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<TITLE>XO COMMUNICATIONS, INC.</TITLE>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">As filed with the Securities and Exchange
Commission on July&nbsp;22, 2003</FONT></B>
</DIV>

<P align="right">
<B><FONT size="2">Registration Statement No.
333-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></B>

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<P align="center">
<B><FONT size="4">SECURITIES AND EXCHANGE COMMISSION</FONT></B>

<DIV align="center">
<B>Washington, D.C. 20549</B>
</DIV>

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<DIV align="center">
<B><FONT size="5">Form S-1</FONT></B>
</DIV>

<DIV align="center">
<B>REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933</B>
</DIV>

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<DIV align="center">
<B><FONT size="5">XO Communications, Inc.</FONT></B>
</DIV>

<DIV align="center">
<I><FONT size="2">(Exact name of Registrant as specified in its
charter)</FONT></I>
</DIV>

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    <TD width="32%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD align="center" valign="top">
    <B><FONT size="2">Delaware</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">4813</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <B><FONT size="2">54-1983517</FONT></B></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <I><FONT size="2">(State or other jurisdiction of incorporation
    or organization of each)</FONT></I></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(Primary Standard Industrial Classification
    Code Number of the registrant)<BR>
    <BR>
     </FONT></I><B><FONT size="2">11111 Sunset Hills Road<BR>
    Reston, Virginia 20190<BR>
    (703)&nbsp;547-2000</FONT></B></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <I><FONT size="2">(I.R.S. Employer Identification No.)</FONT></I></TD>
</TR>

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<P align="center">
<I><FONT size="2">(Address, including zip code, and telephone
number, including area code, of registrant&#146;s principal
executive offices)</FONT></I>

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<P align="center">
<B><FONT size="2">Wayne M. Rehberger</FONT></B>

<DIV align="center">
<B><FONT size="2">Executive Vice President, Chief Financial
Officer</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">XO Communications, Inc.</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">11111 Sunset Hills Drive</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">Reston, Virginia 20190</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(703)&nbsp;547-2000</FONT></B>
</DIV>

<P align="center">
<I><FONT size="2">(Name, address, including zip code, and
telephone number,</FONT></I>

<DIV align="center">
<I><FONT size="2">including area code, of agent for service of
the registrant)</FONT></I>
</DIV>

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<P align="center">
<B><I><FONT size="2">Copy to:</FONT></I></B>

<P align="center">
<B><FONT size="2">Bruce R. Kraus, Esq.</FONT></B>

<DIV align="center">
<B><FONT size="2">Willkie Farr &#38; Gallagher</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">787 Seventh Avenue</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">New York, NY 10019</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(212)&nbsp;728-8000</FONT></B>
</DIV>

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<P align="left">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;Approximate date of
commencement of proposed sale to
public:</FONT></B><FONT size="2"> Approximately 45&nbsp;days
after the effective date of this Registration Statement
</FONT>

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<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If any of the securities
being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule&nbsp;415 under the Securities
Act of 1933, check the following
box.&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is filed to
register additional securities for an offering pursuant to
Rule&nbsp;462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
of the earlier effective registration statement for the same
offering.&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is a
post-effective amendment filed pursuant to Rule&nbsp;462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If this Form is a
post-effective amendment filed pursuant to Rule&nbsp;462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;If delivery of the
prospectus is expected to be made pursuant to Rule&nbsp;434,
check the following
box.&nbsp;<FONT face="wingdings">&#111;</FONT>
</FONT>

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<B><FONT size="2">CALCULATION OF REGISTRATION FEE</FONT></B>

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    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="16%"><FONT size="2">&nbsp;</FONT></TD>
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    <TD colspan="9"></TD>
</TR>

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    <TD colspan="9" align="center" nowrap><HR size="1" noshade></TD>
</TR>

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    <TD colspan="9"></TD>
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    <TD colspan="3"></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Proposed</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Proposed</FONT></B></TD>
    <TD></TD>
    <TD></TD>
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    <TD colspan="3"></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Maximum</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Maximum</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Amount of</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Title of Each Class Of</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Amount to be</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Offering Price</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Aggregate</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Registration</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Securities To Be Registered</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Registered</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Per Unit</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Offering Price(2)</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Fee(2)</FONT></B></TD>
</TR>

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    <TD colspan="9"></TD>
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    <TD colspan="9" align="center" nowrap><HR size="1" noshade></TD>
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<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common Stock, $.01 par value per share
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">43,333,333(1)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$5.00(1)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$216,666,665
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$17,528.33
    </FONT></TD>
</TR>

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    <TD colspan="9" align="left"><HR size="1" noshade></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom">
    <FONT size="2">$17,528.33
    </FONT></TD>
</TR>

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    <TD colspan="9" align="left"><HR size="1" noshade></TD>

</TR>

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    <TD colspan="9" align="left"><HR size="1" noshade></TD>

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<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
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<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">43,333,333 shares of New Common Stock will be
    reserved for issuance upon exercise of the Subscription Rights
    at $5.00 per share (if fully exercised, for an aggregate of
    $216,666,665) in the Rights Offering.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Estimated solely for purposes of determining the
    registration fee pursuant to Rule&nbsp;457(f) under the
    Securities Act of 1933, as amended (the &#147;Securities
    Act&#148;).
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<HR size="1" width="26%" align="center" noshade>

<P align="left">
<FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;<B>The Registrant hereby
amends this Registration Statement on such date or dates as may
be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section&nbsp;8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said
Section&nbsp;8(a), may determine.</B>
</FONT>

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<HR size="1" width="100%" align="left" noshade>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<TABLE width="100%" border="1" cellpadding="5"><TR><TD>
<FONT size="2" color="#E8112D">The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
</FONT>
</TD></TR></TABLE>

<P align="center">
<B><FONT size="2" color="#E8112D">SUBJECT TO COMPLETION, DATED
JULY&nbsp;22, 2003</FONT></B>

<P align="left">
<B><FONT size="2">PROSPECTUS</FONT></B>

<P align="center">
<B><FONT size="6">XO Communications, Inc.</FONT></B>

<P align="center">
<B><FONT size="5">Rights Offering</FONT></B>

<P align="center">
<B><FONT size="4">43,333,333 Shares of Common Stock, $0.01 par
value,</FONT></B>

<DIV align="center">
<B><FONT size="4">at $5.00 per share</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are offering up to 43,333,333 shares of our
common stock, $0.01 par value, in a rights offering, which we
refer to as the &#147;Rights Offering&#148;. We recently emerged
from Chapter&nbsp;11 reorganization proceedings, and have
granted non-transferable rights to participate in this offering
to certain of our former creditors and equity security holders
as part of our plan of reorganization. The rights entitle these
holders to purchase shares of our common stock for $5.00 per
share.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We refer to our common stock, par value $0.01, as
the &#147;New Common Stock.&#148; We refer to the
non-transferable subscription rights to buy our New Common Stock
at $5.00 per share in this offering as &#147;Subscription
Rights&#148;. We refer to this offering of shares of New Common
Stock upon exercise of Subscription Rights as the &#147;Rights
Offering&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our New Common Stock is quoted on the Nasdaq
over-the-counter bulletin board at www.otcbb.com, or OTCBB, and
in the Pink Sheets at www.pinksheets.com, under the symbol
&#147;XOCM,&#148; but is not listed on any national or regional
securities exchange or quoted through NASDAQ. On
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003], the last reported sale price for our New Common Stock on
the OTCBB was
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;per
share, with a bid price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of New Common Stock and an ask price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of New Common Stock at the close of the market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Rights Offering will begin on the date of
this prospectus and continue
until &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003 (29&nbsp;days after the date of this Prospectus) at 5 p.m.,
New York City time, the Subscription Rights Expiration Date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net proceeds of this offering will be used to
repay and reduce our outstanding secured debt.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The information contained in this information
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In this prospectus, &#147;XO Parent&#148;,
&#147;we&#148;, &#147;us&#148; and &#147;our&#148; each refers
to XO Communications, Inc., a Delaware corporation, and not to
its current or future subsidiaries unless the context otherwise
requires or as expressly stated. The &#147;Company&#148; refers
to XO Parent and its current subsidiaries, unless the context
otherwise requires or as expressly stated.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">INVESTING IN OUR COMMON STOCK INVOLVES RISKS. WE
URGE YOU TO CAREFULLY READ THE &#147;RISK FACTORS&#148; SECTION
BEGINNING ON PAGE [&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;] BEFORE YOU
MAKE ANY INVESTMENT DECISION.
</FONT>

<P align="center">
<FONT size="2">The date of this prospectus is
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;],
2003
</FONT>

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<!-- TOC -->
<A name="toc"><DIV align="CENTER" style="page-break-before:always"><U><B>TABLE OF CONTENTS</B></U></DIV></A>

<P><CENTER>
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<TR>
	<TD width="3%"></TD>
	<TD width="3%"></TD>
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	<TD width="3%"></TD>
	<TD width="3%"></TD>
	<TD width="76%"></TD>
</TR>
<TR><TD colspan="9"><A HREF="#000">QUESTIONS AND ANSWERS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#001">PROSPECTUS SUMMARY</A></TD></TR>
<TR><TD colspan="9"><A HREF="#002">THE RIGHTS OFFERING</A></TD></TR>
<TR><TD colspan="9"><A HREF="#003">RISK FACTORS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#004">SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION</A></TD></TR>
<TR><TD colspan="9"><A HREF="#005">THE OFFERING</A></TD></TR>
<TR><TD colspan="9"><A HREF="#006">DIVIDEND POLICY</A></TD></TR>
<TR><TD colspan="9"><A HREF="#007">SELECTED HISTORICAL FINANCIAL AND OPERATING DATA</A></TD></TR>
<TR><TD colspan="9"><A HREF="#008">FRESH START ACCOUNTING INFORMATION</A></TD></TR>
<TR><TD colspan="9"><A HREF="#009">THE BUSINESS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#010">MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#011">2003 Employee Retention Plan</A></TD></TR>
<TR><TD colspan="9"><A HREF="#012">DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT</A></TD></TR>
<TR><TD colspan="9"><A HREF="#013">EXECUTIVE COMPENSATION</A></TD></TR>
<TR><TD colspan="9"><A HREF="#014">SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</A></TD></TR>
<TR><TD colspan="9"><A HREF="#015">CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#016">SHARES ELIGIBLE FOR FUTURE SALE</A></TD></TR>
<TR><TD colspan="9"><A HREF="#017">DESCRIPTION OF OUTSTANDING INDEBTEDNESS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#018">DESCRIPTION OF OUTSTANDING EQUITY SECURITIES</A></TD></TR>
<TR><TD colspan="9"><A HREF="#019">CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#020">PLAN OF DISTRIBUTION</A></TD></TR>
<TR><TD colspan="9"><A HREF="#021">MATERIAL FEDERAL INCOME TAX CONSIDERATIONS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#022">EXPERTS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#023">WHERE YOU CAN FIND MORE INFORMATION</A></TD></TR>
<TR><TD colspan="9"><A HREF="#024">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS</A></TD></TR>
<TR><TD colspan="9"><A HREF="#025">SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS</A></TD></TR>
<TR><TD colspan="9"><A HREF="w86904exv10w6.htm">FORM OF RIGHTS CERTIFICATE</A></TD></TR>
<TR><TD colspan="9"><A HREF="w86904exv23w1.htm">CONSENT OF ERNST & YOUNG LLP</A></TD></TR>
<TR><TD colspan="9"><A HREF="w86904exv23w2.htm">NOTICE RE LACK OF CONSENT OF ARTHUR ANDERSEN</A></TD></TR>
<TR><TD colspan="9"><A HREF="w86904exv99w1.htm">FORM OF LETTER OF INSTRUCTIONS FROM NOMINEE TO BO</A></TD></TR>
</TABLE>
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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">TABLE OF CONTENTS</FONT></B>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="90%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Page</FONT></B></TD>
</TR>

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    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">QUESTIONS AND ANSWERS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">PROSPECTUS SUMMARY
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">RISK FACTORS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">THE OFFERING
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">USE OF PROCEEDS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DETERMINATION OF OFFERING PRICE
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">PRICE AND RELATED INFORMATION CONCERNING
    REGISTERED SHARES
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DIVIDEND POLICY
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">FRESH START ACCOUNTING INFORMATION
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">THE BUSINESS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EXECUTIVE COMPENSATION
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">96</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">99</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">SHARES ELIGIBLE FOR FUTURE SALE
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DESCRIPTION OF OUTSTANDING INDEBTEDNESS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">DESCRIPTION OF OUTSTANDING EQUITY SECURITIES
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">103</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">PLAN OF DISTRIBUTION
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">LEGAL MATTERS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">EXPERTS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">WHERE YOU CAN FIND MORE INFORMATION
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">INDEX TO FINANCIAL STATEMENTS
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">


<!-- link1 "QUESTIONS AND ANSWERS" -->
<DIV align="left"><A NAME="000"></A></DIV>

<DIV align="center">
<B><FONT size="2">QUESTIONS AND ANSWERS</FONT></B>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What rights have I received in this Rights
    Offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">If you are an eligible participant, we have
    issued you a rights certificate entitling you to subscribe for
    shares of XO Parent New Common Stock for $5.00 per share. Your
    rights are not transferable.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Why is XO Parent making this Rights
    Offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We are required to make this Rights Offering as
    part of our Chapter&nbsp;11 reorganization plan.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How will you use the proceeds of the Rights
    Offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We intend to use all of the proceeds of the
    Rights Offering to repay our outstanding senior secured debt.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How long do I have to decide whether to
    exercise my rights?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">The Subscription Rights expire
    on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
    2003 [29&nbsp;days after the date of this
    prospectus] &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;at
    5:00 p.m., New York City time, which we refer to as the
    Subscription Rights Expiration Date. The Rights Agent must
    receive all required documents and payments before that date and
    time for your exercise to be valid.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Where is my rights certificate?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">If, as of November&nbsp;15, 2002, you held
    pre-petition securities of XO Parent in your own name, or had a
    pre-petition general unsecured claim against XO Parent in its
    reorganization proceeding, your rights certificate is enclosed
    with this prospectus. If, as of November&nbsp;15, 2002, you held
    pre-petition securities of XO Parent in street name through a
    broker, your broker should have received the rights certificate,
    and will exercise your Subscription Rights as you direct.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Who else is receiving Subscription Rights in
    this offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We have issued non-transferable Subscription
    Rights to XO Parent&#146;s pre-petition general unsecured
    creditors as of November&nbsp;15, 2002, holders as of that date
    of XO Parent&#146;s pre-petition senior notes, pre-petition
    subordinated notes, pre-petition preferred stock, pre-petition
    class A common stock, pre-petition class B common stock, and
    legal counsel for the pre-petition class A common stock.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2"> We, however, are not issuing Subscription Rights
    to security holders who have previously waived in writing their
    rights to participate in this Rights Offering, including holders
    of certain series of XO Parent&#146;s pre-petition preferred
    stock and certain holders of pre-petition common stock.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Are all holders of general unsecured claims
    entitled to Subscription Rights?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">No.&nbsp;You are only entitled to Subscription
    Rights in this offering as a holder of a general unsecured claim
    if you:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">were a general unsecured creditor of XO Parent on
    November&nbsp;15, 2002;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">properly filed a claim with the bankruptcy court
    which was not disputed or was approved by or allowed by the
    bankruptcy court; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">did not elect to have your claim paid in part as
    a convenience claim under the Plan of Reorganization;
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2"> If you do not meet these requirements, you are
    not a holder of a pre-petition general unsecured claim and you
    are not entitled to Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2"> In this prospectus, when we refer to
    pre-petition holders of general unsecured claims, we are only
    referring to holders of general unsecured claims that meet these
    requirements.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How big is the total Rights
    Offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We are initially offering 40,000,000 shares of
    our New Common Stock. We have guaranteed that holders of
    pre-petition class A common stock and their legal counsel will
    receive the opportunity to purchase, in the aggregate, at least
    3,333,333 shares, of New Common Stock in the Rights Offering.
    Thus, it is possible that the Rights Offering will be expanded
    by up to 3,333,333 additional shares, if and to the extent the
    Rights Offering is subscribed by the holders of pre-petition
    senior notes and general unsecured creditors on a pro rata basis
    in amounts that would not leave at least 3,333,333 shares
    available in the rights offer to holders of pre-petition
    Class&nbsp;A common stock and their legal counsel.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>How much is
that on a percentage basis?</I>
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">As of March&nbsp;31, 2003, XO Parent had
    95,000,001 shares of New Common Stock outstanding including
    shares held for distribution upon final determination of
    disputed claims in our reorganization proceeding. If the Rights
    Offering were fully subscribed, the 43,333,333 shares issued
    would represent approximately 30% of our outstanding shares of
    New Common Stock, subject to dilution by outstanding warrants
    and employee stock options, each with exercise prices that range
    from $5.00 to $10.00.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How many shares of New Common Stock are you
    offering to me?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">You can request as many shares of New Common
    Stock as you would like to purchase in the Rights Offering, up
    to the full 40,000,000 share amount of the offering, or any
    smaller number. If the offering is not fully subscribed, you
    will receive all the shares of New Common Stock you request. If
    it is over-subscribed, shares of New Common Stock will be
    allocated among the requesting Subscription Rights holders
    according the pro ration procedures described below.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">When is payment for the shares due?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">You must send payment for the full number of
    shares of New Common Stock requested at the time you make your
    request, recognizing that your request might not be fulfilled
    completely. If you receive less than all the shares you
    requested because of pro ration, we will refund the excess
    payment to you without interest.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">If the Rights Offering is oversubscribed, how
    will you determine how many shares of New Common Stock I will
    receive in the offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">The number of shares of New Common Stock you
    receive will depend on the classification under the chapter 11
    reorganization plan of the pre-petition claims or interests of
    XO Parent that you hold, the number of shares of New Common
    Stock you requested, and the number of shares requested by other
    eligible participants participating in the Rights Offering. We
    will make the computations required by the pro ration procedures
    described on
    pages &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;- &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of
    this Prospectus following the conclusion of the Rights Offering,
    and then will notify you of the number of shares you have
    purchased. Our determinations will be final and binding, absent
    manifest error.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">When and how will I receive the shares of New
    Common Stock I have purchased?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We estimate that the shares purchased will be
    issued within two weeks of the Subscription Rights Expiration
    Date. We will mail certificates representing the shares of New
    Common Stock to you, or deposit them in your brokerage account,
    as you request.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">If I subscribe for shares of New Common Stock,
    is there any guaranteed minimum amount of shares I will be
    entitled to buy?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">That depends on the class of pre-petition claims
    or interests of XO Parent that you hold. Holders of XO
    Parent&#146;s pre-petition senior notes, pre-petition general
    unsecured claims and pre-petition class A common stock will
    receive Subscription Rights to purchase at least a defined
    minimum amount of shares of New Common Stock. The minimum number
    of shares available to these holders will vary depending on the
    size of their holdings. There is no guaranteed minimum for
    holders of pre-petition preferred stock or pre-petition
    subordinated notes.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">2
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What is the guaranteed minimum for senior
    noteholders and general unsecured creditors?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">Each holder of a pre-petition senior note and
    pre-petition general unsecured claim will have the right to
    subscribe for and receive its pro rata share of the initial
    40,000,000 shares of New Common Stock offered in the Rights
    Offering. We call this number their basic subscription
    privilege. This pro rata share is a percentage equal to the
    amount of the holder&#146;s claim divided by the total amount of
    all such claims.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Where can senior noteholders and unsecured
    creditors find out the amount of their basic subscription
    privileges?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">On the upper right hand corner of your rights
    certificate is the amount of shares of New Common Stock
    available pursuant to the basic subscription privileges, if any.
    If you hold your shares through a broker, your broker should
    have supplied you with this information. If your broker did not
    do so, please contact your broker.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Do holders of pre-petition class A common
    stock also have a minimum guaranteed right to
    subscribe?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">Yes. Each holder of pre-petition class A common
    stock will have the right to subscribe for and receive its pro
    rata share of at least 2,500,000 shares of New Common Stock
    offered in the Rights Offering. We call this number their
    minimum over subscription privilege. This pro rata share is a
    percentage equal to the number of shares of pre-petition class A
    common stock the holder holds divided by the total number of
    eligible shares of pre-petition XO Parent class A stock
    outstanding on the record date. Certain holders of pre-petition
    class A common stock, including certain investment funds
    affiliated with Forstmann Little &#38; Co., have declined and
    waived any opportunity they might have been entitled to, or
    offered, to exercise or receive Subscription Rights in the
    Rights Offering. Therefore, the actual number of guaranteed
    rights to subscribe to be distributed to other holders will be
    increased accordingly.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Do any other classes of creditors and
    stockholders have a guaranteed minimum right to
    subscribe?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">No.&nbsp;If all holders of pre-petition senior
    notes and general unsecured creditors exercise all their basic
    subscription privilege in full, holders of pre-petition
    preferred stock, pre-petition subordinated notes and
    pre-petition class B common stock will not receive any New
    Common Stock in the Rights Offering.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Can senior noteholders subscribe for less than
    their basic subscription privileges?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">Yes. They, like all other participants in the
    Rights Offering, may decline to participate in the Rights
    Offering or request any number of shares of New Common Stock
    from one share of New Common Stock up to 40,000,000 shares of
    New Common Stock. We will not permit subscriptions for
    fractional shares, and none will be issued in the Rights
    Offering.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What will happen if I do not exercise my
    Subscription Rights?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">If you do not exercise your rights, you will not
    receive any New Common Stock in this offering. Your pre-petition
    XO Parent claims and securities have been cancelled through the
    Plan of Reorganization and have no value. If you are currently a
    holder of New Common Stock, you will retain your current number
    of shares of New Common Stock whether or not you exercise your
    Subscription Rights. However, if you are currently a holder of
    New Common Stock and do not exercise your Subscription Rights
    and other eligible participants do, the percentage of the
    outstanding shares of New Common Stock of XO Parent that you own
    will diminish.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Are my Subscription Rights
    transferable?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">No.&nbsp;Your Subscription Rights are not
    transferable.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What will happen to the leftover Subscription
    Rights if the Rights Offering is not fully subscribed?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">Our Plan of Reorganization requires that they
    will be converted into transferable rights and awarded to XO
    Parent&#146;s senior secured lenders as of the record date.
    Those rights will have an exercise period of an additional
    30&nbsp;days, and may be exercised by those lenders or by their
    transferees.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How do I exercise my Subscription Rights if I
    elect to purchase shares?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">If you are a record holder and your rights
    certificate is enclosed with this prospectus, you should:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(a)&nbsp;complete and sign the original rights
    certificate (copies will not be accepted) and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(b)&nbsp;return the signed original rights
    certificate in the envelope provided, together with payment for
    all shares of New Common Stock subscribed for at the
    subscription price of $5.00&nbsp;per share in the form of either:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(i)&nbsp;a check, bank draft, cashier&#146;s
    check or money order in United States dollars for the full
    number of shares subscribed, including any over-subscription
    shares, payable to: American Stock Transfer &#38; Trust Company
    as Rights Agent &#150; XO Communications or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(ii)&nbsp;a wire transfer of payment and
    notification that payment for the shares was sent prior to the
    final due date via wire transfer directly to a bank account
    maintained by American Stock Transfer &#38; Trust Company at
    Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for credit to
    Account #: 323053785, Contact: XO Communications Rights Offering.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2"> In any event, for your rights exercise to be
    valid you must deliver your subscription request
    before &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
    the Subscription Rights Expiration Date.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What should I do if I want to participate in
    this Rights Offering, but my pre-petition XO Parent securities
    are held in the name of my broker, dealer or other
    nominee?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A.</FONT></TD>
    <TD align="left">
    <FONT size="2">If you hold your pre-petition XO Parent
    securities through a broker, dealer or other nominee, for
    example, through a custodian bank, then your broker, dealer or
    other nominee is the record holder of the pre-petition XO Parent
    securities you beneficially own. This record holder must
    exercise the Subscription Rights on your behalf for the shares
    of New Common Stock you wish to purchase. Therefore, you will
    need to have your record holder act for you.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What fees or charges apply if I purchase
    shares of New Common Stock?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We are not charging any fee or sales commission
    to issue rights to you or to issue shares of New Common Stock to
    you if you exercise Subscription Rights. If you exercise
    Subscription Rights through a record holder of your shares, you
    are responsible for paying any fees that person may charge.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">May I change or cancel my exercise of
    Subscription Rights after I send in the required
    forms?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">No.&nbsp;Once you send in your rights certificate
    and payment, or your broker, dealer or other nominee sends in a
    rights certificate and such payment on your behalf you cannot
    revoke the exercise of your Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What happens if my payment does not correspond
    to the number of shares or New Common Stock that I have
    requested?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">If you do not indicate on your rights certificate
    the number shares of New Common Stock you wish to purchase, or
    do not forward sufficient payment for the number of shares of
    New Common Stock that you indicate you wish to purchase, then we
    will accept the rights certificate and payment only for the
    maximum number of shares of New Common Stock that may be
    exercised based on the actual payment delivered.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">I noticed that some Subscription Rights will
    be allocated &#147;Pro Rata By Holdings&#148;. What does this
    mean?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro rata by holdings&#148; means that the
    number of Subscription Rights exercisable by any holder in the
    tier in question will equal the total number of Subscription
    Rights allocated to that tier multiplied by A/ B where:
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">A = the total amount of the holder&#146;s
holdings in that tier, and
</FONT>

<P align="left">
<FONT size="2">B = the total amount of all holders&#146;
holdings in that tier.
</FONT>

<P align="center"><FONT size="2">4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">I noticed that some Subscription Rights will
    be allocated &#147;Pro Rata By Subscription&#148;. What does
    this mean?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro rata by subscription&#148; means that
    the number of Subscription Rights exercisable by any holder in
    the tier in question will equal the total number of Subscription
    Rights allocated to that tier multiplied by A/ B where:
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">A = the total number of shares of New Common
Stock theretofore requested by the holder, and
</FONT>

<P align="left">
<FONT size="2">B = the total amount of all shares of New Common
Stock theretofore requested by all holders in that tier.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">How many shares of New Common Stock will be
    outstanding after the Rights Offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">If we sell all of the shares of New Common Stock
    offered by this prospectus, then we will issue approximately
    43.3&nbsp;million shares of New Common Stock and then we will
    have approximately 138.3&nbsp;million shares of New Common Stock
    outstanding (based on the number of shares of New Common Stock
    outstanding as of March&nbsp;31, 2003).
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Is this a good investment? Should I subscribe
    to purchase New Common Stock in this offering? Has the board of
    directors made a recommendation regarding this
    offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We and our board of directors are making no
    recommendation to holders of Subscription Rights as to whether
    or not they should subscribe for shares of New Common Stock in
    the Rights Offering. You should consult with your own financial
    advisor, refer to current prices for our New Common Stock on the
    OTCBB and in the Pink Sheets (Symbol: XOCM) and read this
    prospectus carefully before considering such an investment.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">What risk factors should I consider in respect
    to this offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">We urge you to carefully read the &#147;Risk
    Factor&#148; Section beginning on page
    [&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;] before you make any investment
    decision.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">Q:&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Who can answer my other questions about the
    offering?</FONT></I></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">A:</FONT></TD>
    <TD align="left">
    <FONT size="2">If you have any questions about (1)&nbsp;the
    procedure for exercising the Subscription Rights in the Rights
    Offering, (2)&nbsp;the number of shares of New Common Stock
    available to you, or (3)&nbsp;a lost rights certificate or a
    damaged rights certificate, please contact the Information Agent:
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<FONT size="2">MacKenzie Partners, Inc.
</FONT>

<DIV align="center">
<FONT size="2">105 Madison Avenue, 14th Floor
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10016
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Robert Marese
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">(212)&nbsp;929-5500
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Toll-Free (800)&nbsp;322-2885
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">proxy@mackenziepartners.com
</FONT>
</DIV>

<P align="left">
<FONT size="2">If you have any questions as to whether your
completed rights certificate or payment has been received,
please contact the Rights Agent:
</FONT>

<P align="center">
<FONT size="2">XO Communications, Inc.
</FONT>

<DIV align="center">
<FONT size="2">c/o American Stock Transfer &#38; Trust Company
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">59 Maiden Lane
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10038
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Shareholder Relations Department
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Phone: (800)&nbsp;937-5449
</FONT>
</DIV>

<P align="center"><FONT size="2">5
</FONT>

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<P align="left">


<!-- link1 "PROSPECTUS SUMMARY" -->
<DIV align="left"><A NAME="001"></A></DIV>

<DIV align="center">
<B><FONT size="2">PROSPECTUS SUMMARY</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">This summary highlights information contained
elsewhere in this prospectus. We urge you to read the entire
prospectus, including &#147;Risk Factors,&#148; and the
information contained in the public documents that we have filed
with the Securities and Exchange Commission.</FONT></I>

<P align="center">
<B><FONT size="2">Our Company</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide a comprehensive array of voice and
data communications services to business customers. Our voice
services include local and long distance services, both bundled
and stand-alone, other voice-related services such as
conferencing, interactive voice response, domestic and
international toll free services and voicemail, and transactions
processing services for prepaid calling cards. Our data services
include Internet access, private data networking, including
dedicated transmission capacity on our networks, virtual private
network services and Ethernet services, and hosting services. We
also combine many of these services in flat rate service
packages. These services are offered to a variety of customers,
including small, medium and large retail businesses,
multi-location businesses, and carrier or wholesale customers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To serve our customers&#146; broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmissions
capacity on fiber optic cables, which we refer to as an
intercity network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network and among customers with
multiple locations primarily or entirely over our network.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment capable of carrying high volumes of data, voice, video
and Internet traffic. We operate 37 metro fiber networks in 22
states and the District of Columbia, include 25 of the 30
largest metropolitan areas in the U.S. We have constructed or
acquired many of these metro fiber networks, which consist of up
to 432 strands of fiber optic cable and, in some cases,
additional empty conduits through which fiber optic cable can be
deployed. For our inter-city network, we have acquired
dedicated, high-capacity wavelengths of transmission capacity on
fiber optic cables, onto which we have deployed our own
switching, routing and optical equipment, which gives us greater
control over how voice and data information is transmitted. We
also hold indefeasible exclusive rights to use 18 unlit fiber
optic strands on the routes served by our intercity networks
pursuant to arrangements with Level&nbsp;3 Communications, Inc.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conduct our business primarily through the
more than 60 subsidiaries we own and manage. Our principal
executive and administrative offices are located at 11111 Sunset
Hills Road, Reston, Virginia 20190, our telephone number is
(703)&nbsp;547-2000, and our Internet address is www.xo.com.
</FONT>

<P align="center">
<B><FONT size="2">Our Chapter&nbsp;11 Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;17, 2002, XO Parent filed for
protection under the Bankruptcy Code. On November&nbsp;15, 2002,
the Bankruptcy Court confirmed XO Parent&#146;s plan of
reorganization, and, on January&nbsp;16, 2003, XO Parent
consummated the plan of reorganization and emerged from its
Chapter&nbsp;11 reorganization proceedings with a significantly
restructured balance sheet.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the period preceding and immediately after
the filing of XO Parent&#146;s Chapter&nbsp;11 petition, we met
with a committee of lenders under XO Parent&#146;s
$1.0&nbsp;billion senior secured credit facility, which we refer
to as the Pre-Petition Credit Facility, an informal committee of
unsecured creditors that represented holders of our unsecured
notes (and following the filing of the Chapter&nbsp;11 petition,
the official committee of unsecured creditors appointed in the
Chapter&nbsp;11 proceedings) and potential investors to discuss
potential transactions that could be implemented to reorganize
our capital structure. These discussions led to an agreement with
</FONT>

<P align="center"><FONT size="2">6
</FONT>

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<DIV align="left">
<FONT size="2">certain of our creditors regarding the terms of a
plan of reorganization that envisioned two reorganization
structures, the first of which was based on, among other things,
a proposed cash investment in XO Parent by third parties (which
was ultimately abandoned), and the second of which contemplated
a stand-alone restructuring with no new cash infusion committed
in advance. The plan of reorganization, as supplemented, was
filed with the Bankruptcy Court on July&nbsp;22, 2002 and
distributed to creditors of XO Parent eligible to vote in the
reorganization. We refer to the stand-alone alternative under
the plan of reorganization that ultimately was confirmed by the
Bankruptcy Court as the Plan of Reorganization.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr.&nbsp;Carl
Icahn, commenced an offer to purchase loans under the
Pre-Petition Credit Facility at a purchase price of $0.50 for
each $1.00 in principal amount thereof. Purchases made under
this offer, together with the loans under the Pre-Petition
Credit Facility that High River previously had acquired,
resulted in High River holding approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On November&nbsp;15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January&nbsp;16, 2003,
XO Parent consummated the Plan of Reorganization and emerged
from its Chapter&nbsp;11 reorganization proceedings.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Distributions
Under the Plan of Reorganization</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After the consummation of the Plan of
Reorganization, and giving effect to the implementation of fresh
start accounting, our capital structure consisted of the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$500.0&nbsp;million in outstanding principal
    amount of loans under a restructured secured credit and guaranty
    agreement, which we refer to as the New Credit Agreement.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">approximately $70.6&nbsp;million of other
    long-term liabilities, which include various capital lease
    obligations; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">95.0&nbsp;million outstanding shares of common
    stock, par value $0.01 per share, which we refer to as New
    Common Stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the Pre-Petition
Credit Facility being converted into the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">90.25&nbsp;million shares of New Common Stock; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$500.0&nbsp;million of outstanding principal
    amount of loans under the New Credit Agreement.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Plan of Reorganization also resulted in the
cancellation of all of XO Parent&#146;s pre-petition senior
unsecured notes and general unsecured claims in exchange for the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">4.75&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">warrants to purchase up to an additional
    23.75&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">rights to purchase shares of New Common Stock at
    $5.00 per share in the Rights Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination of
    the proposed investment transaction that was the basis for the
    first restructuring alternative contemplated by the Plan of
    Reorganization, which we refer to as the Investment Termination
    Payment.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants consist of:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;A Warrants to purchase
    9.5&nbsp;million shares of New Common Stock at an exercise price
    of $6.25&nbsp;per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $7.50&nbsp;per share; and
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">7
</FONT>
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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $10.00&nbsp;per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants will expire on January&nbsp;16,
2010. Each series of warrants is identical, except as to the
applicable exercise price. The exercise price applicable to each
respective series of warrants is subject to adjustment in
certain events.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, under the Plan of Reorganization:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition subordinated notes of XO
    Parent had their securities cancelled, and received a cash
    payment from High River based upon the amount of the Investment
    Termination Payment that High River would have been entitled to
    receive as holder of the loans under the New Credit Agreement
    and the right to participate in the Rights Offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class A common stock of
    XO Parent had their securities cancelled, and received the right
    to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class&nbsp;B common stock
    and holders of all series of pre-petition preferred stock of XO
    Parent had their securities cancelled and received only the
    right to participate in the Rights Offering;
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">in each case, subject to the pro ration
procedures described on
pages&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;-&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;of
this Prospectus. If holders of pre-petition senior notes and
pre-petition general unsecured claims exercise all their basic
subscription privilege in full, holders of pre-petition
preferred stock, pre-petition subordinated notes and
pre-petition class&nbsp;B common stock will not receive any New
Common Stock in the Rights Offering.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Post-Bankruptcy
Interests Held by Entities Owned by Carl Icahn</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the 90.25&nbsp;million shares of New Common
Stock distributed to the lenders under the Pre-Petition Credit
Facility, approximately 76.6&nbsp;million shares were issued to
High River, as owner of approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility, upon
consummation of the stand-alone restructuring under the Plan of
Reorganization. Immediately following this distribution, High
River transferred all such shares of New Common Stock to Cardiff
Holding LLC, a Delaware limited liability company owned by
Mr.&nbsp;Icahn.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Meadow Walk Limited Partnership, a limited
partnership owned by Mr.&nbsp;Icahn, owned over
$1.5&nbsp;billion in principal amount of various tranches of XO
Parent&#146;s pre-petition senior unsecured notes, representing
approximately 33% in principal amount of such notes. Meadow Walk
has transferred beneficial ownership to all distributions with
respect to such notes under the Plan of Reorganization to
Cardiff.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Giving effect to these transactions and the
distributions of New Common Stock pursuant to the Plan of
Reorganization, Cardiff holds over 80% of the outstanding shares
of the New Common Stock. In addition, affiliates of Mr. Icahn
are entitled to participate in the Rights Offering, based on
their ownership of pre-petition XO Parent securities and may
receive additional shares of New Common Stock or warrants as a
result of the resolution of disputed claims of certain creditors
in favor of XO Parent.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the warrants distributed under the Plan of
Reorganization to holders of the pre-petition senior unsecured
notes, we estimate Cardiff received Series&nbsp;A Warrants to
purchase approximately 3.0&nbsp;million shares of New Common
Stock, Series&nbsp;B Warrants to purchase approximately
2.3&nbsp;million shares of New Common Stock, and Series&nbsp;C
Warrants to purchase approximately 2.3&nbsp;million shares of
New Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the Plan of Reorganization,
High River became the holder of approximately 85% of the loans
outstanding under the New Credit Agreement. In January 2003,
High River assigned all of its rights in the loans outstanding
under the New Credit Agreement to Chelonian Corp., a corporation
owned by Mr.&nbsp;Icahn. Subsequently, these loans were assigned
to Arnos Corp., a corporation owned by Mr.&nbsp;Icahn. As a
result, Arnos now holds approximately 85% of the loans
outstanding under the New Credit Agreement.
</FONT>

<P align="center"><FONT size="2">8
</FONT>

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<P align="left">


<!-- link1 "THE RIGHTS OFFERING" -->
<DIV align="left"><A NAME="002"></A></DIV>

<DIV align="center">
<B><FONT size="2">THE RIGHTS OFFERING</FONT></B>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="28%"></TD>
    <TD width="1%"></TD>
    <TD width="71%"></TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Eligible Participants
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">Holders, as of November&nbsp;15, 2002, of XO
    Parent&#146;s pre-petition general unsecured claims,
    pre-petition senior notes, pre-petition subordinated notes,
    pre-petition preferred stock and pre-petition common stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Participant Eligibility Date; Non-Transferability
    of Subscription Rights
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">Only holders of pre-petition XO Parent claims and
    securities as of November&nbsp;15, 2002 are entitled to
    participate in the Rights Offering. Subscription Rights are not
    transferable and will not be admitted for trading on any
    exchange.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Subscription Rights
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">Subscription Rights to purchase up to
    43,333,333&nbsp;shares of New Common Stock shall be issued to
    the Eligible Participants. Fractional shares will not be issued
    upon exercise of any Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Subscription
    Rights Expiration Date</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">(1).
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Optional
    Exercise</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">You may exercise your Subscription Rights to
    purchase up to 40,000,000 shares of New Common Stock until the
    Subscription Rights Expiration Date. The Rights Agent will
    determine allocations of any over-subscribed shares after the
    Subscription Rights Expiration Date in accordance with the
    allocation procedures discussed in this Prospectus. Any
    Subscription Rights not exercised prior to 5:00 PM on the
    Subscription Rights Expiration Date will be cancelled.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Rights Exercise Price
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">$5.00 per share.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Payment
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">To exercise any Subscription Rights you or your
    broker must:
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">(a)&nbsp;complete and sign the original rights
    certificate (copies will not be accepted) and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">(b)&nbsp;return the signed, original rights
    certificate in the envelope provided, together with payment for
    all shares of New Common Stock subscribed for, including any
    oversubcription shares, in the form of either:
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(i)&nbsp;&nbsp;a
    check, bank draft, cashier&#146;s check or money order in United
    States dollars for the full number of shares of New Common Stock
    subscribed, including any over-subscription shares, payable to:
    American Stock Transfer &#38; Trust Company as Rights
    Agent&nbsp;&#151; XO Communications or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;(ii)&nbsp;a wire
    transfer of payment and notification that payment for the shares
    of New Common Stock was sent prior to the final due date via
    wire transfer directly to a bank account maintained by American
    Stock Transfer &#38; Trust Company at Chase Manhattan Bank, ABA
    ROUTING&nbsp;#:&nbsp;021-000-021, for credit to
    Account&nbsp;#:&nbsp;323053785,
    Contact:&nbsp;XO&nbsp;Communications Rights Offering.
    </FONT></TD>
</TR>

</TABLE>

<DIV align="left">

</DIV>

<P align="left">
<HR size="1" width="25%" align="left" noshade>

<DIV align="left">
<FONT size="2"> (1)&nbsp;29&nbsp;days after the date of this
Prospectus.
</FONT>
</DIV>

<P align="center"><FONT size="2">9
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="28%"></TD>
    <TD width="1%"></TD>
    <TD width="71%"></TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Other Terms of the Rights Offering
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
</TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>No Interest on
    Payments</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">No interest will be paid with respect to any
    amounts received by the Rights Agent.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Overpayments</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The Rights Agent will return to you or your
    broker, as applicable, by check or wire transfer any amount
    which you or your broker have overpaid in the Rights Offering,
    within 30 business days after the Subscription Rights Expiration
    Date.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Rights Agent</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">American Stock Transfer &#38; Trust Company
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Information
    Agent</I>
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">MacKenzie Partners, Inc.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">Use of Proceeds
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The net proceeds of this offering will be used to
    repay and reduce our outstanding secured debt.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">OTCBB and Pink Sheets symbol
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">&#147;XOCM&#148;
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">INFORMATION AGENT</FONT></B>

<P align="center">
<FONT size="2">The Information Agent for the Rights Offering is:
</FONT>

<P align="center">
<FONT size="2">MacKenzie Partners, Inc.
</FONT>

<DIV align="center">
<FONT size="2">105 Madison Avenue, 14th Floor
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10016
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Robert Marese
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">(212)&nbsp;929-5500
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Toll-Free (800)&nbsp;322-2885
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">proxy@mackenziepartners.com
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">RIGHTS AGENT</FONT></B>

<P align="center">
<FONT size="2">The Rights Agent for the Rights Offering is:
</FONT>

<P align="center">
<FONT size="2">XO Communications, Inc.
</FONT>

<DIV align="center">
<FONT size="2">c/o American Stock Transfer &#38; Trust Company
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">59 Maiden Lane
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10038
</FONT>
</DIV>

