (7,793                                                                         | ) | (1,207,287                                                                       | )(3)

---

This
Amendment No. 1 amends only the items of the Form 10-Q specified and does not otherwise update the disclosures in the Form 10-Q as
originally filed and does not reflect events occurring after the original filing of the Form 10-Q.

2

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PART I. FINANCIAL INFORMATION        ITEM 1.Financial Statements

ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
(Debtors and Debtors-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)

|                                                 |                                                                                                                                                                                                                | June 30,
2003                                         |           | December 31,
2002 |          
|------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | --------- | ----------------- | ---------
|
|ASSETS                                           |                                                                                                                                                                                                               
|Current assets:                                  |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 | Cash and cash equivalents                                                                                                                                                                                      |                                                       | $         | 268,711           |          
|                                                 | Short-term investments                                                                                                                                                                                         |                                                       |           | 500               |          
|                                                 | Restricted short-term investments                                                                                                                                                                              |                                                       |           | 1,821             |          
|                                                 | Accounts receivable, net                                                                                                                                                                                       |                                                       |           | 131,076           |          
|                                                 | Prepaid expenses and other current assets                                                                                                                                                                      |                                                       |           | 22,930            |          
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total current assets                                  |           |                   | 425,038  
|Property and equipment, net                      |                                                                                                                                                                                                                |                                                       | 810,439   |                   |          
|Deferred debt issuance costs, net                |                                                                                                                                                                                                                |                                                       | 14,541    |                   |          
|Long-term investments, restricted                |                                                                                                                                                                                                                |                                                       | 6,881     |                   |          
|Other assets, net                                |                                                                                                                                                                                                                |                                                       | 35,225    |                   |          
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total assets                                          |           | $                 | 1,292,124
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)   |                                                                                                                                                                                                               
|Current liabilities not subject to compromise:   |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 | Accounts payable                                                                                                                                                                                               |                                                       | $         | 29,102            |          
|                                                 | Accrued liabilities and other current liabilities                                                                                                                                                              |                                                       |           | 74,593            |          
|                                                 | Current portion of long-term debt                                                                                                                                                                              |                                                       |           |                  |          
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total current liabilities not subject to compromise   |           |                   | 103,695  
|Liabilities subject to compromise (see Note 2)   |                                                                                                                                                                                                                |                                                       | 1,355,538 |                   |          
|Long-term liabilities not subject to compromise: |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 | Long-term debt                                                                                                                                                                                                 |                                                       |           |                  |          
|                                                 | Other long-term liabilities                                                                                                                                                                                    |                                                       |           | 7                 |          
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total long-term liabilities not subject to compromise |           |                   | 7        
|Commitments and contingencies (see Note 11)      |                                                                                                                                                                                                                |                                                       |           |                   |          
|Stockholders' equity (deficit):                  |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 | Preferred stock, $.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at June 30, 2003 and December 31, 2002                                                                           |                                                       |           |                  |          
|                                                 | Common stock, $.01 par value, 750,000,000 shares authorized, 125,264,444 and 125,157,605 shares issued and 124,742,246 and 124,830,110 shares outstanding at June 30, 2003 and December 31, 2002, respectively |                                                       |           | 1,252             |          
|                                                 | Additional paid-in capital                                                                                                                                                                                     |                                                       |           | 1,808,569         |          
|                                                 | Common stock in treasury, at cost, 522,198 and 327,495 shares at June 30, 2003 and December 31, 2002, respectively                                                                                             |                                                       |           | (45               | )        
|                                                 | Common stock warrants                                                                                                                                                                                          |                                                       |           | 1,857             |          
|                                                 | Deferred compensation                                                                                                                                                                                          |                                                       |           | (3,387            | )        
|                                                 | Accumulated deficit                                                                                                                                                                                            |                                                       |           | (1,975,362        | )        
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total stockholders' equity (deficit)                  |           |                   | (167,116 
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          
|                                                 |                                                                                                                                                                                                                | Total liabilities and stockholders' equity (deficit)  |           | $                 | 1,292,124
|                                                 |                                                                                                                                                                                                                |                                                       |           |                   |          

The
accompanying notes are an integral part of these consolidated financial statements.