<P align="center">
<FONT size="2">Shareholder Relations Department
</FONT>

<DIV align="center">
<FONT size="2">Toll Free: (800)&nbsp;937-5449
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">IMPORTANT DATES TO REMEMBER</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="73%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="24%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Event</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Date</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Record Date
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">November&nbsp;15, 2002
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Subscription Period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size="2">,
    2003
    to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2003
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Subscription Rights Expiration Date*
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size="2">,
    2003
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Estimated Distribution Date
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<FONT size="2">,
    2003
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Eligible Participants exercising rights or
    brokers exercising rights on their behalf must deliver to the
    Rights Agent by the expiration date (i)&nbsp;the completed
    original rights certificates and (ii)&nbsp;payment as discussed
    above.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">SUMMARY ALLOCATION TABLE</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following categories of holders of the
following XO Parent claims and securities as of
November&nbsp;15, 2002 will have the opportunity to exercise the
Subscription Rights: (i)&nbsp;holders of pre-petition general
unsecured claims and pre-petition senior notes,
(ii)&nbsp;holders of pre-petition subordinated notes,
(iii)&nbsp;holders of pre-petition preferred stock and
(iv)&nbsp;holders of pre-petition common stock. We refer
collectively to these holders as the &#147;Eligible
Participants&#148;. Holders of pre-petition general unsecured
claims, pre-petition senior notes and Class&nbsp;A common stock
will receive basic subscription privileges and oversubscription
privileges. All other Eligible Participants will only receive
oversubscription privileges. Each Eligible Participant will have
the opportunity to specify on its rights certificate the total
number of shares of New Common Stock it wishes to purchase (up
to the full amount of the offering), subject to allocation and
pro ration as set forth below:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="82%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">First:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">to the holders of pre-petition general unsecured
    claims and pre-petition senior notes, pro rata by holdings;
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Second:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">one-third of any remaining Subscription Rights to
    each of the following groups of holders:
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(i)&nbsp;holders of pre-petition subordinated
    notes,
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(ii)&nbsp;holders of pre-petition preferred
    stock, and
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(iii)&nbsp;holders of pre-petition class&nbsp;A
    common stock (with 25% of the Subscription Rights allocated to
    holders of pre-petition class A common stock reallocated to
    legal counsel to the class of pre-petition class&nbsp;A common
    stockholders as part of their attorney&#146;s fees in the
    stockholder class action suit). See &#147;The
    Offering&nbsp;&#151; Fees and Expenses&#148; on
    page&nbsp;&nbsp;&nbsp;.],
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">allocated within each of those groups
    pro&nbsp;rata by holdings. However, if, but only to the extent,
    that the category of holders of pre-petition class&nbsp;A common
    stock receive less than 3,333,333 Subscription Rights,
    additional Subscription Rights will be issued so that holders of
    pre-petition class&nbsp;A common stock are entitled to purchase
    at least 3,333,333&nbsp;shares of New Common Stock (with at
    least 2,500,000 of those shares available for purchase by the
    holders of pre-petition class&nbsp;A common stock with the
    remaining 833,333&nbsp;shares in the Rights Offering allocated
    to legal counsel for the class of pre-petition class A common
    stockholders).
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Any remaining Subscription Rights from such
    initial allocation to the holders of pre-petition class A common
    stock shall subsequently be reallocated to the holders of
    pre-petition class&nbsp;A common stock and the legal counsel for
    the class of pre-petition class&nbsp;A common stockholders, pro
    rata by subscription. Notwithstanding anything herein to the
    contrary, on the Subscription Rights Expiration Date any
    unexercised additional Subscription Rights added to the offering
    to ensure that the holders of pre-petition class&nbsp;A common
    stock receive Subscription Rights for at least
    3,333,333&nbsp;shares of New Common Stock will be deemed
    cancelled and will not be allocated beyond this Second
    allocation tier;
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Third:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">any remaining Subscription Rights to the holders
    of pre-petition general unsecured claims and pre-petition senior
    notes, pro&nbsp;rata by subscriptions; and
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fourth:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">any remaining Subscription Rights to the holders
    of pre-petition subordinated notes, pre-petition preferred stock
    and pre-petition common stock (including legal counsel for the
    class of pre-petition class&nbsp;A common stockholders),
    pro&nbsp;rata by subscriptions.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As soon as practicable after the Subscription
Rights Expiration Date, if and to the extent that any
outstanding Subscription Rights have not been exercised, XO
Parent will issue and the Rights Agent will deliver to the
holders of senior secured lenders claims an equivalent number of
transferable rights on a pro rata basis, based upon the amount
of each such holder&#146;s claims in a non-registered,
supplemental rights offering. Please refer to
page&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for a full description
of the Rights Offering and how you may exercise your
Subscription Rights.
</FONT>

<P align="center"><FONT size="2">11
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following flow chart graphically sets forth
how the Rights are allocated in the Rights Offering:
</FONT>

<P align="center">
<IMG src="w86904w8690400.gif" alt="Flow Chart">

<DIV align="left">
<HR size="1" width="18%" align="left" noshade>
</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro Rata by Holdings&#148; means that the
    number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">A&nbsp;=&nbsp;the total amount of the
    holder&#146;s holdings in that tier, and
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">B&nbsp;=&nbsp;the total amount of all
    holders&#146; holdings in that tier.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">12
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="1%"></TD>
    <TD width="93%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(2)</FONT></TD>
    <TD align="left">
    <FONT size="2">XO has agreed to add additional rights to the
    rights offering to ensure that holders of Pre-Petition
    Class&nbsp;A Common Stock Interests receive the opportunity to
    subscribe for at least 2,500,000&nbsp;shares of New Common Stock
    and the class action attorneys will receive the opportunity to
    subscribe for at least 833,333&nbsp;shares of New Common Stock
    as part of their attorney&#146;s fees. On the Subscription
    Rights Expiration Date any unexercised additional Subscription
    Rights added to the offering to ensure that the holders of
    pre-petition class A common stock receive Subscription Rights
    for at least 3,333,333&nbsp;shares of New Common Stock will be
    deemed cancelled and will not be allocated further in this
    chart. Thus, the holders of pre-petition General Unsecured
    Claims and pre-petition Senior Note Claims will never receive
    such unexercised additional Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">(3)</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro Rata by Subscriptions&#148; means that
    the number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">A&nbsp;=&nbsp;the total number of shares
    theretofore duly requested by such holder, and
    </FONT></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">B&nbsp;=&nbsp;the total amount of all shares
    therefore duly requested by all holders in that tier.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="6%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">HOLDERS WHO ACQUIRED PRE-PETITION SECURITIES AND
    PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT AFTER
    NOVEMBER&nbsp;15, 2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE
    RIGHTS OFFERING. ONLY HOLDERS OF PRE-PETITION SECURITIES AND
    PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT ON
    NOVEMBER&nbsp;15, 2002 ARE ELIGIBLE TO PARTICIPATE IN THE RIGHTS
    OFFERING.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">13
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">Summary Consolidated Financial Data</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Because the Plan of Reorganization was not
consummated and effective until January&nbsp;16, 2003, the
summary consolidated financial data below as of and for the
years ended December&nbsp;31, 1998, 1999, 2000, 2001 and 2002
and the financial data as of and for the three months ended
March&nbsp;31, 2002 does not include the effects of the
&#147;fresh start&#148; accounting provisions of AICPA Statement
of Position, &#147;Financial Reporting by Entities in
Reorganization under the Bankruptcy Code,&#148; or SOP 90-7, but
the financial data as of and for the three months ended
March&nbsp;31, 2003 does reflect the impact of adopting fresh
start. Although the effective date of the Plan of Reorganization
was January&nbsp;16, 2003, due to the immateriality of the
results of operations for the period between January&nbsp;1,
2003 and the effective date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January&nbsp;1, 2003 and implemented fresh start as of that
date. Reorganized XO&#146;s financial statements issued for
periods beginning after consummating our Plan of Reorganization
and adopting fresh start accounting are not comparable to that
of predecessor XO.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fresh start required that XO adjust the
historical cost of its assets and liabilities to their fair
values as determined by the reorganization value of XO Parent
and that the reorganization value be allocated among the
reorganized entity&#146;s net assets in conformity with
procedures specified by Statement of Financial Accounting
Standards No.&nbsp;141, &#147;Business Combinations,&#148; or
SFAS No.&nbsp;141. We engaged an independent appraiser to assist
in the allocation of the reorganization value to Reorganized
XO&#146;s assets and liabilities by determining the fair market
value of its property and equipment, intangible assets and
certain obligations related to its facility leases.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes our audited
predecessor company financial results as of and for the fiscal
years ended December&nbsp;31, 1998 through December&nbsp;31,
2002 and our unaudited results for predecessor XO and
reorganized XO, respectively, for the three months ended
March&nbsp;31, 2002 and 2003. The consolidated balance sheet
data and the consolidated statement of operations data presented
below as of December&nbsp;31, 1998, 1999, 2000 and 2001, and for
each of the years in the four-year period ended
December&nbsp;31, 2001, have been derived from our consolidated
financial statements that have been audited by Arthur Andersen
LLP, independent public accountants. The consolidated balance
sheet data and the consolidated statement of operations data
presented below as of December&nbsp;31, 2002 and for the year
ended December&nbsp;31, 2002, have been derived from our
consolidated financial statements which have been audited by
Ernst &#38; Young LLP, independent auditors. You should also
read the section in this prospectus captioned &#147;Selected
Financial Data,&#148; our audited and unaudited financial
statements and their accompanying notes, and
&#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operation,&#148; all of which are
included elsewhere in this prospectus. The consolidated
financial statements of Reorganized XO are not comparable to
that of the predecessor company.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="19%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1998</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000(b)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27" align="center" nowrap><I><FONT size="1">(Dollars in thousands, except per share data)</FONT></I></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Statement of Operations Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">139,667</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">274,324</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">723,826</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,258,567</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,259,853</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">333,405</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">286,093</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Loss from operations(c)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(206,184</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(366,530</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,011,652</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,949,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,208,898</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(182,663</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(14,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(278,340</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(558,692</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,175,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss applicable to common shares(d)(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(337,113</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(627,881</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,247,655</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,838,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,350,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,198,480</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss per common share, basic and diluted(f)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1.57</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2.51</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3.87</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4.55</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7.58</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4.97</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Statement of Cash Flow Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(174,484</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(349,192</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(559,414</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(560,877</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,602</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(47,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">24,190</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,276,747</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,050,344</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,464,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(708,598</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">57,582</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">159,914</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(49,245</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash (used in) provided by financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,381,653</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,948,503</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,648,663</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,019,647</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(6,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,848</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(219</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">14
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

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<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="19%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1998</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000(b)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27" align="center" nowrap><I><FONT size="1">(Dollars in thousands, except per share data)</FONT></I></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Cash, cash equivalents and marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,478,062</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,881,764</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,860,963</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">755,167</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">560,983</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">588,972</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">538,380</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">594,408</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,180,021</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,794,105</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,742,577</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,780,589</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,633,380</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">476,509</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Investment in fixed wireless licenses, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">67,352</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">926,389</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">997,333</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">947,545</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">911,832</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">939,603</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">57,926</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total assets(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,483,106</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,597,108</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">9,085,375</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">7,930,465</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,585,496</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,704,497</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,323,943</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,013,192</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,733,342</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,396,596</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,109,503</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,165,718</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,144,851</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">507,868</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Redeemable preferred stock, net of issuance
    costs(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">556,168</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">612,352</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,097,016</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,781,990</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,708,316</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,785,960</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total stockholders&#146; equity (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(246,463</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(13,122</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,838,401</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">297,416</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,900,899</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">454,314</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">a.</FONT></TD>
    <TD align="left">
    <FONT size="2">On June&nbsp;17, 2002, XO Parent filed for
    protection under Chapter&nbsp;11 of the United States Code. On
    November&nbsp;15, 2002, the Bankruptcy Court confirmed XO
    Parent&#146;s Plan of Reorganization, and, on January&nbsp;16,
    2003, XO Parent consummated the Plan of Reorganization. See
    further discussion in Management&#146;s Discussion and Analysis
    of Financial Condition and Results of Operations.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">b.</FONT></TD>
    <TD align="left">
    <FONT size="2">The selected financial data includes the accounts
    and activities of Concentric Network Corporation since
    June&nbsp;16, 2000, the date that we merged with Concentric.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">c.</FONT></TD>
    <TD align="left">
    <FONT size="2">In 2002, loss from operations includes a non-cash
    asset write down totaling $477.3&nbsp;million resulting from the
    return of previously acquired inter-city fiber in exchange for
    reduced maintenance expenses beginning in 2003. In 2001, loss
    from operations includes restructuring charges totaling
    $509.2&nbsp;million associated with plans to restructure certain
    aspects of our business operations. In 2000, loss from
    operations includes a $36.2&nbsp;million charge in connection
    with the June 2000 acquisition of Concentric resulting from the
    allocation of the purchase price to in-process research and
    development. Loss from operations in 1999 includes restructuring
    charges totaling $30.9&nbsp;million associated with relocating
    our Bellevue, Washington headquarters to Northern Virginia.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">d.</FONT></TD>
    <TD align="left">
    <FONT size="2">In 2002, net loss and total assets reflects a
    $1,876.6&nbsp;million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to Statement of Financial Accounting Standards No.&nbsp;142,
    &#147;Goodwill and Other Intangible Assets&#148; or SFAS
    No.&nbsp;142. In 2002, net loss also includes $91.1&nbsp;million
    in net reorganization expenses which includes the write-off, in
    accordance with SOP&nbsp;90-7, of deferred financing fees
    associated with the issuance of XO&#146;s pre-petition debt and
    professional fees incurred in conjunction with XO&#146;s
    recapitalization. During 2002, we ceased accruing interest and
    penalties on our pre-petition senior unsecured notes,
    subordinated notes and Pre-Petition Credit Facility, and we
    ceased accruing dividends and accreting the redemption
    obligation on all of our outstanding preferred stock as of the
    Petition Date, in accordance with SOP&nbsp;90-7. In 2001, net
    loss includes a gain of $345.0&nbsp;million resulting from the
    repurchase of certain of our senior notes and a write-down of
    $89.0&nbsp;million for an other than temporary decline in the
    value of certain investments. In 2000, net loss includes a
    $57.7&nbsp;million write-down for an other than temporary
    decline in the value of certain investments and a
    $225.1&nbsp;million net gain from the sale of an equity
    investment.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">e.</FONT></TD>
    <TD align="left">
    <FONT size="2">The comparability of net loss applicable to
    common shares is impacted by the transactions disclosed in d.
    above. In addition, in 2002, net loss applicable to common
    shares includes a net gain of $78.7&nbsp;million resulting from
    the recognition of our deferred modification fee less the write
    off our unamortized discounts and issuance costs. In 2001, net
    loss applicable to common shares includes a gain of
    $376.9&nbsp;million resulting from the repurchase of certain of
    our preferred stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">f.</FONT></TD>
    <TD align="left">
    <FONT size="2">The net loss per share data for the years ended
    December&nbsp;31, 1998, 1999, 2000, 2001 and 2002 and the three
    months ended March&nbsp;31, 2002 has been calculated based on
    the shares outstanding of our class A and class B common stock
    prior to the consummation of our Plan of Reorganization.
    Effective January&nbsp;16, 2003, the effective date of the Plan
    of Reorganization, all interests in our class&nbsp;A and
    class&nbsp;B common stock were terminated and all outstanding
    shares were cancelled. For further discussion of our Plan of
    Reorganization, see &#147;Business&nbsp;&#151; Our
    Chapter&nbsp;11 Reorganization&#148;. The net loss per share
    data for the years ended December&nbsp;31, 1998, 1999 and 2000
    has been adjusted for the splits of our class&nbsp;A and
    class&nbsp;B common stock effected in 2000 and in prior periods.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">15
</FONT>

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<P align="left">


<!-- link1 "RISK FACTORS" -->
<DIV align="left"><A NAME="003"></A></DIV>

<DIV align="center">
<B><FONT size="2">RISK FACTORS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">You should carefully consider the following
risk factors and other information included in this prospectus.
Certain of these risks could materially and adversely affect our
business, financial condition, results or operations and
prospects which could in turn materially and adversely affect
the price of the New Common Stock issuable under the Plan of
Reorganization and in the Rights Offering.</FONT></I>

<P align="left">
<B><FONT size="2">Risks Related to this Offering</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If you elect to exercise your
    oversubscription privilege, you will have to make an advance
    deposit of the full amount of the purchase price for all the New
    Common Stock you request, without any assurance as to whether
    you will receive any shares, or any further guidance as to the
    amounts requested by other participants in the
    offering.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The offerings of New Common Stock at $5.00 per
share upon exercise of both the basic subscription privilege and
the oversubscription privilege will be simultaneous. Only those
participants who deliver completed Subscription Rights
Certificates and payment in full by the Subscription Rights
Expiration Date will be entitled to participate. We will not be
in a position to make any announcements during the offering
period of the subscription requests received. Therefore, if you
wish to exercise an oversubscription privilege, you will have to
do so without any further information as to whether and to what
extent the offering will be fully-subscribed. In that case, you
would be advancing funds, subject to refund, without knowing
whether you will receive all the shares you requested, or any
shares at all.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">You will not receive interest on
    subscription funds returned to you.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If your participation in the Rights Offering is
cut back because the Rights Offering is oversubscribed, neither
we nor the Rights Agent will have any obligation with respect to
the Subscription Rights except to return to you, without
interest, any subscription payments to you that you have made
for shares you requested but did not receive.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The price of our common stock may decline
    before or after the Subscription Rights expire.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The public trading market price of our New Common
Stock may decline after you exercise your Subscription Rights.
If that occurs, you will have committed to buy New Common Stock
at a price above the prevailing market price and you will have
an immediate unrealized loss. Moreover, you may not be able to
sell any New Common Stock you purchase at a price equal to or
greater than the subscription price. New Common Stock issued in
this offering will be delivered following the Subscription
Rights Expiration Date, after the Rights Agent has examined and
tabulated all Rights Certificates received.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Even if the public trading market price of our
New Common Stock is above $5.00 on the date you exercise your
subscription rights, you might not be able to realize a profit
on your investment. The small existing public float of the New
Common Stock makes it impracticable to sell our stock short in
connection with a Rights exercise, and, therefore, it is very
difficult, if not impossible, to hedge your investment.
Therefore, until the New Common Stock is delivered upon
expiration of this offering, you may not be able to sell the New
Common Stock you purchase in this offering. In the five trading
days
preceding &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003, closing bid prices were quoted for an average of
only &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares.
If the market for our New Common Stock remains small and
illiquid after the Rights Offering, your ability sell shares of
New Common Stock at a price at or above $5.00 in substantial
amounts may remain severely limited.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Once you exercise your Subscription Rights,
    you may not revoke your commitment.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Once you exercise your Subscription Rights, you
may not revoke your commitment. Therefore, even if circumstances
arise after you have subscribed in the offering that change your
mind about investing in our New Common Stock, you will
nonetheless be legally bound to proceed.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">You will need to act promptly and follow
    instructions carefully if you want to exercise your Subscription
    Rights.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Eligible participants and, if applicable, brokers
acting on their behalf, who desire to purchase New Common Stock
in this Rights Offering must act promptly to ensure that all
required certificates and payments
</FONT>

<P align="center"><FONT size="2">16
</FONT>

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<DIV align="left">
<FONT size="2">are actually received by the Rights Agent,
American Stock Transfer &#38; Trust Company, before the
Subscription Rights Expiration Date. If you or your broker fail
to complete and sign the required rights certificate, send an
incorrect payment amount, or otherwise fail to follow the
subscription procedures that apply to your desired transaction,
we may, depending on the circumstances, reject your subscription
or accept it to the extent of the payment received. Neither we
nor the Rights Agent undertake to contact you concerning, or
attempt to correct, an incomplete or incorrect rights
certificate or payment or contact you concerning whether a
broker holds Subscription Rights on your behalf. We have the
sole discretion to determine whether a subscription exercise
properly follows the subscription procedures. Any personal check
used to pay for New Common Stock must clear before the
Subscription Rights Expiration Date, and the clearing process
may require five or more business days.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">You should not consider the subscription
    price as an indication of the value of our company or our New
    Common Stock.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Plan of Reorganization sets forth all the
terms and conditions of the Rights Offering, including the
subscription price. The subscription price was negotiated with
holders of loans under the Pre-Petition Credit Facility in 2002
and does not necessarily bear any relationship to our past or
future operations, cash flows, current financial condition, or
any other established criteria for value including market value
of New Common Stock. As a result, you should not consider the
subscription price as an indication of our value or that of our
New Common Stock.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The Rights Offering could result in a
    dilution to your percentage ownership of XO
    Parent.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you currently hold shares of New Common Stock
and do not exercise any of your rights, then your percentage
ownership in XO Parent will be reduced if other eligible
participants exercise their rights. Even if you participate in
the Rights Offering, your percentage ownership of XO Parent may
be reduced depending on the number of shares for which you
subscribe relative to the subscriptions of other participants.
</FONT>

<P align="left">
<B><FONT size="2">Risks Related to Our Operations</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The wave of bankruptcies in the Internet
    and communications-related industries has diminished our
    marketing prospects and may have an adverse effect on the
    results of our operations in future periods.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We historically have provided services to, and
generated significant revenues from, customers that conduct
business in the Internet and communications-related segments.
Many businesses that operated in those segments, particularly
start-ups in the Internet service provider segment, have
liquidated, otherwise gone out of business, or modified their
business plans in ways that have significantly reduced their
need for communications services. These developments have
decreased the size of the potential market for many of our
wholesale and carrier-related services, particularly data
transport services. Those of our Internet and
communications-related customers that remain in business and
have not sought bankruptcy protection nevertheless have been
adversely affected by recent business trends in the sectors. To
the extent the credit quality of these customers deteriorates or
these customers seek bankruptcy protection, we may not be able
to collect all amounts due from them and our ability to generate
revenue in future periods from them could be adversely affected.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The failure of our operations support
    systems to perform as we expect could impair our ability to
    retain customers and obtain new customers, or provision their
    services, or result in increased capital expenditures, which
    would adversely affect our revenues or capital
    resources.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our operations support systems are an important
factor in our success. Critical information systems used in
daily operations perform sales and order entry, provisioning,
billing and accounts receivable functions, and cost of service
verification and payment functions, particularly with respect to
facilities leased from incumbent carriers. If any of these
systems fail or do not perform as expected, it would impact our
ability to process orders and provision sales, and to bill for
services efficiently and accurately, which could cause us to
suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would
adversely affect our revenues. In additional, system failure or
performance issues could impact our ability to effectively audit
and dispute invoicing and provisioning data provided by service
providers from whom we lease
</FONT>

<P align="center"><FONT size="2">17
</FONT>

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<DIV align="left">
<FONT size="2">facilities. Furthermore, problems may arise with
higher processing volumes or with additional automation
features, which could potentially result in system breakdowns
and delays and additional unanticipated expense to remedy the
defect or to replace the defective system with an alternative
system.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are in the process of updating and replacing
software and related systems for sales tracking, order entry and
provisioning and plan to implement changes to our billing
systems later this year to support our growth and improve the
order and provisioning processes. We have experienced, and may
continue to experience, delays and related problems in
processing orders, provisioning sales and billing in connection
with the transition to these new systems. Our ability to
efficiently and accurately provision new orders for services on
a timely basis is necessary for us to begin to generate revenue
related to those services. If the delays or related problems
continue, or if any unforeseen problems emerge in connection
with our migration to the new provisioning software and systems,
delays and errors may occur in the provisioning process, which
could significantly increase the time until an order for new
service can begin to generate revenue, which could have a
material adverse effect on our operations.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">It is expensive and difficult to switch new
    customers to our network, and lack of cooperation of the
    incumbent carrier can slow the new customer connection process,
    which could impact our ability to compete.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">It is expensive and difficult for us to switch a
new customer to our network because:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we charge the potential customer certain one-time
    installation fees, and, although the fees are less than the cost
    to install a new customer, they may act as a deterrent to become
    our customer, and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">we require cooperation from the incumbent carrier
    in instances where there is no direct connection between the
    customer and our network, which can complicate and add to the
    time that it takes to provision a new customer&#146;s service.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our principal competitors, the incumbent
carriers, are already established providers of local telephone
services to all or virtually all telephone subscribers within
their respective service areas. Their physical connections from
their premises to those of their customers are expensive and
difficult to duplicate. To complete the new customer
provisioning process, we rely on the incumbent carrier to
process certain information. The incumbent carriers have a
financial interest in retaining their customers, which could
reduce their willingness to cooperate with our new customer
provisioning requests.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We depend on our key personnel and
    qualified technical staff and, if we lose their services, our
    ability to manage the day-to-day aspects of our complex network
    will be weakened. We may not be able to hire and retain
    qualified personnel, which could adversely affect our operating
    results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are highly dependent on the services of our
management and other key personnel. The loss of the services of
our senior executive management team or other key personnel
could cause us to make less successful strategic decisions,
which could hinder the introduction of new services or make us
less prepared for technological or marketing problems, which
could reduce our ability to serve our customers or lower the
quality of our services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that a critical component for our
success will be the attraction and retention of qualified,
professional technical and sales personnel. We have experienced
intense competition for qualified personnel in our business with
the sales, technical and other skill sets that we seek. We may
not be able to attract, develop, motivate and retain experienced
and innovative personnel. If we fail to do so, there will be an
adverse effect on our ability to generate revenue and operate
our business.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our rights to the use of the dark fiber
    that make up our network may be affected by the financial health
    of our fiber providers.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We hold some of the fiber that makes up the
foundation of our network, particularly in our inter-city
network, through long-term leases or indefeasible right of use
agreements. A bankruptcy or financial collapse of one of these
fiber providers could result in a loss of our rights under such
leases and agreements with the
</FONT>

<P align="center"><FONT size="2">18
</FONT>

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<DIV align="left">
<FONT size="2">provider, which in turn could have a negative
impact on the integrity of our network and ultimately on our
results of operations. Since early 2001, there has been
increasing financial pressure on some of our fiber providers as
part of the overall weakening of the telecommunications market.
Several such providers have sought bankruptcy protection. To our
knowledge, the rights of the holder of such rights in strands of
fiber have never been addressed by the judiciary at the state or
federal level in bankruptcy and, therefore, under such
circumstances, our rights under dark fiber agreements would be
unclear.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We may not be able to continue to connect
    our network to the incumbent carrier&#146;s network or maintain
    Internet peering arrangements on favorable terms, which would
    impair our growth and performance.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We must be a party to interconnection agreements
with the incumbent carrier and certain independent carriers in
order to connect our customers to the public telephone network.
If we are unable to renegotiate or maintain interconnection
agreements in all of our markets on favorable terms, it could
adversely affect our ability to provide services in the affected
markets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Peering agreements with Internet service
providers allow us to access the Internet and exchange transit
for free with these providers. Depending on the relative size of
the carriers involved, these exchanges may be made without
settlement charge. Recently, many Internet service providers
that previously offered peering have reduced or eliminated
peering relationships or are establishing new, more restrictive
criteria for peering and an increasing number of these service
providers are seeking to impose charges for transit. Increases
in costs associated with Internet and exchange transit could
have a material adverse effect on our margins for our products
that require Internet access. We may not be able to renegotiate
or maintain peering arrangements on favorable terms, which would
impair our growth and performance.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">If our selection of IP technology is
    incorrect, ineffective or unacceptably costly, implementation of
    our business strategy could be delayed, which would adversely
    affect our growth and operating results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We rely on IP technology as the basis for our
metro and intercity networks. Integrating this technology into
our network may prove difficult and may be subject to delays. In
addition, affordable IP customer premise equipment may not
become available in a timely fashion, if at all. If the
technology choices we make prove to be incorrect, ineffective or
unacceptably costly, our strategy of meeting our customer&#146;s
demand for existing and future telecommunications services using
IP technology could fail, which would adversely affect our
growth and operating results.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Physical space limitations in office
    buildings and landlord demands for fees or revenue sharing could
    limit our ability to connect customers to our networks and
    increase our costs, which would adversely impact our
    results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In some circumstances, connecting a customer who
is a tenant in an office building to our network requires
installation of in-building cabling through the building&#146;s
risers from the customer&#146;s office to our fiber in the
street or building equipment room, or our antenna on the roof.
In some office buildings, particularly the premier buildings in
the largest markets, the risers are already close to their
maximum physical capacity due to the entry of other competitive
carriers into the market. Fixed wireless direct connections
require us to obtain access to rooftops from building owners.
Moreover, the owners of these buildings are increasingly
requiring competitive telecommunications service providers like
us to pay fees or otherwise share revenue as a condition of
access to risers and rooftops. Although we generally do not
agree to revenue sharing arrangements, we may continue to be
required to pay fees to access buildings, particularly for
building located in larger markets, which would reduce our
operating margins.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our reliance on third-party DSL service
    providers could affect adversely our ability to provide service
    to our DSL customers.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide a significant portion of our DSL
service through wholesale arrangements with incumbent carriers
and other DSL service providers. To the extent that such DSL
service providers are unable to provide wholesale DSL service to
us, we in turn may be unable to provide that service to our
customers if we cannot
</FONT>

<P align="center"><FONT size="2">19
</FONT>

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<DIV align="left">
<FONT size="2">provide service on our own DSL equipment or
obtain wholesale service from another DSL service provider. In
addition, the transition of our DSL customers&#146; services to
another source of DSL service may cause potential disruptions
for the affected DSL customers&#146; services. If we are unable
to serve these customers, we will lose the related revenues.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Risks Related to Competition and Our
Industry</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Technological advances and regulatory
    changes are eroding traditional barriers between formerly
    distinct telecommunications markets, which could increase the
    competition we face and put downward pressure on prices, which
    could impair our results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">New technologies, such as voice-over-IP, and
regulatory changes&nbsp;&#151; particularly those permitting
incumbent local telephone companies to provide long distance
services&nbsp;&#151; are blurring the distinctions between
traditional and emerging telecommunications markets. In
addition, the increasing importance of data services has focused
the attention of most telecommunications companies on this
growing sector. As a result, a competitor in any of our business
areas is potentially a competitor in our other business areas,
which could impair our prospects, put downward pressure on
prices and adversely affect our operating results.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We face competition in each of our markets
principally from the incumbent carrier in that market, but also
from recent and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into
the local exchange marketplace and incumbent carriers seeking to
enter into the long distance market as they are granted the
regulatory authority to do so. This competition places downward
pressure on prices for local and long distance telephone service
and data services, which can adversely affect our operating
results. In addition, we could face competition from other
companies, such as other competitive carriers, cable television
companies, microwave carriers, wireless telephone system
operators and private networks built by large end-users. If we
are not able to compete effectively with these industry
participants, our operating results could be adversely affected.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Many of our competitors have superior
    resources, which could place us at a cost and price
    disadvantage.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Many of our current and potential competitors
have market presence, engineering, technical and marketing
capabilities and financial, personnel and other resources
substantially greater than ours. As a result, some of our
competitors can raise capital at a lower cost than we can, and
they may be able to adapt more swiftly to new or emerging
technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily,
and devote greater resources to the development, marketing and
sale of products and services than we can. Also, our
competitors&#146; greater brand name recognition may require us
to price our services at lower levels in order to win business.
Finally, our competitors&#146; cost advantages give them the
ability to reduce their prices for an extended period of time if
they so choose.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The technologies we use may become
    obsolete, which would limit our ability to compete effectively
    and adversely impact our results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The telecommunications industry is subject to
rapid and significant changes in technology. Most technologies
and equipment that we use or will use, including wireline and
wireless transmission technologies, circuit and packet switching
technologies, multiplexing technologies, data transmission
technologies, including the DSL, ATM and IP technologies, and
server and storage technologies may become obsolete. If we do
not replace or upgrade technology and equipment that becomes
obsolete, we will be unable to compete effectively because we
will not be able to meet the expectations of our customers,
which could cause our results to suffer.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The introduction of new technologies may reduce
the cost of services similar to those that we plan to provide.
As a result, our most significant competitors in the future may
be new entrants to the telecommunications industry. These new
entrants may not be burdened by an installed base of outdated
equipment and, therefore, may be able to more quickly respond to
customer demands.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Additionally, the markets for data and
Internet-related services are characterized by rapidly changing
technology, evolving industry standards, changing customer
needs, emerging competition and frequent new
</FONT>

<P align="center"><FONT size="2">20
</FONT>

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<DIV align="left">
<FONT size="2">product and service introductions. The future
success of our data services business will depend, in part, on
our ability to accomplish the following in a timely and
cost-effective manner:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">effectively use leading technologies and update
    or convert from existing technologies and equipment;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">continue to develop technical expertise;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">develop new services that meet changing customer
    needs; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">influence and respond to emerging industry
    standards and other technological changes.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our pursuit of necessary technological advances
may require substantial time and expense.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our company and industry are highly
    regulated, which restricts our ability to compete in our target
    markets and imposes substantial compliance costs on us that
    adversely impact our results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are subject to varying degrees of regulation
from federal, state and local authorities. This regulation
imposes substantial compliance costs on us. It also restricts
our ability to compete. For example, in each state in which we
desire to offer our services, we are required to obtain
authorization from the appropriate state commission. If any
required authorization for any of our markets or services is
revoked or otherwise terminated, our ability to operate in the
affected markets would be adversely affected.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Attempts to limit the basic competitive
    framework of the Telecom Act could interfere with the successful
    implementation of our business plan.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Successful implementation of our business plan is
predicated on the assumption that the basic framework for
competition in the local exchange services market established by
the Telecom Act will remain in place. We expect that there will
be attempts to limit or eliminate this basic framework through a
combination of federal legislation, new rulemaking by the FCC
and challenges to existing and proposed regulations by the
RBOCs. It is not possible to predict the nature of any such
action or its impact on our business and operations.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The requirement that we obtain permits and
    rights-of-way to develop our network increases our cost of doing
    business and could adversely affect our performance and
    results.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order for us to acquire and develop our fiber
networks, we must obtain local franchises and other permits, as
well as rights-of-way and fiber capacity from entities such as
incumbent carriers and other utilities, railroads, long distance
companies, state highway authorities, local governments and
transit authorities. The process of obtaining these permits and
rights-of-way is time-consuming and burdensome and increases our
cost of doing business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We may not be able to maintain our existing
franchises, permits and rights-of-way that we need for our
business. We may also be unable to obtain and maintain the other
franchises, permits and rights that we require. A sustained and
material failure to obtain or maintain these rights could
materially adversely affect our performance and operating
results in the affected metropolitan area.
</FONT>

<P align="left">
<B><FONT size="2">Risks Related to Liquidity and Financial
Resources</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We incurred a substantial net loss in 2002
    and, in the near term, will not generate funds from operations
    sufficient to meet all of our cash requirements.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For each period since inception, we have incurred
substantial net losses. For 2002, we posted a net loss
attributable to common stockholders of approximately
$3.4&nbsp;billion and a loss from operations of
$1.2&nbsp;billion. In the near term, our existing and projected
operations are not expected to generate cash flows sufficient to
pay our expected operating expenses, fund our capital
expenditure requirements.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">The covenants in our New Credit Agreement
    restrict our financial and operational flexibility, which could
    have an adverse affect on our results of
    operations.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our New Credit Agreement contains covenants that
require us to maintain certain amounts of unrestricted cash,
require us to achieve specified operating results, and restrict,
among other things, the amount of our capital expenditures, our
ability to borrow money, grant additional liens on our assets,
make
</FONT>

<P align="center"><FONT size="2">21
</FONT>

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<DIV align="left">
<FONT size="2">particular types of investments or other
restricted payments, sell assets or merge or consolidate. Arnos
Corp., a company owned by Mr.&nbsp;Icahn, holds approximately
85% of the principal amount of the loans outstanding under the
New Credit Agreement. Because amendments to or waivers of
covenants under the New Credit Agreement generally require the
approval or consent of holders of only a majority of the
outstanding principal amount under the New Credit Agreement,
decisions whether to amend or waive compliance with such
covenants by the holders of loans under the New Credit Agreement
can be made by Arnos Corp., and ultimately Mr.&nbsp;Icahn,
whether or not the other holders consent.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The security for the New Credit Agreement
consists of substantially all of the assets of XO Parent and our
subsidiaries. A default under the New Credit Agreement could
adversely affect our rights under other commercial agreements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net proceeds of this offering will be used to
repay our outstanding secured debt under the New Credit
Agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The New Credit Agreement and the existence of the
loans under the New Credit Agreement also could affect our
financial and operational flexibility, as follows:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">they may impair our ability to obtain additional
    financing in the future;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">they may limit our flexibility in planning for or
    reacting to changes in market conditions; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">they may cause us to be more vulnerable in the
    event of a downturn in our business.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our investment in Global Crossing has
    reduced our cash available for operating needs, and we cannot
    assure you that we will recover the value of that
    investment.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We paid approximately $160.7&nbsp;million to
purchase $766.6&nbsp;million principal amount of secured bank
debt of Global Crossing Holdings Ltd. and Global Crossing North
America, Inc., telecommunications companies which are currently
in reorganization proceedings. As a result, we hold
approximately 34.63% of the $2.214&nbsp;billion principal amount
of such debt outstanding. We made an offer to acquire any and
all of the outstanding senior secured bank debt of Global
Crossing in connection with an attempt to purchase a controlling
interest in those debtors, or their assets and business. We may
in the future make additional offers to acquire control of, or
otherwise invest in, lend to or otherwise do business with
Global Crossing. If we do so, we do not know what the terms of
any such offers would be, or whether any such offers will be
accepted. Any such future offers, if made for cash
consideration, could significantly and adversely affect our
liquidity.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Global Crossing bankruptcy process remains
subject to significant uncertainties and could continue for a
substantial period of time. If we elect to liquidate our
investment in Global Crossing senior secured debt, we cannot
assure you that we will be able to dispose of that investment
for an amount greater than or equal to the amount we paid for
it, or that any distribution be receive in respect of it upon
consummation of Global Crossing&#146;s bankruptcy case will have
a value greater than the amount of our investment.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">As a result of the recent investment
    history of the telecommunications sector, the access of
    telecommunications service providers like us to capital for
    growth or acquisitions is likely to be limited.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Telecommunications companies, including us, have
experienced massive defaults on debt securities and bank loans
in recent years, as well as the elimination of equity positions
in the ensuing bankruptcy reorganizations. This experience has
made the industry one of the worst-performing investment sectors
in recent years. We expect that this history has led to
extremely limited, if any, access to the capital markets by
companies in our industry, and that this situation may continue
for some time. As a result, we may have to rely entirely on cash
on hand and internally generated funds from operations to
finance our business in the future, which would diminish our
financial and operational flexibility, and diminish our ability
to take advantage of opportunities for expansion of our network
and for growth through business acquisitions.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We may be required to make cash payments in
    respect of certain disputed administrative claims in our
    bankruptcy proceedings.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Houlihan, Lokey, Howard&nbsp;&#38; Zuchin has
submitted a claim for professional fees in connection with our
reorganization of approximately $18&nbsp;million, to which we
have filed an objection. If our objection is overruled, we could
be required to pay some or all of the claimed amount in cash.
</FONT>

<P align="center"><FONT size="2">22
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, several alleged creditors have
presented claims in our reorganization proceeding whose amounts
we are disputing in whole or in part or which are indeterminate
on their face.
</FONT>

<P align="left">
<B><FONT size="2">Risks Related to Our New Common
Stock</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">A company owned and controlled by
    Mr.&nbsp;Carl Icahn is our majority stockholder.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cardiff, a company owned and controlled by
Mr.&nbsp;Carl Icahn, beneficially owns over 80% of our
outstanding New Common Stock. As a result, Mr.&nbsp;Icahn has
the power to elect all of our directors. Under applicable law
and our certificate of incorporation and by-laws, certain
actions can not be taken without the approval of holders of a
majority of our voting stock including, without limitation,
mergers and the sale of substantially all of our assets and
amendments to our certificate of incorporation and by-laws.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">We could be liable for the funding and
    termination liabilities of certain pension plans sponsored by
    affiliates of Mr.&nbsp;Carl Icahn.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed above, affiliates of Mr.&nbsp;Icahn
hold over 80% of the outstanding New Common Stock of XO Parent.
Applicable pension and tax laws make each member of a plan
sponsor&#146;s &#147;controlled group&#148; (generally defined
as entities in which there is at least an 80% common ownership
interest) jointly and severally liable for certain pension plan
obligations of a plan sponsor that is a member of the controlled
group. These pension obligations include ongoing contributions
to fund the plan, as well as liability for any unfunded
liabilities that may exist at the time the plan is terminated.
In addition, the failure to pay these pension obligations when
due may result in the creation of liens in favor of the pension
plan or the Pension Benefit Guaranty Corporation, or the PBGC,
against the assets of each member of the plan sponsor&#146;s
controlled group.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn&#146;s affiliates, XO Parent
and its subsidiaries will be subject to the pension liabilities
of any entities in which Mr.&nbsp;Icahn has a direct or indirect
ownership interest of at least 80%, which includes ACF
Industries LLC, which is the sponsor of certain pension plans.
As most recently determined by the ACF plans&#146; actuaries,
pension plans maintained by ACF are underfunded in the aggregate
by approximately $14&nbsp;million on an ongoing actuarial basis
and by approximately $102&nbsp;million if those plans were
terminated. As a member of the same controlled group, XO Parent
and each of its subsidiaries would be liable for any failure of
ACF to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of the ACF pension plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as we remain a member of the ACF controlled
group, certain other &#147;reportable events,&#148; including
certain extraordinary dividends and stock redemptions, must be
reported to the PBGC.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Because our New Common Stock is not listed
    for quotation on either the Nasdaq National or Small Cap Market,
    we are not subject to certain reporting and corporate governance
    provisions.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The New Common Stock is not quoted on the Nasdaq
National or SmallCap Markets. Companies whose shares are quoted
on the Nasdaq National Market and the Nasdaq SmallCap Market are
required to comply with the Nasdaq Marketplace Rules, which, as
required by the Sarbanes-Oxley Act of 2002, contain or will
contain corporate governance requirements in addition to those
contemplated by the Delaware General Corporation Law and the
federal securities laws, including requirements related to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Distribution of interim reports
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Solicitation of proxies
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Independent directors
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Audit committees
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Stockholder approval
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Stockholder voting rights
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Auditor peer review
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As our New Common Stock is not so quoted, we are
not subject to these requirements. As a result, for example, we
are not required to comply with recently adopted rules that will
require listed companies to have increased independent director
representation on their boards of directors or an audit
committee composed
</FONT>

<P align="center"><FONT size="2">23
</FONT>

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<DIV align="left">
<FONT size="2">solely of independent directors. We do not
currently intend to seek a listing on any exchange or the Nasdaq
National Market or the Nasdaq SmallCap Market.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Limited liquidity of our New Common Stock
    may result in delays in your ability to sell your common stock
    or lower your returns; you should be prepared to hold your
    investment indefinitely.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although, there currently is a limited trading
market for our New Common Stock on the OTCBB and in the Pink
Sheets, we cannot assure that an active trading market for our
stock will exist in the future. Unlike the Nasdaq National
Market and Small Cap Market where the issuer applies for listing
of its securities, an active and orderly trading market on the
OTCBB and in the Pink Sheets depends on the existence, and
individual decisions, of willing buyers and sellers at any given
time. We will not have any control over the willingness of any
such parties to create a trading market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of the date of this prospectus, there were
proposals pending at the OTCBB which would eliminate the OTCBB.
If such proposals are adopted, the only trading market for your
securities would be in the Pink Sheets. If the OTCBB and/or in
the Pink Sheets&#146; trading market does not continue or
becomes more sporadic, the market value of our New Common Stock
could be affected adversely and it would become difficult to buy
or sell shares on short notice. Consequently, you should be
prepared to hold your New Common Stock indefinitely. We
currently have no plans to apply or qualify for listing on any
other market or exchange.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If shares of New Common Stock trade at less than
$5.00 per share on the OTCBB or in the Pink Sheets, under SEC
regulations the New Common Stock may be defined as &#147;penny
stock,&#148; which could adversely affect the market liquidity
of our New Common Stock during such period. These rules impose
additional sales practice requirements on broker-dealers that
sell low priced securities to persons other than established
customers and institutional accredited investors and required
the delivery of a disclosure schedule explaining the nature and
risks of the penny stock market. As a result, the ability or
willingness of broker-dealers to sell or make a market in our
New Common Stock may decline.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Future sales of our New Common Stock could
    adversely affect its price and/or our ability to raise
    capital.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Future sales of substantial amounts of New Common
Stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the New Common
Stock and our ability to raise capital.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of March&nbsp;31, 2003, there were
approximately 95.0&nbsp;million shares of New Common Stock
outstanding. The shares of New Common Stock owned by Cardiff, an
entity owned and controlled by Mr.&nbsp;Icahn, are restricted
shares that may be sold only under a registration statement or
an exemption from federal securities registration requirements.
Although Cardiff holds restricted stock, it may cause us to
register sales of that stock at any time, whether pursuant to
its contractual registration rights or otherwise.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to our Plan of Reorganization, we have
issued three series of warrants to purchase up to an aggregate
of approximately 9.5&nbsp;million, 7.1&nbsp;million and
7.1&nbsp;million additional shares of New Common Stock, at
exercise prices of $6.25, $7.50 and $10.00 per share,
respectively. The warrants will expire on January&nbsp;16, 2010.
In addition, if the eligible participants exercise all the
rights in the Rights Offering, up to an additional approximately
43.3&nbsp;million shares of New Common Stock will be issued to
such eligible holders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have options outstanding to purchase
approximately 11.4&nbsp;million shares of New Common Stock
outstanding under our stock incentive plan as of March&nbsp;31,
2003, with an exercise price of $5.00 per share. Unless
surrendered or cancelled earlier under the terms of the stock
incentive plan, those options will expire in 2013. In addition,
our stock incentive plan authorizes future grants of options to
purchase New Common Stock, or awards of restricted New Common
Stock, with respect to an additional 6.2&nbsp;million shares of
New Common Stock in the aggregate.
</FONT>