3

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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
(Debtors and Debtors-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
(Unaudited)

|                                                                 |                                                  | Three Months Ended June 30,  |             | Six Months Ended June 30, |        
|---------------------------------------------------------------- | ------------------------------------------------ | ---------------------------- | ----------- | ------------------------- | -------
|
|Revenues                                                         |                                                  | $                            | 196,652     |                           | $      
|Operating expenses:                                              |                                                  |                              |             |                           |        
|                                                                 | Network                                          |                              |             | 104,989                   |        
|                                                                 | Selling, general and administrative              |                              |             | 98,563                    |        
|                                                                 | Depreciation and amortization                    |                              |             | 65,292                    |        
|                                                                 | Non-cash deferred compensation                   |                              |             | 656                       |        
|                                                                 | Goodwill impairment charge                       |                              |             | 2,105                     |        
|                                                                 |                                                  |                              |             |                           |        
|                                                                 |                                                  | Total operating expenses     |             |                           | 271,605
|                                                                 |                                                  |                              |             |                           |        
|                                                                 | Loss from operations                             |                              |             | (74,953                   | )      
|Other income (expense):                                          |                                                  |                              |             |                           |        
|                                                                 | Interest income                                  |                              |             | 827                       |        
|                                                                 | Interest expense                                 |                              |             | (18,961                   | )      
|                                                                 | Gain on sale of investment (see Note 12)         |                              |             | 3,277                     |        
|                                                                 |                                                  |                              |             |                           |        
|                                                                 |                                                  | Total other income (expense) |             |                           | (14,857
|                                                                 |                                                  |                              |             |                           |        
|                                                                 | Loss from operations before reorganization items |                              |             | (89,810                   | )      
|Reorganization items (see Note 13)                               |                                                  |                              | (2,587      | )                         |        
|                                                                 |                                                  |                              |             |                           |        
|Net loss                                                         |                                                  | $                            | (92,397     | )                         | $      
|                                                                 |                                                  |                              |             |                           |        
|Net loss per share, basic and diluted                            |                                                  | $                            | (0.76       | )                         | $      
|                                                                 |                                                  |                              |             |                           |        
|Weighted average number of shares outstanding, basic and diluted |                                                  |                              | 120,802,701 |                           |        

The
accompanying notes are an integral part of these consolidated financial statements.

4

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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
(Debtors and Debtors-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except share and per share data)
(Unaudited)

|                                                                                |                                                                   | Six Months Ended
June 30,                                                             |                                                                         
|------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------------------------
|
|Cash flows from operating activities:                                           |                                                                   |                                                                                       |                                                                         
|                                                                                | Net loss                                                          |                                                                                       | $                                                                       
|                                                                                |                                                                   | Adjustments to reconcile net loss to cash (used in) provided by operating activities |                                                                         
|                                                                                |                                                                   |                                                                                       | Depreciation and amortization                                           
|                                                                                |                                                                   |                                                                                       | Provision for uncollectible accounts receivable                         
|                                                                                |                                                                   |                                                                                       | Gain on sale of investment                                              
|                                                                                |                                                                   |                                                                                       | Accretion of investments                                                
|                                                                                |                                                                   |                                                                                       | Accretion of Series B and 127/8% notes                                  
|                                                                                |                                                                   |                                                                                       | Amortization of deferred debt issuance costs                            
|                                                                                |                                                                   |                                                                                       | Amortization of deferred compensation                                   
|                                                                                |                                                                   |                                                                                       | Goodwill impairment charge                                              
|                                                                                |                                                                   | Changes in assets and liabilities, net of effects of acquisitions                    |                                                                         
|                                                                                |                                                                   |                                                                                       | Increase in accounts receivable                                         
|                                                                                |                                                                   |                                                                                       | Decrease (increase) in prepaid expenses and other current assets        
|                                                                                |                                                                   |                                                                                       | Decrease (increase) in other assets                                     
|                                                                                |                                                                   |                                                                                       | Increase (decrease) in accounts payable                                 
|                                                                                |                                                                   |                                                                                       | Increase (decrease) in accrued liabilities and other current liabilities
|                                                                                |                                                                   |                                                                                       |                                                                         
|                                                                                | Net cash used in operating activities before reorganization items |                                                                                       |                                                                         
|                                                                                |                                                                   | Reorganization items:                                                                 |                                                                         
|                                                                                |                                                                   |                                                                                       | Increase in liabilities subject to compromise                           
|                                                                                |                                                                   |                                                                                       |                                                                         
|                                                                                | Net cash (used in) provided by operating activities               |                                                                                       |                                                                         
|Cash flows from investing activities:                                           |                                                                   |                                                                                       |                                                                         
|                                                                                | Purchases of property and equipment                               |                                                                                       |                                                                         
|                                                                                | Capitalized interest                                              |                                                                                       |                                                                         
|                                                                                | Purchases of subsidiaries, net of cash acquired                   |                                                                                       |                                                                         
|                                                                                | Purchases of investments                                          |                                                                                       |                                                                         
|                                                                                | Proceeds from sale of investments                                 |                                                                                       |                                                                         
|                                                                                |                                                                   |                                                                                       |                                                                         
|                                                                                |                                                                   |                                                                                       | Net cash (used in) provided by investing activities                     
|Cash flows from financing activities:                                           |                                                                   |                                                                                       |                                                                         
|                                                                                | Proceeds from issuance of common stock, net                       |                                                                                       |                                                                         
|                                                                                | Proceeds from borrowings under senior secured credit facilities   |                                                                                       |                                                                         
|                                                                                | Payments on senior secured credit facilities                      |                                                                                       |                                                                         
|                                                                                | Payments on capital lease obligations                             |                                                                                       |                                                                         
|                                                                                | Reclassification of debt subject to compromise                    |                                                                                       |                                                                         
|                                                                                | Other                                                             |                                                                                       |                                                                         
|                                                                                |                                                                   |                                                                                       |                                                                         
|                                                                                |                                                                   |                                                                                       | Net cash (used in) provided by financing activities                     
|                                                                                |                                                                   |                                                                                       |                                                                         
|Increase (decrease) in cash and cash equivalents                                |                                                                   |                                                                                       | 15,400                                                                  
|Cash and cash equivalents, beginning of period                                  |                                                                   |                                                                                       | 253,311                                                                 
|                                                                                |                                                                   |                                                                                       |                                                                         
|Cash and cash equivalents, end of period                                        |                                                                   | $                                                                                     | 268,711                                                                 
|                                                                                |                                                                   |                                                                                       |                                                                         
|Supplemental disclosure of cash flow information:                               |                                                                   |                                                                                       |                                                                         
|                                                                                | Cash paid for interest                                            |                                                                                       | $                                                                       
|Supplemental disclosure of non-cash investing and financing activities:         |                                                                   |                                                                                       |                                                                         
|                                                                                | Assets acquired under capital lease obligations                   |                                                                                       |                                                                         
|Fair value of assets acquired in business acquisitions                          |                                                                   |                                                                                       |                                                                        
|Liabilities assumed in business acquisitions                                    |                                                                   |                                                                                       |                                                                        
|Common stock issued for business acquisitions (242,968 shares at June 30, 2002) |                                                                   |                                                                                       |                                                                        