<P align="center"><FONT size="2">24
</FONT>

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<P align="left">
<B><FONT size="2">Other Risks</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Our adoption of fresh start accounting
    makes comparisons of our financial position and results of
    operations with those of prior periods more
    difficult.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Due to our emergence from bankruptcy pursuant to
the Plan of Reorganization, we implemented fresh start
accounting for periods following the restructuring. Fresh start
accounting required us to restate all our assets and liabilities
to reflect their respective fair values. As a result, the
consolidated financial statements for periods after our
emergence from bankruptcy are not comparable to our consolidated
financial statements for the periods prior to our emergence from
bankruptcy, which were prepared on an historical basis. The
application of fresh start accounting may make it more difficult
to compare our post-emergence operations and results to those in
pre-emergence periods.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">There may be risks related to our use of
    Arthur Andersen as our independent auditors for the year ended
    December&nbsp;31, 2001 and prior periods.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Arthur Andersen, LLP, our former independent
public accountants, which audited our financial statements for
the years ended December&nbsp;31, 2001 and 2000, was found
guilty on June&nbsp;15, 2002 of federal obstruction of justice
charges in connection with the federal government&#146;s
investigation of Enron Corp. Arthur Andersen ceased practicing
before the SEC effective August&nbsp;31, 2002. Based on our
understanding of Arthur Andersen&#146;s financial condition, it
may be unable to satisfy any claims that arise out of its
provision of auditing and other services to us, including claims
that may arise out of Arthur Andersen&#146;s audits of our
consolidated financial statements in years prior to 2002. The
SEC has said that it will continue to accept financial
statements audited or reviewed by Arthur Andersen in compliance
with applicable rules and orders issued by the SEC in March 2002
in connection therewith.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">When we seek to access the capital markets in an
offering that requires registration of securities under the
Securities Act of 1933, as will be the case in the Rights
Offering, current SEC rules require that three years of audited
financial statements be included or incorporated by reference
into the related prospectus. These rules would require that we
present financial statements for one or more fiscal years that
were audited by Arthur Andersen, until our audited financial
statements for the year ending December&nbsp;31, 2004 become
available. The SEC recently adopted rules that exempt certain
issuers that file registration statements under the Securities
Act that contain financial statements audited by Arthur Andersen
from having to comply with regulations that require such issuers
to present manually signed accountants&#146; reports and written
consents of Arthur Andersen to include such financial statements
in the registration statement. If the SEC ceases accepting
financial statements audited by Arthur Andersen without such
reports and consents, we could be precluded from filing such a
registration statement, unless our current independent auditors,
Ernst &#38; Young LLP, or another independent accounting firm,
audits the financial statements for the years ended
December&nbsp;31, 2001 and 2000, which originally were audited
by Arthur Andersen. The time to complete such an audit would
delay, and could prevent, us from accessing the capital markets.
</FONT>

<P align="left">


<!-- link1 "SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION" -->
<DIV align="left"><A NAME="004"></A></DIV>

<DIV align="center">
<B><FONT size="2">SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Some statements and information contained in this
Prospectus are not historical facts, but are
&#147;forward-looking statements,&#148; as such term is defined
in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can be identified by the use of
forward-looking terminology such as &#147;believes,&#148;
&#147;expects,&#148; &#147;plans,&#148; &#147;may,&#148;
&#147;will,&#148; &#147;would,&#148; &#147;could,&#148;
&#147;should,&#148; or &#147;anticipates&#148; or the negative
of these words or other variations of these words or other
comparable words, or by discussions of strategy that involve
risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">our services, including the development and
    deployment of data products and services based on IP, Ethernet
    and other technologies and strategies to expand our targeted
    customer base and broaden our sales channels;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the operation of our network, including with
    respect to the development of IP protocols;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">25
</FONT>

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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">liquidity and financial resources, including
    anticipated capital expenditures, funding of capital
    expenditures and anticipated levels of indebtedness; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">trends related to and expectations regarding the
    results of operations in future periods, including but not
    limited to those statements set forth in &#147;Management&#146;s
    Discussion and Analysis of Financial Condition and Results of
    Operations&#148; below.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All such forward-looking statements are qualified
by the inherent risks and uncertainties surrounding expectations
generally, and also may materially differ from our actual
experience involving any one or more of these matters and
subject areas. The operation and results of our business also
may be subject to the effect of other risks and uncertainties,
in addition to the relevant qualifying factors identified in the
above &#147;Risk Factors&#148; section and elsewhere in this
annual report and in the documents incorporated by reference in
this annual report, including, but not limited to:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">general economic conditions in the geographic
    areas that we are targeting for communications services;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the ability to achieve and maintain market
    penetration and average per customer revenue levels sufficient
    to provide financial viability to our business;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the quality and price of similar or comparable
    communications services offered or to be offered by our current
    or future competitors; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">future telecommunications-related legislation or
    regulatory actions.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Many factors mentioned in our discussion in this
prospectus will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any additional disclosures we make in our
Forms 10-K, 10-Q and 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risks and uncertainties under
&#147;Risk Factors&#148; on page
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;] of this prospectus. These are
factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those
listed here could also adversely affect us.
</FONT>

<P align="center"><FONT size="2">26
</FONT>

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<P align="left">


<!-- link1 "THE OFFERING" -->
<DIV align="left"><A NAME="005"></A></DIV>

<DIV align="center">
<B><FONT size="2">THE OFFERING</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Before exercising any rights, you should read
carefully the information set forth under the &#147;Risk
Factors&#148; beginning on
page &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.</FONT></I>

<P align="left">
<B><FONT size="2">The Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are offering up to 43,333,333 shares of our
common stock, $0.01 par value, which we refer to as New Common
Stock, in a Rights Offering. Certain of our pre-petition
unsecured creditors and equity security holders as of November
15, 2002, whose claims and interests were discharged or
cancelled by the confirmation of our Plan of Reorganization, are
entitled to participate in the Rights Offering pursuant to the
terms of our Plan of Reorganization. Each Subscription Right
entitles a holder to purchase one share of New Common Stock for
a subscription price of $5.00 per share. On
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003] the last reported sale price for our New Common Stock on
the OTCBB was
$[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;]&nbsp;per
share, with a bid price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of New Common Stock and an ask price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up
to &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;shares
of New Common Stock at the close of the market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subscription Rights may be exercised at any time
during the subscription period, which commences on the date of
this Prospectus and ends at 5:00 p.m., New York City Time,
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subscription Rights are evidenced by rights
certificates. As explained in &#147;Subscription Rights&#148;
below, certain eligible participants are entitled to
Subscription Rights that include both basic subscription
privileges and oversubscription privileges while Subscription
Rights available to others include only oversubscription
privileges. If you are entitled to basic subscription
privileges, your rights certificate specifies the number of
shares of New Common Stock you are entitled to purchase pursuant
to those privileges. All eligible participants electing to
purchase New Common Stock in the Rights Offering are asked to
indicate the total number of shares of New Common Stock they
wish to purchase on their rights certificate. The method by
which Subscription Rights may be exercised and shares of New
Common Stock paid for is explained in the sections below
entitled &#147;Procedure.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subscription Rights are non-transferable. Shares
of New Common Stock issued in the Rights Offering are not listed
or quoted on any exchange, but there currently is a limited
trading market for the New Common Stock on the OTCBB and in the
Pink Sheets. Fractional shares will not be issued upon exercise
of Subscription Rights.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net proceeds of this offering will be used to
repay our outstanding senior secured debt.
</FONT>

<P align="left">
<B><FONT size="2">Record Date and Eligible
Participants</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The record date of the Rights Offering is
November&nbsp;15, 2002. Only holders of pre-petition senior
notes, general unsecured claims, pre-petition subordinated
notes, pre-petition preferred stock and pre-petition common
stock on November&nbsp;15, 2002 will have the opportunity to
exercise Subscription Rights to subscribe for any or all of the
New Common Stock in the Rights Offering, subject to the priority
and allocation rules described below.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following series of pre-petition senior notes
of XO Parent were outstanding as of November&nbsp;15, 2002:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">12&nbsp;1/2% Senior Notes due 2006 (CUSIP Nos.
    65333A AC 2, 65333A AA 6 and 65333A AB&nbsp;4);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">9&nbsp;5/8% Senior Notes due 2007 (CUSIP
    No.&nbsp;65333H AA&nbsp;1);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">9% Senior Notes due 2008 (CUSIP Nos. 65333H AB 9,
    65333H AC 7 and 65333H AD&nbsp;5);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">9.45% Senior Discount Notes due 2008 (CUSIP Nos.
    65333H AE 3, 65333H AF 0 and 65333H AG&nbsp;8);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">10&nbsp;3/4% Senior Notes due 2008 (CUSIP Nos.
    65333H AH 6 and 65333H AJ&nbsp;2);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">12&nbsp;1/4% Senior Discount Notes due 2009
    (CUSIP No.&nbsp;65333H AL&nbsp;7);
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">27
</FONT>
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<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">10&nbsp;3/4% Senior Notes due 2009 (CUSIP
    No.&nbsp;65333H AK&nbsp;9);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">12&nbsp;1/8% Senior Discount Notes due 2009
    (CUSIP Nos. 65333H AN 3 and 65333H AQ&nbsp;6);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">10&nbsp;1/2% Senior Notes due 2009 (CUSIP Nos.
    65333H AP 8 and 65333H AM&nbsp;5); and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">12&nbsp;3/4% Senior Notes due 2007 (CUSIP Nos.
    65333H AR 4 and 20589R AC&nbsp;1).
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following series of pre-petition subordinated
notes of XO Parent was outstanding as of November&nbsp;15, 2002:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">5&nbsp;3/4% Convertible Subordinated Notes due
    2009 (CUSIP Nos. 983764 AC 5, 983764 AA9 and 983764 AB5)
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following series of pre-petition preferred
stock of XO Parent were outstanding as of November&nbsp;15, 2002
and are eligible to participate in the Rights Offering:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">14% Series&nbsp;A Senior Exchangeable Preferred
    Stock (CUSIP Nos. 983764 20 0, 983764 30 9 and 983764 40 8,
    983764 86 1 and 983764 87 9);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">6&nbsp;1/2% Series&nbsp;B Convertible Preferred
    Stock (CUSIP Nos. 983764 80 4 and 983764 85 3);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">13&nbsp;1/2% Series&nbsp;E Senior Exchangeable
    Preferred Stock Due 2010 (CUSIP Nos. 983764 50 7, 983764 60 6
    and 983764 70 5);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">7% Series&nbsp;F Convertible Redeemable Preferred
    Stock Due 2010;
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Certain investment funds affiliated with
Forstmann Little &#38; Co., which collectively held all
outstanding shares of XO Parent&#146;s pre-petition
Series&nbsp;C Cumulative Convertible Participating Preferred
Stock, Series&nbsp;D Convertible Participating Preferred Stock,
Series&nbsp;G Cumulative Convertible Participating Preferred
Stock and Series&nbsp;H Convertible Participating Preferred
Stock, have declined and waived any opportunity they might have
been entitled to, or offered, to exercise or receive
Subscription Rights in the Rights Offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following series of pre-petition common stock
of XO Parent were outstanding as of November&nbsp;15, 2002:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">class A common stock, par value $0.02 per share
    (CUSIP Nos. 983764 10 1 and 983764 88 7); and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">class B common stock, par value $0.02 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Certain holders of pre-petition class A common
stock, including certain investment funds affiliated with
Forstmann Little &#38; Co., have declined and waived any
opportunity they might have been entitled to, or offered, to
exercise or receive Subscription Rights in the Rights Offering.
Therefore, the actual amount of guaranteed rights to subscribe
to be distributed to other holders will be increased accordingly.
</FONT>

<P align="left">
<B><FONT size="2">Subscription Price</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The subscription price is $5.00 per share,
payable in United Stated dollars by personal check,
cashier&#146;s check, money order or wire transfer. All payments
must be delivered to the Rights Agent and cleared on or before
the Subscription Rights Expiration Date.
</FONT>

<P align="left">
<B><FONT size="2">Subscription Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are an eligible participant in the Rights
Offering you will receive Subscription Rights with either
(a)&nbsp;a basic subscription privilege and an oversubscription
privilege or (b)&nbsp;an oversubscription privilege.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Basic
Subscription Privilege</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A basic subscription privilege in a Subscription
Right entitles eligible participants have their Subscription
Right exercisable into a fixed minimum number of shares of New
Common Stock in the initial allocation of the Rights Offering.
Only eligible participants who, as of November&nbsp;15, 2002,
held claims in our Chapter&nbsp;11
</FONT>

<P align="center"><FONT size="2">28
</FONT>

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<DIV align="left">
<FONT size="2">reorganization proceedings as holders of general
unsecured claims and holders of pre-petition senior notes will
be allocated Subscription Rights with basic subscription
privileges.
</FONT>
</DIV>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Oversubscription
Privilege</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All Subscription Rights have oversubscription
privileges, which entitle the holder to a portion of the shares
remaining after exercise of the basic subscription privilege.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If any eligible participant does not exercise its
basic subscription privileges in full (by non-payment, failing
to timely return the rights certificate or otherwise), other
eligible participants will have the opportunity to exercise
their oversubscription privileges in accordance with their
position in the pro ration procedures described on
pages&nbsp;&nbsp;&nbsp;-&nbsp;&nbsp;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Holders of pre-petition class A common stock will
receive Subscription Rights with oversubscription privileges
exercisable for at least 2,500,000 shares of New Common Stock.
Legal counsel for the class of pre-petition class A common
stockholders will receive Subscription Rights of 25% of such
initial distribution to the category of pre-petition class A
common stock as part of their attorney&#146;s fees in the
settlement of certain stockholder class action litigation. See
&#147;The Offering&nbsp;&#151; Fees and Expenses&#148; on
page&nbsp;&nbsp;&nbsp;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In exercising your oversubscription privileges,
you must specify the number of shares of New Common Stock that
you elect to purchase pursuant to the oversubscription privilege
and must pay the full subscription price for all the shares of
New Common Stock you are electing to purchase. If we do not
allocate to you all of the shares of New Common Stock you have
subscribed for under your oversubscription privileges, we expect
to refund by mail to you any payment you have made for shares
which are not available to issue to you within fifteen business
days after the Subscription Rights Expiration Date. Interest
will not be payable on amounts refunded.
</FONT>

<P align="left">
<B><FONT size="2">Expiration Time and Date.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Subscription Rights expire
on &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;at
5:00 p.m. New York City time, the Subscription Rights Expiration
Date. Subscription Rights (including the basic subscription
privileges and/or oversubscription privileges contained therein)
must be exercised prior to the Subscription Rights Expiration
Date to be valid. Any Subscription Right not exercised by the
Subscription Rights Expiration Date will be null and void.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to exercise Subscription Rights in a
timely manner, you must ensure that the Rights Agent actually
receives, prior to Subscription Rights Expiration Date, the
properly executed and completed rights certificate together with
full payment for all New Common Stock you wish to purchase.
</FONT>

<P align="left">
<B><FONT size="2">No Revocation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You will not be allowed to revoke or change your
exercise of Subscription Rights after you send in your
subscription forms and payment, even if you later learn new or
additional information about us that you consider to be
unfavorable.
</FONT>

<P align="left">
<B><FONT size="2">Not Transferable</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Your rights certificates are not transferable and
are only exercisable by the record holder of such certificate.
</FONT>

<P align="left">
<B><FONT size="2">Mailing of Rights Certificates and Record
Holders</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Rights Agent will be sending a rights
certificate to each eligible participant or record holder, as
applicable, along with this prospectus and related instructions
to evidence the Subscription Rights. To exercise Subscription
Rights, you must fill out and sign the rights certificate and
timely deliver it with full payment for the shares of New Common
Stock to be purchased.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you own pre-petition XO Parent securities held
in a brokerage, bank or other custodial or nominee account, to
exercise your Subscription Rights you must promptly send the
proper instruction form to the
</FONT>

<P align="center"><FONT size="2">29
</FONT>

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<DIV align="left">
<FONT size="2">person holding your securities. Your broker,
dealer, depository or custodian bank or other person holding
your securities is the record holder of your securities and will
have to act on your behalf in order for you to exercise your
Subscription Rights. We have asked your broker, dealer or other
nominee holders of certain categories of our pre-petition
securities to contact the beneficial owners to obtain
instructions concerning Subscription Rights the beneficial
owners it represents are entitled to exercise.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are a holder of a claim or security
entitled to receive Subscription Rights in the Plan of
Reorganization and did not receive a Rights Certificate,
received a damaged Rights Certificate or lost your Rights
Certificate, or if you have any questions concerning the
procedures for exercising your Rights, please call the
Information Agent at (212)&nbsp;929-5500 or Toll-Free (800)
322-2885.
</FONT>

<P align="left">
<B><FONT size="2">Foreign and Unknown Addresses</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not mailing rights certificates to
stockholders whose addresses are outside the United States or
who have an APO or FPO address. In those cases, the rights
certificates will be held by the Rights Agent for those eligible
participants. To exercise their Subscription Rights, these
eligible participants must notify the Rights Agent prior to
11:00&nbsp;a.m., New York City time, on the third business day
prior to the Subscription Rights Expiration Date.
</FONT>

<P align="left">
<B><FONT size="2">Right to Block Exercise Due to Regulatory
Issues</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We reserve the right to refuse the exercise of
Subscription Rights by any holder of Subscription Rights who
would, in our opinion, be required to obtain prior clearance or
approval from any U.S. state or federal or regulatory
authorities for the exercise of rights or ownership of
additional shares of New Common Stock if, at the Subscription
Rights Expiration Date, this clearance or approval has not been
obtained. We are not undertaking to pay any expenses incurred in
seeking such clearance or approval.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not offering or selling, or soliciting any
purchase of, shares in any state or other jurisdiction in which
this offering is not permitted. We reserve the right to delay
the commencement of this offering in certain states or other
jurisdictions if necessary to comply with local laws. However,
we may elect not to offer Subscription Rights to residents of
any state or other jurisdiction whose law would require a change
in this offering in order to carry out this offering in such
state or jurisdiction.
</FONT>

<P align="left">
<B><FONT size="2">Procedure</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Please do not send rights certificates or related
forms to us. Please send the properly completed and executed
form of rights certificate with full payment to the Rights Agent
for this offering, American Transfer &#38; Trust Company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should read carefully the rights certificate
and related instructions and forms which accompany this
prospectus. You should call MacKenzie Partners, Inc., the
Information Agent for this offering, at the address and
telephone number listed below under the caption &#147;Questions;
Additional Information&#148; promptly with any questions you may
have.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All shares of New Common Stock issuable upon
exercise of the Subscription Rights will be offered
simultaneously throughout the thirty day period ending on the
Subscription Rights Expiration Date on a contingent basis for
all Subscription Rights other than the first allocation to the
holders of pre-petition general unsecured claims and
pre-petition senior notes pursuant to the basic subscription
privilege described above.
</FONT>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Method of
Exercise of Rights.</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are entitled to purchase shares of New
Common Stock pursuant to the Rights Offering, you must
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(a)&nbsp;complete and sign your original rights
certificate (copies will not be accepted) and
</FONT>

<P align="center"><FONT size="2">30
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(b)&nbsp;return the signed original rights
certificate in the envelope provided, together with payment for
all shares of New Common Stock subscribed for in the form of
either:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(i)&nbsp;a check, bank draft, cashier&#146;s
    check or money order for the full number of shares of New Common
    Stock subscribed, including any over-subscription shares,
    payable to: American Stock Transfer &#38; Trust Company as
    Rights Agent-XO Communications or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(ii)&nbsp;a wire transfer of payment and
    notification that payment for the shares of New Common Stock was
    sent prior to the final due date via wire transfer directly to a
    bank account maintained by American Stock Transfer &#38; Trust
    Company at Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for
    credit to Account #: 323053785, Contact: XO Communications
    Rights Offering.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To have a valid request to subscribe for any
shares of New Common Stock in the Rights Offering you must have
both requested the shares in a Rights Certificate and paid $5.00
per such requested share. Only valid requests will receive
shares in the Rights Offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Rights Agent will deposit all share purchase
funds it receives prior to the final due date into a segregated
account pending proration and distribution of shares of New
Common Stock. The Rights Agent will not accept cash as a means
of payment for shares of New Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Any payment required from a holder of
Subscription Rights must be received by the Rights Agent on or
prior to the Subscription Rights Expiration Date. Any excess
payment to be refunded by the Rights Agent to a holder of
Subscription Rights will be mailed by the Rights Agent to the
holder within fifteen business days after the Subscription
Rights Expiration Date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">IN ORDER FOR YOU TO EXERCISE YOUR SUBSCRIPTION
RIGHTS, YOUR RIGHTS CERTIFICATE MUST BE PROPERLY COMPLETED AS
SET FORTH ABOVE AND IN ACCORDANCE WITH THE INSTRUCTIONS THEREON.
ALL RIGHTS CERTIFICATES AND PAYMENT FOR SHARES MUST BE RECEIVED
BY AMERICAN STOCK TRANSFER &#38; TRUST COMPANY, THE RIGHTS
AGENT, NO LATER THAN 5:00&nbsp;P.M. (EASTERN TIME)
ON &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
THE SUBSCRIPTION RIGHTS EXPIRATION DATE.
</FONT>

<P align="left">
<B><FONT size="2">Incomplete Forms; Insufficient
Payment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you do not or incorrectly indicate on your
rights certificate the number of shares of New Common Stock you
wish to purchase, or do not forward sufficient payment for the
number of shares of New Common Stock that you indicate you wish
to purchase, then we will accept the rights certificate and
payment only for the maximum number of shares of New Common
Stock that may be exercised based on the actual payment
delivered. We will make this determination as follows:
(1)&nbsp;you will be deemed to have exercised your basic
subscription privileges, if any, to the full extent of the
payment received, and (2)&nbsp;if any funds remain, you will be
deemed to have exercised your oversubscription privileges to the
extent of the remaining funds. We will return any payment not
applied to the purchase of New Common Stock under this offering
within fifteen business days after the Subscription Rights
Expiration Date. Interest will not be paid on amounts refunded.
</FONT>

<P align="left">
<B><FONT size="2">No Fractional Shares</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each Subscription Right entitles you to purchase
one share of New Common Stock at the subscription price. We will
accept any inadvertent subscription indicating a purchase of
fractional common stock by rounding down to the nearest whole
share and refunding without interest any payment received for a
fractional share within fifteen business days after the
Subscription Rights Expiration Date.
</FONT>

<P align="left">
<B><FONT size="2">Instructions to Banks, Brokers and other
Nominees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you are a broker, trustee or depository for
securities or other nominee holder for any eligible participant,
we are requesting that you contact such eligible participants as
soon as possible to obtain instructions and related
certifications concerning their Subscription Rights. Our request
to you is further
</FONT>

<P align="center"><FONT size="2">31
</FONT>

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<DIV align="left">
<FONT size="2">explained in the suggested form of letter of
instructions from nominee holders to beneficial owners
accompanying this prospectus.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To the extent so instructed, nominee holders
should complete appropriate rights certificates on behalf of
beneficial owners and submit them on a timely basis to the
Rights Agent with the proper payment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Banks, brokers and other nominees who exercise
the Subscription Rights on behalf of beneficial owners of
pre-petition XO Parent securities must report certain
information to the Rights Agent and us and record certain other
information received from each beneficial owner exercising
rights. Generally, banks, brokers and other nominees must report
with specificity:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the number and type of pre-petition XO Parent
    security held on the record date on behalf of each beneficial
    owner;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the number of Subscription Rights as to which the
    basic subscription privileges, if any, has been exercised on
    behalf of each beneficial owner;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">that each beneficial owner&#146;s basic
    subscription privileges held in the same capacity has been
    exercised in full; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the number of shares of New Common Stock
    subscribed for under the oversubscription privileges by each
    beneficial owner.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Risk of Loss on Delivery of Rights certificate
Forms and Payments</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND
PAYMENT OF THE PURCHASE PRICE FOR SHARES OF NEW COMMON STOCK TO
THE RIGHTS AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT
NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE RIGHTS AGENT
AND CLEARANCE OF PAYMENT PRIOR TO 5:00&nbsp;P.M., EASTERN TIME,
ON THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,
YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS
OF A CERTIFIED OR CASHIER&#146;S CHECK OR MONEY ORDER. PERSONAL
CHECKS DRAWN UPON NON-U.S. BANKS WILL NOT BE ACCEPTED.
</FONT>

<P align="left">
<B><FONT size="2">How Procedural and Other Questions are
Resolved</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are entitled to resolve all questions
concerning the timeliness, validity, form and eligibility of any
exercise of Subscription Rights. Our determination of such
questions will be final and binding. We, in our reasonable
discretion, may waive any defect or irregularity, or permit a
defect or irregularity to be corrected within such time as we
may determine, or reject the purported exercise of any
Subscription Right because of any defect or irregularity.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Rights certificates will not be considered
received or accepted until all irregularities have been waived
or cured within such time as we determine in our reasonable
discretion. Neither we nor the Rights Agent have any duty to
give notification of any defect or irregularity in connection
with the submission of rights certificates or any other required
document. Neither we nor the Rights Agent will incur any
liability for failure to give such notification.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We reserve the right to reject any exercise of
Subscription Rights if the exercise does not comply with the
terms of this offering or is not in proper form or if the
exercise of Subscription Rights would be unlawful or materially
burdensome. See also &#147;Right to Block Exercise Due to
Regulatory Issues.&#148;
</FONT>

<P align="center"><FONT size="2">32
</FONT>

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<P align="left">
<B><FONT size="2">Issuance of New Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">New Common Stock purchased in this Rights
Offering will be issued as soon as practicable after the
Subscription Rights Expiration Date and the Rights Agent&#146;s
examination and tabulation of the Rights Certificates received.
The Rights Agent will deliver subscription payments to us only
after consummation of the Rights Offering and the issuance of
certificates to eligible participants that exercised
Subscription Rights. New Common Stock purchased by the exercise
of Subscription Rights will be registered in the name of the
person exercising the Subscription Rights.
</FONT>

<P align="left">
<B><FONT size="2">Common Stock Outstanding After the Rights
Offering</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Assuming we issue all of the New Common Stock
available in the Rights Offering, based on the number of shares
of New Common Stock outstanding as of March&nbsp;31, 2003,
approximately 138.3&nbsp;million shares of New Common Stock will
be issued and outstanding after the Rights Offering. Such newly
issued shares would represent approximately 30% of the number of
shares of New Common Stock outstanding thereafter, without
giving effect to any exercise of warrants or options currently
outstanding.
</FONT>

<P align="left">
<B><FONT size="2">Fees and Expenses</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">General</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will pay all fees charged by the Rights Agent.
You will be responsible for paying any other commissions, fees,
taxes or other expenses incurred in connection with the exercise
of the Subscription Rights. Neither we nor the Rights Agent will
pay these expenses.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Fees and Expenses of Stockholder
    Settlement</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2001 and January 2002, three state
law complaints were filed against XO and/or its directors, among
others, by alleged stockholders of XO, purportedly on behalf of
themselves and others similarly situated in the New York State
Supreme Court for Nassau County. These New York actions were
consolidated by order dated April&nbsp;5, 2002 with the matter
styled as <I>Irving Schoenfeld et&nbsp;al v. XO Communications,
Inc. et al.</I>, Index No.&nbsp;01-018358.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to a Stipulation of Compromise and
Settlement dated July&nbsp;11, 2002, which we refer to as the
Stockholder Settlement, the Schoenfeld action was settled and
the plaintiff class dismissed and released all claims and causes
of action against the defendants in that action and their
respective affiliates and current and former officers, partners,
directors, employees, agents, members, stockholders, advisors,
including any attorneys, financial advisors, investment bankers
and other professionals retained by such persons, based upon or
relating to XO or any of the facts or events alleged in the
action.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As part of their compensation for legal fees and
expenses incurred pursuant to the <I>Schoenfeld</I> action and
the Stockholder Settlement, counsel for the plaintiffs in the
<I>Schoenfeld</I> action will receive, pursuant to the
Shareholder Settlement, Subscription Rights with basic
subscription privileges for 833,333&nbsp;shares of New Common
Stock (representing 25% of the basic subscription privileges
allocated to the holders of class&nbsp;A common stock) and the
same oversubscription rights as holders of Common Stock.
</FONT>

<P align="left">
<B><FONT size="2">Priority and Allocation of Subscription
Rights</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following categories of holders as of
November&nbsp;15, 2002 will have the opportunity to exercise the
Subscription Rights: (i)&nbsp;holders of pre-petition general
unsecured claims and pre-petition senior notes,
(ii)&nbsp;holders of pre-petition subordinated notes,
(iii)&nbsp;holders of pre-petition preferred stock and
(iv)&nbsp;holders of pre-petition common stock. Holders of
pre-petition general unsecured claims and pre-petition senior
notes will receive basic subscription privileges and
oversubscription privileges. All other eligible participants
will only receive oversubscription privileges.
</FONT>

<P align="center"><FONT size="2">33
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Allocations of New Common Stock within any tier
and/or category of the priority and allocation table below will
be made either &#147;pro&nbsp;rata by holdings&#148; or
&#147;pro&nbsp;rata by subscription&#148;:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro rata by holdings&#148; means that the
    number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">A&nbsp;=&nbsp;the total amount of the
holder&#146;s holdings in that tier, and
</FONT>

<P align="left">
<FONT size="2">B&nbsp;=&nbsp;the total amount of the
holder&#146;s holdings in that tier.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">&#147;Pro rata by subscription&#148; means that
    the number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">A&nbsp;=&nbsp;the total number of shares of New
Common Stock theretofore requested by the holder, and
</FONT>

<P align="left">
<FONT size="2">B&nbsp;=&nbsp;the total amount of all shares of
New Common Stock theretofore requested by all holders in that
tier.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each eligible participant will have the
opportunity to specify on its rights certificate the total
number of shares of New Common Stock it wishes to purchase (up
to the full amount of the offering), subject to allocation and
pro ration as set forth below:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="82%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">First:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">to the holders of pre-petition general unsecured
    claims and pre-petition senior notes, pro rata by holdings;
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Second:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">one-third of any remaining Subscription Rights to
    each of the following groups of holders:
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(i)&nbsp;&nbsp;holders of pre-petition
    subordinated notes,
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(ii)&nbsp;&nbsp;holders of pre-petition preferred
    stock, and
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">(iii)&nbsp;&nbsp;holders of pre-petition
    class&nbsp;A common stock (with 25% of the Subscription Rights
    allocated to holders of pre-petition class&nbsp;A common stock
    reallocated to legal counsel to the class of pre-petition
    class&nbsp;A common stockholders as part of their
    attorney&#146;s fees in the stockholder class action suit). See
    &#147;The Offering&nbsp;&#151; Fees and Expenses&#148; on
    page&nbsp;&nbsp;&nbsp;.,
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">allocated within each of those groups pro rata by
    holdings. However, if, but only to the extent, that the category
    of holders of pre-petition class&nbsp;A common stock receive
    less than 3,333,333 Subscription Rights, additional Subscription
    Rights will be issued so that holders of pre-petition
    class&nbsp;A common stock are entitled to purchase at least
    3,333,333&nbsp;shares of New Common Stock (with at least
    2,500,000 of those shares available for purchase by the holders
    of pre-petition class&nbsp;A common stock with the remaining
    833,333&nbsp;shares in the Rights Offering allocated to legal
    counsel for the class of pre-petition class&nbsp;A common
    stockholders).
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Any remaining Subscription Rights from such
    initial allocation to the holders of pre-petition class&nbsp;A
    common stock shall subsequently be reallocated to the holders of
    pre-petition class A common stock and the legal counsel for the
    class of pre-petition class&nbsp;A common stockholders,
    pro&nbsp;rata by subscription. Notwithstanding anything herein
    to the contrary, on the Subscription Rights Expiration Date any
    unexercised additional Subscription Rights added to the offering
    to ensure that the holders of pre-petition class&nbsp;A common
    stock receive Subscription Rights for at least
    3,333,333&nbsp;shares of New Common Stock will be deemed
    cancelled and will not be allocated beyond this Second
    allocation tier;
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Third:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">any remaining Subscription Rights to the holders
    of pre-petition general unsecured claims and pre-petition senior
    notes, pro&nbsp;rata by subscriptions; and
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fourth:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">any remaining Subscription Rights to the holders
    of pre-petition subordinated notes, pre-petition preferred stock
    and pre-petition common stock (including legal counsel for the
    class of pre-petition class&nbsp;A common stockholders), pro
    rata by subscriptions.
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">34
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Supplemental offering</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As soon as practicable after the Subscription
Rights Expiration Date, if and to the extent that any
outstanding Subscription Rights have not been exercised, we will
issue and the Rights Agent will deliver to the holders of senior
secured lenders claims an equivalent number of transferable
rights on a pro rata basis, based upon the amount of each such
holder&#146;s claims in a non-registered, supplemental rights
offering. These transferable rights will be exercisable for a
thirty day period after their issuance.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">PERSONS WHO ACQUIRED PRE-PETITION SECURITIES OF
OR GENERAL UNSECURED CLAIMS AGAINST XO PARENT AFTER NOVEMBER 15,
2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL
OFFERING. ONLY SUCH HOLDERS OF AND CLAIMANTS AS OF NOVEMBER 15,
2002 ARE ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL OFFERING.
</FONT>

<P align="left">
<B><FONT size="2">The Board Makes No Investment Recommendations
to Eligible Participants.</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our board of directors has approved the
registration statement of which this prospectus is a part, but
has and does not make any recommendation to you about whether
you should exercise any Subscription Rights. In making the
decision to exercise or not exercise your Subscription Rights,
you must consider your own best interests.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you choose not to exercise your Subscription
Rights in full and you currently hold New Common Stock, your
relative ownership interest in us will be diluted. If you
exercise Subscription Rights, you risk investment loss on new
money invested. The trading price of our New Common Stock may
decline below the subscription price. We cannot assure you that
the subscription price will remain below any trading price for
our New Common Stock or that its trading price will not decline
to below the subscription price during or after this Rights
Offering. For a summary of some of the risks a new investment
would entail, see &#147;Risk Factors&#148; beginning on
page&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;.
</FONT>

<P align="center">
<B><FONT size="2">IMPORTANT</FONT></B>

<P align="left">
<FONT size="2">PLEASE CAREFULLY READ THE INSTRUCTIONS
ACCOMPANYING THE RIGHTS CERTIFICATE AND FOLLOW THOSE
INSTRUCTIONS IN DETAIL. DO NOT SEND RIGHTS CERTIFICATES DIRECTLY
TO US. YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT AND DELIVERY
METHOD FOR YOUR RIGHTS CERTIFICATE, AND YOU BEAR THE RISKS
ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR
RIGHTS CERTIFICATE AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU
USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED. WE ALSO RECOMMEND THAT YOU ALLOW A SUFFICIENT NUMBER
OF DAYS PRIOR
TO &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE TO TEN BUSINESS DAYS TO
CLEAR, WE STRONGLY URGE YOU TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER&#146;S CHECK OR BANK DRAFT DRAWN
UPON A U.S. BANK, OR A U.S. POSTAL MONEY ORDER.
</FONT>

<P align="left">
<B><FONT size="2">Questions; Additional Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you have any questions about (1)&nbsp;the
procedure for exercising the Subscription Rights in the Rights
Offering, (2)&nbsp;the number of shares of New Common Stock
available to you, (3)&nbsp;a lost or damaged rights certificate,
please contact the Information Agent:
</FONT>

<P align="center">
<FONT size="2">MacKenzie Partners, Inc.
</FONT>

<DIV align="center">
<FONT size="2">105 Madison Avenue, 14th Floor
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10016
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Robert Marese
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">(212)&nbsp;929-5500
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Toll-Free (800)&nbsp;322-2885
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">proxy@mackenziepartners.com
</FONT>
</DIV>

<P align="center"><FONT size="2">35
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you have any questions as to whether your
completed rights certificate or payment has been received,
please contact the Rights Agent:
</FONT>

<P align="center">
<FONT size="2">XO Communications, Inc.
</FONT>

<DIV align="center">
<FONT size="2">c/o American Stock Transfer &#38; Trust Company
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">59 Maiden Lane
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">New York, NY 10038
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Shareholder Relations Department
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Phone: (800)&nbsp;937-5449
</FONT>
</DIV>

<P align="center">
<B><FONT size="2">USE OF PROCEEDS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We estimate that our net proceeds from this
offering will be approximately $216.7&nbsp;million if all
holders of Subscription Rights exercise their rights in full.
The net proceeds of this offering will be used to repay and
reduce our outstanding secured debt.
</FONT>

<P align="center">
<B><FONT size="2">DETERMINATION OF OFFERING PRICE</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Subscription Rights are being issued pursuant
to the Plan of Reorganization. The exercise price of the
Subscription Rights, like all other aspects of our Plan of
Reorganization, was determined through arm&#146;s length
negotiations between us and our various creditor constituencies
and approved by the bankruptcy court. This price represents the
same price per share attributed to the shares of New Common
Stock issued under the Plan of Reorganization to our former
senior secured lenders.
</FONT>

<P align="center">
<B><FONT size="2">PRICE AND RELATED INFORMATION CONCERNING
REGISTERED SHARES</FONT></B>

<P align="left">
<B><FONT size="2">Predecessor Market Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our pre-petition class A common stock was traded
on the Nasdaq National Market under the symbol &#147;XOXO&#148;
until December 2001, at which time we voluntarily delisted it
from that market. On December&nbsp;17, 2001, our pre-petition
class A common stock began trading on the Nasdaq
Over-the-Counter Bulletin Board or OTCBB until January&nbsp;16,
2003, the effective date of our Plan of Reorganization, at which
time trading was halted on the Nasdaq OTCBB.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows, for the periods
indicated, the high and low closing bid prices for our
pre-petition class A common stock as reported by the Nasdaq
National Market or Nasdaq Over-the-Counter Bulletin Board, as
applicable.
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">High</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Low</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">High</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Low</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">First Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.19</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.04</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27.81</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">Second Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.07</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.63</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">Third Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.97</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.33</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">Fourth Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.15</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.02</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.72</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.08</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All interests in our pre-petition class A common
stock were cancelled effective as of January&nbsp;16, 2003,
pursuant to our Plan of Reorganization.
</FONT>

<P align="left">
<B><FONT size="2">Successor Market Information</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our New Common Stock trades on the OTCBB and in
the Pink Sheets under the symbol &#147;XOCM&#148;. It began
trading shortly after the first distribution of New Common Stock
pursuant to our Plan of Reorganization. On
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
2003], the last reported sale price for our New Common Stock was
$[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;]
per share, with a bid price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up to &nbsp;shares of New Common Stock and an ask
</FONT>

<P align="center"><FONT size="2">36
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">price of
$&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;for
up to &nbsp;shares of New Common Stock at the close of the
market. See also &#147;Risks Related to Our Common Stock&#148;
on page&nbsp;[&nbsp;] of this prospectus.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of [March&nbsp;1, 2003], the approximate
number of stockholders of record of our New Common Stock was
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;].
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table shows, for the periods
indicated, the high and low closing bid prices for our New
Common Stock as reported by the Nasdaq Over-the-Counter Bulletin
Board.
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="81%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">High</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Low</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">First Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <I><FONT size="2">Second Quarter</FONT></I></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.80</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.95</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<!-- link1 "DIVIDEND POLICY" -->
<DIV align="left"><A NAME="006"></A></DIV>

<P align="center">
<B><FONT size="2">DIVIDEND POLICY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have never declared or paid any cash dividends
on our pre-petition class A common stock or our New Common Stock
and do not intend to declare or pay any cash dividends on our
New Common Stock. Covenants within the New Credit Agreement
restrict our ability to pay cash dividends on our capital stock.
</FONT>

<!-- link1 "SELECTED HISTORICAL FINANCIAL AND OPERATING DATA" -->
<DIV align="left"><A NAME="007"></A></DIV>

<P align="center">
<B><FONT size="2">SELECTED HISTORICAL FINANCIAL AND OPERATING
DATA</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Because the Plan of Reorganization was not
consummated and effective until January&nbsp;16, 2003, the
summary consolidated financial data below as of and for the
years ended December&nbsp;31, 1998, 1999, 2000, 2001 and 2002
and the summary consolidated financial information for the three
months ended March&nbsp;31, 2002 does not include the effects of
the fresh start accounting provisions of SOP&nbsp;90-7, but the
financial data as of and for the three months ended
March&nbsp;31, 2003 does reflect the impact of adopting fresh
start. Although the effective date of the Plan of Reorganization
was January&nbsp;16, 2003, due to the immateriality of the
results of operations for the period between January&nbsp;1,
2003 and the effective date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January&nbsp;1, 2003 and implemented fresh start as of that
date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fresh start required that XO adjust the
historical cost of its assets and liabilities to their fair
values as determined by the reorganization value of the Company
and that the reorganization value be allocated among the
reorganized entity&#146;s net assets in conformity with
procedures specified by SFAS No.&nbsp;141. We engaged an
independent appraiser to assist in the allocation of the
reorganization value to the reorganized Company&#146;s assets
and liabilities by determining the fair market value of its
property and equipment, intangible assets and certain
obligations related to its facility leases. Reorganized
XO&#146;s consolidated financial statements issued for
</FONT>