The accompanying notes are an integral part of these consolidated financial statements.

5

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ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
(Debtors and Debtors-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2003 and 2002
(Dollars in thousands, except share and per share data)
(Unaudited)

1.     General:

Allegiance Telecom, Inc. is a facilities-based national local exchange carrier that provides integrated telecommunications services to business, government
and other institutional users in major metropolitan areas across the United States of America and it is focused primarily on small to medium-sized businesses. Allegiance Telecom, Inc. was
incorporated on April 22, 1997, as a Delaware corporation, and it and its subsidiaries are generally referred to herein as the "Company."

The
Company provides service in 36 of the largest metropolitan areas in the United States of America as follows: Atlanta, Austin, Baltimore, Boston, Chicago, Cleveland, Dallas, Denver,
Detroit, Fort Lauderdale, Fort Worth, Houston, Long Island, Los Angeles, Miami, Minneapolis/St. Paul, New York City, Northern New Jersey, Oakland, Ontario/Riverside, 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.

The
Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of
America for interim financial information and are in the form prescribed by the Securities and Exchange Commission in instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for
complete financial statements. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited
consolidated financial statements as of and for the year ended December 31, 2002. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.

Certain
amounts in the prior period's condensed consolidated financial statements have been reclassified to conform to current period presentation.

2.     Reorganization and Going Concern:

Voluntary Bankruptcy Filing.On May 14, 2003, Allegiance Telecom, Inc. and all of its
direct and indirect wholly owned subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court") in order to facilitate the restructuring of the Company's debt, trade liabilities and other obligations. The Company is currently operating as a
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code, the Federal Rules of Bankruptcy
Procedure and applicable court orders. In general, as a debtor-in-possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may
not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.

Under
Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against the Company, including most actions to collect
pre-petition indebtedness or to

6

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exercise
control of the property of the Company's estate. Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities will be addressed under a plan of
reorganization.

Under
Section 365 of the Bankruptcy Code, the Company may assume or reject certain pre-petition executory contracts and unexpired leases, including leases of real
property, subject to the approval of the Bankruptcy Court and certain other conditions. In general, rejection of an unexpired lease or executory contract is treated as a pre-petition
breach of the lease or contract. Counterparties to these rejected contracts or leases may file proofs of claim against the Company's estate for damages relating to such breaches. The Company cannot
presently determine
with certainty the ultimate aggregate liability which will result from the filing of claims relating to such contracts that have been or may be rejected.