<P align="center"><FONT size="2">37
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">periods beginning after consummating our Plan of
Reorganization and adopting fresh start accounting are not
comparable to that of predecessor&nbsp;XO.
</FONT>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="26%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Predecessor XO(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1998</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">1999</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000(b)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003(a)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="27" align="center" nowrap><I><FONT size="1">(Dollars in thousands, except per share data)</FONT></I></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><I><FONT size="1">(unaudited)</FONT></I></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Statement of Operations Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">139,667</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">274,324</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">723,826</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,258,567</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,259,853</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">333,405</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">286,093</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Loss from operations(c)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(206,184</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(366,530</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,011,652</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,949,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,208,898</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(182,663</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(14,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(278,340</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(558,692</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,175,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss applicable to common shares(d)(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(337,113</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(627,881</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,247,655</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,838,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,350,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2,198,480</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net loss per common share, basic and diluted(f)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1.57</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(2.51</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3.87</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4.55</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(7.58</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4.97</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Statement of Cash Flow Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(174,484</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(349,192</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(559,414</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(560,877</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">17,602</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(47,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">24,190</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,276,747</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,050,344</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,464,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(708,598</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">57,582</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">159,914</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(49,245</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Net cash (used in) provided by financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,381,653</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,948,503</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,648,663</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,019,647</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(6,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(4,848</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(219</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="1">Balance Sheet Data:</FONT></B></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Cash, cash equivalents and marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,478,062</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,881,764</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,860,963</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">755,167</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">560,983</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">588,972</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="1">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">538,380</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">594,408</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,180,021</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,794,105</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,742,577</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,780,589</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,633,380</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">476,509</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Investment in fixed wireless licenses, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">67,352</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">926,389</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">997,333</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">947,545</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">911,832</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">939,603</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">57,926</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total assets(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,483,106</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,597,108</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">9,085,375</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">7,930,465</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,585,496</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,704,497</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,323,943</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,013,192</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">3,733,342</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">4,396,596</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,109,503</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,165,718</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,144,851</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">507,868</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Redeemable preferred stock, net of issuance
    costs(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">556,168</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">612,352</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">2,097,016</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,781,990</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,708,316</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,785,960</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Total stockholders&#146; equity (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(246,463</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(13,122</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,838,401</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">297,416</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">(1,900,899</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="1">)</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">454,314</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">a.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">On June&nbsp;17, 2002, XO&nbsp;Parent filed for
    protection under Chapter&nbsp;11 of the United States Code. On
    November&nbsp;15, 2002, the Bankruptcy Court confirmed
    XO&nbsp;Parent&#146;s Plan of Reorganization, and, on
    January&nbsp;16, 2003, XO&nbsp;Parent consummated the Plan of
    Reorganization. See further discussion in Management&#146;s
    Discussion and Analysis of Financial Condition and Results of
    Operations.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">b.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The selected financial data includes the accounts
    and activities of Concentric Network Corporation since
    June&nbsp;16, 2000, the date that we merged with Concentric.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">c.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In 2002, loss from operations includes a non-cash
    asset write down totaling $477.3&nbsp;million resulting from the
    return of previously acquired inter-city fiber in exchange for
    reduced maintenance expenses beginning in 2003. In 2001, loss
    from operations includes restructuring charges totaling
    $509.2&nbsp;million associated with plans to restructure certain
    aspects of our business operations. In 2000, loss from
    operations includes a $36.2&nbsp;million charge in connection
    with the June 2000 acquisition of Concentric resulting from the
    allocation of the purchase price to in-process research and
    development. Loss from operations in 1999 includes restructuring
    charges totaling $30.9&nbsp;million associated with relocating
    our Bellevue, Washington headquarters to Northern Virginia.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">d.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In 2002, net loss and total assets reflects a
    $1,876.6&nbsp;million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to SFAS No.&nbsp;142. In 2002, net loss also includes
    $91.1&nbsp;million in net reorganization expenses which includes
    the write-off, in accordance with SOP&nbsp;90-7, of deferred
    financing fees associated with the issuance of XO&#146;s
    pre-petition debt and professional fees incurred in conjunction
    with XO&#146;s
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">38
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
</TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">recapitalization. During 2002, we ceased accruing
    interest and penalties on our pre-petition senior unsecured
    notes, subordinated notes and Pre-Petition Credit Facility, and
    we ceased accruing dividends and accreting the redemption
    obligation on all of our outstanding preferred stock as of the
    Petition Date, in accordance with SOP&nbsp;90-7. In 2001, net
    loss includes a gain of $345.0&nbsp;million resulting from the
    repurchase of certain of our senior notes and a write-down of
    $89.0&nbsp;million for an other than temporary decline in the
    value of certain investments. In 2000, net loss includes a
    $57.7&nbsp;million write-down for an other than temporary
    decline in the value of certain investments and a
    $225.1&nbsp;million net gain from the sale of an equity
    investment.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">e.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The comparability of net loss applicable to
    common shares is impacted by the transactions discussed in d.
    above. In addition, in 2002, net loss applicable to common
    shares includes a net gain of $78.7&nbsp;million resulting from
    the recognition of our deferred modification fee less the write
    off our unamortized discounts and issuance costs. In 2001, net
    loss applicable to common shares includes a gain of
    $376.9&nbsp;million resulting from the repurchase of certain of
    our preferred stock.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">f.
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The net loss per share data for the years ended
    December&nbsp;31, 1998, 1999, 2000, 2001 and 2002 and the three
    months ended March&nbsp;31, 2002 has been calculated based on
    the shares outstanding of our class&nbsp;A and class&nbsp;B
    common stock prior to the consummation of our Plan of
    Reorganization. Effective January&nbsp;16, 2003, the effective
    date of the Plan of Reorganization, all interests in our
    class&nbsp;A and class&nbsp;B common stock were terminated and
    all outstanding shares were cancelled. For further discussion of
    our Plan of Reorganization, see &#147;Business&nbsp;&#151; Our
    Chapter&nbsp;11 Reorganization&#148;. The net loss per share
    data for the years ended December&nbsp;31, 1998, 1999 and 2000
    has been adjusted for the splits of our class&nbsp;A and
    class&nbsp;B common stock effected in 2000 and in prior periods.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">39
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "FRESH START ACCOUNTING INFORMATION" -->
<DIV align="left"><A NAME="008"></A></DIV>

<P align="center">
<B><FONT size="2">FRESH START ACCOUNTING INFORMATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO adopted fresh start as of January&nbsp;1,
2003. Although the Effective Date of the Plan of Reorganization
was January&nbsp;16, 2003, due to the immateriality of the
results of operations for the period between January&nbsp;1,
2003 and the Effective Date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January&nbsp;1, 2003 and implemented fresh start as of that
date. Fresh start required that XO adjust the historical cost of
its assets and liabilities to their fair values as determined by
the reorganization value of XO Parent and that the
reorganization value be allocated among the reorganized
entity&#146;s net assets in conformity with procedures specified
by SFAS No.&nbsp;141. We engaged an independent appraiser to
assist in the allocation of the reorganization value to
reorganized XO&#146;s assets and liabilities by determining the
fair market value of its property and equipment, intangible
assets and certain obligations related to its facility leases. A
reconciliation of the adjustments recorded in connection with
our reorganization and the adoption of fresh start is presented
below (in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fresh Start</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January 1,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Adjustments(d)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Audited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">761,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">712,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,304,001</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,588</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses and other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(848,936</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,678</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,237,406</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; (DEFICIT)
    EQUITY</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">63,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,539</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">266,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,910</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">235,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,466,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,540</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,827,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,466,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(57,911</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">302,460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(b)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,612</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,630</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,182</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,966,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(69,705</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">873,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO redeemable preferred
    stock&nbsp;&#151; subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,708,316</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; (deficit) equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,628,139</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganized XO common stock and warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(c)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,512</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,199,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,454,450</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; (deficit) equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,674,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,167,701</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146;
    (deficit) equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,237,406</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">40
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the discharge of pre-petition
    indebtedness, including a $1.0&nbsp;billion credit facility,
    $4.2&nbsp;billion of senior and convertible subordinated notes,
    $245.2&nbsp;million of accrued interest, and the elimination of
    $1.7&nbsp;billion of pre-petition redeemable preferred stock and
    $50.6&nbsp;million of accrued dividends, all in accordance with
    the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(c)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the issuance of New Common Stock and
    warrants in accordance with the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(d)</FONT></TD>
    <TD align="left">
    <FONT size="2">To adjust the carrying value of assets,
    liabilities and stockholders&#146; equity to fair value, in
    accordance with fresh start.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net reorganization gain on January&nbsp;1, 2003
consisted of the following (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="79%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain resulting from reorganization of debt,
    preferred stock and equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,199,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss resulting from fresh start fair value
    adjustments to assets and liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,167,701</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total reorganization gain, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, we had incurred
$91.1&nbsp;million in net reorganization expenses which included
the write-off of deferred financing fees associated with the
issuance of XO&#146;s pre-petition debt and professional fees
incurred in conjunction with the Company&#146;s recapitalization.
</FONT>

<P align="center"><FONT size="2">41
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">


<!-- link1 "THE BUSINESS" -->
<DIV align="left"><A NAME="009"></A></DIV>

<DIV align="center">
<B><FONT size="2">THE BUSINESS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">The following description of our business
should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this
prospectus. The following contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ substantially from those anticipated in these
forward-looking statements as a result of several factors,
including those set forth under &#147;Risk Factors&#148; and
elsewhere in this prospectus.</FONT></I>

<P align="center">
<B><FONT size="2">Introduction</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO Communications, Inc., a Delaware corporation,
through its predecessor entities, was formed in 1994. XO Parent
was originally organized as a Washington limited partnership and
in 1995 merged into a Washington limited liability company,
which following several name changes became known as NEXTLINK
Communications, L.L.C. In January 1997, NEXTLINK Communications,
L.L.C. merged into NEXTLINK Communications, Inc., a Washington
corporation, which in June 1998 reincorporated in Delaware under
the same name. On June&nbsp;16, 2000, in connection with XO
Parent&#146;s merger with Concentric Network Corporation,
NEXTLINK Communications, Inc. merged with XO Parent and XO
Parent, as the surviving corporation in the merger, changed its
name to NEXTLINK Communications, Inc. On September&nbsp;25,
2000, XO Parent began doing business as &#147;XO
Communications&#148; and, on October&nbsp;25, 2000, XO Parent
changed its name to XO Communications, Inc. We conduct our
business primarily through the more than 50 subsidiaries that XO
Parent owns and manages.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;17, 2002, XO Parent filed for
protection under Title&nbsp;11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November&nbsp;15, 2002, the Bankruptcy Court confirmed
XO Parent&#146;s plan of reorganization, and, on
January&nbsp;16, 2003, XO Parent consummated the plan of
reorganization and emerged from its Chapter&nbsp;11
reorganization proceedings with a significantly restructured
balance sheet.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2001, XO Parent voluntarily delisted
its pre-petition class&nbsp;A common stock from the Nasdaq
National Market, which was traded under the symbol
&#147;XOXO&#148;, and, on December&nbsp;17, 2001, began trading
on the OTCBB. XO Parent&#146;s pre-petition class A common stock
stopped trading on the OTCBB as of January&nbsp;16, 2003, the
effective date of XO Parent&#146;s plan of reorganization, at
which time all interests in XO Parent&#146;s pre-petition class
A common stock were terminated pursuant to the plan of
reorganization. The New Common Stock of reorganized XO Parent
issued pursuant to its plan of reorganization began trading on
the OTCBB and in the Pink Sheets under the symbol
&#147;XOCM&#148; shortly after the first distribution of common
stock pursuant to the plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our principal executive and administrative
offices are located at 11111 Sunset Hills Road, Reston, Virginia
20190 and our telephone number is (703)&nbsp;547-2000. Our
Internet address is www.xo.com, where, under &#147;About
XO-Investor Center&#148;, you can find copies of our annual
report as of and for the year ended December&nbsp;31, 2002 on
Form&nbsp;10-K, and XO Parent&#146;s quarterly reports on
Form&nbsp;10-Q and current reports on Form&nbsp;8-K, all of
which we make available as soon as reasonably practicable after
the report is filed with the Securities and Exchange Commission,
or SEC.
</FONT>

<P align="center">
<B><FONT size="2">Overview of Our Company</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide business customers with a
comprehensive array of communications services, which include
voice, Internet access, private data networking and hosting
services. Our services are designed to take advantage of our
network assets, which are capable of carrying high volumes of
all types of communications traffic, and to meet the needs of
all sizes of business customers, from small and medium
businesses to large enterprise and carrier and wholesale
customers. Although these services are of significant benefit to
businesses of all sizes, we believe them to be of particular
benefit to multi-location businesses that desire to improve
</FONT>

<P align="center"><FONT size="2">42
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">communications among their locations, whether
within a single metropolitan area or across the country. These
services include the following:
</FONT>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Voice services:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Local and long distance services, both bundled
    and stand-alone, other voice-related services such as
    conferencing, domestic and international toll free services and
    voicemail, and transaction processing services for prepaid
    calling cards; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Interactive voice response, or IVR, systems that
    we develop, host and manage that enable our customers&#146;
    end-users to order products and services, collect and receive
    information, seek assistance, facilitate bill payment and a host
    of other capabilities over the telephone using natural language
    speech recognition and systems that enable persons to access
    web-based information over the telephone;
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Internet access:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Dedicated Internet access for customers with
    large, high-speed Internet access requirements;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Digital subscriber line, or DSL, services for
    businesses that require high-speed Internet access over existing
    copper wire telephone lines; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Dial access, which allows remote users to connect
    to a customer&#146;s network;
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Private data networking:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Dedicated transmission capacity on our networks,
    including dedicated circuits and the lease of one or more
    dedicated wavelengths on a fiber optic cable, to customers that
    desire high-bandwidth links between locations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Virtual private network, or VPN, services, which
    provide customers with a managed, private data service over the
    public Internet, designed for medium and large businesses that
    want to create secure, wide-area networks for users at various
    and remote locations; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Ethernet services, which are designed to connect
    the local area networks, or LANs, of medium and large customers
    within and between metropolitan areas at speeds of up to one
    gigabit per second; and
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Hosting services:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Web site services, which allow a customer to
    establish a Web presence;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Web hosting, including hosting and web site
    traffic management tools, for Internet-centric businesses, and
    streamed media services designed for small and medium-sized
    businesses; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Server collocation and management and customer
    support to manage a customer&#146;s hosting needs.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also combine many of these services in
integrated, flat rate service packages, known as XOptions that
are tailored to the communications needs of small and
medium-sized businesses and larger businesses with multiple
locations. These packages eliminate the separation between local
and long-distance communications services, and combine this
&#147;all distance&#148; telephone service with high-speed
Internet access and web hosting services, all for one flat
monthly rate. We also offer shared tenant services, which
consist of telecommunications management services provided to
groups of small and medium-sized businesses located in the same
office building.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that one of the significant factors
used by business customers in making purchase decisions relating
to communications services is the quality of service and
customer support offered by the service provider. Our customer
care representatives offer customer support 24&nbsp;hours a day,
seven days a week. We focus on proactive resolution of customer
issues by training our customer care representatives extensively
on the services that we offer and promoting accountability of
the customer care team. We also have developed a secure, on-line
Business Center, through which many customers can access
information about their accounts and track requests, review
services, analyze trends, make decisions and pay bills.
</FONT>

<P align="center"><FONT size="2">43
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To serve our customers&#146; broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmission
capacity on fiber optic cables, which we refer to as an
inter-city network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network, and among a customer&#146;s
multiple locations, primarily or entirely over our network.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment (including switches and routers that direct voice and
data traffic to their destinations) capable of carrying high
volumes of data, voice, video and Internet traffic. We operate
37 metro fiber networks in 22 states and the District of
Columbia, including 25 of the 30 largest metropolitan areas in
the U.S. We have constructed or acquired many of these metro
fiber networks, which consist of up to 432 strands of fiber
optic cable and, in some cases, additional empty conduits
through which fiber optic cable can be deployed. For our
inter-city network, we have acquired dedicated, high-capacity
wavelengths of transmission capacity on fiber optic cables, onto
which we have deployed our own switching, routing and optical
equipment, thereby giving us greater control over the
transmission of voice and data information. We also hold
indefeasible exclusive rights to use unlit fiber optic strands
on the routes served by our existing inter-city network.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From time to time we consider merger and
acquisition opportunities in the telecommunications industry and
may use available cash to acquire the securities of entities in
which we have a strategic interest before any public
announcement of our interest.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On May&nbsp;30, 2003, we made the first of a
series of offers to acquire all of the assets and business of
Global Crossing Ltd. and Global Crossing Holdings, Ltd.
(collectively, &#147;Global Crossing&#148;), a
telecommunications company which is currently in reorganization
proceedings. Thereafter, we made several modifications to, and
enhancements of, our initial offer, and on June&nbsp;24, 2003,
commenced an offer to purchase any all of the senior secured
bank debt of Global Crossing Holdings Ltd. and Global Crossing
North America, Inc. that we did not already own for an aggregate
maximum purchase price of $472.5&nbsp;million. As a result of
this offer and our previous purchases, we now own approximately
$766.6&nbsp;million of the approximately $2.214&nbsp;billion
principal amount of such debt outstanding. We may in the future
make additional offers to acquire control of, or otherwise
invest in, lend to or otherwise do business with Global
Crossing. If we do so, we do not know what the terms of any such
offers would be, or whether any such offers will be accepted.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;1, 2003, the U.S. Bankruptcy Court
for the Southern District of New York approved Global
Crossing&#146;s request to extend until October&nbsp;28, 2003
the exclusivity period of its purchase agreement with Singapore
Technologies Telemedia PTE. We believe that the purchase
agreement nonetheless permits Global Crossing to consider
unsolicited superior offers such as ours pursuant to the
applicable &#147;fiduciary out&#148; provisions of the agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to actively monitor Global
Crossing&#146;s reorganization and the regulatory proceedings
that are conditions to any closing under the Singapore
Technologies Telemedia PTE agreement.
</FONT>

<P align="center">
<B><FONT size="2">Our Chapter&nbsp;11 Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;17, 2002, XO Parent filed for
protection under the Bankruptcy Code. On November&nbsp;15, 2002,
the Bankruptcy Court confirmed XO Parent&#146;s plan of
reorganization, and, on January&nbsp;16, 2003, XO Parent
consummated the plan of reorganization and emerged from its
Chapter&nbsp;11 reorganization proceedings with a significantly
restructured balance sheet.
</FONT>

<P align="center"><FONT size="2">44
</FONT>

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<P align="left">
<B><FONT size="2">Events Leading Up to the Chapter&nbsp;11
Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From 1996 through 2001, we financed the
construction and acquisition of our networks, our growth and our
working capital requirements through public and private
offerings of senior and subordinated unsecured notes and common
and preferred equity securities. In addition, in 2000, we
financed certain network acquisitions and some of our working
capital requirements through secured borrowings under XO
Parent&#146;s $1.0&nbsp;billion senior secured credit facility,
which we refer to as the Pre-Petition Credit Facility. As of
December&nbsp;31, 2001, we had approximately $5.2&nbsp;billion
in secured and unsecured long term debt obligations and
approximately $1.8&nbsp;billion in liquidation preference of
preferred stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 2001, market valuations of debt and equity
securities of telecommunications companies, especially emerging
providers such as us, experienced significant declines, leading
to a wave of bankruptcies in the industry. As a result, the
capital markets were largely closed to emerging
telecommunications companies which made it difficult or
impossible for companies like us to obtain additional funding.
In response to these conditions, we implemented stringent
measures in 2001 that were designed to conserve cash and reduce
operating expenses and capital expenditures. Despite these
efforts, we concluded that our cash on hand would not be
sufficient to fund operations, capital expenditures and debt
service until such time as we expected our operations to become
profitable and we determined that a restructuring of our balance
sheet was necessary.
</FONT>

<P align="left">
<B><FONT size="2">The Chapter&nbsp;11 Petition and Plan of
Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the period preceding and immediately after
the filing of XO Parent&#146;s Chapter&nbsp;11 petition, we met
with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured creditors that
represented holders of our unsecured notes (and following the
filing of the Chapter&nbsp;11 petition, the official committee
of unsecured creditors appointed in the Chapter&nbsp;11
proceedings) and potential investors to discuss potential
transactions that could be implemented to reorganize our capital
structure. These discussions led to an agreement with certain of
our creditors regarding the terms of a plan of reorganization
that envisioned two reorganization structures, the first of
which was based on, among other things, a proposed cash
investment in XO Parent by third parties (which was ultimately
abandoned), and the second of which contemplated a stand-alone
restructuring with no new cash infusion committed in advance.
The plan of reorganization, as supplemented, was filed with the
Bankruptcy Court on July&nbsp;22, 2002 and distributed to
creditors of XO Parent eligible to vote in the reorganization.
We refer to the stand-alone alternative under the plan of
reorganization that ultimately was confirmed by the Bankruptcy
Court as the Plan of Reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;21, 2002, High River Limited
Partnership, a limited partnership owned by Mr.&nbsp;Carl Icahn,
commenced an offer to purchase loans under the Pre-Petition
Credit Facility at a purchase price of $0.50 for each $1.00 in
principal amount thereof. Purchases made under this offer,
together with the loans under the Pre-Petition Credit Facility
that High River previously had acquired, resulted in High River
holding approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On November&nbsp;15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January&nbsp;16, 2003,
XO Parent consummated the Plan of Reorganization and emerged
from its Chapter&nbsp;11 reorganization proceedings.
</FONT>

<P align="left">
<B><FONT size="2">Distributions Under the Plan of
Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After the consummation of the Plan of
Reorganization, and giving effect to the implementation of fresh
start accounting, our capital structure consists of the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$500.0&nbsp;million in outstanding principal
    amount of loans under a restructured secured credit and guaranty
    agreement, which we refer to as the New Credit Agreement;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">approximately $70.6&nbsp;million of other
    long-term liabilities, which include various capital lease
    obligations; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">95.0&nbsp;million outstanding shares of common
    stock, par value $0.01 per share, which we refer to as New
    Common Stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">45
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the Pre-Petition
Credit Facility being converted into the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">90.25&nbsp;million shares of New Common Stock; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$500.0&nbsp;million of outstanding principal
    amount of loans under the New Credit Agreement.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Plan of Reorganization also resulted in the
cancellation of all of XO Parent&#146;s pre-petition senior
unsecured notes and general unsecured claims in exchange for the
following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">4.75&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">warrants to purchase up to an additional
    23.75&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">rights to purchase shares of New Common Stock at
    $5.00 per share in this Rights Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination of
    the proposed investment transaction that was the basis for the
    first restructuring alternative contemplated by the Plan of
    Reorganization, which we refer to as the Investment Termination
    Payment.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants consist of:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;A Warrants to purchase
    9.5&nbsp;million shares of New Common Stock at an exercise price
    of $6.25 per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $7.50 per share; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $10.00 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants will expire on January&nbsp;16,
2010. Each series of warrants is identical, except as to the
applicable exercise price. The exercise price applicable to each
respective series of warrants is subject to adjustment in
certain events.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, under the Plan of Reorganization:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition subordinated notes of XO
    Parent had their securities cancelled, and received a cash
    payment from High River based upon the amount of the Investment
    Termination Payment that High River would have been entitled to
    receive as holder of the loans under the New Credit Agreement
    and the right to participate in the Rights Offering;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class A common stock of
    XO Parent had their securities cancelled, and received the right
    to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class B common stock and
    holders of all series of pre-petition preferred stock of XO
    Parent had their securities cancelled and received only the
    right to participate in the Rights Offering.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Post-Bankruptcy Interests Held by Entities
Owned by Mr.&nbsp;Carl Icahn</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the 90.25&nbsp;million shares of New Common
Stock distributed to the lenders under the Pre-Petition Credit
Facility, approximately 76.6&nbsp;million shares were issued to
High River upon consummation of the stand-alone restructuring
under the Plan of Reorganization. Immediately following this
distribution, High River transferred all such shares of New
Common Stock to Cardiff Holding LLC, a Delaware limited
liability company owned by Mr.&nbsp;Icahn.
</FONT>

<P align="center"><FONT size="2">46
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Meadow Walk Limited Partnership, a limited
partnership owned by Mr.&nbsp;Icahn, owned over
$1.5&nbsp;billion in principal amount of various tranches of XO
Parent&#146;s pre-petition senior unsecured notes, representing
approximately 33% in principal amount of such notes. Meadow Walk
has transferred beneficial ownership to all distributions with
respect to such notes under the Plan of Reorganization to
Cardiff.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Giving effect to these transactions and the
distributions of New Common Stock pursuant to the Plan of
Reorganization, Cardiff holds over 80% of the outstanding shares
of the New Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the warrants distributed under the Plan of
Reorganization to holders of the pre-petition senior unsecured
notes, we estimate Cardiff received Series&nbsp;A Warrants to
purchase approximately 3.0&nbsp;million shares of New Common
Stock, Series&nbsp;B Warrants to purchase approximately
2.3&nbsp;million shares of New Common Stock, and Series&nbsp;C
Warrants to purchase approximately 2.3&nbsp;million shares of
New Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the Plan of Reorganization,
High River became the holder of approximately 85% of the loans
outstanding under the New Credit Agreement. In January 2003,
High River assigned all of its rights in the loans outstanding
under the New Credit Agreement to Chelonian Corp., a corporation
owned by Mr.&nbsp;Icahn. Subsequently, these loans were assigned
to Arnos Corp., a corporation owned by Mr.&nbsp;Icahn. As a
result, Arnos now holds approximately 85% of the loans
outstanding under the New Credit Agreement.
</FONT>

<P align="left">
<B><FONT size="2">Accounting for Consummation of Plan of
Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the consummation of the Plan of
Reorganization, XO Parent was required to implement the fresh
start accounting provisions of SOP&nbsp;90-7 to its financial
statements. The fresh start accounting provisions required that
we establish a &#147;fair value&#148; basis for the carrying
value of the assets and liabilities for Reorganized XO, the
implementation of which resulted in a substantial reduction in
the carrying value of our long-lived assets, including property
and equipment, fixed wireless licenses, other intangible assets
and other noncurrent assets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under SOP&nbsp;90-7, the implementation of fresh
start accounting was triggered by the emergence of XO Parent
from its Chapter&nbsp;11 proceedings. Although the effective
date of the Plan of Reorganization was January&nbsp;16, 2003,
due to the immateriality of the results of operations for the
period between January&nbsp;1, 2003 and the Effective Date, we
have accounted for the consummation of the Plan of
Reorganization as if it had occurred on January&nbsp;1, 2003 and
implemented fresh start as of that date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For further discussion of the effects of our
implementation of the Plan of Reorganization on our financial
condition and results of operations, see &#147;Our
Chapter&nbsp;11 Reorganization&#148; and &#147;Liquidity and
Capital Resources&#148; in &#147;Management&#146;s Discussion
and Analysis of Financial Condition and Results of
Operations.&#148;
</FONT>

<P align="center">
<B><FONT size="2">2002 Capital Conservation
Initiatives</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002, in conjunction with the actions
taken in connection with our Chapter&nbsp;11 reorganization, we
took a number of steps in an effort to conserve our available
funding, including some modest workforce reductions in addition
to those initiated in 2001, and to reduce our long-term
obligations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Amendment to Level&nbsp;3 Inter-city Network
Agreement.</FONT></I><FONT size="2"> In August 2002, we entered
into a Master Agreement with Level&nbsp;3 Communications, Inc.,
which amends various agreements related to our acquisition of
fiber networks in the United&nbsp;States from Level 3 and the
recurring maintenance charges relating to those networks.
Beginning on January&nbsp;1, 2003 and continuing over the
remaining term of the initial agreement, Level&nbsp;3 has
reduced the operating and maintenance fees as well as fiber
relocation charges from approximately $17.0&nbsp;million
annually to a fixed rate of $5.0&nbsp;million annually. In
exchange for this reduction and certain other concessions, we
surrendered our indefeasible right to use an empty conduit and
our indefeasible right to use six of the 24 fibers previously
acquired from Level 3.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Sale of European
Business.</FONT></I><FONT size="2"> In February 2002, we
completed the sale of the European Internet service provider
business that we acquired as part of the 2000 acquisition of
Concentric Network Corporation.
</FONT>

<P align="center"><FONT size="2">47
</FONT>

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<P align="center">
<B><FONT size="2">Applications and Services</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide business customers with a
comprehensive array of data and voice communications services,
which include voice, Internet access, private data networking
and hosting services. We have designed these communications
services to meet the needs of all sizes of business customers,
from small and medium businesses to multi-location businesses,
and large enterprise, and carrier and wholesale customers.
</FONT>

<P align="left">
<B><FONT size="2">Voice Applications and Services</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Local and Long Distance Voice
    Services</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We offer a variety of voice applications and
services, generally to businesses at prices significantly lower
than for comparable local services from the incumbent carrier.
These voice services include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">local standard dial tone, including touch-tone
    dialing, 911 access and operator assisted calling;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">local multi-trunk dial tone services, including
    direct inward dialing, and direct outward dialing;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">long distance services, including 1+, toll free,
    calling card and operator services;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">voice messaging with personalized greetings,
    send, transfer, reply and remote retrieval capabilities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">conferencing services, including voice and web
    conferencing services; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">directory listings and assistance.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In each of our markets, we have negotiated and
entered into interconnection agreements with the incumbent
carrier and certain independent carriers, and implemented
permanent local number portability, which allows customers to
retain their telephone numbers when changing telephone service
providers.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Hosted Interactive Voice
    Response</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We develop and manage hosted interactive voice
response, or IVR, systems for customers that enable end users to
order products and services, collect and receive information,
seek assistance, facilitate bill payments, and a host of other
capabilities over the telephone. Our hosted IVR capabilities
utilize a wide range of technologies, from standard touch-tone/
push-button dialing to natural language speech recognition and
extensible markup language, or XML, and VoiceXML technologies,
which are sophisticated systems that enable persons to access
Web-based information over the telephone. We customize for our
clients&#146; particular needs telephony-based software
applications and technologies developed by third parties to
create IVR systems. We integrate these IVR systems with our
clients&#146; other business systems, such as information
databases and customer relationship management systems. We host
and maintain the IVR systems in data centers and deploy them to
clients across a network, thereby alleviating the need for our
clients to purchase, own, install, or maintain these
applications. Clients pay for the use of these customized
solutions through a combination of &#147;upfront&#148; payments
for development and recurring fees based on transaction volume.
We also host and manage personal-identification number, or PIN,
management systems, primarily pre-paid calling card systems for
customers, which includes providing transaction processing
services relating to prepaid calling card services provided by
other telecommunications carriers.
</FONT>

<P align="left">
<B><FONT size="2">Data Applications and Services</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Internet Access</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Internet access offerings include dedicated
access services targeted at businesses that desire single or
multipoint high-speed, dedicated connections to the Internet, at
speeds ranging from 56&nbsp;kilobits per second, or kbps, to 155
megabits per second, or mbps, and digital subscriber line, or
DSL, services that include a wide range of dedicated access
speeds. We are a tier-1 Internet backbone provider in the U.S.,
with over 200 public and private peering arrangements with other
Internet backbones.
</FONT>

<P align="center"><FONT size="2">48
</FONT>

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<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Private Data Networking</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide dedicated transmission capacity on our
networks to customers that desire high-bandwidth links between
locations. We offer special access and point-to-point circuits
to long distance carriers and other high volume customers, which
are used as both primary and back-up circuits. In addition,
fiber optic technology that enables signals to be transmitted at
different wavelengths on a single fiber allows us to lease one
or more dedicated wavelengths to customers that desire
high-bandwidth links between locations. We currently offer these
services with connections of up to 9.6&nbsp;gigabits per second,
or what our industry refers to as OC-192. This service supports
a variety of transmission protocols, including ATM, Frame Relay
and SONET.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our virtual private network, or VPN, services
enable customers to deploy tailored, Internet Protocol-based
mission-critical business applications for secure internal
enterprise, business-to-business and business-to-customer data
communications among geographically dispersed locations, while
also affording high-speed access to the Internet. VPN services
also provide secure access for remote users, such as traveling
employees and employees working from home or a remote location,
which is not possible using private line and frame relay
services. We also offer managed firewall services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Finally, we offer a suite of Ethernet services,
including Gigabit Ethernet, or GigE, in most of our U.S.
markets, as well as inter-city Ethernet services between our
markets. Our Ethernet services are designed to provide
high-speed, high-capacity connections between customers&#146;
local area networks, or LANs, within and between metropolitan
areas, while eliminating the need for ongoing configuration,
management and acquisition of equipment by the customer. These
services are designed to provide private networking data speeds
ranging from 10 or 100 megabits per second to one gigabit per
second connections, to simplify customers&#146; network
connections, and to significantly reduce their costs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Hosting Services</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We offer a range of applications hosting
services, which can manage a customer&#146;s web-based
infrastructure and operational needs allowing customers to focus
on their web-based content. In addition, we provide server
management tools and services to manage customers&#146; larger
computers (which are known as servers) for them.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To provide this service, we have equipped our
data centers and have configured the central offices of our
network backbone with electrical and environmental controls and
24-hour maintenance and technical support, to provide an
attractive location for our customers to locate their servers or
from which they can run important applications on servers that
we maintain.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our hosting services include:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Web Hosting: </FONT></I><FONT size="2">support
    for customers&#146; websites, including design, maintenance and
    telecommunications services;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Server Collocation:
    </FONT></I><FONT size="2">collocation of customers&#146; servers
    in our data centers; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Application Hosting:
    </FONT></I><FONT size="2">running our customers&#146;
    enterprise-wide applications at our data centers and
    distributing them as needed over our network or servers to
    ensure uniformity, reduce costs and implement upgrades on a
    continuous and immediate basis.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As part of some of our XOptions integrated
packages of communications services, we offer web hosting with
Microsoft&#146;s bCentral web-based tools and applications,
which enables customers to conduct targeted email marketing,
register their web site with hundreds of Internet search engines
and directories, build catalogues and sell products over the
web, and coordinate meetings and appointments online. We also
offer a suite of hosting outsourcing services that provide
customers web-based access to email, group distribution lists,
calendaring, contacts databases management and file sharing.
Hosting can be &#147;shared&#148;, in which we own the equipment
and provide the underlying services, or &#147;dedicated,&#148;
in which we provide some or all of the hosting and services from
our data centers using the customer&#146;s own equipment.
</FONT>

<P align="center"><FONT size="2">49
</FONT>

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<P align="left">
<B><FONT size="2">Integrated Voice and Data Services</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We offer bundled packages of voice and data
products, known as XOptions, to small and medium-sized
businesses, that include integrated, flat-rate packages for
specified amounts of certain services, including local and long
distance voice services, Internet access and web hosting
services. These services include a variety of service packages
designed to accommodate different sized customers with anywhere
from 10 to 100 employees per location. XOptions eliminates the
complexity of working with multiple service providers for
installation, maintenance and billing, and also can result in
significant savings over the average cost of buying these
services from separate competitive voice and data providers. We
also offer Integrated Access Services, which can reduce telecom
costs by combining local voice, long distance, and dedicated
Internet access on a single facility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 2002, we introduced a number of new XOptions
packages designed to meet the needs of larger customers,
specifically, those with small offices at multiple locations,
those desiring to pool hosting and email accounts across
multiple locations under a single account, and those that rely
heavily on voice communications services. We also introduced
XOptions packages that combine the benefits of XOptions&#146;
local and long distance voice, Internet access and web hosting
with Microsoft&#146;s bCentral web-based tools and applications.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our integrated services also include shared
tenant services, which are telecommunications management
services provided to groups of small and medium-sized businesses
located in the same office building. This service enables
businesses too small to justify hiring their own
telecommunications managers to benefit from the efficiencies,
including volume discounts, normally available only to larger
enterprises. We install an advanced telecommunications system
throughout each building we serve, leasing space for on-site
sales and service, and offer tenants products and services such
as telephones, voice mail, local calling lines, discounted long
distance and high-speed Internet connections, all on a single,
detailed invoice.
</FONT>

<P align="center"><FONT size="2">50
</FONT>

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<P align="center">
<B><FONT size="2">XO&#146;s Networks</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have built fiber optic networks with robust
capacity in urban centers in North America. Our IP-optimized
inter-city network in North America connects these local
networks to one another.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following diagram depicts the physical
components of our nationwide networks.
</FONT>

<P align="center">
<IMG src="w86904w8690401.gif" alt="(NETWORK DIAGRAM)">

<P align="left">
<B><FONT size="2">Metro Fiber Optic Networks</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The core of each of our metro fiber networks is a
ring of fiber optic cable in a city&#146;s central business
district that connects to our central offices. These central
offices contain the switches and routers that direct data and
voice traffic to their destinations, and also have the space to
house the additional equipment necessary for future
telecommunications services. Whenever we can, we build and own
these metro fiber
</FONT>

<P align="center"><FONT size="2">51
</FONT>

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<DIV align="left">
<FONT size="2">networks ourselves or obtain indefeasible rights
to use fiber so that we can control the design and technology
used to best meet our customers&#146; needs. We operate 37 metro
fiber networks serving the cities noted below.
</FONT>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">State</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Market</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Arizona
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Phoenix
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">California
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Los Angeles<BR>
    Orange County: Anaheim; Costa<BR>&nbsp;&nbsp;Mesa; Fullerton;
    Garden<BR>&nbsp;&nbsp;Grove; Huntington
    Beach;<BR>&nbsp;&nbsp;Inglewood; Irvine;<BR>&nbsp;&nbsp;Long
    Beach; Orange;<BR>&nbsp;&nbsp;and Santa Ana<BR>
    Sacramento<BR>
    San Diego<BR>
    San Francisco Bay Area:<BR>&nbsp;&nbsp;Fremont;
    Milpitas;<BR>&nbsp;&nbsp;Mountain View;
    Oakland;<BR>&nbsp;&nbsp;Palo Alto; San Jose;
    San<BR>&nbsp;&nbsp;Francisco; Santa Clara
    and<BR>&nbsp;&nbsp;Sunnyvale
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Colorado
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Denver
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Delaware
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Wilmington
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">District of Columbia
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Washington
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Florida
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Miami<BR>
    Fort Lauderdale<BR>
    Orlando<BR>
    Tampa Bay
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Georgia
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Atlanta<BR>
    Marietta
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Illinois
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Chicago
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Maryland
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Baltimore
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Massachusetts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Boston
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michigan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Detroit
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Minnesota
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Greater Minneapolis/St. Paul
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Missouri
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">St. Louis
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nevada
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Las Vegas
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New Jersey
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Bergen/Passaic<BR>
    Middlesex<BR>
    Newark
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New York
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Manhattan
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Ohio
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Cleveland<BR>
    Columbus<BR>
    Akron<BR>
    Canton
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Oregon
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Portland
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pennsylvania
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Central Pennsylvania:<BR>&nbsp;&nbsp;Allentown;
    Harrisburg;<BR>&nbsp;&nbsp;Lancaster; and
    Reading<BR>&nbsp;&nbsp;&nbsp;&nbsp;Philadelphia<BR>&nbsp;&nbsp;&nbsp;&nbsp;Scranton/Wilkes<BR>
    Barre
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Tennessee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Memphis<BR>
    Nashville
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Texas
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Austin<BR>
    Dallas<BR>
    Houston<BR>
    San Antonio
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Utah
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Salt Lake City<BR>
    Orem/Provo
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Washington
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Seattle<BR>
    Spokane<BR>
    Vancouver
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We built our high capacity metro fiber networks
using a backbone density typically ranging between 72 and 432
strands of fiber optic cable. Fiber optic cables have the
capacity, or bandwidth, to carry tens of thousands of times the
amount of traffic as traditionally-configured copper wire. We
believe that installing high-count fiber strands will allow us
to offer a higher volume of broadband and voice services without
incurring significant additional construction costs. To enhance
our ability to economically connect customers to our networks
and services, we design our networks to serve both core downtown
areas and other metropolitan and suburban areas where business
development supports the capital required for the network build.
</FONT>

<P align="left">
<B><FONT size="2">Inter-City Network</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have created a single, end-to-end network by
linking our metro fiber networks to one another through the use
of an inter-city fiber optic network, largely purchased from
Level&nbsp;3, which enables us to offer our customers
integrated, end-to-end communications services over facilities
we control. All of our metro networks are connected to this
inter-city network, either directly or through other connections.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although we own rights to multiple fibers
primarily on the Level&nbsp;3 network, to conserve capital, we
have delayed &#147;lighting&#148; much of our inter-city fibers
and provide inter-city transport primarily by purchasing
wavelength capacity from Level&nbsp;3 along the same routes as
our inter-city network assets onto which we have deployed
transmission and routing equipment. By using our own
transmission and routing equipment, we maximize the capacity and
enhance the performance of the network as needed to meet our
customers&#146; current
</FONT>

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<DIV align="left">
<FONT size="2">and future broadband data and other
communications needs, rather than relying on the owners of
leased lines to make those upgrades.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Using Level&nbsp;3 wavelength services and our
own routers and transport equipment, we also operate an OC-192
capacity Internet backbone, onto which a substantial amount of
our Internet-related services and customer traffic runs. This
backbone provides our customers with improved network
redundancy, security and performance, and enables us to offer
customers services that take advantage of future Internet
Protocol technologies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our inter-city network assets primarily consist
of an exclusive interest in 18&nbsp;unlit fibers in a shared,
filled conduit in the Level&nbsp;3 North American network, which
consists of a fiber network that traverses over
16,000&nbsp;miles and connects more than 60 cities in the United
States and Canada, including most of the major metropolitan
markets served by our metro networks. We will install optical
network equipment to &#147;light&#148; specific segments of this
inter-city fiber where the demand for telecommunications
capacity makes the related capital expenditures economic in
comparison to purchasing wavelength or other capacity. Due to
the need for additional, cost-efficient capacity along the
segment of this network that runs from Los Angeles to San Diego,
we are in the processes of lighting this network segment, which
is the only segment that we have current plans to light. Much of
the equipment used in connection with our inter-city network is
positioned so that we can easily transfer voice and data traffic
from the wavelength capacity purchased from Level 3 to servers
on our inter-city fiber network as portions of that network are
lit.
</FONT>

<P align="left">
<B><FONT size="2">Connecting Customers to Our Networks</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We attempt to connect our customers directly to
our networks where it is economical to do so. We believe that by
deploying direct connections to our customers, rather than
connecting through the incumbent carriers&#146; facilities, we
will reduce our costs and be better positioned to meet our
customers&#146; communications requirements and to more rapidly
deploy our service. We connect customers to our networks by
using fiber optic cable and, in limited circumstances, fixed
wireless spectrum.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In many cases, we must lease facilities from an
incumbent carrier to connect a customer to our network. By
building our metro networks in central business districts, in
many cases we have minimized the distance from our network to a
potential customer, which results in lower costs associated with
these leased facilities because the cost of those facilities is
generally based, in part, on the length of the leased connection.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Fiber Optics.</FONT></I><FONT size="2"> In
cases where expected revenues justify the construction cost, we
will install a new fiber optic extension from our network to the
customer&#146;s premises. Whether it is economical to construct
a fiber optic extension depends, among other things, on:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the existing and potential revenue base located
    in the building in question;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the building location relative to our network and
    our ability to access the communications equipment in that
    building, and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">local permit requirements.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Even if we initially determine that it is not
economical to construct a fiber connection to a building, we
will continually reexamine the costs and benefits of a fiber
connection and may at a later date determine that construction
of one is justified.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Broadband Wireless
Spectrum.</FONT></I><FONT size="2"> In cases where construction
of a fiber optic connection is not practical or economical, in
limited cases we have deployed a high-bandwidth wireless
connection between an antenna on the roof of the customer&#146;s
premises and an antenna attached to our fiber rings. We hold
licenses to fixed wireless spectrum in numerous cities, covering
areas where 95% of the population of the 30 largest U.S. cities
live or work.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In those limited cases where we decide to install
equipment to operate fixed broadband licenses, we must secure
roof and other building access rights, including access to
conduits and wiring from the owners of each
</FONT>

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<DIV align="left">
<FONT size="2">building or other structure on which we propose
to install our equipment, and may need to obtain construction,
zoning, franchise or other governmental permits.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">DSL Technology.</FONT></I><FONT size="2"> We
have also deployed DSL technology to meet the high-bandwidth
needs of those customers located less than three miles from the
incumbent carrier&#146;s central office and whose customer
connection remains over copper wire. DSL technology reduces the
bottleneck in the transport of information, particularly for
data services, by increasing the data carrying capacity of
copper telephone lines. We believe that, for many small to
medium sized customers within the geographic areas that can be
served by DSL technology, existing copper connections using DSL
technology from customer buildings to our local fiber optic
networks will offer a lower cost solution for providing
high-quality broadband services than fiber or fixed wireless
connections.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We offer DSL service in numerous markets in the
U.S., mainly through wholesale arrangements with the incumbent
carriers and other DSL service providers. We have introduced our
own DSL equipment and services at many collocation sites,
including central offices of the incumbent carriers that serve a
significant number of business customers.
</FONT>

<P align="center">
<B><FONT size="2">Network Technology</FONT></B>

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The wires, cables and spectrum that comprise the
physical layer of our networks can support a variety of
communications technologies. We seek to offer customers a set of
technology options that can support services that meet their
changing needs and introduce new technologies as necessary.
Specifically, we believe that a service platform based on
Internet Protocol, or IP, will provide us with significant
future opportunities, because it will enable data, voice and
video to be carried inexpensively over our end-to-end,
facilities-based network. Consequently, we have supplemented our
current data and voice switching technology with IP equipment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Over the past few years, both optical and
IP-based networking technologies have undergone rapid
innovation. These technological developments enable us to offer
our customers numerous high-speed data services. Many of these
innovations have the effect of increasing the efficiency of the
physical components of our network by increasing the effective
capacity of networks for these types of applications. In the
future, we expect that IP-based technology will become the
preferred technology for voice calls and facsimile transmission
as well. We plan to remain flexible in our use of technology, so
that, as underlying communications technology changes, we will
have the ability to take advantage of and implement new
technologies that best meet our network requirements and
customers&#146; needs.
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The illustration below depicts the configured
circuit capacities deployed in the IP network.
</FONT>

<P align="center">
<IMG src="w86904w8690402.gif" alt="(NETWORK DIAGRAM)">

<P align="left">
<B><FONT size="2">Fiber Optic Technology</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To enhance the capacity of our metro networks, we
are incorporating dense wavelength division multiplexing
technology, which makes it possible to simultaneously transmit
data at more than one wavelength, thereby allowing the
transmission of multiple signals through the same fiber at
different wavelengths. When applied to the state-of-the-art
optical fiber deployed in many of our metro networks and in our
intercity network, this technology can dramatically increase the
capacity of an optical fiber.
</FONT>

<P align="left">
<B><FONT size="2">Switching Technology</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There are two widely used switching technologies
currently deployed in communications networks: circuit-switching
systems and packet-switching systems. Circuit switch-based
communications systems, which currently dominate the public
telephone network, establish a dedicated channel for each
communication (such as a telephone call for voice or fax),
maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Packet switch-based communications systems, which
format the information to be transmitted into a series of
shorter digital messages called &#147;packets,&#148; are the
preferred means of data transmission. Each packet consists of a
portion of the complete message plus the addressing information
to identify the destination and return address. A key feature
that distinguishes Internet architecture from the public
telephone network is that on the packet-switched Internet, a
single dedicated channel between communication points is not
required.
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Packet switch-based systems offer several
advantages over circuit switch-based systems, particularly the
ability to commingle packets from several communications sources
together simultaneously onto a single channel. For most
communications, particularly those with bursts of information
followed by periods of &#147;silence,&#148; the ability to
commingle packets provides for superior network utilization and
efficiency, resulting in more information being transmitted
through a given communication channel.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">IP technology, an open protocol that allows
unrelated computer networks to exchange data, is the
technological basis of the Internet. The Internet&#146;s
explosive growth in recent years has focused intensive efforts
worldwide on developing IP-based networks and applications. In
contrast to protocols like ATM, which was the product of
elaborate negotiations between the world&#146;s monopoly
telephone companies, IP is an open standard, subject to
continuous improvement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that a form of IP-based switching will
eventually replace both ATM and circuit switched technologies,
and will be the foundation of integrated networks that treat all
transmissions&nbsp;&#151; including voice, fax and
video&nbsp;&#151; simply as forms of data transmission. Although
not always the case, voice over IP technology now incorporates
the quality of service necessary for commercial deployments, but
the pricing of equipment that must be installed at customer
locations in order to implement voice over IP applications is
not yet cost-effective for widespread application. We expect
that over time improved technology and the manufacture of
sufficient volumes of equipment will make customer adoption of
voice over IP applications more cost-effective.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have constructed IP points of presence in all
of our major markets using high-capacity IP routers, through
which we offer Internet-related services. We currently connect
these points of presence with our inter-city fiber network,
which serves as our OC-192 IP backbone.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have deployed a number of next generation
switching technologies, including soft-switch, optical and
Ethernet switching technologies. The soft-switch is a
distributed computer system that performs the same functions as
a circuit switch. It can route and switch information at an
extremely fast rate. Initially, we will use soft-switch
technology to complement and relieve traffic from our circuit
switches. We have deployed optical switching, routing and
transmission equipment on our inter-city network to create an
all-optical network. This technology is designed to make
significant amounts of bandwidth available to our customers. It
also is designed to enable us to more effectively and
efficiently manage our customers&#146; transmissions and to
enhance our deployment of dense wavelength division multiplexing
technology. Optical switching will support all transmission
protocols, including IP, ATM, and frame relay. We also are
deploying Ethernet switching technology to support and expand
our Ethernet services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that the deployment of IP and
soft-switch technologies in our network will enable us to
implement new services based on current IP technology, and
position us to adopt future IP technology implementations as
they evolve to support fully integrated communications networks.
</FONT>

<P align="left">
<B><FONT size="2">Fixed Wireless Technology</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We hold licenses for 1,150 to 1,300&nbsp;MHz of
local multipoint distribution services, or LMDS, spectrum in 58
cities, covering areas where 95% of the population of the 30
largest U.S. cities live or work. Our licenses also include 150
MHz of LMDS spectrum in 10 smaller cities and 300&nbsp;MHz of
spectrum in the five boroughs that comprise New&nbsp;York City.
We also hold ten fixed wireless licenses in the 39 gigahertz, or
GHz, frequency. Eight such licenses provide from 100 to 300
additional MHz in four cities where we hold a 150&nbsp;MHz LMDS
license and two 39&nbsp;GHz licenses provide us with
200&nbsp;MHz of fixed wireless capacity in Las Vegas, where we
do not hold a LMDS license.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The spectrum under the licenses we hold is not
suitable for mobile telephones, but can transmit voice, data or
video signals from one fixed antenna to one or many others. As
the word &#147;local&#148; in the local multipoint distribution
service name implies, the radio links provided using LMDS
frequencies are of limited distance, typically of a few miles or
less, due to the degradation of these high-frequency signals
over greater distances. The same is true of the 39&nbsp;GHz
spectrum. Although technology to support the multipoint
characteristics of this spectrum has not been developed, we use
the spectrum for point-to-point connections in those limited
</FONT>

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<DIV align="left">
<FONT size="2">situations where it is more cost-efficient than
installing a fiber cable or leasing facilities from the
incumbent carrier.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A wireless connection typically consists of
paired antennas placed at a distance of up to 2.5&nbsp;miles
from one another with a direct, unobstructed line of sight. The
antennas are typically installed on rooftops, towers or windows.
Because these connections are affected by rain attenuation, in
areas of heavy rainfall transmission links are engineered for
shorter distances and greater power to maintain transmission
quality, which tends to increase the cost of service coverage.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">With the 39&nbsp;GHz spectrum, because there are
existing users of that spectrum, we as a new user of the
spectrum will be required to coordinate our use so as not to
interfere with an existing user. We do not believe that the
coordination process will significantly limit our ability to
make use of the spectrum.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The term of the licenses for our fixed wireless
spectrum generally is ten years, and the initial term of a few
licenses expires as early as 2006. Although the licenses are
renewable for an additional ten year term, renewal is
conditioned on us satisfying certain utilization requirements
established by the Federal Communications Commission, or FCC.
Our current utilization may not be sufficient to satisfy this
condition for certain licenses, and, unless we begin to use
substantially more fixed wireless spectrum, the FCC may not
renew one or more of our licenses.
</FONT>

<P align="center">
<B><FONT size="2">Sales and Customer Care</FONT></B>

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our sales organization includes a direct field
sales force and alternative sales channels. Our direct sales
force for services other than shared tenant services includes
two sales organizations. Our market sales organization focuses
on small to medium-sized customers and larger or growing
businesses within a market and multi-market accounts. Our
national sales organization focuses on targeted larger and
national accounts, and specific enterprise and carrier channels.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our market sales organization focuses on selling
our full suite of services to small to medium and larger
businesses and multi-market accounts. Our market research
indicates that these customers prefer a single source for all of
their telecommunications requirements, including products,
billing, installation, maintenance, and customer service. By
offering these customers our local and long distance services or
our XOptions packages, which combine local and long distance
voice services, Internet access and web hosting services, we
believe we provide our customers a level of convenience that
generally is unavailable in the communications marketplace.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We market and sell services to other
telecommunications carriers and large commercial users and
national accounts through our national sales team. The expansion
of our data service capabilities has enabled our national sales
team to expand our targeted customers to include larger national
and multi-market accounts customers that can benefit from our
broad range of services.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We market and sell our shared tenant services
through a separate direct sales force, which targets high
concentrations of business customers in multi-tenant commercial
office buildings in the metropolitan areas in which we provide
this service.
</FONT>

<P align="left">
<B><FONT size="2">Direct Sales Force</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have established highly motivated and
experienced direct sales forces. Our strategy is to design the
structure of our sales efforts so that our sales personnel are
able to establish a direct and personal relationship with our
customers. We seek to recruit salespeople with strong sales and
telecommunications backgrounds, including salespeople from long
distance companies, telecommunications equipment manufacturers,
network systems integrators and the incumbent carriers.
Salespeople are offered incentives through a commission
structure that generally targets 40% to 50% of a
salesperson&#146;s total compensation to be based on
performance. The size of our sales organization decreased from
2001 to 2002, from approximately 1,750&nbsp;employees at
December&nbsp;31, 2001 to approximately 1,100 employees at
December&nbsp;31, 2002.
</FONT>

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<P align="left">
<B><FONT size="2">Other Sales Channels</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have complemented our direct sales force by
developing alternative sales channels to distribute the
increasing number of products and services available to our
broadening customer base. These channels include numerous third
party sales agents. We currently have distribution arrangements
with a number of national, regional and local agents and agency
firms, whose representatives market a broad range of XO Parent
services. We have a staff of approximately 65 employees who
manage our agent relationship and the over 500 indirect agents
in markets throughout the United States. We also sell and market
certain services via our telesales operation and via the
Internet at www.xo.com.
</FONT>

<P align="left">
<B><FONT size="2">Customer Care</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Once a customer&#146;s services have been
installed, our customer care operations support customer
retention and satisfaction. Our goal is to provide customers
with a customer care group that has the ability and resources to
respond to and resolve customer questions and issues as they
arise, 24&nbsp;hours a day, seven days a week. In 2002, although
we conducted much of our customer care operations from four call
centers, we also provided locally-based care for many large
customers. Although we believe that a centralized care structure
not only takes advantage of economies of scale, but also enables
us to provide better customer service, we intend to close one of
our care facilities in 2003 and are evaluating whether to place
additional customer care resources locally. The size of our
customer care organization decreased from 2001 to 2002, from
approximately 1,000 employees at December&nbsp;31, 2001 to
approximately 700 employees at December&nbsp;31, 2002.
</FONT>

<P align="center">
<B><FONT size="2">Regulatory Overview</FONT></B>

<P align="left">
<B><FONT size="2">Overview</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Telecommunications Act of 1996, or the
Telecom Act, which substantially revised the Communications Act
of 1934, has established the regulatory framework for the
introduction of competition for local telecommunications
services throughout the United States by new competitive
entrants such as us. Prior to the passage of the Telecom Act,
states typically granted an exclusive franchise in each local
service area to a single dominant carrier&nbsp;&#151; often a
former subsidiary of AT&#38;T, known as a Regional Bell
Operating Company, or RBOC&nbsp;&#151; which owned the entire
local exchange network and operated a virtual monopoly in the
provision of most local exchange services in most locations in
the United States. The RBOCs, following some recent
consolidation, now consist of the following companies:
BellSouth, Verizon, Qwest Communications and SBC Communications.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Among other things, the Telecom Act preempts
state and local governments from prohibiting any entity from
providing telecommunications service, which has the effect of
eliminating prohibitions on entry that existed in almost half of
the states at the time the Telecom Act was enacted. At the same
time, the Telecom Act preserved state and local jurisdiction
over many aspects of local telephone service, and, as a result,
we are subject to varying degrees of federal, state and local
regulation. Consequently, federal, state and local regulation,
and other legislative and judicial initiatives relating to the
telecommunications industry could significantly affect our
business.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We believe that the Telecom Act provided the
opportunity to accelerate the development of competition at the
local level by, among other things, requiring the incumbent
carriers to cooperate with competitors&#146; entry into the
local exchange market. We have developed our business and
designed and constructed our networks to take advantage of the
features of the Telecom Act that require cooperation from the
incumbent carriers, and believe that the continued viability of
the provisions relating to these matters is critical to the
success of the competitive regime contemplated by the Telecom
Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although the Telecom Act and the related rules
governing competition issued by the FCC, as well as
pro-competitive policies already developed by state regulatory
commissions, have enabled new entrants like us to capture a
portion of the incumbent carriers&#146; market share of local
services, there have been numerous attempts to limit or
eliminate the basic framework for competition in the local
exchange services market established by the Telecom Act through
a combination of federal legislation, new rulemaking by the FCC
and challenges to
</FONT>

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<DIV align="left">
<FONT size="2">existing and proposed regulations by the
incumbent carriers. We expect these efforts to limit the
benefits of the Telecom Act to continue. Successfully
implementing our business plan is predicated on the assumption
that the basic competitive framework will remain in place.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Federal Regulation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FCC exercises jurisdiction over our
communication facilities and services. We have authority from
the FCC for the installation, acquisition or operation of our
wireline network facilities to provide facilities-based
international services. In addition, we have obtained FCC
authorizations for the operation of our LMDS and 39&nbsp;GHz
fixed wireless facilities. Unlike incumbent carriers, we are not
currently subject to price cap or rate of return regulation,
which leaves us free to set our own pricing policies for end
user services subject only to the general federal guidelines
that our charges for interstate and international services be
just, reasonable, and nondiscriminatory. The FCC does authorize
us to file interstate tariffs on an ongoing basis for interstate
access (rates charged among carriers for access to their
networks). The FCC, however, has issued a decision that required
us (with only minor exceptions) to withdraw tariffs for
interstate domestic long distance service and international long
distance service. We, however, still are required to make the
terms, conditions and pricing of the detariffed services
available to the public on our Company web page.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following is a summary of the interconnection
and other rights granted by the Telecom Act that are most
important for full local competition and our belief as to the
effect of the requirements, if properly implemented:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Interconnection with the networks of incumbents
    and other carriers, which permits customers of ours to exchange
    traffic with customers connected to other networks;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Local loop unbundling, which allows us to
    selectively gain access to incumbent carriers&#146; facilities
    and wires that connect the incumbent carriers&#146; central
    offices with customer premises, thereby enabling us to serve
    customers on a facilities basis not directly connected to our
    networks;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Reciprocal compensation, which mandates
    arrangements for local traffic exchange between us and both
    incumbent and competitive carriers and compensation for
    terminating local traffic originating on other carriers&#146;
    networks, thereby improving our margins for local service;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Number portability, which allows customers to
    change local carriers without changing telephone numbers,
    thereby removing a significant barrier for a potential customer
    to switch to our local voice services;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Access to phone numbers, which mandates
    assignment of new telephone numbers to our customers, thereby
    enabling us to provide telephone numbers to new customers on the
    same basis as the incumbent carrier; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Collocation of telecommunications equipment in
    incumbent central offices, which enables us to have direct
    access to unbundled loops and other network elements and
    facilitates their efficient integration with our switching and
    other network facilities.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In January 1999, the U.S. Supreme Court upheld
key provisions of the FCC rules implementing the Telecom Act, in
a decision that was generally favorable to competitive telephone
companies such as us. In finding that the FCC has general
jurisdiction to implement the Telecom Act&#146;s local
competition provisions, the Supreme Court confirmed the
FCC&#146;s role in establishing national telecommunications
policy, and thereby created greater certainty regarding the
rules governing local competition going forward.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although the rights established in the Telecom
Act are a necessary prerequisite to the introduction of full
local competition, they must be properly implemented and
enforced to permit competitive telephone companies like us to
compete effectively with the incumbent carriers. Discussed below
are several FCC and court proceedings relating to the
application of certain FCC rules and policies that are
significant to our operations.
</FONT>

<P align="center"><FONT size="2">59
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    <TD>
    <B><I><FONT size="2">Unbundling of Incumbent Network
    Elements</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the January 1999 Supreme Court decision
discussed above, the Court affirmed the FCC&#146;s
interpretation of matters related to unbundling of incumbent
carriers&#146; network elements. It held that the FCC correctly
interpreted the meaning of the term &#147;network element&#148;,
which defines the parts of an incumbent carrier&#146;s
operations that may be subject to the &#147;unbundling&#148;
requirement of the Telecom Act. The Court, however, also held
that the FCC did not correctly determine which network elements
must be unbundled and made available to competitive telephone
companies such as us. In November 1999, the FCC released its
&#147;UNE (unbundled network element) Remand Order&#148;, which
addressed the deficiencies in the FCC&#146;s original ruling
cited by the Supreme Court. The order generally was viewed as
favorable to us and other competitive carriers because it
ensured that incumbent carriers would be required to continue to
make available those network elements, including unbundled
loops, that are crucial to our ability to provide local and
other services. The UNE Remand Order subsequently was appealed
by the incumbent carriers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On May&nbsp;24, 2002, the United States Court of
Appeals for the D.C. Circuit released an opinion remanding the
UNE Remand Order to the FCC for further consideration. The Court
of Appeals stated that it had remanded the order because it felt
that:
</FONT>
<P>

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    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the FCC had adopted uniform national rules with
    respect to almost every unbundled element for every geographic
    market without regard to the state of competition in any
    particular market; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the FCC&#146;s determination of when cost
    disparities impair a competitor&#146;s ability to provide
    service without unbundled elements was too broad.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In response to the Court of Appeals&#146;
decision, and as part of its statutorily required periodic
review of its list of unbundled elements, the FCC initiated its
&#147;Triennial Review&#148; proceeding.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On February&nbsp;20, 2003, the FCC held an open
meeting and adopted its Triennial Review decision. The full text
of what is expected to be a voluminous order is not yet
available, so we have only a broad outline of the FCC&#146;s
actions without the detail required to clearly understand all of
the ramifications of this important decision. Based on the
FCC&#146;s press release and the comments of each FCC
Commissioner at the meeting, it appears that, under that order,
our ability to obtain access to certain unbundled network
elements and incumbent network upgrades will be curtailed or
more costly in the future. Also, it appears that the order would
delegate to the states the overall responsibility for deciding
what unbundled elements should be available to competitors like
us in local markets of each of the respective states. Delegation
of these determinations creates the risk that some states may
decide to limit or eliminate unbundled elements to which we have
access today and that we will be faced with different sets of
rules and costs if states issue inconsistent decisions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Based on the FCC&#146;s press release announcing
the Triennial Review decision and related comments of the
Commissioners, the following matters may be of relevance to us
once the order is issued:
</FONT>
<P>

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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Curtailed Access to Broadband: It appears that
    the order will adopt new rules that would restrict competitive
    carriers from leasing as unbundled elements certain upgrades
    that the incumbent carriers make to their networks, such as the
    deployment of new optical fiber or upgrades from copper to
    optical fiber. For example, a new fiber loop to a customer that
    replaces an existing copper loop could be exempt from
    unbundling, except that incumbents must continue to unbundle the
    pre-existing copper loop or provide a voice channel for us on
    the new fiber loops that is equivalent to the old copper loop.
    Although the imposition of any restrictions on our access to the
    incumbents&#146; broadband networks is not a favorable
    development for us, we believe that the adverse impact is
    partially mitigated by the fact that it appears that incumbents
    would be required to continue to provide us with basic access to
    those facilities that we currently lease from them to serve many
    of our customers.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Unbundled Local Loops: It appears that the order
    will make a general, national finding that competitive carriers
    should have access to certain unbundled loops of the incumbent
    carriers. The states, however, may remove competitive
    carriers&#146; access to such loops based on the results of
    specified competitive analyses. Incumbent carriers will no
    longer be required to provide competitive carriers with
    </FONT></TD>
</TR>

</TABLE>

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    <TD></TD>
    <TD align="left">
    <FONT size="2">access to certain very high-capacity loops. We
    believe that the net result of such an order would not have a
    significant impact on us, as the access to the vast majority of
    unbundled loops that we use today would be preserved.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Unbundled Transport: It appears from the press
    release announcing the Triennial Review decision that the order
    will change the definition of &#147;dedicated transport&#148; in
    such a way that competitive carriers would have to purchase
    certain transport facilities at higher rates than they do today.
    It appears that the order would maintain access to many types of
    transport between incumbent facilities, such as transport
    between incumbent central offices, but it would redefine
    transport to eliminate the unbundling of other transport. It
    also appears that the order would set forth a test that the
    states must follow in considering whether transport should be
    available in local markets within the states. It appears that
    the order will provide that certain very high-capacity transport
    would no longer be available as an unbundled element and that
    shared transport would be unavailable as an unbundled element in
    most business markets. Although it is not possible to gauge the
    full effect of these changes without seeing the text of the
    order, we believe that it is likely that these actions would
    raise our costs for transport services in the future.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Enhanced Extended Links and Co-mingling: It
    appears that the order will facilitate the ability of
    competitive carriers like us to obtain a loop and transport
    combination of unbundled elements known as &#147;enhanced
    extended links&#148;, provided that the underlying loop and
    transport elements are available on an unbundled basis. It also
    appears that the order will permit competitive carriers to mix
    unbundled network elements with retail services instead of
    requiring them to artificially segregate unbundled elements from
    the remainder of their networks. Because we currently take
    advantage of both services from the incumbent carriers, we
    believe that these developments could result in cost savings for
    us.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Calculation of Unbundled Element Rates: It
    appears that the order will allow the incumbent carriers to
    utilize a higher cost of capital and shorter depreciation lives
    to establish rates for unbundled elements. We believe that these
    modifications could raise our costs for leasing unbundled
    elements in the future.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As indicated above, the text of the Triennial
Review decision has not yet been released. We anticipate that,
once the FCC&#146;s new unbundling rules are effective,
incumbent carriers will pursue review in courts, institute
administrative proceedings with the FCC and state regulatory
agencies and lobby the United States Congress, all in an effort
to affect laws and regulations in a manner even more favorable
to them and against the interest of competitive carriers. At the
same time, we would anticipate that the competitive carriers
will endeavor to improve their positions and access to the
incumbents&#146; networks through similar means.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Collocation in Incumbent Central
    Offices</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Collocation regulations promulgated by the FCC
specify in greater detail obligations that the Telecom Act
imposes upon the incumbent carriers to open their local networks
to competition by providing competitors space to locate their
equipment in incumbent central offices and remote terminals for
the purpose of interconnection. This allows the competitive
carriers to provide local telephone services and to use portions
of the incumbent carriers&#146; existing networks to offer new
and innovative services. Over the past four years, the
FCC&#146;s collocation regulations have been the subject of very
contentious proceedings at the FCC and litigation before several
courts. On remand from a March 2000 decision by the U.S. Court
of Appeals for the D.C. Circuit, the FCC issued a decision that
revised its rules in a manner that permits incumbent companies
to exercise more discretion in determining the placement of
competitors&#146; equipment in their central offices, and does
not require the incumbents to allow competitors to install and
maintain cross-connections between other collocated competitors,
but requires the incumbents themselves to provide this as part
of their collocation services. In June, 2002, the D.C. Circuit
Court of Appeals affirmed the FCC&#146;s remand order, and the
FCC has since clarified that incumbents should make their
cross-connection service available in the physical collocation
tariffs they file with the FCC.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In October 2002, Verizon filed an application
with the FCC requesting authority to discontinue providing
federally-tariffed physical collocation services, as required
under current FCC regulations applicable to most incumbent
carriers. Verizon asked the FCC to require its competitors
instead to order collocation services
</FONT>

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<DIV align="left">
<FONT size="2">solely pursuant to terms and conditions approved
by state public service commissions. Verizon&#146;s application
remains pending, but if this authority is granted, such
discontinuance would make it more costly and difficult for
competitors such as us to obtain collocation services because
the rates set by state public service commissions are typically
significantly higher than those approved by the FCC, and may
require competitors to engage in costly negotiations in
different states. If Verizon is successful, other large
incumbent providers are likely to seek and receive comparable
relief.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

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    <TD width="3%"></TD>
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<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Regulation of the RBOCs&#146; Ability to
    Provide Long Distance Service</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FCC has primary jurisdiction over the
implementation of Section&nbsp;271 of the Telecom Act, which
provides that the RBOCs cannot offer in-region long distance
services until they have demonstrated that:
</FONT>
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    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">they have entered into an approved
    interconnection agreement with a facilities-based competitive
    telephone company or that no such competitive telephone company
    has requested interconnection as of a statutorily determined
    deadline;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">they have satisfied a 14-element checklist
    designed to ensure that the RBOC is offering access and
    interconnection to all local exchange carriers on competitive
    terms; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the FCC has determined that allowing the RBOC to
    offer in-region, long distance services is consistent with the
    public interest, convenience and necessity.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FCC has granted each of the RBOCs the
authority to provide long distance service in a number of
states. We expect that the RBOCs will have received such
authority with respect to most of the remaining states in the
near term. Although we cannot predict when such approval is
likely to occur, it could have an adverse affect on our ability
to compete if it is not accompanied by safeguards to ensure that
the RBOC continues to comply with the market-opening
requirements of Section&nbsp;271 or if it is granted prematurely
before the RBOC has completely satisfied the market-opening
requirements.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Provision of Broadband Telecommunications
    Services and Information Services</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Current federal and state regulation places
certain restrictions and conditions on the provision of advanced
telecommunications services, or broadband services, such as data
and DSL services, by the RBOCs. Furthermore, the network
elements that RBOCs must make available under the FCC&#146;s
unbundling rules to competitors may be used for the provision of
broadband services. However, at the urging of the RBOCs and
other incumbent carriers, the FCC in its Triennial Review
decision, appears to have greatly curtailed the extent to which
the incumbents must unbundle the broadband portion of their
networks for their competitors. Despite this apparent victory,
the RBOCs have vowed to continue to push for further
deregulation through federal and state legislative efforts. For
example, broadband deregulation legislation is currently under
consideration in several states, including Georgia, Texas and
Missouri. In addition, it is anticipated that deregulatory
legislation will be pursued by the RBOCs in Congress. In
addition to possible legislation, the FCC has initiated another
pending proceeding that could result in a further diminishment
of incumbent carriers&#146; requirement to make unbundled
network elements that are used for certain broadband or
information services available to us. The FCC has issued a
Notice of Proposed Rulemaking entitled &#147;Appropriate
Framework for Broadband Access to the Internet Over Wireline
Facilities&#148; that requests comments on the proper
classification of broadband access services as either regulated
telecommunications services or unregulated information services.
The Triennial Review decision significantly restricts the
availability on an unbundled basis of certain network elements
deploying fiber or packet-switching technologies. That decision,
in conjunction with a decision in this proceeding, legislative
change or a court ruling further broadening the definition of
what constitutes unregulated information services could have the
effect of allowing RBOCs to provide terms, conditions and
pricing to their own affiliates that provide data or information
services that are better than those made available to us. Such
developments could also be expected to adversely affect our cost
of doing business by increasing the cost of purchasing or
leasing such facilities from the RBOCs.
</FONT>

<P align="center"><FONT size="2">62
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    <TD>
    <B><I><FONT size="2">Universal Service</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In 1997, the FCC established a significantly
expanded federal telecommunications subsidy regime known as
&#147;universal service&#148;. For example, the FCC established
new subsidies for services provided to qualifying schools and
libraries and rural health care providers, and expanded existing
subsidies to low income consumers. Most telecommunications
companies, including us, must pay for these programs based on
their share of interstate and international telecommunications
end user revenues. In a 1999 decision, the Fifth Circuit Court
of Appeals issued a ruling that had the net effect of somewhat
lowering our contribution of revenues to universal service,
which stands at 7.28% of end user telecommunications revenues
for the first quarter of 2003. Now, the FCC has taken further
steps to modify the system for assessment and recovery of
universal service funds. In a December 2002 Notice of Proposed
Rulemaking, the FCC has asked many broad-ranging questions
regarding universal service, including whether to change its
method of assessing contributions due from carriers by basing it
on the number and capacity of connections they provide, rather
than on interstate and international end user revenues they
earn. We cannot be sure that legislation or FCC rulemaking will
not increase the size of our subsidy payments, the scope of the
subsidy program or our costs of calculating, collecting and
remitting the universal service related payments.
</FONT>

<DIV>&nbsp;</DIV>

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    <TD></TD>
    <TD>
    <B><I><FONT size="2">Intercarrier Compensation
    Reform</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Currently, communications carriers are required
to pay other carriers for interstate access charges and local
reciprocal compensation charges, both of which are being
considered for reform.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interstate Access
Charges.</FONT></I><FONT size="2"> Long distance carriers pay
local facilities-based carriers, including us, interstate access
charges for both originating and terminating the interstate
calls of long distance customers on the local carriers&#146;
networks. Historically, the RBOCs set access charges higher than
cost and justified this pricing to regulators as a subsidy to
the cost of providing local telephone service to higher cost
customers. With the establishment of an explicit and
competitively neutral universal service subsidy mechanism,
however, the FCC is under increasing pressure to revise the
current access charge regime to bring the charges closer to the
cost of providing access. In response, the FCC issued a decision
in 2001 setting the interstate rates that competitive local
carriers charge to long distance carriers at a level that will
gradually decrease over three years from a maximum of $0.025 per
minute to the rates charged by incumbent carriers. So long as we
are in compliance with the FCC&#146;s rate schedule, the
FCC&#146;s order forbids long distance carriers from challenging
our interstate access rates. Although this FCC decision lowering
interstate access charges will reduce our access charge revenues
over time, we do not expect that such a reduction will have a
material impact on our total revenues or financial position. The
FCC is also considering, in a declaratory ruling proceeding
commenced in November 2002, the question of whether voice over
the Internet services or services utilizing an Internet protocol
should be made subject to interstate access charges in the same
manner as traditional telephony. Like a growing number of
carriers, we utilize an Internet protocol for a portion of our
traffic as do some of our customers. The FCC has indicated on
several occasions that such services are exempt from interstate
access charges, but until the FCC issues its ruling in the
current proceeding, it is unclear how such traffic will be
treated for intercarrier compensation purposes.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Local Reciprocal Compensation
Charges.</FONT></I><FONT size="2"> Local telephone companies
such as us that originate traffic that is terminated on the
network of other carriers typically compensate the other local
carriers for terminating that traffic. These payments flow in
both directions between any two carriers. First, when we
terminate traffic for another local carrier to a customer on our
network, we collect compensation. Second, when we send traffic
to another carrier for termination, we pay compensation. Some
competitors, however, have a customer base that generates many
more minutes of terminating traffic from other carriers than
originating traffic destined for other carriers. For example, a
competitor that has a customer base that has many information
service providers typically will have a large amount of
compensation being paid to it by other carriers, while it will
owe very little reciprocal compensation to other carriers. The
FCC revamped the local reciprocal compensation structure in 2001
on an interim basis for three years to eliminate or reduce the
opportunity for carriers to take advantage of an imbalance of
originating and terminating traffic flows due to traffic
terminated to information service providers. The FCC also
initiated a rulemaking to examine inter-carrier compensation
more comprehensively. Under the decision, at the election of the
incumbent carrier, terminating traffic that is out-
</FONT>

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<DIV align="left">
<FONT size="2">of-balance by a ratio of more than 3 to 1 can be
compensated at a lower rate, or in some cases, at no charge.
Because the traffic we exchange with other local carriers is
relatively in balance across our markets, however, we do not
expect FCC decisions to restructure reciprocal compensation to
have a material impact on our total revenues or financial
position vis-&#224;-vis other carriers.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Regulation of Business
    Combinations</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The FCC, along with the Department of Justice and
state commissions, has jurisdiction over business combinations
involving telecommunications companies. For example, the
FCC&#146;s approval was required to implement certain aspects of
our Chapter&nbsp;11 reorganization. The FCC has reviewed a
number of recent and proposed combinations to determine whether
the combination would undermine the market-opening incentives of
the Telecom Act by permitting the combined company to expand its
operations without opening its local markets to competition or
have other anti-competitive effects on the telecommunications
and Internet access markets. In some cases, the FCC has set
conditions for its approval of the proposed business
combination. We cannot predict whether any conditions imposed
will be effective, nor can we predict whether the FCC will
impose similar conditions should it approve future business
combinations.
</FONT>

<P align="left">
<B><FONT size="2">State Regulation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">State regulatory commissions retain jurisdiction
over our facilities and services to the extent they are used to
provide intrastate communications. We expect that we will be
subject to direct state regulation in most, if not all, states
in which we operate in the future. Many states require
certification before a company can provide intrastate
communications services. We are certified in all states where we
have operations and certification is required. We cannot be sure
that we will retain such certifications or that we will receive
authorization for markets in which we expect to operate in the
future.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Most states require us to file tariffs or price
lists setting forth the terms, conditions and prices for
services that are classified as intrastate. In some states, our
tariff can list a range of prices for particular services. In
other states, prices can be set on an individual customer basis.
Several states where we do business, however, do not require us
to file tariffs. We are not subject to price cap or to rate of
return regulation in any state in which we currently provide
service.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the regulatory arrangement contemplated by
the Telecom Act, state authorities continue to regulate matters
related to universal service, public safety and welfare, quality
of service and consumer rights. All of these regulations,
however, must be competitively neutral and consistent with the
Telecom Act, which generally prohibits state regulation that has
the effect of prohibiting us from providing telecommunications
services in any particular state. State commissions also enforce
some of the Telecom Act&#146;s local competition provisions,
including those governing the arbitration of interconnection
disputes between the incumbent carriers and competitive
telephone companies and the setting of rates for unbundled
network elements. Finally, the order expected from the
FCC&#146;s Triennial Review decision will delegate to the states
important authority to decide what unbundled elements must be
made available to competitive carriers in each of the
states&#146; local markets over a period three to nine months
following the effectiveness of the decision. Consequently, this
authority would give the states a key role regarding our
continuing access to unbundled elements, such as loops and
transport in particular, that are necessary in many cases to
connect our customers to our metro networks.
</FONT>

<P align="left">
<B><FONT size="2">Local Government Regulation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In certain locations, we must obtain local
franchises, licenses or other operating rights and street
opening and construction permits to install, expand and operate
our fiber-optic networks in the public right-of-way. In some of
the areas where we provide network services, our subsidiaries
pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis. Cities that do not
currently impose fees might seek to impose them in the future,
and after the expiration of existing franchises, fees could
increase. Under the Telecom Act, state and local governments
retain the right to manage the public rights-of-way and to
require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and
</FONT>

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<DIV align="left">
<FONT size="2">nondiscriminatory basis, for use of public
rights-of-way. As noted above, these activities must be
consistent with the Telecom Act, and may not have the effect of
prohibiting us from providing telecommunications services in any
particular local jurisdiction.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If an existing franchise or license agreement
were to be terminated prior to its expiration date and we were
forced to remove our fiber from the streets or abandon our
network in place, our operations in that area would cease, which
could have a material adverse effect on our business as a whole.
We believe that the provisions of the Telecom Act barring state
and local requirements that prohibit or have the effect of
prohibiting any entity from providing telecommunications service
should be construed to limit any such action. Although none of
our existing franchise or license agreements has been
terminated, and we have received no threat of such a
termination, there can be no assurance that one or more local
authorities will not attempt to take such action. Nor is it
clear that we would prevail in any judicial or regulatory
proceeding to resolve such a dispute.
</FONT>

<P align="left">
<B><FONT size="2">Environmental Regulation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our switch site and customer premise locations
are equipped with back-up power sources in the event of an
electrical failure. Each of our switch site locations has
battery and diesel fuel powered back-up generators, and we use
batteries to back-up some of our customer premise equipment.
Federal, state and local environmental laws require that we
notify certain authorities of the location of hazardous
materials and that we implement spill prevention plans. We
believe that we currently are in compliance with these
requirements in all material respects.
</FONT>

<P align="center">
<B><FONT size="2">Competition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The industry environment in which we operate has
changed significantly recently. In particular, with the steep
decline in the market valuations of debt and equity securities
of telecommunications companies, particularly emerging
providers, in the last two years the financial condition of many
competitive and other carriers has deteriorated, and a number of
these competitors have attempted to reorganize, or have
completed reorganizations, under Chapter&nbsp;11 of the
Bankruptcy Code. Several competitors who have completed these
reorganization efforts, have emerged from bankruptcy with
significant improvements to their financial condition or are
newly formed entities that have acquired the assets of others at
substantial discounts when compared to their original cost basis.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At the same time, the regulatory environment has
changed and continues to change rapidly. Although the Telecom
Act and other actions by the FCC and state regulatory
authorities have had the general effect of promoting competition
in the provision of communications services, it also has allowed
the incumbent carriers to begin to provide long distance
services in many states. These effects, together with new
technologies, such as voice-over-IP, and the importance of data
services, have blurred the distinctions among traditional
communications markets. As a result, a competitor in any of our
business areas potentially is a competitor in our other business
areas.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Many of our existing and potential competitors
have greater market presence, including name recognition,
engineering and marketing capabilities, and financial,
technological and personnel resources, including resources for
the development and deployment of new technology and services,
than those available to us.
</FONT>

<P align="left">
<B><FONT size="2">Incumbent Carriers</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In each market that we serve, we face, and expect
to continue to face, significant competition from the incumbent
carriers, which currently dominate the local telecommunications
markets, primarily the RBOCs, which include BellSouth, Verizon,
Qwest Communications and SBC Communications. We compete with the
incumbent carriers in our markets for local exchange and other
services on the basis of product offerings, quality, capacity
and reliability of network facilities, state-of-the-art
technology, price, route diversity, ease of ordering and
customer service. However, the incumbent carriers have
long-standing relationships with their customers and provide
those customers with various transmission and switching services
that we, in many
</FONT>

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<FONT size="2">cases, do not currently offer. Competition,
however, is not based on any proprietary technology. Because our
fiber optic networks have been recently installed compared to
those of the incumbent carriers, our networks&#146; dual path
architectures and state-of-the-art technology may provide us
with cost, capacity, and service quality advantages over some
existing incumbent carrier networks. Incumbent carriers also
have received regulatory approval to provide and have begun to
provide long distance voice service in a number of regions.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Other Voice Service Competitors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We face, and expect to continue to face,
competition for local and long distance telecommunications
services from competitors and potential competitors in addition
to the incumbent carriers, primarily AT&#38;T, WorldCom, Inc.
and Sprint Corporation. With respect to local telecommunications
services, we also face, and expect to continue to face,
competition from other carriers and competitors, such as Time
Warner Telecom, Allegiance Telecom Inc., Focal Communications
and McLeodUSA Incorporated. With respect to long distance
telecommunications services, although the market is dominated by
AT&#38;T, WorldCom, and Sprint, hundreds of other companies,
such as Qwest, also compete in the long distance marketplace. In
addition, as the RBOCs continue to receive FCC authorization to
increase the number of states in which they are authorized to
provide long distance telecommunications services, we would
expect them to become increasingly significant competitors for
those services.
</FONT>

<P align="left">
<B><FONT size="2">Data Service Competitors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We face, and expect to continue to face,
competition for Internet access and other data services from
telecommunications companies, including AT&#38;T, WorldCom, and
Sprint, online service providers, DSL service providers, and
Internet service providers and web hosting providers.
</FONT>

<P align="left">
<B><FONT size="2">Other Business Competitors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our enhanced communications service offerings are
also subject to competition. For example, there are several
competitors that offer interactive voice response services
similar to those offered by our Interactive division, such as
Basis, Interactive Telesis and West Corporation, which we
believe focus their sales efforts on large volume interactive
voice response service users, live agent call centers and IVR
hardware sales.
</FONT>

<P align="center">
<B><FONT size="2">Employees</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of March&nbsp;31, 2003 we employed
approximately 4,900 people, including full-time and part-time
employees. We consider our employee relations to be good. None
of our employees is covered by a collective bargaining agreement.
</FONT>

<P align="center">
<B><FONT size="2">Properties</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We own or lease, in our operating territories,
telephone property which includes: fiber optic backbone and
distribution network facilities; point-to-point distribution
capacity; central office switching equipment; connecting lines
between customers&#146; premises and the central offices; and
customer premise equipment. Our central office switching
equipment includes electronic switches and peripheral equipment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The fiber optic backbone and distribution network
and connecting lines include aerial and underground cable,
conduit, and poles and wires. These facilities are located on
public streets and highways or on privately-owned land. We have
permission to use these lands pursuant to consent or lease,
permit, easement, or other agreements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We, and our subsidiaries, lease facilities for
our and their administrative and sales offices, central
switching offices, network nodes and warehouse space. The
various leases expire in years ranging from 2003 to 2021. Most
have renewal options.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our headquarters are located in Reston, Virginia,
where we are currently leasing approximately 170,000 square feet
of space. In February 2003, Dixon Properties, LLC, which is
owned by Mr.&nbsp;Carl Icahn, acquired ownership of the building
in which our headquarters is located in a transaction that was
approved by the Bankruptcy Court in our Chapter&nbsp;11
proceedings.
</FONT>

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<B><FONT size="2">Legal Proceedings</FONT></B>

<P align="left">
<B><FONT size="2">Chapter&nbsp;11 Related Disputes</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter&nbsp;11 proceedings,
disputes with respect to the amount of allowed claims owed by XO
Parent to certain of its general unsecured creditors, and claims
of certain professionals remain outstanding. XO has objected to
the application of Houlihan Lokey Howard&nbsp;&#38; Zukin
Capital for professional fees in the amount of approximately
$18&nbsp;million. In addition, a party has filed a complaint in
the Bankruptcy Court seeking relief from the court&#146;s order
confirming the Plan of Reorganization and a declaratory judgment
that such party&#146;s claim under section&nbsp;16b of the
Exchange Act for the benefit of the Company against a former
director of XO Parent and an affiliate of that director should
not be released by the confirmation order. While the outcome of
these matters, or any other relief that may be granted, is
currently not determinable, management does not expect that the
ultimate costs to resolve these matters will have a material
adverse effect on the Company&#146;s consolidated financial
position, results of operations, or cash flows.
</FONT>

<P align="left">
<B><FONT size="2">Prepaid Calling Card Tax Matter</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;26, 2002, the Company was advised by
the staff of the Commission that it was conducting an informal
inquiry primarily relating to the Company&#146;s obligations
with respect to, and its accrual of liabilities for, specified
federal excise and state sales tax and similar tax obligations
arising in connection with prepaid calling card services and
relating to certain other matters. Sales from prepaid calling
card services that are potentially subject to these taxes
accounted for approximately $56&nbsp;million of the
Company&#146;s total revenues from 1999, when the Company began
providing these services, through June&nbsp;30, 2002. The
Company believes that its accounting for these potential tax
obligations is appropriate and that its accruals of liabilities
relating to these obligations are adequate.
</FONT>

<P align="left">
<B><FONT size="2">Unfunded Affiliate Pension
Obligation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As affiliates of Mr.&nbsp;Icahn hold over 80% of
the outstanding New Common Stock of XO&nbsp;Parent, applicable
pension and tax laws make each member of a plan sponsor&#146;s
&#147;controlled group&#148; (generally defined as entities in
which there is at least an 80% common ownership interest)
jointly and severally liable for certain pension plan
obligations of the plan sponsor. These pension obligations
include ongoing contributions to fund the plan, as well as
liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay
these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC against the assets of each
member of the plan sponsor&#146;s controlled group.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the more than 80% ownership
interest in XO Parent by Mr.&nbsp;Icahn&#146;s affiliates,
XO&nbsp;Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr.&nbsp;Icahn has
a direct or indirect ownership interest of at least 80%, which
includes ACF Industries, Inc. or ACF, which is the sponsor of
certain pension plans. As most recently determined by the ACF
plans&#146; actuaries, pension plans maintained by ACF are
underfunded in the aggregate by approximately $14&nbsp;million
on an ongoing actuarial basis and by approximately
$102&nbsp;million if those plans were terminated. As a member of
the same controlled group, XO&nbsp;Parent and each of its
subsidiaries would be liable for any failure of ACF to make
ongoing pension contributions or to pay the unfunded liabilities
upon a termination of the ACF pension plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO&nbsp;Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other &#147;reportable events,&#148;
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
</FONT>

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<!-- link1 "MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" -->
<DIV align="left"><A NAME="010"></A></DIV>

<P align="center">
<B><FONT size="2">MANAGEMENT&#146;S DISCUSSION AND ANALYSIS
OF</FONT></B>

<DIV align="center">
<B><FONT size="2">FINANCIAL CONDITION AND RESULTS OF
OPERATIONS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">The following discussion of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. The
following contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ substantially
from those anticipated in these forward-looking statements as a
result of several factors, including those set forth under
&#147;Risk Factors&#148; and elsewhere in this
prospectus.</FONT></I>