The
United States Trustee for the Southern District of New York has appointed an official committee of unsecured creditors (the "Creditors' Committee"). The Creditors' Committee and its
legal representatives have a right to be heard on all matters that come before the Bankruptcy Court. The rights and claims of various creditors and security holders will be determined by a plan of
reorganization that is confirmed by the Bankruptcy Court. Under the priority rules established by the Bankruptcy Code, certain post-petition liabilities and certain
pre-petition liabilities (e.g., senior secured debt) are given priority over unsecured pre-petition indebtedness and need to be satisfied before unsecured creditors or
stockholders are entitled to any distribution. Any Chapter 11 plan filed by the Company may provide that unsecured creditors of subsidiaries of Allegiance Telecom, Inc. will need to be
satisfied before any distribution to the unsecured creditors or stockholders of Allegiance Telecom, Inc. As a result, a plan of reorganization could result in holders of the Company's common
stock and Series B 11 3/4% notes due 2008 and 12 7/8% senior notes due 2008 receiving little or no value as part of the plan of reorganization.

In
order to exit Chapter 11 successfully, the Company will need to propose and obtain confirmation by the Bankruptcy Court of a plan of reorganization that satisfies the requirements of
the Bankruptcy Code. As provided by the Bankruptcy Code, the Company initially has the exclusive right to solicit a plan of reorganization for 120 days from the date of filing its petition for
relief, which expires September 11, 2003. There can be no assurance that the Bankruptcy Court will extend the exclusivity period beyond that date. In addition, the bar date for claims has not
yet been set. At this time, it is not possible to predict accurately the effect of the Chapter 11 reorganization process on the Company's business, creditors or stockholders or when the Company may
emerge from Chapter 11. The Company's future results depend on the timely and successful confirmation and implementation of a plan of reorganization.

Accounting Impact.These condensed consolidated financial statements have been prepared in accordance
with the provisions of the American Institute of Certified Public Accountants Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7"). Pursuant to SOP 90-7, the Company's pre-petition liabilities that are subject to compromise are reported separately on the balance sheet as an estimate of
the amount that will ultimately be allowed by the Bankruptcy Court.

7

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The
following table sets forth the liabilities of the Company subject to compromise as of June 30, 2003:

June 30, 2003Accounts payable and other claims

$
161,673Senior secured credit facilities, variable interest rate


465,300Series B 113/4% notes, face amount $445,000 due February 15, 2008; effective interest rate of 12.21%; at accreted value


440,489127/8% senior notes, face amount $205,000 due May 15, 2008; effective interest rate of 13.24%; at accreted value


202,354Capital lease obligations


85,722Total liabilities subject to compromise

$
1,355,538


Pursuant
to SOP 90-7, an objective of financial statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding. For that purpose,
the financial statements for periods including and subsequent to filing the Chapter 11 petition should distinguish transactions and events that are directly associated with the reorganization from the
ongoing operations of the business. Certain expenses, realized gains and losses and provisions for losses not directly related to ongoing operations are reflected separately in the consolidated
statement of operations as reorganization items (see Note 13).

Additionally,
pre-petition debt that is subject to compromise must be recorded at the allowed claim amount, which generally results in the write-off of any
deferred financing amounts associated with the debt. No claims relating to pre-petition debt have been allowed by the Bankruptcy Court as of June 30, 2003. As a result,
pre-petition debt subject to compromise is recorded at its pre-petition value.

Deferred
debt issuance costs include costs incurred by the Company in raising debt proceeds. These costs were being amortized to interest expense over the life of the related debt
pre-petition. In accordance with SOP 90-7, the Company stopped recording interest expense on the Company's Series B 11 3/4% notes due 2008 and
12 7/8% senior notes due 2008 as of the Commencement Date. Accordingly, the deferred debt issuance costs related to this debt is no longer being amortized. Under the Final Cash
Collateral Order, discussed below, the Company is required to continue incurring and paying interest under its senior secured credit facilities. Accordingly, the deferred debt issuance costs related
to the senior secured credit facilities continue to be amortized to interest expense over the life of the debt.

Certain
pre-petition debt that is classified as subject to compromise, specifically the senior secured credit facilities, continues to accrue interest. Interest on the
remaining pre-petition debt that is subject to compromise ceased to accrue when the bankruptcy was filed. On June 23, 2003, the Company received final Bankruptcy Court approval for
the use of its cash collateral under a Final Order Authorizing Use of Cash Collateral by Consent (the "Final Cash Collateral Order"). The Final Cash Collateral Order among other things:
(1) restricts the Company's use of cash, (2) requires the Company to prepare and follow a budget and maintain a minimum weekly cash balance, and (3) requires the Company to
provide certain financial, operational and other information to its senior lenders and the Creditors' Committee. Under this Final Cash Collateral Order, the Company is required to continue incurring
and paying interest under its senior secured credit agreement.

The
consolidated financial statements contained herein have been prepared in accordance with generally accepted accounting principles applicable to a going concern, and do not purport to
reflect or to provide all of the possible consequences of the ongoing Chapter 11 reorganization cases. Specifically, the consolidated financial statements do not present the amount which will
ultimately be paid to settle liabilities and contingencies which may be required in the Chapter 11 reorganization. The Debtors have

8

---

not
filed a plan of reorganization as of this date, but currently expect to file one in the near term. The plan, when filed is subject to the acceptance by the required creditors and approval by the
Bankruptcy Court.

In
accordance with the guidance provided by the Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", the Company considered the bankruptcy filing on May 14, 2003 a triggering event which required that the Company's long-lived assets to be
evaluated for impairment. Based on management's best estimate of the future cash flows of the Company, it has been determined that the undiscounted cash flows generated from the Company's assets are
sufficient to recover their current carrying value. These cash flows are based on numerous assumptions, including, among other things, the achievement of certain operating results and cost reductions.

Under
accounting guidelines commonly referred to as "fresh start", the fair value of all assets of the Company will be estimated as it emerges from bankruptcy in conformity with
accounting principles generally accepted in the United States of America, specifically by Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 141 "Business
Combinations". Under fresh start accounting, an enterprise value will be determined based on a plan of reorganization for the Company and will be used to determine the fair value of all the Company's
assets and liabilities. The assumptions in the plan of reorganization may vary from the assumptions used by the Company as of June 30, 2003 to evaluate impairment of long-lived
assets, therefore the fair values assigned to the assets upon emergence may be different than the carrying values recorded as of June 30, 2003. As a result, an adjustment to the fair value of
long-lived assets may be required.

Because
of the ongoing nature of the reorganization cases, the outcome of which is not presently determinable, the consolidated financial statements contained herein are subject to
material uncertainties and may not be indicative of the results of the Company's future operations or financial position. No assurance can be given that the Company will be successful in reorganizing
its affairs within the Chapter 11 bankruptcy proceedings.

As
a result of the items discussed above, there is substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern
is dependent upon, but not limited to, formulation, approval, and confirmation of a plan of reorganization and the ability to obtain positive results of operations. The consolidated financial
statements do not include any adjustments to the recorded amounts or reflect any amounts that may be ultimately paid to settle liabilities and contingencies which may be required in the Chapter 11
reorganization or the effect of any changes, which may be made in connection with the Company's operations resulting from a plan of reorganization.

3.     Stock-Based Compensation:

At June 30, 2003, the Company had three stock-based compensation plans, the 1997 Nonqualified Stock Option Plan, the 1998 Stock Incentive Plan and the
Employee Stock Discount Purchase Plan. The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and the
related interpretations in accounting for the Company's plans. Fixed stock option and restricted stock awards with pro-rata vesting are recognized as expense using the
straight-line method over the vesting period. Effective May 14, 2003, vesting for the Company's restricted stock ceased as a result of the Company's bankruptcy proceedings, although
amortization of deferred compensation related to restricted stock continued and is included in the reported expense below (see Note 2).

Had
compensation cost for the Company's plans been determined based on the fair value of the stock options as of the grant dates for awards under the plans consistent with the method
prescribed by the Financial Accounting Standards Board in Statement of Financial Accounting Standards No. 123,

9

---

"Accounting
for Stock-Based Compensation," the Company's net loss applicable to common stock and net loss per share would have increased to the pro forma amounts indicated below. The Company utilized
the following assumptions in calculating the estimated fair value of each stock option on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions
for grants:

June 30, 2003

June 30, 2002Dividend yield


%

%Expected volatility

123.0
%
123.0
%Expected life

3.0

3.0Risk-free interest rate

2.05
%
3.32
%


|                                                                                                    |  | Three Months Ended
June 30, |          | Six Months Ended
June 30, |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | ------------------------- | -
|
|Reported net loss                                                                                   |  | $                           | (92,397  | )                         | $
|Add: stock-based employee compensation expense included in reported net income                      |  |                             | 656      |                           |  
|Deduct: stock-based employee compensation expense determined under fair value method for all awards |  |                             | (10,989  | )                         |  
|                                                                                                    |  |                             |          |                           |  
|Pro forma net loss                                                                                  |  | $                           | (102,730 | )                         | $
|                                                                                                    |  |                             |          |                           |  
|Net loss per share, basic and diluted  as reported                                                 |  | $                           | (0.76    | )                         | $
|Net loss per share, basic and diluted  pro forma                                                   |  | $                           | (0.85    | )                         | $

4.     Business Acquisitions:

On June 17, 2002, the Company purchased substantially all of the assets and assumed substantially all of the liabilities of WorldCom's customer premise
equipment sales and equipment maintenance businesses, known in the industry as "Shared Technologies Fairchild" or "Shared Technologies." The acquisition was accounted for using the purchase method,
and accordingly, the net assets and results of operations of Shared Technologies have been included in the Company's consolidated financial statements since the date of acquisition.