<P align="center">
<B><FONT size="2">Overview of Our Business</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide a comprehensive array of voice and
data communications services to business customers. Our voice
services include local and long distance services, both bundled
and stand-alone, other voice-related services such as
conferencing, domestic and international toll free services and
voicemail, and transactions processing services for prepaid
calling cards. Our data services include Internet access,
private data networking, including dedicated transmission
capacity on our networks, virtual private network services and
Ethernet services, and hosting services. We also combine many of
these services in flat rate service packages. These services are
offered to a variety of customers, including small, medium and
large retail businesses, multi-location businesses, and carrier
or wholesale customers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To serve our customers&#146; broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmission
capacity on fiber optic cables, which we refer to as an
intercity network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network and among customers with
multiple locations primarily or entirely over our network.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment capable of carrying high volumes of data, voice, video
and Internet traffic. We operate 37&nbsp;metro fiber networks in
22&nbsp;states and the District of Columbia, including 25 of the
30&nbsp;largest metropolitan areas in the U.S. We have
constructed or acquired many of these metro fiber networks,
which consist of up to 432&nbsp;strands of fiber optic cable
and, in some cases, additional empty conduits through which
fiber optic cable can be deployed. For our inter-city network,
we have acquired dedicated, high-capacity wavelengths of
transmission capacity on fiber optic cables, onto which we have
deployed our own switching, routing and optical equipment, which
gives us greater control over how voice and data information is
transmitted. We also hold indefeasible exclusive rights to use
18&nbsp;unlit fiber optic strands on the routes served by our
intercity networks pursuant to arrangements with Level&nbsp;3
Communications, Inc.
</FONT>

<P align="center">
<B><FONT size="2">Our Chapter&nbsp;11 Reorganization</FONT></B>

<P align="left">
<B><FONT size="2">The Reorganization Proceedings</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;17, 2002, XO&nbsp;Parent filed for
protection under Chapter&nbsp;11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November&nbsp;15, 2002, the Bankruptcy Court confirmed
XO&nbsp;Parent&#146;s Plan of Reorganization, and, on
January&nbsp;16, 2003, XO&nbsp;Parent consummated the Plan of
Reorganization and it emerged from its Chapter&nbsp;11
reorganization proceedings with a significantly restructured
balance sheet.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the period immediately preceding and after
the filing of XO&nbsp;Parent&#146;s Chapter&nbsp;11 petition, we
met with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured
</FONT>

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<FONT size="2">creditors that represented holders of our senior
unsecured notes (and following the filing of the Chapter&nbsp;11
petition, the official committee of unsecured creditors
appointed in the Chapter&nbsp;11 proceedings) and potential
investors to discuss potential restructuring transactions that
could be implemented to reorganize our capital structure. These
discussions led to an agreement with the lenders under the
Pre-Petition Credit Facility regarding the terms of a Plan of
Reorganization that envisioned two potential reorganization
structures the first of which was based on, among other things,
a proposed cash investment in XO&nbsp;Parent by third parties
(which was ultimately abandoned) and the second of which
contemplated a stand alone restructuring with no new cash
infusion. The Plan of Reorganization, as supplemented, was filed
with the Bankruptcy Court on July&nbsp;22, 2002 and distributed
to creditors of XO Parent eligible to vote in the reorganization.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;21, 2002, High River Limited
Partnership, a limited partnership owned by Mr.&nbsp;Carl Icahn,
commenced an offer to purchase loans under our $1.0&nbsp;billion
secured Pre-Petition Credit Facility at a purchase price of
$0.50 for each $1.00 in principal amount thereof. Purchases made
under this offer, together with the loans under the Pre-Petition
Credit Facility that High River previously had acquired,
resulted in High River holding approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On November&nbsp;15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January&nbsp;16, 2003,
XO&nbsp;Parent consummated the Plan of Reorganization and it
emerged from the Chapter&nbsp;11 reorganization proceedings. The
consummation of the Plan of Reorganization resulted in the
following changes in our debt and equity capital structure:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$1.0&nbsp;billion of loans under the Pre-Petition
    Credit Facility were converted into $500.0&nbsp;million of
    outstanding principal amount under a New Credit Agreement;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The extinguishment of all amounts due under our
    pre-petition unsecured senior and subordinated notes and certain
    general unsecured obligations; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The cancellation of all outstanding shares and
    interest in our pre-petition preferred stock and pre-petition
    class&nbsp;A and class&nbsp;B common stock.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under our Plan of Reorganization, the following
equity securities have been or will be distributed to holders of
the Pre-Petition Credit Facility and holders of
XO&nbsp;Parent&#146;s pre-petition unsecured senior and
subordinated notes and pre-petition general unsecured claims:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">95.0&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;A Warrants to purchase
    9.5&nbsp;million shares of New Common Stock at an exercise price
    of $6.25 per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $7.50 per share; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $10.00 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For more information concerning the terms of the
securities and distributions under our Plan of Reorganization,
see &#147;The Business&nbsp;&#151; Our Chapter&nbsp;11
Reorganization.&#148;
</FONT>

<P align="left">
<B><FONT size="2">Distributions to and Interests Held by
Entities Owned by Mr.&nbsp;Carl C. Icahn</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">After the initial distribution of New Common
Stock pursuant to the Plan of Reorganization, Cardiff Holding
LLC, a Delaware limited liability company owned by Mr.&nbsp;Carl
C. Icahn, holds more than 80% of the outstanding shares. Of the
warrants distributed under the Plan of Reorganization to holders
of the pre-bankruptcy senior unsecured notes, we estimate
Cardiff received Series&nbsp;A Warrants to purchase
approximately 3.0&nbsp;million shares of New Common Stock,
Series&nbsp;B Warrants to purchase approximately
2.3&nbsp;million shares of New Common Stock, and Series&nbsp;C
Warrants to purchase approximately 2.3&nbsp;million shares of
New Common Stock. High River assigned its 85% interest in the
$500.0&nbsp;million in loans outstanding under the New Credit
Agreement to Chelonian Corp., an entity which is owned by
Mr.&nbsp;Icahn, which subsequently assigned those loans to Arnos
Corp., an entity which is also owned by Mr.&nbsp;Icahn.
</FONT>

<P align="center"><FONT size="2">69
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounting
Impact of Implementing the Plan of Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Due to XO&nbsp;Parent&#146;s Chapter&nbsp;11
filing, our consolidated financial statements included in our
2002 annual report have been prepared in accordance with
SOP&nbsp;90-7. Pursuant to SOP&nbsp;90-7, the financial
statements for the periods presented distinguish transactions
and events that are directly associated with our reorganization
from our ongoing operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although the effective date of the Plan of
Reorganization was January&nbsp;16, 2003, due to the
immateriality of the results of operations for the period
between January&nbsp;1, 2003 and the Effective Date, we
accounted for the consummation of the Plan of Reorganization as
if it had occurred on January&nbsp;1, 2003 and implemented fresh
start as of that date. The fresh start accounting provisions
required that we establish a &#147;fair value&#148; basis for
the carrying value of the assets and liabilities for reorganized
XO. As disclosed on the balance sheet included in the
accompanying condensed consolidated financial statements as of
and for the three months ended March&nbsp;31, 2003, and in
note&nbsp;2 to such financial statements, the value of our
long-lived assets, including property and equipment, fixed
wireless licenses, other intangibles and other non-current
assets, after implementing SOP&nbsp;90-7 decreased to
$635.4&nbsp;million from $3.8&nbsp;billion. Accordingly,
depreciation and amortization expense will decline significantly
in future periods.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, as described above and in &#147;The
Business&nbsp;&#151; Our Chapter&nbsp;11 Reorganization,&#148;
implementation of the Plan of Reorganization resulted in the
cancellation of over $6.9&nbsp;billion in pre-bankruptcy debt
and preferred stock obligations leaving outstanding only the
$500.0&nbsp;million in debt obligations under the New Credit
Agreement, and $70.6&nbsp;million of other long term liabilities
including obligations under various capital leases. As a result,
our interest expense and preferred stock dividend obligations in
future periods will decline significantly in comparison to the
interest expense and preferred stock dividend obligations
incurred in periods prior to the consummation of the Plan of
Reorganization. As a result of the gain resulting from the
cancellation of our pre-bankruptcy debt obligations, a
substantial portion of our capital and net operating loss
carryforwards, which totaled approximately $4.5&nbsp;billion at
December&nbsp;31, 2002, have been eliminated.
</FONT>

<P align="center">
<B><FONT size="2">Recent Events in 2003</FONT></B>

<!-- link1 "2003 Employee Retention Plan" -->
<DIV align="left"><A NAME="011"></A></DIV>

<P align="left">
<B><FONT size="2">2003 Employee Retention Plan</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June of 2003, we replaced the Restructuring
Retention Plan with a new Employee Retention and Incentive Plan,
which we refer to as the 2003 Retention Plan to provide
long-term equity incentives to senior management, based on
certain revenue and cash balance performance targets. The 2003
Retention Plan was offered to participants of the Restructuring
Retention Plan as an alternative to the EBITDA targets under the
Restructuring Retention Plan. Participants in the Restructuring
Retention Plan who elected into the 2003 Retention Plan
forfeited their rights under the Restructuring Retention Plan in
exchange for the opportunity to participate in the 2003
Retention Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2003 Retention Plan provides for a bonus
award aligned with each of the Company&#146;s first two and last
two quarters of 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each participant received a guaranteed Q1/ Q2
bonus award, regardless of the Company&#146;s operating results
for that period. The Q1/ Q2 bonus awards were paid in cash and
options on or after July&nbsp;11, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For those participants who received options as
Q1/ Q2 bonus awards, the options were 50% vested on the date of
grant, with the remainder vesting ratably each month over the
next 24&nbsp;months of employment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Q3/ Q4 bonus award under the 2003 Retention
Plan will be tied to the achievement of revenue and cash balance
performance objectives and will be settled fully in stock
options. Under the 2003 Retention Plan, two-thirds of the
participant&#146;s Q3/ Q4 bonus award will be based on
achievement of the revenue component, with the remaining
one-third based on the cash balance component. The Q3/ Q4 bonus
awards may be partially earned subject to partial achievement of
the revenue and cash balance goals with an additional
overachievement bonus for overachievement of the revenue goal.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Options distributed in settlement of a Q3/ Q4
bonus award will be 25% vested on the date of grant, with the
remainder vesting ratably each month over the next
36&nbsp;months of employment. Bonus awards under the
</FONT>

<P align="center"><FONT size="2">70
</FONT>

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<DIV align="left">
<FONT size="2">2003 Retention Plan may be prorated for partial
service during the Q1/ Q2 and/or Q3/ Q4 periods and may be
forfeited in certain circumstances following a termination of
employment.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The options granted for both Q1/ Q2 and Q3/ Q4
bonus awards are options to purchase XO&#146;s New Common Stock,
par value $0.01 per share. The options were and will be granted
under the Company&#146;s 2002 Stock Incentive Plan, with an
exercise price equal to $5.84, which represents 80% of the
market value of one share of XO&#146;s New Common Stock on the
effective date of the 2003 Retention Plan. The stock options
issued in conjunction with the Q1/ Q2 bonus payments will result
in recognition of compensation expense over the options&#146;
vesting period.
</FONT>

<P align="left">
<B><FONT size="2">Global Crossing Investment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On May&nbsp;30, 2003, we made the first of a
series of offers to acquire all of the assets and business of
Global Crossing, a telecommunications company which is currently
in reorganization proceedings. Thereafter, we made several
modifications to, and enhancements of, our initial offer, and on
June&nbsp;24, 2003, commenced an offer to purchase any all of
the senior secured bank debt of Global Crossing Holdings Ltd.
and Global Crossing North America, Inc. that we did not already
own for an aggregate maximum purchase price of
$472.5&nbsp;million. As a result of this offer and our previous
purchases, we now own approximately $766.6&nbsp;million of the
approximately $2.214&nbsp;billion principal amount of such debt
outstanding. We may in the future make additional offers to
acquire control of, or otherwise invest in, lend to or otherwise
do business with Global Crossing. If we do so, we do not know
what the terms of any such offers would be, or whether any such
offers will be accepted.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;1, 2003, the U.S. Bankruptcy Court
for the Southern District of New York approved Global
Crossing&#146;s request to extend until October&nbsp;28, 2003
the exclusivity period of its purchase agreement with Singapore
Technologies Telemedia PTE. We believe that the purchase
agreement nonetheless permits Global Crossing to consider
unsolicited superior offers such as ours pursuant to the
applicable &#147;fiduciary out&#148; provisions of the agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We intend to actively monitor Global
Crossing&#146;s reorganization and the regulatory proceedings
that are conditions to any closing under the Singapore
Technologies Telemedia PTE agreement.
</FONT>

<P align="center">
<B><FONT size="2">Significant Transactions and Trends in
2002</FONT></B>

<P align="left">
<B><FONT size="2">Inter-city Network Agreement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;8, 2002, we entered into a Master
Agreement with Level&nbsp;3 Communications, Inc., which amends
various agreements related to XO&nbsp;Parent&#146;s acquisition
of fiber networks in the United States from Level&nbsp;3 and the
recurring maintenance charges relating to those networks.
Beginning on January&nbsp;1, 2003 and continuing over the
remaining term of the initial agreement, Level&nbsp;3 will
reduce the operating and maintenance fees as well as fiber
relocation it charges us from approximately $17.0&nbsp;million
annually to a fixed rate of $5.0&nbsp;million annually. In
exchange for this reduction and certain other concessions,
effective as of February&nbsp;11, 2003, the closing date for the
transaction, we surrendered our indefeasible right to use an
empty conduit and our indefeasible right to use six of the 24
fibers previously acquired from Level&nbsp;3. Because we had
committed to this plan of disposal and believed at the time that
we entered into the Master Agreement that consummation of the
contemplated transaction was probable, we recorded a
$477.3&nbsp;million non-cash write-down of these assets during
the third quarter of 2002. Pursuant to applicable accounting
principles, the write-down is based on the book value of the
surrendered facilities and does not reflect the future benefits
to be received by us under the Master Agreement.
</FONT>

<P align="left">
<B><FONT size="2">Operational Restructuring</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In the second quarter of 2002, we restructured
our operations by reducing our workforce by approximately 350
employees, the majority of whom were employed in network
operations, sales and marketing and information technology, and
recorded a $2.9&nbsp;million restructuring charge related to
involuntary termination severance liabilities.
</FONT>

<P align="center"><FONT size="2">71
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Prepaid Calling Card Tax Matter</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;26, 2002, we were advised by the
staff of the SEC that it was conducting an informal inquiry
primarily relating to our obligations with respect to, and our
accrual of liabilities for, specified federal excise and state
sales tax and similar tax obligations arising in connection with
prepaid calling card services and relating to certain other
matters. Sales from prepaid calling card services that are
potentially subject to these taxes accounted for approximately
$56&nbsp;million of our total revenues from 1999, when we began
providing these services, through June&nbsp;30, 2002. We believe
that our accounting for these potential obligations is
appropriate and that our accrual of liabilities relating to
these obligations is adequate.
</FONT>

<P align="center">
<B><FONT size="2">Comparison of Financial Results</FONT></B>

<P align="left">
<B><FONT size="2">Three Months Ended March&nbsp;31, 2003 versus
Three Months Ended March&nbsp;31, 2002</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a consequence of our Chapter&nbsp;11
reorganization, our first quarter financial results have been
separately presented under the label &#147;Reorganized XO&#148;
for the period January&nbsp;1, 2003 to March&nbsp;31, 2003. The
results for &#147;Predecessor XO&#148; for January&nbsp;1, 2003
reflect solely the impact of the application of fresh start on
that date. Reorganized XO has adopted the policy of expensing
customer installation costs and internal labor directly
associated with network construction in the period in which the
costs are incurred. Predecessor XO capitalized and amortized
these costs. In accordance with SOP&nbsp;90-7, the Reorganized
XO was required to implement newly issued accounting
pronouncements that would require adoption within twelve months
of applying fresh start.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The operational results for the quarter are
discussed below.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Revenue.</FONT></I><FONT size="2"> Total
revenue for the three months ended March&nbsp;31, 2003 decreased
14.2% to $286.1&nbsp;million from $333.4&nbsp;million in the
same period of 2002. The decline is primarily due to a high
level of customer disconnects due to reduced demand from other
telecommunications companies, customer bankruptcies in the
telecommunication industry, and the weakened economy. In
addition, sales productivity was reduced due to fewer direct
sales representatives and adverse public perception that
accompanied our Chapter&nbsp;11 proceedings. To increase sales
activity in 2003, we are in the process of hiring additional
direct sales personnel. Programs launched in 2002 to decrease
customer disconnects will continue. New order entry and order
processing systems, which are designed to improve speed and
efficiency of new customer installations, are partially
installed, and we expect to complete installation of these
systems in the second half of 2003. We believe that total
revenue in the near term will remain relatively stable with
first quarter 2003 results. Given our recent emergence from
bankruptcy and continued uncertainty in the economy and our
industry specifically, we are unable to predict revenue trends
in future periods. Revenue was earned from providing the
following services (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Voice services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,723</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">168,834</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101,977</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35.6%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,761</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Integrated voice and data
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,393</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.6%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">286,093</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">333,405</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
interactive voice response services and stand-alone long
distance services. Voice services revenue in the first quarter
of 2003 decreased to $150.7&nbsp;million from
$168.8&nbsp;million in the first quarter of 2002. The decrease
is primarily attributable to customer bankruptcy impacts in the
telecommunications industry, continued customer disconnects due
to the state of the economy and reduced sales productivity in
2002 due to our bankruptcy filing.
</FONT>

<P align="center"><FONT size="2">72
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Data services revenue includes revenue from
Internet access, network access and web applications hosting
services. Data services revenue in the first quarter of 2003
decreased to $102.0&nbsp;million from $135.8&nbsp;million in the
first quarter of 2002. The decline was attributable to customer
bankruptcies, continued customer disconnects, and a lower demand
from large customers due to reductions in those customers&#146;
data capacity needs. The sale of our European operations in
February 2002 also contributed somewhat to this decline.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Integrated voice and data services revenue is
generated largely from our XOptions service offerings, a
flat-rate bundled package offering a combination of voice and
data services. Integrated voice and data services revenue in the
first quarter of 2003 increased to $33.4&nbsp;million from
$28.8&nbsp;million in the first quarter of 2002. The increase is
due to the success of our XOptions service offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Costs and expenses.</FONT></I><FONT size="2">
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Reorganized&nbsp;XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Predecessor&nbsp;XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,506</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37.6%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">140,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">42.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(23.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating and general
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">166,235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">205,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61.6%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,095</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.7%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">NM</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48.4%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">NM</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">516,068</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(41.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left">
<HR size="1" width="18%" align="left" noshade>
</DIV>

<DIV align="left">
<FONT size="2">NM&nbsp;&#151; Not Meaningful
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Cost of service.</FONT></I><FONT size="2">
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service for the three months ended
March&nbsp;31, 2003 of $107.5&nbsp;million decreased in absolute
dollars and as a percentage of revenue versus
$140.4&nbsp;million in the period ended March&nbsp;31, 2002. The
year over year 2003 decline was due primarily to cost
optimization programs which reduced expenses by transferring
traffic from leased facilities onto our owned or controlled
facilities, reduced costs due to customer disconnects and
approximately $6.4&nbsp;million of net benefit associated with
favorable resolution of disputed third party costs. The decline
was somewhat offset by our adoption of an accounting policy
during the first quarter of 2003, to cease the deferral of costs
associated with the installation of customer services and
expense such installation costs as incurred.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We anticipate that cost of service will increase
to historical levels as a percentage of revenue in future
periods, based on our expectation that the reduction in expenses
resulting from favorable dispute resolutions will be less than
we experienced in the first quarter of 2003. In addition, we
expect cost of service will also fluctuate based on trends in
revenue, product mix, the impact of customer bankruptcies and
regulatory decisions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Selling, operating and general.
</FONT></I><FONT size="2">Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, general
corporate office functions and collection risks. Selling,
operating and general expense in the first quarter of 2003 was
$166.2&nbsp;million versus $205.3&nbsp;million in the first
quarter of 2002. Selling, operating and general expense
decreased due to the centralization of many functions, cost
reduction and restructuring initiatives that included
significant headcount reductions and savings from the planned
exit of our European operations. In addition, recording our real
estate contracts at their fair value, as required by fresh
start, contributed to the decrease. The decline was somewhat
offset by our adoption of the policy of expensing internal labor
directly associated with the construction of our network, which
resulted in a $5.7&nbsp;million increase in selling, operating
and general expense in that period.
</FONT>

<P align="center"><FONT size="2">73
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We expect selling, operating and general expense
to increase in absolute dollars for the remainder of 2003 due
primarily to new sales incentive programs and increased
compensation costs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Stock-based
compensation.</FONT></I><FONT size="2"> Stock-based compensation
expense represents non-cash charges recorded in connection with
the grant of compensatory stock options and restricted stock to
employees whose compensation is included in selling, operating
and general expense. During the first quarter of 2003, we
incurred no stock-based compensation expense as its deferred
compensation balance was eliminated in conjunction with fresh
start. We incurred $9.1 million in deferred compensation expense
in the first quarter of 2002. The reorganized company will
recognize stock-based compensation only with respect to any new
grants of compensatory stock options and restricted stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Depreciation and
amortization.</FONT></I><FONT size="2"> As discussed above, we
implemented fresh start on January&nbsp;1, 2003 which resulted
in a reduction of the carrying value of our property and
equipment to its estimated fair value which is significantly
lower than historical cost. Consequently, depreciation expense
decreased to $19.9&nbsp;million in the first quarter of 2003,
versus $135.1&nbsp;million in the first quarter of 2002.
Amortization expense includes the amortization of fixed wireless
licenses and other intangible assets with definite lives. As a
result of fresh start accounting, the carrying value of fixed
wireless licenses and intangible assets were adjusted to their
estimated fair value. The aggregate estimated fair value of
these assets is significantly lower than their historical cost.
Total amortization expense decreased to $6.5&nbsp;million for
the first quarter of 2003 versus $26.3&nbsp;million in the first
quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We would expect depreciation and amortization
expense for the remainder of the year to continue to track with
the first quarter 2003 amount. As of March&nbsp;31, 2003, we had
approximately $606&nbsp;million of long-lived assets, including
approximately $94&nbsp;million of construction-in-progress and
certain fixed wireless licenses that are not currently ready for
their intended use and accordingly, are not currently being
depreciated or amortized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest income.</FONT></I><FONT size="2">
Interest income in the first quarter of 2003 decreased to
$3.2&nbsp;million from $5.5&nbsp;million in the first quarter of
2002. The decrease in interest income is due to reduced interest
rates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest expense, net.
</FONT></I><FONT size="2">Interest expense, net in the first
quarter of 2003 decreased to $9.7&nbsp;million from
$120.7&nbsp;million in the first quarter of 2002. The
significant reduction was principally caused by the cancellation
of our pre-petition senior notes, pre-petition convertible
subordinated notes and the Pre-Petition Credit Facility upon
consummation of our Plan of Reorganization. Interest expense for
the three months ended March&nbsp;31, 2003 primarily relates to
interest accreted on the New Credit Agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other income (loss), net.
</FONT></I><FONT size="2">Other income (loss), net was zero in
the first quarter of 2003, versus a net loss of
$0.2&nbsp;million in the first quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net income (loss)&nbsp;before cumulative
effect of accounting change</FONT></I><FONT size="2">. Net loss
before cumulative effect of accounting change for the
reorganized company in the first quarter of 2003 was
$20.5&nbsp;million versus a net loss before cumulative effect of
accounting change of $299.0&nbsp;million for the predecessor
company in the first quarter of 2002, due to the foregoing
factors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Cumulative effect of accounting change.
</FONT></I><FONT size="2">We performed the required impairment
tests of goodwill as required by SFAS No.&nbsp;142 as of
January&nbsp;1, 2002. Based on these tests, we recorded a
$1,876.6&nbsp;million impairment charge to write-off all of our
goodwill as a cumulative effect of accounting change during the
first quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net income (loss).</FONT></I><FONT size="2">
Net loss for the reorganized company in the first quarter of
2003 was $20.5&nbsp;million versus a net loss for the
predecessor company for the first quarter of 2002 of
$2,175.7&nbsp;million, due to the foregoing factors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
</FONT></I><FONT size="2">As a result of our implementation of
fresh start, as discussed above, our pre-petition redeemable
preferred stock has been cancelled and discharged. As a result,
the reorganized company recorded no preferred stock dividends
during the first quarter of 2003 versus $22.8&nbsp;million net
expense for the predecessor company&#146;s first quarter
of&nbsp;2002.
</FONT>

<P align="center"><FONT size="2">74
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net income (loss)&nbsp;applicable to common
shares. </FONT></I><FONT size="2">Net loss applicable to common
shares for the reorganized company in the first quarter of 2003
was $20.5&nbsp;million. Net loss applicable to common shares for
the predecessor company was $2,198.5&nbsp;million in the first
quarter of&nbsp;2002.
</FONT>

<P align="left">
<B><FONT size="2">Year Ended December&nbsp;31, 2002 Compared to
Year Ended December&nbsp;31, 2001</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Because our Plan of Reorganization was not
consummated until January&nbsp;16, 2003, the results of our
operations for 2002 do not include the effects of the resulting
cancellations of pre-petition indebtedness and preferred stock
or the reduction in the carrying value of our long-lived assets
from the implementation of fresh start accounting. As of the
Effective Date the cancellation of our pre-petition indebtedness
and preferred stock resulted in a significant gain that was
partially offset by a loss on the reduction in the carrying
value of our long-lived assets as a result of the application of
fresh start accounting. The net gain and the adjustment to our
financial position are reflected in our financial statements for
the first quarter of 2003. The extinguishment of indebtedness
and preferred stock will result in interest expense and
preferred stock dividends being lower, and the reduction in the
carrying value of our long-lived assets will result in
depreciation and amortization expense being lower in periods
subsequent to the effective date of the Plan of Reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Revenue.</FONT></I><FONT size="2"> Total
revenue in 2002 of $1,259.9&nbsp;million was consistent with
total revenue in 2001 of $1,258.6&nbsp;million. The weakened
economy and the perceived uncertainties in the market regarding
XO&nbsp;Parent&#146;s recently concluded Chapter&nbsp;11
proceedings had a negative impact on our ability to generate new
sources of revenue. Consequently, we were not able to maintain
the level of growth that we had historically achieved. We
experienced a high level of customer disconnects in 2002 due to
reduced demand from other telecommunications companies and
increased customer bankruptcies in the telecommunications and
dot-com industries. Total revenue declined from
$343.0&nbsp;million in the fourth quarter of 2001 to
$299.4&nbsp;million in the fourth quarter of&nbsp;2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue was earned from providing the following
services (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Voice services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">658,453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52.3%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">606,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">472,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">596,664</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20.9%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Integrated voice and data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">128,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,018</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,105</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,037</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(63.6%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,259,853</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,258,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
interactive voice response services and stand-alone long
distance services. Voice services revenue in 2002 increased to
$658.5&nbsp;million from $606.8&nbsp;million in 2001. The
increase was primarily due to more sales to larger business
customers, including the impact of the rollout of our carrier
long distance service. Voice revenue declined from
$166.5&nbsp;million in the fourth quarter of 2001 to
$157.3&nbsp;million in the fourth quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Data services revenue includes revenue from
Internet access, network access and web applications hosting
services. Data services revenue in 2002 decreased to
$472.2&nbsp;million from $596.7&nbsp;million in 2001. This
decline was attributable primarily to customer bankruptcies
affecting some large network access customers, increased levels
of customer disconnects, and a lower demand from large customers
due to reductions in those customers&#146; data and fiber
capacity needs. The sale of our European operations in February
2002 also contributed to this decline. Data service revenue
declined from $152.8&nbsp;million in the fourth quarter of 2001
to $108.0&nbsp;million in the fourth quarter of&nbsp;2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Integrated voice and data services revenue is
generated largely from our XOptions service offerings, a
flat-rate bundled package offering a combination of voice and
data services. Integrated voice and data services revenue in
2002 increased to $128.0&nbsp;million from $52.0&nbsp;million in
2001. The increase is primarily attributed to an increase in the
number of customers to whom we provide XOptions service.
</FONT>

<P align="center"><FONT size="2">75
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Costs and expenses.</FONT></I><FONT size="2">
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">522,924</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">527,698</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.9%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating and general
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">736,925</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">971,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24.2%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.3%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22.2%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">699,806</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,162,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(39.8%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restructuring and asset write-downs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">480,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">509,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40.5</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.7%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,468,751</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,208,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(23.1%</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Cost of service.</FONT></I><FONT size="2">
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2002 was $522.9&nbsp;million
compared to $527.7&nbsp;million in 2001. The 2002 decline was
due primarily to cost optimization programs to reduce expenses
by transferring traffic from leased facilities onto facilities
owned or controlled by us. These cost reductions were offset to
some extent by increased costs of service that were attributable
to the increase in voice and integrated services revenue as a
percentage of our total revenue, which generally carry lower
margins when compared to data services because voice and
integrated services are more likely to utilize leased versus
owned network facilities to terminate calls.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Selling, operating and general.
</FONT></I><FONT size="2">Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, general
corporate office functions and expenses relating to collection
risks. Selling, operating and general expense in 2002 was
$736.9&nbsp;million compared to $971.7&nbsp;million in 2001.
Selling, operating and general expense decreased both in
absolute dollars and as a percentage of revenue in 2002 when
compared to 2001 due to efficiencies resulting from the
centralization of and process improvements in many functions and
cost reduction and restructuring initiatives that included
significant headcount reductions and savings from the planned
exit of certain leased facilities, as well as the February 2002
sale of our European operations.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Stock-based
compensation.</FONT></I><FONT size="2"> Stock-based compensation
expense represents non-cash charges recorded in connection with
the grant of compensatory stock options and restricted stock
grants to employees whose compensation is included in selling,
operating and general expense. Compensation expense is
recognized over the vesting periods of such grants based on the
excess of the fair value of the common stock at the date of
grant (determined by reference to the market price on that date)
over the exercise price. Stock-based compensation in 2002
decreased to $28.9&nbsp;million from $37.2&nbsp;million in 2001
primarily due to certain grants becoming fully amortized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Depreciation and
amortization.</FONT></I><FONT size="2"> We have constructed an
integrated facilities-based network in the United States.
Primarily in late 2001 and early 2002, we expanded our services
in existing markets, placed more assets into service, and
increased our obsolescence expense, all of which caused
depreciation expense to increase to $598.5&nbsp;million in 2002
from $447.0&nbsp;million in 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amortization expense includes the amortization of
fixed wireless licenses and other intangibles assets with
definite lives and, for 2001, also includes the amortization of
goodwill. Amortization expense decreased to $101.3&nbsp;million
in 2002 from $715.7&nbsp;million in 2001. The significant
decrease is primarily due to our implementation of SFAS
No.&nbsp;142 and the resulting write-off of all our goodwill as
of January&nbsp;1, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, our balance sheet
reflected approximately $731.0&nbsp;million of long-lived
assets, including construction-in-progress and certain fixed
wireless licenses that had not been placed into service and,
accordingly, were not being depreciated or amortized.
</FONT>

<P align="center"><FONT size="2">76
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Restructuring and asset
write-downs.</FONT></I><FONT size="2"> Restructuring and asset
write-downs were $480.2&nbsp;million in 2002 and
$509.2&nbsp;million in 2001. During 2001, restructuring charges
primarily related to the implementation of our plan to
restructure certain of our business operations. The
restructuring plan included divesting certain assets and
businesses, and reducing our discretionary spending, capital
expenditures and workforce, based on our assessment of current
and future market conditions. The 2001 restructuring charges
include a $366.8&nbsp;million write-down for the excess of
carrying value of assets to be sold or abandoned, including our
European business unit and a $134.4&nbsp;million restructuring
charge relating to the consolidation and exiting of domestic
facility leases, which was determined based on the future
minimum rent commitments for the buildings that management
intends to exit less estimated sublease rental streams. The 2001
restructuring charges also included an $8.0&nbsp;million
restructuring charge related to involuntary termination
severance costs with respect to 700 persons whose employment was
terminated in connection with a workforce reduction, the
majority of whom were terminated by December&nbsp;31, 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002, we continued to restructure our
operations and reduced our workforce by approximately 350
additional employees, the majority of whom were employed in
network operations, sales and marketing and information
technology, and recorded a $2.9&nbsp;million restructuring
charge related to the involuntary termination severance costs.
In addition, we recorded a $477.3&nbsp;million non-cash asset
write-down during the third quarter of 2002 as a result of
returning inter-city assets to Level&nbsp;3 in exchange for
reduced future maintenance expenses beginning in 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest income.</FONT></I><FONT size="2">
Interest income in 2002 decreased to $16.5&nbsp;million from
$77.9&nbsp;million in 2001. The decrease in interest income
corresponds to the decrease in our average cash and marketable
securities balances and a reduction in interest rates. The
amount of interest income attributable to increased cash
balances during the bankruptcy proceedings was not material.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest expense,
net.</FONT></I><FONT size="2"> Interest expense, net in 2002
decreased to $226.5&nbsp;million from $465.4&nbsp;million in
2001, as we ceased accruing interest and penalties on our
pre-petition senior unsecured, subordinated notes and
Pre-Petition Facility as of the petition date, in accordance
with SOP&nbsp;90-7. The contractual interest amounts of
$501.1&nbsp;million reflected on the consolidated statement of
operations represents the interest expense that would have been
accrued under the relevant financing agreements had we not
ceased accruing interest as described above.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other income (loss), net.
</FONT></I><FONT size="2">Other income (loss), net was a loss of
$0.2&nbsp;million in 2002 and a loss of $93.8&nbsp;million in
2001. The 2001 balance includes an $89.0&nbsp;million write-down
for an other than temporary decline of the value of certain
equity method investments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Reorganization.
</FONT></I><FONT size="2">Reorganization expenses include
adjustments to our financial position and professional service
fees that are a direct result of our June&nbsp;17, 2002
Chapter&nbsp;11 filing and our application of the accounting
required by SOP&nbsp;90-7. Reorganization expense in 2002 was
$91.1&nbsp;million and included the (i)&nbsp;non-cash charges
relating to the write off of issuance costs, discounts and
purchase accounting adjustments to adjust the historical
carrying amounts of our debt to the allowed claim amount by the
Bankruptcy Court, (ii)&nbsp;professional fees associated with
our Plan of Reorganization, (iii)&nbsp;the penalties from the
rejection of contracts, (iv)&nbsp;adjustments to unpaid
pre-petition accounts payable and accrued expenses to the claim
amounts allowed by the bankruptcy court, and (v)&nbsp;the net
gain resulting from payments received by XO Parent in connection
with the settlement and termination of the proposed investment
transaction that was the basis for the first restructuring
alternative contemplated by the Plan of Reorganization, less
amounts paid to settle certain stockholder claims.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net loss before extraordinary gain and
cumulative effect of accounting change.
</FONT></I><FONT size="2">Net loss before extraordinary gain and
cumulative effect of accounting change during 2002 improved to
$1,510.2&nbsp;million from a net loss of $2,431.1&nbsp;million
in 2001 due to the foregoing factors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Extraordinary gain on repurchases of debt,
net. </FONT></I><FONT size="2">During 2001, we recorded an
extraordinary gain totaling $345.0&nbsp;million related to our
repurchase of $557.1&nbsp;million of senior notes at a
substantial discount from their respective face values.
</FONT>

<P align="center"><FONT size="2">77
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Cumulative effect of accounting change.
</FONT></I><FONT size="2">We performed the newly required
transitional impairment tests of goodwill as required by SFAS
No.&nbsp;142 as of January&nbsp;1, 2002. Based on these tests,
we recorded a $1,876.6&nbsp;million impairment charge to
write-off all of our goodwill as a cumulative effect of
accounting change during the first quarter of 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net loss.</FONT></I><FONT size="2"> Net loss
in 2002 increased to $3,386.8&nbsp;million from a net loss of
$2,086.1&nbsp;million in 2001 due to the foregoing factors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Recognition of preferred stock modification
fee, net- reorganization item.</FONT></I><FONT size="2"> In
order to adjust the historical carrying amount of our preferred
stock to the amount allowed by the Bankruptcy Court, we
recognized the unamortized balance of a deferred modification
fee with respect to our preferred stock as of the petition date
and wrote off certain unamortized issuance costs and recognized
certain purchase accounting adjustments related to the preferred
stock which netted a $78.7&nbsp;million gain during 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Gain on repurchases of preferred stock, net.
</FONT></I><FONT size="2">In 2001, we recorded a net gain
totaling $376.9&nbsp;million related to our repurchase of
$472.6&nbsp;million in liquidation preference of our preferred
stock at a substantial discount from the respective carrying
amounts.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
</FONT></I><FONT size="2">As our preferred stock was deemed
subject to compromise under SOP&nbsp;90-7, we ceased accruing
dividends and accreting the redemption obligation on all of our
outstanding preferred stock as of our petition date. As a
result, we recorded $42.2&nbsp;million of preferred stock
dividends during 2002 as compared to $129.7&nbsp;million in such
dividends in 2001. The contractual dividend amount of
$98.8&nbsp;million reflected on the accompanying condensed
consolidated statement of operations represents the dividends
that would have been accrued under the terms of our preferred
stock had we not ceased accruing such dividends as described
above.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net loss applicable to common shares.
</FONT></I><FONT size="2">Net loss applicable to common shares
in 2002 increased to $3,350.4&nbsp;million from
$1,838.9&nbsp;million in 2001 due to the foregoing factors.
</FONT>

<P align="left">
<B><FONT size="2">Year Ended December&nbsp;31, 2001 Compared to
Year Ended December&nbsp;31, 2000</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Revenue.</FONT></I><FONT size="2"> Total
revenue in 2001 increased to $1,258.6&nbsp;million from
$723.8&nbsp;million in 2000. The increase was primarily due to
the increase in the number of customers and growth in network
traffic and average monthly revenue per customer. The growth in
our customer base was largely due to our penetration of existing
markets, expansion into new markets in 2001 and 2000 and our
June 2000 Concentric acquisition. The growth in network traffic
and average monthly revenue per customer was primarily due to
the expansion of our service offerings and our emphasis on
selling to larger business customers.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue was earned from providing the following
services (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="40%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Voice services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">606,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">386,796</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53.4%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">596,664</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45.9%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">79.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Integrated voice and data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,018</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.1%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,693</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.4%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">NM</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,037</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,445</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.3%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,258,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">723,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">73.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">NM&nbsp;&#151; Not Meaningful
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
including shared tenant services, interactive voice response
services and stand-alone long distance services. Voice services
revenue in 2001 increased to $606.8&nbsp;million from
$386.8&nbsp;million in 2000. The increase was primarily due to
the growth in the number of our voice services customers and our
targeting of larger business customers.
</FONT>

<P align="center"><FONT size="2">78
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Data services revenue includes revenue from
Internet access, network access and applications hosting
services. Data services revenue in 2001 increased to
$596.7&nbsp;million from $331.9&nbsp;million in 2000. A primary
contributor to this growth was our migration from voice-centric
service offerings to a more balanced portfolio of voice and data
services, facilitated in large part by our June 2000 acquisition
of Concentric and the integration of its data products with our
pre-existing services and by our development of new and enhanced
data services. Data services revenue increased slightly as a
percentage of total revenue for 2001 compared to 2000 due to a
full year impact of the integration of data products and the new
and enhanced data services we have developed. However, the
majority of the impact realized from fully integrating these
data products was partially offset by new customers choosing our
integrated voice and data services and customer bankruptcies.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Integrated voice and data services revenue is
generated largely from our XOptions product, a flat-rate bundled
package offering a combination of voice and data services.
Integrated voice and data services revenue in 2001 increased to
$52.0&nbsp;million from $2.7&nbsp;million in 2000. The increase
is primarily attributable to the addition of XOptions to our
product portfolio beginning in the fourth quarter of 2000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Costs and expenses.</FONT></I><FONT size="2">
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of 2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Revenue</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% Change</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">527,698</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.9%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">302,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.8</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating and general
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">971,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77.2%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">730,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">100.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3.0%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(23.1</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,162,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">92.4%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">617,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">88.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restructuring charge
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">509,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40.5%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">NM</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">In-process research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">NM</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,208,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,735,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">84.9</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">NM&nbsp;&#151; Not Meaningful
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Cost of service.</FONT></I><FONT size="2">
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2001 was $527.7&nbsp;million
compared to $302.7&nbsp;million in 2000. Cost of service for
2001 was consistent as a percentage of revenue as compared to
2000, but increased in absolute dollars on a period-over-period
comparison due to the corresponding increase in revenue.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Selling, operating and general.
</FONT></I><FONT size="2">Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, and
general corporate office functions. Selling, operating and
general expense in 2001 was $971.7&nbsp;million compared to
$730.6&nbsp;million in 2000. The majority of the
period-over-period increase was due to the full year impact of
increased sales, network operations and customer support
headcount associated with the expansion of our business and the
June 2000 Concentric acquisition. Selling, operating and general
expense decreased as a percentage of revenue in 2001 compared to
the same period in 2000 due to continued efficiencies generated
by the centralization of many functions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Stock-based
compensation.</FONT></I><FONT size="2"> Stock-based compensation
in 2001 decreased to $37.2&nbsp;million from $48.3&nbsp;million
in 2000 primarily due to the vesting of a fixed number of shares
of restricted stock issued in 2000 in conjunction with the
Concentric acquisition.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Depreciation and
amortization.</FONT></I><FONT size="2"> Our net property and
equipment increased to $3,742.6&nbsp;million as of
December&nbsp;31, 2001 versus $2,794.1&nbsp;million as of
December&nbsp;31, 2000. As we launched and expanded services
</FONT>

<P align="center"><FONT size="2">79
</FONT>

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<DIV align="left">
<FONT size="2">in new and existing markets, more assets were
placed into service, which caused depreciation expense to
increase to $447.0&nbsp;million in 2001 from $223.8&nbsp;million
in 2000. Amortization expense increased to $715.7&nbsp;million
in 2001 from $393.9&nbsp;million in 2000. Of the total 2001
amortization expense, 83.1% relates to goodwill amortization.
The significant increase is primarily due to the amortization of
additional goodwill and intangible assets recorded as a result
of the June 2000 Concentric acquisition, which are being
amortized over a period of up to five years. In conjunction with
the implementation of SFAS No.&nbsp;142, we wrote off all of the
carrying value of our goodwill in the first quarter of 2002.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Restructuring
charge.</FONT></I><FONT size="2"> During 2001, we recorded
$509.2&nbsp;million of estimated restructuring charges primarily
related to implementation of our plan to restructure certain of
our business operations. The restructuring plan includes
divesting certain assets and businesses, and reducing our
discretionary spending, capital expenditures and workforce,
based on our assessment of current and future market conditions.
The restructuring charges include a $366.8&nbsp;million
write-down for the excess of carrying value of assets that were
to be sold or abandoned, including our European business unit.
The consolidation and exiting of domestic facility leases
accounted for $134.4&nbsp;million of the restructuring charges
and was determined based on the future minimum rent commitments
for the buildings management intended to exit less estimated
sublease rental streams. We also reduced our workforce by
approximately 700 employees and recorded an $8.0&nbsp;million
restructuring charge related to involuntary termination
severance. The employment of the majority of the notified
employees was terminated by December&nbsp;31, 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">In-process research and
development.</FONT></I><FONT size="2"> As a result of the
Concentric merger in June 2000, we incurred a $36.2&nbsp;million
one-time charge in the second quarter of 2000 resulting from an
allocation of the purchase price to in-process research and
development. The allocation represents the estimated fair value
based on risk-adjusted future cash flows of Concentric&#146;s
incomplete projects at that time.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest income.</FONT></I><FONT size="2">
Interest income in 2001 decreased to $77.9&nbsp;million from
$180.9&nbsp;million in 2000. The decrease in interest income
corresponds to the decrease in our 2001 average cash and
marketable securities balances and a reduction in interest rates.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Interest expense,
net.</FONT></I><FONT size="2"> Interest expense, net in 2001
increased to $465.4&nbsp;million from $434.1&nbsp;million in
2000. The increase in interest expense, net was primarily due to
an increase in our average outstanding indebtedness over the
respective periods resulting from our increased borrowings under
our Pre-Petition Credit Facility during 2000 and 2001, the
issuance of $517.5&nbsp;million of 5&nbsp;3/4% convertible
subordinated notes in January 2001, and the assumption of
$150.0&nbsp;million of debt in connection with our June 2000
acquisition of Concentric offset in part by the impact of the
repurchase of certain senior notes discussed below, a reduction
in interest rates and increased capitalized interest on
constructed assets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other income (loss), net.
</FONT></I><FONT size="2">Other income (loss), net decreased
from income of $163.6&nbsp;million in 2000 to a loss of
$93.8&nbsp;million in 2001. The 2001 loss relates primarily to
an $89.0&nbsp;million write down for an other than temporary
decline in the value of certain available-for-sale investments.
The other income in 2000 relates primarily to a
$225.1&nbsp;million gain on the sale of an equity investment
partly offset by a $57.7&nbsp;million write-down for an other
than temporary decline in the value of certain
available-for-sale investments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Extraordinary gain on repurchases of debt,
net. </FONT></I><FONT size="2">In the second half of 2001, we
recorded an extraordinary gain totaling $345.0&nbsp;million
related to our repurchase of $557.1&nbsp;million of senior notes
at a substantial discount from their respective face values.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net loss.</FONT></I><FONT size="2"> Net loss
in 2001 increased to $2,086.1&nbsp;million from a net loss of
$1,101.3&nbsp;million in 2000 due to the foregoing factors.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Gain on repurchases of preferred stock, net.
</FONT></I><FONT size="2">In the second half of 2001, we
recorded a net gain totaling $376.9&nbsp;million related to our
repurchase of $472.6&nbsp;million in liquidation preference of
our preferred stock at a substantial discount from their
respective carrying amounts.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
</FONT></I><FONT size="2">Preferred stock dividends and the
accretion of the preferred stock redemption decreased to
$129.7&nbsp;million in 2001 from
</FONT>