Revenues
of Shared Technologies included in the Company's condensed consolidated financial statements for the three months ended June 30, 2003 and 2002 were $28,220 and $5,472,
respectively. Total revenues included for the six months ended June 30, 2003 and 2002 were $63,359 and $5,472, respectively. Total network expenses related to the Shared Technologies businesses
for the three months ended June 30, 2003 and 2002 were $16,945 and $4,253, and for the six months ended June 30, 2003 and 2002 were $37,146 and $4,253, respectively.

The
following presents the unaudited pro forma results of the Company for the three and six months ended June 30, 2002, as if the acquisition of the Shared Technologies businesses
had been consummated at the beginning of the period presented. The pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had
the

10

---

acquisitions
occurred at the beginning of the periods presented or the results which may occur in the future.

|                                      |  | Three Months Ended
June 30, 2002 |          | Six Months Ended
June 30, 2002 |  
|------------------------------------- |  | -------------------------------- | -------- | ------------------------------ | -
|
|Revenue                               |  | $                                | 215,940  |                                | $
|Net loss                              |  |                                  | (223,354 | )                              |  
|Net loss per share, basic and diluted |  |                                  | (1.92    | )                              |  

The
purchase price of the Shared Technologies businesses was allocated to the assets acquired and liabilities assumed, based on their respective estimated fair values at acquisition. The
Company's purchase price allocation was finalized during the quarter ended June 30, 2003. In connection with these final adjustments related to pre-acquisition assets and
liabilities, the Company recorded additional goodwill of $2,105. At June 30, 2003, the Company's market capitalization continued to remain at a level below its book value, indicating that an
impairment of enterprise goodwill existed as of June 30, 2003. Accordingly, the Company recorded a charge of $2,105, reflecting the amount of the impairment as of June 30, 2003 to
eliminate the enterprise goodwill intangible.

5.     Property and Equipment:

Property and equipment includes network equipment, land, leasehold improvements, software, office equipment, furniture and fixtures and
construction-in-progress. These assets are stated at cost, which includes direct costs and capitalized interest and are depreciated over their respective useful lives using the
straight-line method. During the three months ended June 30, 2003 and 2002, $50 and $1,741, respectively, of interest expense was capitalized related to network
construction-in-progress. During the six months ended June 30, 2003 and 2002, $275 and $4,552, respectively, of interest expense was capitalized. Repair and maintenance
costs are expensed as incurred.

Property
and equipment at June 30, 2003 and December 31, 2002, consisted of the following:

June 30,
2003

December 31,
2002

Useful Lives
(in years)Network equipment

$
1,157,354

$
1,148,583

2-20Land


9,365


9,365

Leasehold improvements


145,826


145,713

7-10Software


128,195


125,229

3Office equipment and other


47,168


46,991

2-5Furniture and fixtures


21,007


21,334

7Property and equipment, in service


1,508,915


1,497,215Less: Accumulated depreciation


(716,310
)

(592,069
)Property and equipment, in service, net


792,605


905,146Construction-in-progress


17,834


18,960Property and equipment, net

$
810,439

$
924,106


11

---

6.     Other Assets:

Other assets at June 30, 2003 and December 31, 2002, consisted of the following:

June 30,
2003

December 31, 2002Acquired customer lists

$
62,800

$
62,800Long-term deposits


16,259


17,030Equipment pending deployment


6,565


8,688Other


5,857


5,645Total other assets


91,481


94,163Less: Accumulated amortization


(56,256
)

(50,189
)Other assets, net

$
35,225

$
43,974


The
acquired intangibles are being amortized over their estimated useful life of three years using the straight-line method. Amortization expense related to intangible assets
totaled $6,067 and $18,785 during the six months ended June 30, 2003 and 2002, respectively. The estimated aggregate future amortization expense for intangible assets remaining as of
June 30, 2003 is as follows:

Remainder of 2003

$
4,2332004


2,311Total

$
6,544


Long-term
deposits include a $9,804 prepayment to AT&T for long-distance services. The Company has filed a motion to reject its Master Carrier Agreement with AT&T
under which this deposit was made. If approved, AT&T may have a rejection damage claim that may be equal to some or all of this prepayment and the Bankruptcy Court may allow AT&T to offset some or all
of its rejection damages against this prepayment.

Equipment
pending deployment consists of equipment purchased and being staged for deployment in the Company's network. This equipment will be classified as property and equipment when it
is deployed.

7.     Accrued Liabilities and Other Current Liabilities:

Accrued liabilities and other current liabilities at June 30, 2003 and December 31, 2002, consisted of the following:

June 30, 2003

December 31, 2002Accrued employee compensation and benefits

$
14,410

$
11,824Accrued network expenses


12,849


52,643Business acquisition costs





10,502Accrued taxes


9,821


10,051Accrued interest expense


753


4,154Deferred revenue


34,103


29,009Other


2,657


6,261Accrued liabilities and other current liabilities

$
74,593

$
124,444


Included
in business acquisition costs at December 31, 2002 are $6,684 of reserves primarily for termination of acquired redundant network elements and closure of acquired
duplicate facilities. At

12

---

June 30,
2003, all business acquisitions costs and the current portion of capital lease obligation are included in liabilities subject to compromise in accordance with SOP 90-7 (see
Note 2).