<P align="center"><FONT size="2">80
</FONT>

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<DIV align="left">
<FONT size="2">$146.4&nbsp;million in 2000 due to the impact of
the repurchase of the preferred stock discussed above offset in
part by the increase in our average outstanding preferred stock
balance during the first half of 2001.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Net loss applicable to common shares.
</FONT></I><FONT size="2">Net loss applicable to common shares
in 2001 increased to $1,838.9&nbsp;million from
$1,247.7&nbsp;million in 2000 due to the foregoing factors.
</FONT>

<P align="center">
<B><FONT size="2">Liquidity and Capital Resources</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our goal is to provide our customers complete,
integrated, voice and data network applications and services
primarily through networks that we own or control. Historically,
this strategy has increased our operating losses by requiring us
to incur significant costs and to make substantial capital
investments before we realize related revenue. We have completed
much of the construction relating to our metro fiber networks,
which required substantial capital investment. We believe that
the implementation of the restructuring of our debt and capital
under the Plan of Reorganization and the various initiatives we
have undertaken to reduce operating costs and capital
expenditures over the past two years, positions us to be able to
successfully execute our business plans and generate cash flow
over the long term. However, in the near term we expect to incur
net negative cash flows from operating and investing activities.
</FONT>

<P align="left">
<B><FONT size="2">Reorganization Overview&nbsp;&#151; Changes in
our Capital Structure</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As described in our 2002 Annual Report, in light
of conditions in the capital markets and our funding needs,
XO&nbsp;Parent took a number of steps during 2001 to conserve
cash on hand and raise additional capital. However, conditions
in the capital markets for telecommunications companies
continued to deteriorate, and, in late 2001, we determined that,
in light of the substantial declines in market valuation
suffered by telecommunications service providers throughout the
industry in 2001, we would be unable to obtain the additional
funding needed to conduct our business plan without a
significant balance sheet reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to complete this reorganization, on
June&nbsp;17, 2002, XO&nbsp;Parent filed a voluntary petition
for relief under Chapter&nbsp;11 of the Bankruptcy Code with the
Bankruptcy Court. Concurrent with its Chapter&nbsp;11 filing,
XO&nbsp;Parent submitted a proposed Plan of Reorganization,
which is discussed in detail in the Overview section above, in
note&nbsp;2 to our consolidated financial statements as of and
for the year ended December&nbsp;31, 2002 and in &#147;The
Business&nbsp;&#151; Our Chapter&nbsp;11 Reorganization&#148;.
On November&nbsp;15, 2002, the Plan of Reorganization was
confirmed by the Bankruptcy Court. On January&nbsp;16, 2003,
XO&nbsp;Parent consummated the transactions contemplated by the
Plan of Reorganization and emerged from Chapter&nbsp;11
bankruptcy protection. Under the Plan of Reorganization,
XO&nbsp;Parent has emerged from its Chapter&nbsp;11 proceedings
with:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">no preferred stock and dividend obligations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">significantly reduced debt and interest
    obligations; only $500&nbsp;million of long-term indebtedness
    remains, pursuant to the New Credit Agreement, which includes:
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="1%"></TD>
    <TD width="94%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">financial covenants generally more favorable than
    those included in the Pre-Petition Credit Facility,
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">amended maturity and principal repayment terms
    modified so that required principal payments are deferred by two
    and a half years when compared to the Pre-Petition Credit
    Facility, and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">amended interest payment terms modified so that
    no cash interest payments are required to be made by us until we
    achieve specified financial targets.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The maturity date of the outstanding principal
under the New Credit Agreement is July&nbsp;15, 2009. Automatic
and permanent quarterly reductions of the principal amount
commence on October&nbsp;15, 2007 with scheduled principal
repayments totaling $25&nbsp;million in 2007, $150&nbsp;million
in 2008 and $325&nbsp;million in 2009. All of the proceeds from
the Rights Offering will be used to prepay a portion of the
principal amount outstanding. To that extent future interest
payments and scheduled principal repayments would be reduced.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The security for the New Credit Agreement
consists of all of the assets of XO&nbsp;Parent, including stock
of its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement
limits additional indebtedness, liens, dividend payments and
certain investments and transactions, and contains certain
covenants with respect to minimum cash balance, minimum EBITDA
(earnings before interest, taxes, depreciation and amortization)
requirements and maximum capital expenditures. Loans under the
New Credit Agreement bear interest, at our option, at an
alternate base rate, as defined, or reserve-
</FONT>

<P align="center"><FONT size="2">81
</FONT>
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<DIV align="left">
<FONT size="2">adjusted London Interbank Offered Rate plus, in
each case, applicable margins. We are not required to pay cash
interest accrued on the principal amount under the New Credit
Agreement until we meet certain financial ratios. Nevertheless,
we may elect to begin paying interest in cash earlier than the
required date, but, based on our current funding requirement, we
would not anticipate making such an election in the foreseeable
future. Once we begin to pay accrued interest in cash, even in
the case of an early election, the applicable margins are
reduced. Approximately 85% of the underlying loans of the New
Credit Agreement are held by Arnos Corp., an entity owned by
Mr.&nbsp;Icahn.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Future Funding Needs, Capital Resources and
Liquidity Assessment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our balance of cash and marketable securities
decreased to $538.4&nbsp;million at March&nbsp;31, 2003 from
$561.0&nbsp;million at December&nbsp;31, 2002 and from
$755.2&nbsp;million at December&nbsp;31, 2001. This decrease
from December&nbsp;31, 2001 primarily resulted from capital
expenditures during the early part of 2002 relating to the
completion of ongoing network construction projects. The
transfer of $25.0&nbsp;million to an escrow deposit in the first
quarter of 2003 in conjunction with an agreement to indemnify
certain former directors and executive officers was the main
cause of cash reduction from December&nbsp;31, 2002. We have and
will continue to focus on minimizing the rate at which we use
our cash to fund operations and capital expenditures. For the
past year, the reduction in the rate at which we use our cash
has been accomplished by:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">significantly reducing our capital requirements
    largely due to the completion of several significant technology
    and network enhancements projects and decreases in success-based
    capital spending;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">ceasing to pay interest on the Pre-Petition
    Credit Facility and our pre-petition senior and subordinated
    unsecured notes and dividends on our preferred stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">improving operational results due to initiatives,
    which have resulted in the reduction of cost of service and
    selling, operating and general expenses in both absolute dollars
    and as a percentage of revenue; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">improving working capital mainly through
    aggressive collections of our outstanding accounts receivable,
    and, to a lesser extent, deferred payment of
    XO&nbsp;Parent&#146;s pre-petition liabilities.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in more detail in Credit Risk,
subsequent to March&nbsp;31, 2003, we liquidated substantially
all of our existing marketable securities for
$249.6&nbsp;million in cash, of which we paid
$160.7&nbsp;million to acquire senior secured bank debt of
Global Crossing. We may in the future offers make additional
offers to acquire control of, or otherwise invest in, lend to or
otherwise do business with Global Crossing. If we do so, we do
not know what the terms of any such offers would be, or whether
any such offers will be accepted. Any such future offers, if
made for cash consideration, could significantly and adversely
affect our liquidity.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We expect that, in the near term, our business
will use existing cash primarily to fund capital expenditures,
working capital requirements and possible acquisitions of
businesses or assets, as discussed above. The majority of our
planned capital expenditure requirements will be
&#147;success-based&#148; in that they will be used to purchase
and install optical equipment, channelbanks, routers, servers or
other customer-related equipment and electronics in connection
with adding new customers or increasing the amount of services
provided to existing customers. Much of the remaining planned
capital expenditures will be for the continued development and
implementation of our information systems to support and enhance
the provisioning and billing of new and existing customers. Part
of our working capital requirements are commitments under lease
and contractual obligations for software licenses and ongoing
support of software for information technology and network
applications. As of December&nbsp;31, 2002, such future minimum
commitments were as follows (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other Long-Term</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total Minimum</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Operating Lease</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Capital Lease</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Long-Term</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Year Ending December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,031</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">146,890</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,612</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">119,466</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,842</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">68,451</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,780</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">60,847</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">232,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">340,104</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total future minimum long-term obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">508,720</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,934</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">282,946</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">811,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">82
</FONT>
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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">There are no additional borrowings available
under our New Credit Agreement, although, under certain
circumstances, the New Credit Agreement permits us to obtain a
senior secured facility of up to $200.0&nbsp;million, less the
amount of any proceeds from the Rights Offering, so long as the
terms are satisfactory to the administrative agent and holders
of a majority of the principal amount of the loans outstanding
under the New Credit Agreement. We have no current debt service
requirements since automatic and permanent quarterly reductions
of the principal amount outstanding under the New Credit
Agreement do not commence until October&nbsp;15, 2007. We are
not required to pay cash for interest accrued on the principal
amount under the New Credit Agreement until we meet certain
financial ratios. Nevertheless, we may elect to begin paying
interest in cash earlier than the required date in order to
reduce the effective interest rate, but, based on our current
assessment of our funding requirements, we would not anticipate
making such an election in the foreseeable future. Arnos Corp.,
a company owned by Mr.&nbsp;Icahn, holds approximately 85% of
the principal amount of the loans outstanding under the New
Credit Agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Although we expect that our balance of cash and
marketable securities will decline in the near term to fund
capital expenditures and working capital requirements discussed
above, given (i)&nbsp;our current assumptions with respect to
trends in our business, (ii)&nbsp;our estimates concerning the
substantially lower level of capital expenditures that we will
incur to support our business plan and (iii)&nbsp;the
significant reduction in cash needed to meet our debt service
requirements because we are not required to pay interest accrued
on the New Credit Agreement until we meet certain financial
ratios, we believe that the $538.4&nbsp;million of cash and
marketable securities on hand as of March&nbsp;31, 2003 will be
sufficient to fund our operations until the cash flows generated
by our operations are sufficient to fund our capital
expenditures and debt service requirements.
</FONT>

<P align="left">
<B><FONT size="2">Credit Risk</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of trade
receivables. Although our trade receivables are geographically
dispersed and include customers in many different industries, a
portion of our revenue is generated from services provided to
other telecommunications service providers. Several of these
companies have recently filed for protection under
Chapter&nbsp;11 of the Bankruptcy Code. We believe that our
established valuation and credit allowances are adequate as of
March&nbsp;31, 2003 to cover these risks.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are permitted under the terms of our Credit
Agreement to make investments in a broad range of securities,
including securities that are not cash equivalents or readily
marketable securities, and which therefore may involve
significant credit risk. At March&nbsp;31, 2003, we held
investments in marketable securities of $249.6&nbsp;million,
consisting of U.S. government agency issued and other high-grade
securities with original maturities beyond three months.
Subsequently, we liquidated these marketable securities for cash
and invested $160.7&nbsp;million of the proceeds in
$766.6&nbsp;million principal amount of senior secured bank debt
of Global Crossing, a telecommunications company which is
currently in reorganization proceedings. The Global Crossing
debt trades in a thin market primarily between dealers but is
neither listed on any exchange nor on any over-the-counter
NASDAQ or National Quotation Bureau systems. If we choose to
liquidate our investment in this debt, we cannot be assured that
we will be able to dispose of the investment for an amount
greater than or equal to the amount we paid for it, or that any
distribution that may be received upon consummation of Global
Crossing&#146;s bankruptcy case will have a greater value than
that of our investment.
</FONT>

<P align="center">
<B><FONT size="2">Critical Accounting Policies</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note 2 to the consolidated
condensed consolidated financial statements for the three months
ended March&nbsp;31, 2003, included in this prospectus, we
adopted fresh start accounting as of January&nbsp;1, 2003,
creating, in substance per SOP&nbsp;90-7, a new reporting
entity. SOP&nbsp;90-7 also requires that changes in accounting
principles that will be required in the financial statements of
the emerging entity within twelve months following the adoption
of fresh start reporting be adopted at the time fresh start
reporting is adopted.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The preparation of the financial statements in
accordance with accounting principles generally accepted in the
United States requires management to make judgments, estimates
and assumptions regarding uncertainties that
</FONT>

<P align="center"><FONT size="2">83
</FONT>
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<DIV align="left">
<FONT size="2">affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Management uses
historical experience and all available information to make
these judgments and estimates and actual results could differ
from those estimates and assumptions that are used to prepare
our financial statements at any given time. Despite these
inherent limitations, management believes that Management&#146;s
Discussion and Analysis and the financial statements and
footnotes provide a meaningful and fair perspective of the
Company&#146;s financial condition and its operating results.
Management believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements included in
this prospectus.
</FONT>
</DIV>

<P align="left">
<B><FONT size="2">Long-Lived Assets</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our long-lived assets include property and
equipment, fixed wireless licenses, and identifiable intangible
assets to be held and used. Property and equipment acquired
prior to December&nbsp;31, 2002 is stated at fair value as
required by fresh start, net of accumulated depreciation.
Additions to property and equipment during 2003 are stated at
historical cost, net of accumulated depreciation. Depreciation
is calculated on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives of
telecommunications networks and acquired bandwidth are 3 to
20&nbsp;years and 5 to 7&nbsp;years for furniture fixtures,
equipment and other. These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because we operate within an industry in which new
technological changes could render some or all of our network
related equipment obsolete requiring application of a shorter
useful life or, in certain circumstances, a write-off of the
entire value of the asset. Accordingly, in making this
assessment, we consider our planned use of the assets, the views
of experts both from internal and outside sources regarding the
impact of technological advances and trends in the industry on
the value and useful lives of our network assets. Costs of
additions and improvements (other than internal labor costs
related to network construction, as discussed below) are
capitalized and repairs and maintenance are charged to expense
as incurred. Direct external costs of constructing property and
equipment are capitalized including interest costs related to
construction. The reorganized Company has adopted the policy of
expensing internal labor directly associated with network
construction in the period in which the costs are incurred.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Investments in fixed wireless licenses acquired
prior to December&nbsp;31, 2002 are stated at fair value as
required by fresh start, net of accumulated amortization. We are
amortizing these over the license period of 10&nbsp;years as
determined by the Federal Communications Commission. Other
intangibles consist of customer relationships, internally
developed technology and XO&#146;s trade name. The customer
relationships and internally developed technology are being
amortized using the straight-line method over the estimated
useful lives of three years. The XO trade name was determined to
have an indefinite life and is not being amortized, but is
reviewed at least annually for impairment, as required under
SFAS No.&nbsp;142.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation or amortization of the long-lived
asset begins when the asset is substantially complete or placed
into service. At March&nbsp;31, 2003, our balance sheet includes
approximately $606&nbsp;million of long-lived assets, including
approximately $94&nbsp;million of construction-in-process and
certain fixed wireless licenses, that were either not ready for
their intended use or not placed into service, and accordingly
are not being depreciated or amortized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS
No.&nbsp;144, &#147;Accounting for the Impairment or Disposal of
Long-Lived Assets,&#148; or SFAS No.&nbsp;144. The criteria for
determining impairment for long-lived assets to be held and used
is determined by comparing the carrying value of these
long-lived assets to management&#146;s best estimate of future
undiscounted cash flows expected to result from the use of the
assets and their eventual disposition. We believe that no
impairment existed under SFAS No.&nbsp;144 as of March&nbsp;31,
2003. In the event that there are changes in the planned use of
our long-lived assets or our expected future undiscounted cash
flows are reduced significantly, our assessment of our ability
to recover the carrying value of these assets under SFAS
No.&nbsp;144 could change.
</FONT>

<P align="left">
<B><FONT size="2">Revenue Recognition</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenues from telecommunications services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. In circumstances when
</FONT>

<P align="center"><FONT size="2">84
</FONT>

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<DIV align="left">
<FONT size="2">these criteria are not met, revenue recognition
is deferred until resolution occurs. For example, if a customer
files for bankruptcy, we believe the probability of collection
is weakened. Consequently, under such circumstances, although we
continue to bill the customer for all services provided, we do
not recognize revenue until cash is received. In addition,
telecommunications customers often dispute the amounts that we
invoice them due to regulatory issues, late payment fees and
disconnection penalties based on differences of opinion
regarding contract terms or service levels. Accordingly, these
billings are not considered fixed and determinable and
collection of such amounts is not considered probable. Although
these disputed amounts are billed, revenue recognition is
deferred until the dispute is resolved and the cash is collected.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Service discounts and incentives related to
telecommunications services are recorded as a reduction of
revenue when granted or ratably over a contract period. Fees
billed in connection with customer installations and other
upfront fees are deferred and recognized ratably over the
estimated customer life. The estimated customer life is
calculated by analyzing customer disconnects as a percentage of
revenue. This calculation is reviewed every quarter.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue from the sale or lease of unlit network
capacity is recognized upon consummation of the transaction and
the acquirer&#146;s acceptance of the capacity in instances when
we receive upfront cash payments and are contractually obligated
to transfer title to the specified capacity at the end of the
contract term. If the transaction does not meet these criteria,
revenue is recognized ratably over the contract term. There were
no sales of unlit capacity during 2002 and the three months
ended March&nbsp;31, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We establish an allowance for collection of
doubtful accounts and other sales credit adjustments. Allowances
for sales credits are established through a charge to revenue,
while allowances for doubtful accounts are established through a
charge to selling, operating and general expenses. We assess the
adequacy of these reserves monthly by considering general
factors, such as the length of time individual receivables are
past due, historical collection experience, the economic and
competitive environment, and changes in the credit worthiness of
our customers. As considered necessary, we also assess the
ability of specific customers to meet their financial
obligations to us and establish specific valuation allowances
based on the amount we expect to collect from these customers.
We can and have experienced material changes to our reserve
requirements on a month to month basis as significant customers
have in the past unexpectedly filed for bankruptcy or otherwise
became insolvent. We believe that our established valuation
allowances were adequate as of March&nbsp;31, 2003. If
circumstances relating to specific customers change or economic
conditions worsen such that our past collection experience and
assessment of the economic environment are no longer valid, our
estimate of the recoverability of our trade receivables could be
changed. If this occurs, we would adjust our valuation allowance
in the period the new information is known.
</FONT>

<P align="left">
<B><FONT size="2">Cost of Service</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cost of service includes expenses directly
associated with providing telecommunications services to
customers, including, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. All such costs are expensed as incurred. We accrue for
the expected costs of services received from third party
telecommunications providers during the period the services are
rendered. Invoices received from the third party
telecommunications providers are often disputed due to billing
discrepancies. We accrue for all invoiced amounts, even amounts
in dispute, as these amounts represent contingent liabilities
that are considered probable and measurable. Disputes resolved
in our favor may reduce cost of service in the period the
dispute is settled and typically reflect costs paid in prior
periods. Because the period of time required to resolve these
types of disputes often lapses over several quarters, the
benefits associated with the favorable resolution of such
disputes normally are realized in periods subsequent to the
accrual of the disputed invoice.
</FONT>

<P align="center">
<B><FONT size="2">New Accounting Pronouncements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the Financial Accounting Standards
Board, or FASB issued SFAS No.&nbsp;143, &#147;Accounting for
Asset Retirement Obligations,&#148; or SFAS No.&nbsp;143, which
requires an entity to recognize the fair value of a liability
for an asset retirement obligation in the period in which a
legal or contractual removal obligation is incurred if a
reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset
retirement obligation is incurred, SFAS No.&nbsp;143 requires
the liability to be
</FONT>

<P align="center"><FONT size="2">85
</FONT>

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<DIV align="left">
<FONT size="2">recognized when a reasonable estimate of the fair
value can be made. As required by SOP&nbsp;90-7, we implemented
SFAS No.&nbsp;143 on January&nbsp;1, 2003, in conjunction with
the implementation of fresh start and recorded an asset
retirement obligation of $12.0&nbsp;million.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2003, we adopted SFAS
No.&nbsp;145, &#147;Rescission of FASB Statements No.&nbsp;4,
44, and 64, Amendment of FASB Statement No.&nbsp;13, and
Technical Corrections as of April 2002&#148; or SFAS
No.&nbsp;145, which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity&#146;s statement of operations. SFAS No.&nbsp;145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an extraordinary item only when
the extinguishment meets the criteria of both &#147;unusual in
nature&#148; and &#147;infrequent in occurrence&#148; as
prescribed under Accounting Principles Board Opinion, or APB,
No.&nbsp;30, &#147;Reporting the Results of
Operations&nbsp;&#151; Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions&#148;. The
adoption of SFAS No.&nbsp;145 had no effect on our financial
position or results of operations for the three months ended
March&nbsp;31, 2003 and 2002. We recognized extraordinary gains
from debt repurchases in the third and fourth quarters of 2001.
In the future, such gains will be reclassified in the respective
consolidated statements of operations in accordance with SFAS
No.&nbsp;145.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2003, we adopted SFAS
No.&nbsp;146, &#147;Accounting for Costs Associated with Exit or
Disposal Activities&#148; or SFAS No.&nbsp;146, which requires
that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a
liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements&#146; commitment to an exit plan, which is generally
before an actual liability has been incurred. In the first
quarter of 2003, we did not have any exit or disposal activities
initiated after December&nbsp;31, 2002; however, the provisions
of SFAS No.&nbsp;146 were implemented in conjunction with our
implementation of fresh start accounting. Accordingly, our
remaining restructuring accrual has been reduced to its net
present value.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, the FASB issued SFAS
No.&nbsp;148, &#147;Accounting for Stock-Based
Compensation-Transition and Disclosure,&#148; or SFAS
No.&nbsp;148 which amends SFAS No.&nbsp;123, &#147;Accounting
for Stock-Based Compensation,&#148; or SFAS No.&nbsp;123, to
provide alternative methods of transition to SFAS
No.&nbsp;123&#146;s fair value method of accounting for
stock-based employee compensation. SFAS No.&nbsp;148 also amends
the disclosure provisions of SFAS No.&nbsp;123 and APB
No.&nbsp;28, &#147;Interim Financial Reporting,&#148; or APB
No.&nbsp;28, to require disclosure in the summary of significant
accounting policies of the effects of an entity&#146;s
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. While SFAS No.&nbsp;148
does not amend SFAS No.&nbsp;123 to require companies to account
for employee stock options using the fair value method, the
disclosure provisions of SFAS No.&nbsp;148 are applicable to all
companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value
method of SFAS No.&nbsp;123 or the intrinsic value method of APB
No.&nbsp;28. Effective January&nbsp;1, 2003, we adopted the
disclosure provisions of SFAS No.&nbsp;148. As allowed by SFAS
No.&nbsp;148, we have chosen to continue to account for
compensation cost associated with our employee stock plans in
accordance with the intrinsic value method prescribed by APB
No.&nbsp;25, &#147;Accounting for Stock Issued to
Employees,&#148; or APB No.&nbsp;25.
</FONT>

<P align="center">
<B><FONT size="2">Quantitative and Qualitative Disclosure About
Market Risk</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On January&nbsp;16, 2003, the effective date of
XO&nbsp;Parent&#146;s emergence from Chapter&nbsp;11, we amended
the $1.0&nbsp;billion Pre-Petition Credit Facility in accordance
with the Plan of Reorganization. As of March&nbsp;31, 2003, the
New Credit Agreement was comprised of $500.0&nbsp;million junior
secured loans with principal amounts payable beginning October
2007, and the rate at which interest accrues under the entire
outstanding balance is variable. Currently, we do not pay cash
interest on the New Credit Agreement. However, interest accrues
</FONT>

<P align="center"><FONT size="2">86
</FONT>

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<DIV align="left">
<FONT size="2">based on variable rates. Interest expense and
future cash flow exposure as of December&nbsp;31, 2002 are
illustrated in the following table (dollars in millions).
</FONT>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="30%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">No</FONT></B></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Annual Interest Expense Given</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Change in</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Annual Interest Expense Given</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">an Interest Rate decrease of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Interest</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">an Interest Rate increase of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">X&nbsp;Basis Points</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Rates</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">X&nbsp;Basis Points</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Cash Flow Risk</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(150 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(100 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(50 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">50 BPS</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">100 BPS</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">150 BPS</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">New Credit Agreement
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41.7</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Marketable securities at December&nbsp;31, 2002
and March&nbsp;31, 2003 consist of U.S. government agency issued
and other high-grade securities with original maturities beyond
three months. These securities were classified as
&#147;available for sale.&#148;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Subsequent to March&nbsp;31, 2003, we liquidated
these marketable securities for cash and invested a portion of
the proceeds, $160.7&nbsp;million, in $766.6&nbsp;million
principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in
reorganization proceedings. The debt trades in a thin market
primarily between dealers but is neither listed on any exchange
nor on any over-the-counter NASDAQ or National Quotation Bureau
systems. If we choose to liquidate our investment in this debt,
we cannot be assured that we will be able to dispose of the
investment for an amount greater than or equal to the amount we
paid for it, or that any distribution that may be received upon
consummation of Global Crossing&#146;s bankruptcy case will have
a greater value than that of our investment. If interest rates
had increased or decreased, it would not have had a material
impact on the fair value of these financial instruments or on
the interest we would have earned on our as illustrated in the
following table as of December&nbsp;31, 2002 (dollars in
millions).
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="31%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">No</FONT></B></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Valuation of Securities Given</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Change in</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Valuation of Securities Given</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">an Interest Rate decrease of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Interest</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">an Interest Rate increase of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">X&nbsp;Basis Points</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Rates</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">X&nbsp;Basis Points</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Fair Value Risk</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(150 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(100 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(50 BPS)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fair Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">50 BPS</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">100 BPS</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">150 BPS</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Financial Assets:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities&nbsp;&#151; over 1&nbsp;year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">247.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">247.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">247.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">245.8</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The sensitivity analyses provide only a limited,
point-in-time view of the market risk sensitivity of certain of
our financial instruments. The actual impact of market interest
rate and price changes on the financial instruments may differ
significantly from those shown in the above sensitivity analyses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are not currently engaged in the use of
off-balance sheet derivative financial instruments, to hedge or
partially hedge interest rate exposure.
</FONT>

<P align="center">
<B><FONT size="2">Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On May&nbsp;15, 2002, we dismissed our
independent auditors, Arthur Andersen LLP, and appointed
Ernst&nbsp;&#38; Young LLP to serve as our new independent
auditors for the year ending December&nbsp;31, 2002. Our Board
of Directors approved this decision. We filed a current report
on Form&nbsp;8-K with the SEC on May&nbsp;16, 2002, which
included a notification that the change was effective on
May&nbsp;15, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Arthur Andersen&#146;s report on our financial
statements for the fiscal year ending December&nbsp;31, 2000 did
not contain an adverse opinion or disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit
scope or accounting principles. Arthur Andersen&#146;s report on
the Company&#146;s financial statements for the fiscal year
ending December&nbsp;31, 2001 included an explanatory paragraph
that discussed the substantial doubt concerning our ability to
continue as a going concern.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During each of the two fiscal years ending
December&nbsp;31, 2000 and 2001, there were: (i)&nbsp;no
disagreements with Arthur Andersen on any matter of accounting
principle or practice, financial statement disclosure or
auditing scope or procedure which, if not resolved to Arthur
Andersen&#146;s satisfaction, would have caused them to make
reference to the subject matter in connection with their report
on our financial statements for such years; and (ii)&nbsp;there
were no reportable events as defined in Item&nbsp;304(a)(1)(v)
of Regulation&nbsp;S-K.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During each of our two fiscal years ending
December&nbsp;31, 2000 and 2001 and through the date of their
appointment, we did not consult Ernst&nbsp;&#38; Young with
respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial
statements, or any other matters or reportable events as set
forth in Items&nbsp;304(a)(2)(i) and (ii) of Regulation&nbsp;S-K.
</FONT>

<P align="center"><FONT size="2">87
</FONT>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" -->
<DIV align="left"><A NAME="012"></A></DIV>

<P align="center">
<B><FONT size="2">DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to January&nbsp;16, 2003, the Effective
Date of our Plan of Reorganization, our Board of Directors was
comprised of the following individuals: Daniel&nbsp;F. Akerson,
Nathaniel&nbsp;A. Davis, Nicolas Kauser, Craig&nbsp;O. McCaw,
Sharon&nbsp;L. Nelson, Henry&nbsp;R. Nothhaft, Jeffrey&nbsp;S.
Raikes, Peter&nbsp;C. Waal, and Dennis&nbsp;M. Weibling.
Additional information concerning these former board members is
included in our Annual Report on Form&nbsp;10-K for the year
ended December&nbsp;31, 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The names, ages and positions with XO Parent of
our current directors and executive and other key officers are
listed below.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="58%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Age</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Position</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Carl C. Icahn(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chairman of the Board of Directors
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Carl J. Grivner
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Chief Executive Officer, President and Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Andrew R. Cohen(1)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adam Dell(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Vincent J. Intrieri(2)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Keith Meister(1)(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John H. Jacquay
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Executive Vice President, National Sales
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wayne M. Rehberger
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Executive Vice President, Chief Financial Officer
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Mark W. Faris
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Senior Vice President, Network Operations
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">William Garrahan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Vice President, Corporate Development and
    Strategic Planning
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Brian Oliver
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Executive Vice President, Strategy and Corporate
    Development
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Lee Weiner
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Senior Vice President and General Counsel
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Doug Kelly
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">54</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Executive Vice President, Network Services
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the Executive Committee of the Board of
    Directors.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the Audit Committee of the Board of
    Directors.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Member of the Compensation Committee of the Board
    of Directors.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Brief biographies of our directors are set forth
below.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Carl C. Icahn.
</FONT></I><FONT size="2">Mr.&nbsp;Icahn has served as our
Chairman of the Board of Directors since January 2003. Since
1984, he has served as the Chairman of the Board and a Director
of Starfire Holding Corporation (formerly Icahn Holding
Corporation), a privately-held holding company, and Chairman of
the Board and a Director of various subsidiaries of Starfire,
including ACF Industries, Incorporated, a privately-held railcar
leasing and manufacturing company. Since 1968, he served as the
Chairman of the Board and President of Icahn&nbsp;&#38; Co.,
Inc., a registered broker-dealer and a member of the National
Association of Securities Dealers. Since November 1990,
Mr.&nbsp;Icahn has been Chairman of the Board of American
Property Investors, Inc., the general partner of American Real
Estate Partners, L.P., a public limited partnership that invests
in real estate. Since 1993, Mr.&nbsp;Icahn has been a Director
of Cadus Pharmaceutical Corporation, a firm which holds various
biotechnology patents. Since October 1998, Mr.&nbsp;Icahn has
been the President and a Director of Stratosphere Corporation
which operates the Stratosphere Hotel and Casino. Since
September 2000, Mr.&nbsp;Icahn has served as the Chairman of the
Board of GB&nbsp;Holdings, a holding company that owns the Sands
Hotel and Casino in Atlantic City, New&nbsp;Jersey.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Carl J. Grivner.
</FONT></I><FONT size="2">Mr.&nbsp;Grivner has served as our
Chief Executive Officer and President since May&nbsp;15, 2003.
From May&nbsp;1, 2003 to May&nbsp;15, 2003, he served as a
member of the Office of the Chairman of the Board of XO.
Mr.&nbsp;Grivner has been a member of our Board of Directors
since May&nbsp;1, 2003. From February 2002 to April 2003, he was
Chief Operating Officer of Global Crossing, Ltd. From June 2000
to February 2002, he was Executive Vice President, Operations of
Global Crossing. On January&nbsp;28, 2002, Global Crossing and
certain of its subsidiaries filed a voluntary petition under
Chapter&nbsp;11 of the U.S. Bankruptcy Code. From July
</FONT>

<P align="center"><FONT size="2">88
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">1999 to April 2000, Mr.&nbsp;Grivner was Chief
Executive Officer of Worldport Communications. From July 1998 to
July 1999, he was Chief Executive Officer, Western Hemisphere of
Cable&nbsp;&#38; Wireless Plc.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Andrew R. Cohen.
</FONT></I><FONT size="2">Mr.&nbsp;Cohen has been a member of
our Board of Directors since January 2003. Since 2000, he has
served as Chief Technology Officer of Icahn Associates Corp.
From 1999 to 2000, Mr.&nbsp;Cohen served as senior vice
president and chief technology officer of American
Greetings&nbsp;&#38; Americangreetings.com. From 1998 to 1999,
he served as President of CNS Development, which provides
website transaction consulting services. From 1992 to 1998,
Mr.&nbsp;Cohen served as vice president of development of
Micrografx, Inc., a consumer and business enterprise software
company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Adam Dell.
</FONT></I><FONT size="2">Mr.&nbsp;Dell has been a member of our
Board of Directors since January 2003. Since January 2000, he
has served as the Managing General Partner of Impact Venture
Partners, a venture capital firm focused on information
technology investments. From October 1998 to January 2000,
Mr.&nbsp;Dell was a Senior Associate and subsequently a Partner
with Crosspoint Venture Partners in Northern California. From
July 1997 to August 1998, he was a Senior Associate with
Enterprise Partners in Southern California. From January 1996 to
June 1997 Mr.&nbsp;Dell was associated with the law firm of
Winstead Sechrest&nbsp;&#38; Minick, in Austin, Texas, where he
practiced corporate law.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Vincent J. Intrieri.
</FONT></I><FONT size="2">Mr.&nbsp;Intrieri, has been a member
of our Board of Directors since January 2003. Since March 2003,
he has been Managing Director of Icahn Associates Corp. From
1998 to March 2003, he served as a portfolio manager of High
River Limited Partnership. From 1995 to 1998, Mr.&nbsp;Intrieri
served as portfolio manager for distressed investments with
Elliot Associates L.P., a New&nbsp;York investment fund. Prior
to 1995, Mr.&nbsp;Intrieri was a partner at the Arthur Andersen
accounting firm and is a certified public accountant.
Mr.&nbsp;Intrieri currently serves on the board of TransTexas
Gas Corporation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Keith Meister.
</FONT></I><FONT size="2">Mr.&nbsp;Meister has been a member of
our Board of Directors since January 2003. Since June 2002, he
has served as senior investment analyst of High River Limited
Partnership. From March 2000 through 2001, Mr.&nbsp;Meister
co-founded and served as co-president of J&nbsp;Net Ventures, a
venture capital fund focused on investments in information
technology and enterprise software businesses. From 1997 through
1999, Mr.&nbsp;Meister served as an investment professional at
Northstar Capital Partners, an opportunistic investment
partnership with assets in excess of $2&nbsp;billion. From 1995
to 1997, Mr.&nbsp;Meister served as an investment analyst in the
investment banking group at Lazard Freres.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">John H. Jacquay.
</FONT></I><FONT size="2">Mr.&nbsp;Jacquay has been our
Executive Vice President, National Sales since April 2003. From
February 2002 to April 2003, he was our Senior Vice President,
National Sales. From November 1999 to February 2002, he was
Chairman and Chief Executive Officer of Pagoo, Inc. From January
1999 to July 1999, Mr.&nbsp;Jacquay was President and Chief
Operating Officer of GRIC Communications. From 1997 to 1999, he
was Chief Operating Executive&nbsp;&#151; Regulated Industries
unit of MCI Systemhouse. From 1996 to 1997, Mr.&nbsp;Jacquay was
President&nbsp;&#151; Network Services of US ONE Communications.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Wayne M. Rehberger.</FONT></I><FONT size="2">
Mr.&nbsp;Rehberger has served as our Executive Vice President,
Chief Financial Officer since April 2003. From December 2000 to
April 2003, he was our Senior Vice President, Chief Financial
Officer. From August 2000 to October 2000, Mr.&nbsp;Rehberger
was our Senior Vice President of Finance. From April 2000 to
August 2000, he was Chief Financial Officer of Nettel
Communications. On September&nbsp;28, 2000, Nettel filed a
voluntary petition under Chapter&nbsp;11 of the U.S. Bankruptcy
Code. From April 1999 to March 2000, Mr.&nbsp;Rehberger was
Senior Vice President of Finance at MCI WorldCom. From June 1986
to March 1999, he held other senior level finance positions at
MCI.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Mark W. Faris.</FONT></I><FONT size="2">
Mr.&nbsp;Faris has been our Senior Vice President, Network
Operations since April 2001. From September 2000 to April 2001,
he was the Chief Operating Officer of Gemeni Networks. From
March 2000 to September 2000, Mr.&nbsp;Faris was President and
Chief Operating Officer of BlueStar Communications. Prior to
that, he had been employed by Southwestern Bell for over
20&nbsp;years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">William Garrahan.
</FONT></I><FONT size="2">Mr.&nbsp;Garrahan has served as our
Vice President, Corporate Development and Strategic Planning
since July 2001. From September 1996 to February 2001, he was a
Senior Vice President with Lehman Brothers, in its equity
research department.
</FONT>

<P align="center"><FONT size="2">89
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Brian Oliver.
</FONT></I><FONT size="2">Mr.&nbsp;Oliver has served as our
Executive Vice President of Strategy and Corporate Development
since May 2003. Prior to joining XO, he was the Founder,
Chairman and CEO of Cambrian Communications, a facilities-based
metropolitan area network provider, delivering end-to-end,
all-optical network solutions between New York and Washington,
DC. Prior to forming Cambrian, Mr. Oliver was the founder,
President and CEO of Wave International, Inc. He also held
various senior positions at Bell Atlantic Corporation including
Vice President of Corporate Development and Vice President of
Federal Regulatory Relations. In addition, Mr.&nbsp;Oliver was a
board member for Pontio Communications.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Lee Weiner.
</FONT></I><FONT size="2">Mr.&nbsp;Weiner has served as our
Senior Vice President and General Counsel since June 2003. Prior
to joining XO, Mr.&nbsp;Weiner was Executive Vice President,
General Counsel and Secretary at Net2000 Communications, Inc. He
also served as Vice President and Acting General Counsel/ Senior
Associate Counsel at Qwest Communications International, Inc.
after its merger with LCI International, Inc. Prior to that, he
was Vice President and General Counsel at LCI International,
Inc. Mr.&nbsp;Weiner also held several senior positions at MCI
Telecommunications Corporation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Doug Kelly.
</FONT></I><FONT size="2">Mr.&nbsp;Kelly is Executive Vice
President of Network Services at XO Communications. In this
role, he oversees all service delivery, service assurance and
network performance functions and is responsible for the
end-to-end customer experience, from order entry, through
service installation, billing and customer care. Prior to
joining XO, Mr.&nbsp;Kelly founded DEK Consulting Services which
provided both technical and business analyses to
telecommunications companies involved in acquisitions, business
development and restructuring strategies. Prior to that, he was
President, Network Services for Global Crossing. He also held
several senior management positions at MCI including Vice
President Network Management, Vice President Central Operations
and Director of West Operations. Mr.&nbsp;Kelly also held
positions at New York Telephone Company and AT&#38;T.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each director will hold office until the first
meeting of stockholders immediately following expiration of his
one-year term of office and until his successor is qualified and
elected, or until his earlier resignation or removal. We do not
have a classified or staggered board.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed above, on June&nbsp;17, 2002,
XO&nbsp;Parent filed a voluntary petition for bankruptcy under
Chapter&nbsp;11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of
New&nbsp;York, and emerged from bankruptcy on January&nbsp;16,
2003. Messrs.&nbsp;Davis, Jacquay, Rehberger, Faris, Salemme and
Garrahan and Ms.&nbsp;Gofus each were executive officers of
XO&nbsp;Parent during the bankruptcy proceedings.
</FONT>

<P align="center">
<B><FONT size="2">Section&nbsp;16(a) Beneficial Ownership
Reporting Compliance</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Section&nbsp;16(a) of the Securities Exchange Act
of 1934 requires our directors, executive officers and any
person who owns more than 10% of our common stock, whom were
refer to collectively as the Reporting Persons, to file with the
Securities and Exchange Commission reports of ownership and
reports of changes in ownership of our common stock. Under
Securities and Exchange Commission rules, we receive copies of
all Section&nbsp;16(a) forms that these Reporting Persons file.
We have reviewed copies of these reports and written
representations from the Reporting Persons. We believe all
Reporting Persons complied with their Section&nbsp;16(a)
reporting obligations during 2002, except for the following
individuals: Messrs Davis, Rehberger, Salemme, Ms.&nbsp;Gofus
and Gary Begeman, Doug Carter and Scott Macleod, former
executive officers of ours, had a late Form&nbsp;5 filing with
respect to the cancellation of certain options to purchase
pre-petition class A common stock in connection with our May
2001 option exchange program; Mr.&nbsp;Faris had a late
Form&nbsp;5 filing with respect to the purchase of shares of
pre-petition class&nbsp;A common stock under our employee stock
purchase plan; and Jeffrey S. Raikes, a former member of our
Board of Directors, had a late Form&nbsp;4 filing with respect
to the sale of shares of our pre-petition class A common stock.
</FONT>

<P align="center"><FONT size="2">90
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">


<!-- link1 "EXECUTIVE COMPENSATION" -->
<DIV align="left"><A NAME="013"></A></DIV>