8.     Long-Term Debt:

As a result of the Company's bankruptcy proceedings, all contractual debt payments are suspended and subject to revised payment terms during the bankruptcy
process on a specific case basis. As discussed in
Note 2, the only debt payments being made as of June 30, 2003 relate to interest on the senior secured credit facilities and monthly payments under capital leases. Additionally, as a
result of the bankruptcy filing, there is an event of default under the senior secured credit facilities and both series of notes, which, by their terms, would ordinarily accelerate all amounts due
upon the event of default.

The
senior secured credit facilities, notes and capital lease obligations are now classified as liabilities subject to compromise (see Note 2) and are not reflected in the table
below. No changes to the carrying amount of these debts have been made in the accompanying condensed consolidated balance sheet as a result of the filing.

Long-term
debt at June 30, 2003 and December 31, 2002, consisted of the following:

June 30, 2003

December 31, 2002Series B 113/4% notes, face amount $445,000 due February 15, 2008; effective interest rate of 12.21%; at accreted value

$


$
433,974127/8% senior notes, face amount $205,000 due May 15, 2008; effective interest rate of 13.24%; at accreted value





202,210Senior secured credit facilities, variable interest rate





470,300Capital lease obligations (see Note 9)





94,739Total debt





1,201,223Less: current portion of long-term debt





561,532Long-term debt

$


$
639,691


Senior Secured Credit Facilities.In February 2000, the Company closed on $500,000 of senior
secured credit facilities (the "Credit Facilities"). The Credit Facilities consist of a $350,000 seven-year revolving credit facility and a $150,000 two-year delayed draw term
loan facility. Interest is generally the London Interbank Offered Rate ("LIBOR") plus 4.50%. As of June 30, 2003, there were $319,800 and $145,500 of borrowings outstanding under the
seven-year revolving credit facility and the two-year delayed draw term loan facility, respectively. The blended borrowing rate on outstanding borrowings at June 30,
2003, is 5.66% and will remain fixed until September 18, 2003.

The
Credit Facilities are secured by (1) the capital stock of Allegiance Telecom Company Worldwide (which stock is owned by its parent holding company, Allegiance
Telecom, Inc.) and (2) substantially all of the assets of Allegiance Telecom Company Worldwide and its subsidiaries, including the capital stock owned by that entity in each of its
subsidiaries. The Final Cash Collateral Order also provides the senior lenders with certain replacement liens as described in such Order. Under this order, the Creditors' Committee has until
August 29, 2003 to among other things, challenge the senior lenders' prepetition liens, claims or security interests or the lenders' pre-petition obligations.

On
November 27, 2002, the Company reached an agreement with its senior bank creditors regarding modifications to the Credit Facilities. Under this agreement, the Company obtained
a waiver of all existing financial covenants through April 30, 2003 and replaced those covenants during this period with a free cash flow from operations covenant and a total leverage covenant.
Under this interim amendment, the Company could not permit its consolidated total debt to exceed at any time

13

---

(i) $1,275,000
from November 27, 2002 through April 29, 2003 and (ii) $645,000 thereafter. Under the terms of the interim amendment, the Company repaid $15,000 of the
Credit Facilities, which was applied to the initial amortization of the facility scheduled to begin in 2004.

From
November 27, 2002 to April 29, 2003, the Company negotiated with its senior bank creditors to develop a mutually acceptable plan of restructuring. On April 29,
2003, in anticipation of its breach of various covenants in the Credit Facilities, the Company and its senior bank creditors entered into a forbearance agreement. The Company received a forbearance
from its senior bank creditors until May 15, 2003 to allow the various parties to continue negotiations. In exchange, the Company made a $5,000 principal payment and agreed to certain other
covenants. On May 14, 2003, the Company filed for bankruptcy under Chapter 11 as discussed above.

In
June 2002, the Company requested a draw of the remaining $150,000 under the Credit Facilities, however, as of June 30, 2003, it had received only $135,300 of the
$150,000, with 3 of the 26 banks in the bank syndicate refusing to fund the request. On July 15, 2003, the Company entered into a settlement agreement with Bayerische Hypo-und
Vereinsbank and Bank Austria Creditanstalt Corporate Finance, Inc. (collectively, the "Banks") regarding these funding disputes. On July 29, 2003, the Bankruptcy Court approved this
settlement agreement. On July 31, 2003, the Banks
delivered the Net Funding Obligation to us the Company required under this settlement agreement in the amount of $7,414.

9.     Leases:

The Company has entered into various capital lease agreements, with expirations through 2022, covering dedicated optical fiber capacity and certain equipment.
Assets and future obligations related to capital leases are included in the accompanying condensed consolidated balance sheet in property and equipment and liabilities subject to compromise,
respectively. Depreciation of assets held under capital leases is included in depreciation and amortization expense.

The
Company has entered into various operating lease agreements, with expirations through 2015, for network facilities, office space and equipment. Total rent expense on operating leases
for the three months ended June 30, 2003 and 2002, was $8,173 and $6,106, and for the six months ended June 30, 2003 and 2002 was $16,519 and $16,578, respectively.

Future
minimum lease obligations for all non-cancelable capital and operating lease agreements with initial or remaining terms of one year or more at June 30, 2003,
are as follows:

Years ending December 31,

Capital
Leases

Operating
Leases2003

$
7,385

$
12,9542004


11,509


25,4362005


11,510


25,0422006


11,527


22,9112007


9,181


21,370Thereafter


104,983


66,493Total minimum future lease payments

$
156,095

$
174,206Amount representing interest


(70,373
)Present value of minimum lease payments (included in liabilities subject to compromise)


85,722Current portion (included in liabilities subject to compromise)


(4,602
)Long-term capital lease obligations (included in liabilities subject to compromise)

$
81,120


Certain
operating and capital lease agreements contain renewal and purchase options at the end of the initial lease terms. The Company is analyzing its contracts and leases to determine
those executory contracts and unexpired leases relating to capital and operating leases that may be burdensome to the Company and should be rejected pursuant to Section 365 of the Bankruptcy
Code.

14

---

10.   Capitalization:

During the six months ended June 30, 2003, 56,839 shares of common stock were issued under the Company's Employee Stock Discount Purchase Plan for proceeds
of $32. There are no more shares available for issuance under this Employee Stock Discount Purchase Plan.

11.   Commitments and Contingencies:

In October 2002, the Company executed a Master Carrier Agreement with AT&T Corp. Under this agreement, the Company committed to purchase from AT&T Corp. a
minimum of $10,000 of services per year through February 2007.

In
March 2002, the Company executed a Communications Transport Services Agreement with Southern California Edison Company. Under this agreement, the Company committed to purchase
from Southern California Edison Company an average of $260 of services each month through March 2005.

In
April 2003, the Company executed an Agreement for Additional Services, Security, and Settlement of Certain Matters with WorldCom, Inc. (on behalf of itself and all of
its affiliates and subsidiaries). Under this agreement, the Company committed to purchase from WorldCom an aggregate of $14,000 of services from February 28, 2003 to April 30, 2004 and
an aggregate of at least $12,000 of services from May 1, 2004 and April 30, 2005. Furthermore, under this agreement, the Company agreed to (a) extend the term of its Domestic and
Metro Private Line Special Carrier Service Agreement ("MSA") between WorldCom and the Company dated September 29, 2000, as amended, until April 30, 2005 and (b) increase the
volume commitment under the MSA from $700 per month to $900 per month through April 30, 2005.

12.   Gain on Sale of Investment:

At December 31, 2002, the Company held an investment in commercial paper, which was included in cash and cash equivalents. The original purchase price of
the commercial paper was $9,025. During 2001, the investment was written down to its market value due to a decline in its value, which was deemed to be other than temporary. An impairment of $3,069
was recorded to interest income during 2001. During June 2003, the Company sold its investment in the commercial paper in the open market for proceeds of $9,233 which resulted in the Company
realizing a gain of $3,277. The proceeds of the sale were re-invested in the Company's money market investment accounts, which are classified as cash and cash equivalents.

13.   Reorganization Items:

Pursuant to SOP 90-7, the Company is required to segregate certain expenses, realized gains and losses and provisions for losses not directly related
to ongoing operations as reorganization items in the condensed consolidated statements of operations. The following reorganization items were incurred during the three and six months ended
June 30, 2003:

Three Months Ended
June 30, 2003

Six Months Ended
June 30, 2003(Unaudited)

(Unaudited)Professional fees

$
3,047

$
3,584Other restructuring (gains)/losses


(460
)

(460
)Total reorganization items

$
2,587

$
3,124


15

---



ITEM 6.Exhibits and Reports on Form 8-K



|Exhibit
Number |  | Description                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2           |  | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1           |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|32.2           |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    

16

---



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

|                       |  | ALLEGIANCE TELECOM, INC.
|---------------------- |  | ------------------------
|                       |  | By:                     
|                       |  | By:                     
|Dated: August 27, 2003 |  |                         

17

---

INDEX TO EXHIBITS

|Exhibit
Number |  | Description                                                                                               
|-------------- |  | ----------------------------------------------------------------------------------------------------------
|31.1           |  | Certification of the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|31.2           |  | Certification of the Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|32.1           |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    
|32.2           |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    

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