<DIV align="center">
<B><FONT size="2">EXECUTIVE COMPENSATION</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">Summary Compensation Table</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Predecessor Executive
Compensation.</FONT></I><FONT size="2"> The following table sets
forth, for the fiscal years ended December&nbsp;31, 2002, 2001,
and 2000, individual compensation information for our former
Chief Executive Officer, and each of our four most highly
compensated executive officers, each of whom has resigned from
their positions and terminated their employment with us and whom
we refer to collectively as the Named Executive Officers.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Long Term</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Compensation Awards</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Annual Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Restricted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">All Other</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock Award(s)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name and Principal Position</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Salary($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Bonus($)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)(2)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options(#)(3)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($)(4)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Daniel F. Akerson (5)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">377,303</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,606</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Chief Executive Officer
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">318,006</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(6)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,331</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">477,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,580</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nathaniel A. Davis (7)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">382,212</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,423,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,769</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">President and Chief Operating Officer
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">375,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">296,136</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">432,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">194</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">375,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">239,524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,975,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">179</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">R. Gerard Salemme (8)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">217,300</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,417</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,224</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Senior Vice President, Regulatory and
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213,200</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">223,655</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,787</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Legislative Affairs
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">221,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">205,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,687</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael S. Ruley (9)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">280,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">301,665</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,329</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Vice President, Market Sales
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">268,846</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">192,653</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,900</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Operations Nancy B. Gofus (10)
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="right" valign="bottom"><FONT size="2">2000 2002</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="3" align="right" valign="bottom"><FONT size="2">244,443 275,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">191,648 &#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151; &#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">253,100 212,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,324 9,489</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Executive Vice President, Marketing
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">275,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">178,503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,900</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,950</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">and Customer Care
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">253,846</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">157,723</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">350,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,154</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Includes bonuses earned for the corresponding
    fiscal years that were paid subsequent to the stated calendar
    year end. No bonuses were paid to any Named Executive Officer
    with respect to performance for 2002, other than to
    Mr.&nbsp;Salemme.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents an award of shares of our pre-petition
    class&nbsp;A common stock granted on August&nbsp;20, 2001, which
    shares were restricted and subject to forfeiture until vested.
    All such shares were forfeited in 2002, and no shares were
    outstanding at December&nbsp;31, 2002.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents options to acquire shares of
    class&nbsp;A common stock. Share figures have been restated
    retroactively to reflect stock splits with respect to our
    class&nbsp;A common stock. Grants in 2002 were made in
    connection with the Offer to Exchange with respect to
    outstanding options that we undertook in May 2001. See
    &#147;Report on Repricing of Options&#148; in our Annual Report
    on Form&nbsp;10-K for the year ended December&nbsp;31, 2001.
    Pursuant to XO&nbsp;Parent&#146;s Plan of Reorganization, all
    interests in such stock options and such shares of class&nbsp;A
    common stock issued upon exercise thereof, were cancelled and
    terminated effective January&nbsp;16, 2003, the date that the
    Plan of Reorganization was consummated.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">For 2002, includes for Mr.&nbsp;Akerson: $5,404
    for contributions made by us on behalf of Mr.&nbsp;Akerson under
    our 401(k) Plan and $202 for premiums for group term life
    insurance paid by us; for Mr.&nbsp;Davis: $8,558 for
    contributions made by us on behalf of Mr.&nbsp;Davis under our
    401(k) Plan and $211 for premiums for group term life insurance
    paid by us; for Mr. Salemme: $3,116 for contributions made by us
    on behalf of Mr.&nbsp;Salemme under our 401(k) Plan and $108 for
    premiums for group term life insurance paid by us; for
    Mr.&nbsp;Ruley: $1,216 for reimbursement of relocation expenses;
    $8,000 for contributions made by us on behalf of Mr.&nbsp;Ruley
    under our 401(k) Plan and $113 for premiums for group term life
    insurance paid by
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">91
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD align="left">
    <FONT size="2">us; for Ms.&nbsp;Gofus: $9,309 for contributions
    made by us on behalf of Ms.&nbsp;Gofus under our 401(k) Plan and
    $180 for premiums for group term life insurance paid by us.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Effective January&nbsp;17, 2003, Mr.&nbsp;Akerson
    resigned from his position as Chief Executive Officer and
    terminated his employment with us.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(6)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In August 2001, Mr.&nbsp;Akerson elected to forgo
    all of his salary for the period between August 2001 and April
    2002, after which time he elected to receive his salary. For
    2001, he elected not to receive a bonus. In January 2003,
    Mr.&nbsp;Akerson received a payment of $750,000 under the
    XO&nbsp;Communications, Inc. Employee Retention and Incentive
    Plan described below.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(7)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Effective in May 2003, Mr.&nbsp;Davis resigned
    from his position as President and Chief Operating Officer and
    terminated his employment with us. In January 2003,
    Mr.&nbsp;Davis received a payment of $140,625 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below. Mr. Davis also received a separation payment of
    $500,000, pursuant to the mutual release and settlement
    agreement dated as of May 23, 2003, by and among Mr.&nbsp;Davis
    and the Company (the &#147;Davis Settlement Agreement&#148;).
    The Davis Settlement Agreement also provides that the vested
    options that Mr.&nbsp;Davis&#146; holds on 325,000 shares of our
    common stock granted to him pursuant to our 2002 Stock Incentive
    Plan will remain exercisable through November&nbsp;30, 2003, at
    which time the options will expire. In consideration of the
    benefits he will receive under the Davis Settlement Agreement,
    Mr.&nbsp;Davis agreed to provide certain consulting and
    transition services to us until January&nbsp;31, 2004, and
    agreed not to disclose certain information that was supplied to
    him by us that is confidential, proprietary or otherwise not
    generally available to the public.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(8)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Effective in June 2003, Mr.&nbsp;Salemme resigned
    from his position as Senior Vice President, Regulatory and
    Legislative Affairs and terminated his employment with us.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(9)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Effective in April 2003, Mr.&nbsp;Ruley resigned
    from his position as Executive Vice President, Market Sales
    Operations and terminated his employment with us. In January
    2003, Mr.&nbsp;Ruley received a payment of $85,938 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(10)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Effective in June 2003, Ms.&nbsp;Gofus resigned
    from her position as Executive Vice President, Marketing and
    Customer Care and terminated her employment with us. In January
    2003, Ms.&nbsp;Gofus received a payment of $163,282 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Successor Executive
Compensation.&nbsp;&nbsp;</FONT></I><FONT size="2">The following
table sets forth, for the period beginning January 1, 2003 and
ending June 30, 2003, individual compensation information for
our current Chief Executive Officer, and each of our four most
highly compensated executive officers.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="33%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Long Term</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Annual Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Compensation Awards</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Restricted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Annual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">All Other</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Name and Principal Position</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Salary($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Bonus($)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Awards(s)($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options(#)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation($)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Carl J. Grivner
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">700,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,000,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Chief Executive Officer, President and Director
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Brian D. Oliver
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">288,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,400</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(2)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">400,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Executive Vice President, Strategy and Corporate
    Development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John H. Jacquay
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">288,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">148,438</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(4)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">390,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(5)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Executive Vice President, National Sales
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wayne M. Rehberger
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">287,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">148,438</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(4)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">450,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(5)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Executive Vice President, Chief Financial Officer
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Doug Kelly
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">280,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">350,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">(3)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Executive Vice President, Network Services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">92
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">These numbers include bonuses earned for the
    period ending June 30, 2003, but do not include any payments
    which may become due pursuant to the 2003 Employee Retention
    Plan. For more further information about this plan, please see
    &#147;Employee Retention Plan&#148; below.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Mr. Oliver received $50,400 as a signing bonus.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">These options will be issued pending the approval
    of the Board of Directors of XO Parent.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Mr. Jacquay and Mr. Rehberger received $78,125 of
    these payments pursuant to the Restructuring Retention Plan upon
    emergence from bankruptcy on January&nbsp;16, 2003. Both Mr.
    Jacquay and Mr. Rehberger have agreed to withdraw from the
    Restructuring Retention Plan and are now participants in the
    2003 Employee Retention Plan pursuant to which they both earned
    an additional bonus of $70,313 as of June&nbsp;30, 2003 or any
    additional amounts which may be earned in 2003 pursuant to the
    2003 Employee Retention Plan.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(5)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The numbers do not include 11,452 in options
    which will be issued to each of Mr. Jacquay and Mr. Rehberger in
    2003 or any additional options which may be earned in 2003
    pursuant to the 2003 Employee Retention Plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Option Grants in Last Fiscal Year</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Share and per share figures (including exercise
or base price figures) have been restated retroactively to
reflect stock splits with respect to our pre-petition class A
common stock. All option grants in 2002 were made in connection
with the Offer to Exchange with respect to outstanding options
that we undertook in May 2001. See &#147;Report on Repricing of
Options&#148; in our Annual Report on Form&nbsp;10-K for the
year ended December&nbsp;31, 2001. Pursuant to XO Parent&#146;s
Plan of Reorganization, all interests in such stock options and
all such shares issuable upon exercise thereof were cancelled
and terminated effective January&nbsp;16, 2003, the date that
the Plan of Reorganization was consummated.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="24%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="1">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><B><FONT size="1">Individual Grants(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="19" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">% of Total</FONT></B></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Potential Realizable Value at</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Assumed Annual Rates of</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Granted to</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Market Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Stock Price Appreciation for</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Underlying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Employees</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise or</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">on Date of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Option Terms($)(2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">in Fiscal</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Base Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Grant</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Granted(#)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year(%)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($/Sh)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">($/Sh)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expiration Date</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">0%</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">5%</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">10%</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Daniel F. Akerson
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">&#151;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">N/A</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Nathaniel A. Davis
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1,423,750</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5.71</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="1">January 16, 2012</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">125,355</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">317,673</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">R. Gerard Salemme
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">59,500</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.24</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="1">January 16, 2012</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">5,239</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">13,276</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Michael S. Ruley
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">301,665</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">1.21</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="1">January 16, 2012</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">26,561</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">67,308</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="1">Nancy B. Gofus
    </FONT></DIV>
    </TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">212,500</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.86</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0.14</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="center" valign="bottom" nowrap><FONT size="1">January 16, 2012</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">0</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">18,710</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="1">47,413</FONT></TD>
    <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">All options were granted on January&nbsp;17,
    2002, at which time 30% of the shares subject to the option were
    vested, with the remainder vesting monthly on a ratable basis
    over the 36-month period commencing on the date of grant.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The potential realizable value illustrates value
    that might be realized upon exercise of the options immediately
    prior to the expiration of their terms, assuming the specified
    compounded rates of appreciation of the market price per share
    from the date of grant to the end of the option term. The gains
    shown are net of the option exercise price, but do not include
    deductions for taxes and other expenses payable upon the
    exercise of the option or for sale of underlying shares of
    pre-petition class A common stock. No Named Executive Officer,
    however, realized or can realize any value with respect to such
    grants because, pursuant to XO Parent&#146;s Plan of
    Reorganization, all interests in such stock options and all such
    shares issuable upon exercise thereof were cancelled and
    terminated effective January&nbsp;16, 2003, the date that the
    Plan of Reorganization was consummated, and no Named Executive
    Officer exercised any such option prior to January&nbsp;16, 2003.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">93
</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<B><FONT size="2">Aggregated Option Exercises and Fiscal
Year-End Option Values</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="26%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Number of Securities</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Underlying Unexercised</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Value of Unexercised</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options at Fiscal</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">In-the-Money Options at</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year-End(#)(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Fiscal Year-End($)(2)</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Acquired on</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise(#)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Realized($)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Unexercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Unexercisable</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Daniel F. Akerson
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,200,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,000,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nathaniel A. Davis
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">731,648</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">892,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">R. Gerald Salemme
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">400,876</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,924</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Michael S. Ruley
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">561,319</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">158,646</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">283</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">566</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nancy B. Gofus
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">159,201</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,400</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Pursuant to XO Parent&#146;s Plan of
    Reorganization, all interests in such stock options, all such
    shares issued upon exercise thereof, were cancelled and
    terminated effective January&nbsp;16, 2003, the date that the
    Plan of Reorganization was consummated.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">For purposes of these calculations, the value of
    our pre-petition class A common stock was $0.053 per share,
    which was derived based on trading on the Nasdaq
    Over-the-Counter Bulletin Board. Nevertheless, XO Parent&#146;s
    Plan of Reorganization provided that interests in its
    pre-petition class A common stock would be cancelled and
    terminated without any recovery, and none of the Named Executive
    Officers exercised any exercisable options set forth above prior
    to the effective date of such plan.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Employment Agreements and Other
Arrangements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Carl J. Grivner. </FONT></I><FONT size="2">We
have entered into an Employment Term Sheet and a Change of
Control Agreement with Mr.&nbsp;Grivner. The Employment Term
Sheet provides for his employment as President and Chief
Executive Officer through April&nbsp;30, 2004, but renews
annually for an additional one year term unless, prior to
February 1 of the year in which the term sheet or extension
thereof expires, Mr.&nbsp;Grivner notified us, or we notify
Mr.&nbsp;Grivner, that the term sheet will not be renewed. It
provides for an annual base salary of $700,000, which we may
increase annually, and for an annual bonus of up to 100% of base
salary, based on certain revenue, earnings before interest,
taxes, depreciation and amortization, and cash targets to be
mutually agreed upon between us and Mr. Grivner. Pursuant to the
term sheet, in connection with Mr.&nbsp;Grivner&#146;s
acceptance of employment with us, we granted him options to
purchase 2,000,000 shares of our New Common Stock, with an
exercise price of $4.80, 25% of which shares are fully vested,
and the remainder of such shares vest in equal annual
installments on the first, second and third anniversary of the
date of grant. The term sheet also provides that we will
reimburse Mr.&nbsp;Grivner for certain relocation and related
costs and expenses.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Change of Control Agreement generally
provides that if both (i)&nbsp;a Change in Control occurs and
(ii)&nbsp;at any time on or after such Change in Control, but
before the end of the 24-month period immediately thereafter,
the Mr.&nbsp;Grivner&#146;s employment with us for any reason
other than (A)&nbsp;by Mr.&nbsp;Grivner without Good Reason,
(B)&nbsp;by us as a result of Mr.&nbsp;Grivner&#146;s disability
or with Cause or (C)&nbsp;as a result of the death of
Mr.&nbsp;Grivner, we shall pay him an amount equal to
Mr.&nbsp;Grivner&#146;s annual base salary, plus his targeted
annual bonus, reduced by any cash severance benefits paid to
Mr.&nbsp;Grivner. Under such circumstances, we also will provide
Mr.&nbsp;Grivner with certain health and life insurance benefits
for a period of 12&nbsp;months. In addition, under certain
circumstances, we will make additional payments to
Mr.&nbsp;Grivner for taxes due with respect to any payments or
benefits under this agreement treated as excise taxes under
specified provisions of the Internal Revenue Code.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Change of Control Agreement,
Mr.&nbsp;Grivner will have been deemed to have terminated his
employment for Good Reason if there is:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a material change in his duties that is
    inconsistent with his status as one of our key management
    employees or a substantial adverse alteration in the nature or
    status of his responsibilities;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a reduction in his annual base salary or target
    annual bonus;
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">94
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a relocation of his principal place of business
    of more than 35&nbsp;miles; or
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a failure by us to provide him with benefits as
    favorable in the aggregate in all material respects as those
    enjoyed by him under applicable plans.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Change of Control Agreement, a Change
of Control means the occurrence of any of the following events:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Any person or entity becomes the owners of
    securities of our that represent 50% or more of the voting power
    of our then outstanding securities, other than certain persons
    or entities, including those that owns securities that represent
    more than 10% of the voting power of us as of April&nbsp;1,
    2003. For purpose of this calculation, securities acquired from
    us are excluded from the determination of the percentage
    ownership of a person or entity, but any such securities shall
    be included in the then total number of securities outstanding.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">We merge or consolidate with another company,
    other than a merger or consolidation that would result in our
    stockholders holding more than 65% of the combined voting power
    of the company surviving the merger or consolidation;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">We are liquidated or we sell all or substantially
    all of our assets to any other company.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Despite the occurrence of one of the forgoing
events, no Change of Control will be deemed to have occurred for
purposes of the Change of Control Agreement if Mr.&nbsp;Icahn
and/or his affiliates is our largest stockholder and owns in
excess of 15% of our outstanding shares.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Change of Control Agreement, Cause
means the occurrence of any of the following events:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">the failure by Mr.&nbsp;Grivner to substantially
    perform his duties, other than a failure resulting from his
    incapacity due to physical or mental illness that continues for
    a period of 30&nbsp;days;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">he engages in misconduct that is demonstrably and
    materially injurious to us, monetarily or otherwise; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">an act or acts by him that constitutes any felony
    or a misdemeanor involving moral turpitude.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Director Compensation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each director is entitled to reimbursement for
out-of-pocket expenses incurred for each meeting of the full
Board or a committee of the Board attended. Our pre-petition
stock option plans permitted, and our 2002 Stock Incentive Plan
permits, grants and awards to non-employee directors. We made no
such grants in&nbsp;2002.
</FONT>

<P align="left">
<B><FONT size="2">Compensation Committee Interlocks and Insider
Participation</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During 2002, Messrs.&nbsp;Jeffrey&nbsp;S. Raikes,
Peter&nbsp;C. Waal and Dennis&nbsp;M. Weibling served on the
Compensation Committee of our Board of Directors. From September
1994 to January 1997, Mr.&nbsp;Weibling was Executive Vice
President of XO&nbsp;Parent. Effective January&nbsp;16, 2003,
each of Messrs.&nbsp;Raikes, Waal and Weibling resigned from our
Board of Directors and all committees thereof.
</FONT>

<P align="center"><FONT size="2">95
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<!-- link1 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" -->
<DIV align="left"><A NAME="014"></A></DIV>

<P align="center">
<B><FONT size="2">SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table sets forth information, as of
June&nbsp;30, 2003, with respect to the beneficial ownership of
our New Common Stock by (1)&nbsp;each member of the Board of
Directors, (2)&nbsp;all directors and executive officers as a
group, and (3)&nbsp;persons known to us to be the beneficial
owners of more than five percent of a class of our New Common
Stock.
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="52%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Shares Beneficially Owned</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount and Nature of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ownership(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Percent of Class (%)</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Carl Icahn(2)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,583,827</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">82.89</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Carl J. Grivner(3)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Wayne M. Rehberger
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Mark W. Faris
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">John H. Jacquay
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">97,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">William Garrahan
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Andrew R. Cohen
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adam Dell
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Vincent J. Intrieri
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Keith Meister
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">All directors and executive officers as a group
    (13&nbsp;persons)(4)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86,435,077</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83.03</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Under the rules of the Securities and Exchange
    Commission, a person is deemed to be the beneficial owner of a
    security if such person, directly or indirectly, has or shares
    the power to vote or direct the voting of such security or the
    power to dispose or direct the disposition of such security. A
    person is also deemed to be a beneficial owner of any securities
    if that person has the right to acquire beneficial ownership
    within 60&nbsp;days after June&nbsp;30, 2003. Accordingly, more
    than one person may be deemed to be a beneficial owner of the
    same securities. Unless otherwise indicated by footnote, the
    named individuals have sole voting and investment power with
    respect to the shares of our common stock beneficially owned.
    Share figures do not represent any right to participate in the
    Rights Offering pursuant to the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(2)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">As reported in the Schedule&nbsp;13D of
    Mr.&nbsp;Icahn and other parties to a joint filing agreement
    filed with the SEC, represents 78,078,993 shares of New Common
    Stock held by Cardiff Holding LLC, a Delaware limited liability
    company, and 3,001,936 shares of New Common Stock issuable upon
    exercise of Series&nbsp;A warrants, 2,251,449 shares of New
    Common Stock issuable upon exercise of Series&nbsp;B warrants,
    and 2,251,449 shares of New Common Stock issuable upon exercise
    of Series&nbsp;C warrants, all held by Cardiff. Cardiff is
    wholly-owned by ACF Industries Holding Corp., a Delaware
    corporation, which is wholly-owned by Highcrest Investors Corp.,
    a Delaware corporation, which is approximately 99% owned by
    Buffalo Investors Corp., a New&nbsp;York corporation, which is
    wholly-owned by Starfire Holding Corporation, a Delaware
    corporation, which is wholly-owned by Mr.&nbsp;Icahn.
    Mr.&nbsp;Icahn is the chairman and sole director of Starfire
    Holding, and the chairman and a director of each of Cardiff, ACF
    Industries, Highcrest Investors and Buffalo Investors.
    Additional shares of New Common Stock and warrants to purchase
    shares of New Common Stock may be allocated to Cardiff on a pro
    rata basis under the Plan of Reorganization to the extent that
    shares and warrants held back in respect of claims of general
    unsecured creditors of XO&nbsp;Parent ultimately are
    redistributed under the terms of the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(3)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents shares of New Common Stock obtainable
    as of June&nbsp;30, 2003 or 60&nbsp;days thereafter by
    Mr.&nbsp;Grivner upon the exercise of nonqualified stock options.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(4)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Represents (a)&nbsp;78,078,993 shares of New
    Common Stock held by Cardiff, as described in note&nbsp;2 above,
    (b)&nbsp;warrants to purchase 7,504,834 shares of New Common
    Stock held by Cardiff as described in note&nbsp;2 above, and
    (c)&nbsp;851,250 shares of New Common Stock obtainable as of
    June&nbsp;30, 2003 or 60&nbsp;days thereafter by executive
    officers as a group upon the exercise of nonqualified stock
    options. See notes&nbsp;(2) and (3) above.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="4%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">*</FONT></TD>
    <TD align="left">
    <FONT size="2">Less than 1%
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">96
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">Equity Compensation Plan Information</FONT></B>

<P align="left">
<B><FONT size="2">Our Pre-Petition Stock Option Plans</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, options to purchase
securities had been issued and were outstanding under the
following equity compensation plans: XO&nbsp;Communications,
Inc. Stock Option Plan; and the following stock options plans
assumed in connection with the acquisition of Concentric Network
Corporation: Delta Internet Services, Inc. 1996 Stock Option
Plan; Concentric Network Corporation 1995 Stock Incentive Plan
for Employees and Consultants; Concentric Network Corporation
1996 Stock Plan; Concentric Network Corporation 1997 Stock Plan;
Concentric Network Corporation 1999 Nonstatutory Stock Option
Plan; and certain grants of stock options to Concentric
employees not pursuant to any plan. Pursuant to our Plan of
Reorganization, which became effective as of January&nbsp;16,
2003, interests in each such plan, and rights to securities to
be issued upon the exercise of options outstanding under each
such plan, were terminated and cancelled, and holders of such
interests and options under each such plan were not entitled to
any distribution pursuant to the Plan of Reorganization. The
table below presents information with respect to the above
referenced plans as of December&nbsp;31, 2002.
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="20%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="11%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="14"></TD>
</TR>

<TR>
    <TD colspan="14" align="center" nowrap><B><FONT size="1">Equity Compensation Plan Information</FONT></B></TD>
</TR>

<TR>
    <TD colspan="14" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Securities to be</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of Securities</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Issued Upon Exercise of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted-Average Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining Available for</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding Options,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price of Outstanding Options,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Future Issuance Under Equity</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Plan Category</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants and Rights(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Warrants and Rights(1)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation Plans</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Equity compensation plans approved by security
    holders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,567,555</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.78</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,894,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Equity compensation plans not approved by
    security holders
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">N/A</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,567,555</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.78</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,894,303</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV align="left">
<HR size="1" width="18%" align="left" noshade>
</DIV>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(1)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Excludes options to purchase
    2,630,417&nbsp;shares of our pre-petition class&nbsp;A common
    stock granted prior to our June&nbsp;16, 2000 acquisition of
    Concentric Network Corporation pursuant to various stock option
    plans of Concentric, which options we assumed in connection with
    the Concentric acquisition and have a weighted average exercise
    price of $16.68&nbsp;per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<B><FONT size="2">Our 2002 Stock Incentive Plan Under Our Plan
of Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the confirmation of our Plan
of Reorganization by the Bankruptcy Court, the Bankruptcy Court
approved the adoption of the XO Communications, Inc. 2002 Stock
Incentive Plan, or the 2002 Stock Incentive Plan, which became
effective as of January&nbsp;16, 2003, the date that we
consummated our Plan of Reorganization. Under the 2002 Stock
Incentive Plan, we are authorized to issue, in the aggregate,
stock awards with respect of up to 17,590,020 of shares of New
Common Stock, in the form of options to purchase stock or
restricted stock. Of those shares, non-qualified options to
purchase 11.4&nbsp;million shares of New Common Stock have been
granted and are outstanding as of March&nbsp;31, 2003 pursuant
to the 2002 Stock Incentive Plan, each at a purchase price of
$5.00&nbsp;per share. With respect to the underlying shares of
these options, 25% are fully vested and the remainder vest over
a period of three years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The primary purpose of the 2002 Stock Incentive
Plan is to provide a means through which we may continue to
attract, motivate and retain selected employees, officers and
independent contractors who can materially contribute to our
growth and success, and to encourage stock ownership in us
through granting incentive stock options or nonqualified stock
options, or both, to purchase our common stock or shares of
restricted stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2002 Stock Incentive Plan is administered by
the Compensation Committee of our Board of Directors, and as
such has the discretionary authority to determine all matters
relating to awards of stock options and restricted stock,
including the selection of eligible participants, the number of
shares of common
</FONT>

<P align="center"><FONT size="2">97
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="left">
<FONT size="2">stock to be subject to each option or restricted
stock award, the exercise price of each option, vesting, and all
other terms and conditions of awards.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i)&nbsp;ten
years after the date of grant, (ii)&nbsp;twelve months after
termination of employment with XO Parent due to death or
complete and permanent disability, (iii)&nbsp;immediately upon
termination of employment by us for Cause (as defined in the
Stock Incentive Plan), or (iv)&nbsp;three months after
termination of employment by the employee or by us for other
than Cause.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Compensation Committee may award shares of
restricted stock and may establish terms, conditions and
restrictions applicable thereto. Subject to the restrictions on
restricted stock, award recipients generally will have all the
rights and privileges of a stockholder, including the right to
vote such restricted stock. Restricted stock generally is
subject to restrictions related to transferability and
forfeiture until vested at the expiration of the restricted
period
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon a merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation of
us as a result of which our stockholders receive cash, stock or
other property in exchange for or in connection with their
shares of common stock, any award granted under the 2002 Stock
Incentive Plan will terminate, and, in the case of options, the
recipients shall have the right immediately prior to any such
event to exercise their vested options. In the event that our
stockholders receive capital stock of another corporation in
exchange for their shares of common stock in any transaction
involving a merger, consolidation, acquisition of property or
stock, separation or reorganization, unless otherwise determined
by us, all awards granted under the 2002 Stock Incentive Plan
shall be converted into awards with respect to shares of such
exchange stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless otherwise expressly determined by a
resolution of our Board of Directors on the date of grant or
such later date when the Board of Directors may ratify the
award, (i)&nbsp;awards granted to non-affiliated directors will
vest in full immediately upon the occurrence of a change in
control, as defined in the 2002 Stock Incentive Plan, or
(ii)&nbsp;awards granted to employees whose employment is
terminated by us without Cause, and awards granted to certain
officers whose employment is terminated by us without Cause or
by the officer for Good Reason (as defined in the 2002 Stock
Incentive Plan), will vest in full if such termination occurs
within one year following such change in control. In all other
cases, in the event of a change in control, unless otherwise
determined by the Board prior to the occurrence of such change
in control, any unvested awards shall not become fully vested
merely by the occurrence of such change in control. Because the
Stock Incentive Plan took effect in connection with the
consummation of our Plan of Reorganization, the transactions
contemplated thereby were not deemed a change of control for
purposes of the Stock Incentive Plan.
</FONT>

<P align="left">
<B><FONT size="2">Employee Retention and Incentive
Plans</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with our Plan of Reorganization, we
established the XO Communications, Inc. Employee Retention and
Incentive Plan, which we refer to as the Restructuring Retention
Plan. In June of 2003, the Restructuring Retention Plan was
replaced with a new Employee Retention and Incentive Plan, which
we refer to as the 2003 Retention Plan, for all but a few
individuals who are no longer employed by us. Thirty five of our
former employees are entitled to a partial bonus payment under
the Restructuring Retention Plan. Seven hundred and five of our
current and former employees who were participants in the
Restructuring Retention Plan are now participants in or entitled
to partial bonus payments under the 2003 Retention Plan.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Restructuring
Retention Plan</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Restructuring Retention Plan became effective
on October&nbsp;23, 2002. The primary purposes of the
Restructuring Retention Plan were (a)&nbsp;to encourage certain
of our key employees (including the Named Executive Officers) to
continue their employment with us during the period of our
restructuring and (b)&nbsp;to establish incentives for those
employees to achieve certain corporate performance goals,
including the completion of XO Parent&#146;s Chapter&nbsp;11
reorganization and certain EBITDA earnings objectives. The
maximum amount payable, in the aggregate, to 35 of our former
employees under the Restructuring Retention Plan is $256,000. No
active employees are participants in this plan and no further
bonus awards will be made thereunder.
</FONT>

<P align="center"><FONT size="2">98
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;2003 Employee
Retention Plan</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June of 2003, we replaced the Restructuring
Retention Plan with the 2003 Retention Plan to provide long-term
equity incentives to senior management, based on certain revenue
and cash balance performance targets. The 2003 Retention Plan
was offered to participants of the Restructuring Retention Plan
as an alternative to the EBITDA targets under the Restructuring
Retention Plan. Participants in the Restructuring Retention Plan
who elected into the 2003 Retention Plan forfeited their rights
under the Restructuring Retention Plan in exchange for the
opportunity to participate in the 2003 Retention Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2003 Retention Plan provides for a bonus
award aligned with each of the Company&#146;s first two and last
two quarters of 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each participant received a guaranteed Q1/ Q2
bonus award, regardless of the Company&#146;s operating results
for that period. The Q1/ Q2 bonus awards were paid in cash and
options on or after July&nbsp;11, 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">For those participants who received options as
Q1/ Q2 bonus awards, the options were 50% vested on the date of
grant, with the remainder vesting ratably each month over the
next 24&nbsp;months of employment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Q3/ Q4 bonus award under the 2003 Retention
Plan will be tied to the achievement of revenue and cash balance
performance objectives and will be settled fully in stock
options. Under the 2003 Retention Plan, two-thirds of the
participant&#146;s Q3/ Q4 bonus award will be based on
achievement of the revenue component, with the remaining
one-third based on the cash balance component. The Q3/ Q4 bonus
awards may be partially earned subject to partial achievement of
the revenue and cash balance goals with an additional
overachievement bonus for overachievement of the revenue goal.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Options distributed in settlement of a Q3/ Q4
bonus award will be 25% vested on the date of grant, with the
remainder vesting ratably each month over the next
36&nbsp;months of employment. Bonus awards under the 2003
Retention Plan may be prorated for partial service during the
Q1/ Q2 and/or Q3/ Q4 periods and may be forfeited in certain
circumstances following a termination of employment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The options granted for both Q1/ Q2 and Q3/ Q4
bonus awards are options to purchase XO&#146;s New Common Stock,
par value $0.01 per share. The options were and will be granted
under the Company&#146;s 2002 Stock Incentive Plan, with an
exercise price equal to $5.84, which represents 80% of the
market value of one share of XO&#146;s New Common Stock on the
effective date of the 2003 Retention Plan. The stock options
issued in conjunction with the Q1/ Q2 bonus payments will result
in recognition of compensation expense over the options&#146;
vesting period.
</FONT>

<P align="left">


<!-- link1 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" -->
<DIV align="left"><A NAME="015"></A></DIV>

<DIV align="center">
<B><FONT size="2">CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">Pre-Reorganization Relationships and Related
Transactions</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Pre-Petition Stockholders.
</FONT></I><FONT size="2">Prior to the effective date of our
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little &#38; Co. had a significant equity interest in
us and had designated certain individuals to serve as members of
our board of directors. Such investment funds and other entities
affiliated with Forstmann Little&nbsp;&#38; Co. currently hold a
significant equity interest in McLeodUSA Incorporated. McLeod
provides interconnection and facilities based telecommunications
services to us, for which we paid McLeodUSA approximately
$2.0&nbsp;million in 2002 and $8.4&nbsp;million in 2001. We
provide limited telecommunications services to McLeodUSA, for
which we received approximately $373,000 in 2002 and
$7.1&nbsp;million in 2001.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Craig O. McCaw. </FONT></I><FONT size="2">In
January 2002, we retained an entity owned by Craig&nbsp;O. McCaw
to act as our agent with respect to the sale of our Falcon 2000
aircraft, for which it received a commission of $161,250. In
March 2000, we retained an entity owned by Craig&nbsp;O. McCaw
to act as our agent with respect to the sale of our
Falcon&nbsp;50 aircraft, for which it received a commission of
$147,500. In March 2000, we also retained this entity to act as
our agent with respect to the purchase of a Falcon&nbsp;900
aircraft, for which it received a commission of $50,000.
</FONT>

<P align="center"><FONT size="2">99
</FONT>

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<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2000, as part of the reorganization under
which we acquired Concentric, we acquired from Craig&nbsp;O.
McCaw the 50% interest that we did not already own of XO
Intercity Holdings No.&nbsp;1, LLC, (f/k/a INTERNEXT, L.L.C.),
the joint venture formed to hold interests in a national fiber
optic network under construction. The purchase price was
approximately 6.8&nbsp;million shares of our pre-petition
class&nbsp;A common stock and the assumption of approximately
$9.9&nbsp;million of liabilities.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Craig&nbsp;O. McCaw owns a 20% interest in
Communications Consultants, Inc., which employs Mr.&nbsp;Salemme
and from which we retain Mr.&nbsp;Salemme for service as
XO&#146;s Senior Vice President, Regulatory and Legislative
Affairs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other Transactions and Relationships.
</FONT></I><FONT size="2">In April 2001, we lent $700,000 to
Henry&nbsp;R. Nothhaft, a former Vice Chairman of XO Parent, to
provide short term bridge financing to Mr.&nbsp;Nothhaft in
connection with the retirement of amounts due to third parties
that were secured by XO stock. The loan has been paid in full.
The loan had a term of 60&nbsp;days interest accrued at a per
annual rate of 5%, and was secured by approximately
650,000&nbsp;shares of our pre-petition class&nbsp;A common
stock owned by Mr.&nbsp;Nothhaft.
</FONT>

<P align="left">
<B><FONT size="2">Post-Reorganization Relationships and Related
Transactions</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Carl C. Icahn. </FONT></I><FONT size="2">In
February 2003, Dixon Properties, LLC, which is owned by
Mr.&nbsp;Icahn, acquired ownership of the building in which our
headquarters is located and our lease in a transaction that was
approved by the Bankruptcy Court in our Chapter&nbsp;11
proceedings. We currently are leasing approximately
170,000&nbsp;square feet of space in that building. In
connection with the purchase of the building by Dixon
Properties, it assumed the lease agreement under which we lease
the space we occupy. Pursuant to the lease agreement, we are
obligated to pay Dixon Properties lease payments of
approximately $19.0&nbsp;million in the aggregate (excluding
certain building-related expenses) through the expiration of the
initial term of the lease, which runs through November&nbsp;30,
2007.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have entered into a Tax Allocation Agreement,
dated January&nbsp;16, 2003, between XO Parent and Starfire
Holding Corporation, a company owned by Mr.&nbsp;Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
our Chapter&nbsp;11 proceedings, establishes the methodology for
the calculation and payment of income taxes in connection with
the consolidation of us with Starfire for income tax purposes.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes us, and we will make payments
to Starfire in an amount equal to the tax liability, if any,
that we would have if we were to file as a consolidated group
separate and apart from Starfire.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Mr.&nbsp;Icahn, through various entities that he
owns and controls, has the right to require us to register,
under the Securities Act of 1933, shares of New Common Stock
held by such entities and to include shares of New Common Stock
held by them in certain registration statements filed by us,
pursuant to a Registration Rights Agreement approved by the
Bankruptcy Court in connection with our Chapter&nbsp;11
proceedings.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Arnos Corp., which is owned by Mr.&nbsp;Icahn,
holds approximately 85% of the $500&nbsp;million in loans
outstanding under the New Credit Agreement. Under the New Credit
Agreement, no cash interest payments are required to be made by
us until we achieve specified financial targets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We provide certain telecommunications services to
affiliates of Mr.&nbsp;Icahn at rates that we believe are
comparable to rates charged other customers that purchase
similar services and volumes. For the three months ended
March&nbsp;31, 2003, we recognized revenue of approximately
$88,000 with respect to these services and had outstanding
receivables for such services at March&nbsp;31, 2003 of
approximately $83,000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Other Transactions and Relationships.
</FONT></I><FONT size="2">R.&nbsp;Gerard Salemme owns an 80%
interest in Communications Consultants, Inc., which employs
Mr.&nbsp;Salemme and from which we retain Mr.&nbsp;Salemme for
service as XO Parent&#146;s Senior Vice President, Regulatory
and Legislative Affairs. See the &#147;Summary Compensation
Table&#148; for information regarding payments to Communications
Consultants.
</FONT>

<P align="center"><FONT size="2">100
</FONT>

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<P align="left">


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<DIV align="left"><A NAME="016"></A></DIV>

<DIV align="center">
<B><FONT size="2">SHARES ELIGIBLE FOR FUTURE SALE</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Future sales of substantial amounts of New Common
Stock or the perception that such sales could occur, could
adversely affect the prevailing market price of the New Common
Stock. As of March&nbsp;31, 2003, there were approximately 95
million shares of New Common Stock outstanding. The shares of
New Common Stock owned by Cardiff, an entity owned by
Mr.&nbsp;Icahn, are restricted shares that may be sold only
under a registration statement or an exemption from federal
securities registration requirements. Although Cardiff holds
restricted stock, it may cause us to register sales of that
stock at any time, whether pursuant to its contractual
registration rights or otherwise.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">All of the shares offered for sale pursuant to
this prospectus may be sold pursuant to this prospectus under
the Securities Act, and will thereafter be freely tradable so
long as they are not held by affiliates or underwriters, as such
term is defined by the Securities Act. These shares may be sold
under Rule&nbsp;144 promulgated under the Securities Act.
Rule&nbsp;144 permits sales by a holder within any three-month
period of a number of shares that does not exceed the greater
of: (1)&nbsp;1% of the number of shares of New Common Stock then
outstanding or (2)&nbsp;the average weekly trading volume of the
New Common Stock during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to those sales.
Sales under Rule&nbsp;144 are also governed by manner of sale
provisions and notice requirements, and current public
information about XO&nbsp;Parent must be available.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to our Plan of Reorganization, we have
issued three series of warrants to purchase up to an aggregate
of approximately 9.5&nbsp;million, 7.1&nbsp;million and
7.1&nbsp;million additional shares of New Common Stock, at
exercise prices of $6.25, $7.50 and $10.00 per share,
respectively. The warrants will expire on January&nbsp;16, 2010.
In addition, if the eligible participants exercise all the
rights in the Rights Offering, up to approximately
43.3&nbsp;million additional shares of New Common Stock will be
issued to such eligible holders.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have options to purchase approximately
11.4&nbsp;million shares of New Common Stock outstanding under
our stock incentive plan as of March&nbsp;31, 2003, with an
exercise price of $5.00 per share. Unless surrendered or
cancelled earlier under the terms of the stock incentive plan,
those options will expire in 2013. Subsequent to March&nbsp;31,
2003, we issued approximately 200,000 additional options under
our stock incentive plan pursuant to the 2003 Retention Plan
with an exercise price of $5.84 per share in exchange for rights
of certain employees under our Restructuring Retention Plan. In
addition, our stock incentive plan authorizes future grants of
options to purchase New Common Stock, or awards of restricted
New Common Stock, with respect to an additional 6.6&nbsp;million
shares of New Common Stock in the aggregate. See also
&#147;Risks Related to Our Common Stock&#148; on
page&nbsp;[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;] of this prospectus.
</FONT>

<!-- link1 "DESCRIPTION OF OUTSTANDING INDEBTEDNESS" -->
<DIV align="left"><A NAME="017"></A></DIV>

<P align="center">
<B><FONT size="2">DESCRIPTION OF OUTSTANDING
INDEBTEDNESS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">We have summarized some of the terms and
provisions of our New Credit Agreement in this section. The
summary is not complete. You should read the Amended and
Restated Credit and Guarantee Agreement before making any
investment decision.</FONT></I>

<P align="center">
<B><FONT size="2">New Credit Agreement</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Loans with an outstanding principal amount of
$500&nbsp;million are outstanding under the New Credit
Agreement, which we entered into on January&nbsp;16, 2003 in
connection with the consummation of the Plan of Reorganization.
XO&nbsp;Parent is the borrower under the New Credit Agreement,
and virtually all of its subsidiaries are guarantors of the
facility. Mizuho Corporate Bank, Ltd. is the Administrative
Agent. Approximately 85% of the underlying loans of the New
Credit Agreement are held by Arnos Corp., an entity owned by
Mr.&nbsp;Icahn.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The maturity date of the outstanding principal
under the New Credit Agreement is July&nbsp;15, 2009. Automatic
and permanent quarterly reductions of the principal amount
commence on October&nbsp;15, 2007 with scheduled principal
repayments totaling $25&nbsp;million in 2007, $150&nbsp;million
in 2008 and $325&nbsp;million in 2009. The security for the New
Credit Agreement consists of all of the assets of
XO&nbsp;Parent, including stock of its direct and indirect
subsidiaries, and all assets of virtually all of those
subsidiaries. The New Credit Agreement
</FONT>

<P align="center"><FONT size="2">101
</FONT>

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<DIV align="left">
<FONT size="2">limits additional indebtedness, liens, dividend
payments and certain investments and transactions, and contains
certain covenants with respect to minimum cash balance, minimum
EBITDA (earnings before interest, taxes, depreciation and
amortization) requirements and maximum capital expenditures. The
New Credit Agreement permits us to incur new secured debt
ranking senior to the amounts outstanding under the New Credit
Agreement up to a principal amount equal to $200&nbsp;million
less the proceeds from the Rights Offering, so long as the terms
are satisfactory to the administrative agent and lenders of a
majority of the principal amount of the loan outstanding under
the New Credit Agreement. The New Credit Agreement also requires
prepayments of outstanding principal balances from excess cash
flows, as defined, and from the proceeds of specified types of
transactions. Our ability to comply with the covenants under the
New Credit Agreement is subject to the risks of our business,
including those discussed in this prospectus under &#147;Risk
Factors.&#148;
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Interest on the amounts outstanding under the New
Credit Agreement is initially payable-in-kind, that is, it will
accrue and be added to principal but not be payable in cash.
Interest will accrue quarterly at a rate of Adjusted Eurodollar
plus 6% or the base rate announced by the administrative agent
from time to time plus 5%, at our election, so long as interest
on the outstanding amounts remains payable-in-kind.
XO&nbsp;Parent may, at its option at any time, elect to begin
paying cash interest on the outstanding amounts and interest on
the outstanding amounts will become automatically payable in
cash once the interest coverage ratio (EBITDA/ interest,
calculated on a trailing 12-month basis) exceeds&nbsp;4.0. Based
on our current funding requirement, we would not anticipate
making such an election in the foreseeable future. When interest
on the outstanding amounts becomes payable in cash, the
applicable interest rate will fall to Adjusted Eurodollar Rate
plus 4% or the base rate announced by the administrative agent
from time to time plus 3%, payable quarterly.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will use the net proceeds of this offering to
prepay and reduce indebtedness outstanding under this New Credit
Agreement.
</FONT>

<P align="center"><FONT size="2">102
</FONT>

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<!-- link1 "DESCRIPTION OF OUTSTANDING EQUITY SECURITIES" -->
<DIV align="left"><A NAME="018"></A></DIV>

<P align="center">
<B><FONT size="2">DESCRIPTION OF OUTSTANDING EQUITY
SECURITIES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">We have summarized some of the terms and
provisions of our capital stock and warrants in this section.
The summary is not complete. You should read our amended and
restated Certificate of Incorporation and our restated by-laws
relating to the applicable capital stock and the warrant
agreement with respect to any warrants for additional
information before making any investment decision.</FONT></I>

<P align="center">
<B><FONT size="2">New Common Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Total Shares. </FONT></I><FONT size="2">We
have the authority to issue a total of 1.0&nbsp;billion shares
of New Common Stock. As of March&nbsp;31, 2003, there were
approximately 95.0&nbsp;million shares of New Common Stock
outstanding.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Voting Rights. </FONT></I><FONT size="2">The
New Common Stock has one vote per share and is eligible to vote
on all matters that come before the stockholders, including
without limitation, election of directors to the Board of
Directors. All holders of New Common Stock have the same voting
rights and shall vote together as a single class.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Dividends.</FONT></I><FONT size="2"> If a
dividend is declared by the Board of Directors, the New Common
Stock is entitled to receive dividends.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Liquidation.</FONT></I><FONT size="2"> In the
event of any dissolution, liquidation or winding-up of
XO&nbsp;Parent, after payment or provision for payment of our
debts and subject to any amounts that may be payable in respect
of any outstanding preferred class of capital stock of
XO&nbsp;Parent, the remaining assets will be distributed to the
holders of New Common Stock on a per share basis.
</FONT>

<P align="center">
<B><FONT size="2">Preferred Stock</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Certificate of Incorporation of
XO&nbsp;Parent authorizes the creation of up to
200.0&nbsp;million shares of undesignated preferred stock,
$0.01&nbsp;par value. As of the date hereof, XO&nbsp;Parent has
not designated the rights or preferences of any series of
preferred stock and no preferred stock issued or outstanding.
</FONT>

<P align="center">
<B><FONT size="2">Warrants</FONT></B>

<P align="left">
<B><FONT size="2">Terms</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have issued and are in the process of
distributing three series of warrants under our Plan of
Reorganization: Series&nbsp;A Warrants, Series&nbsp;B Warrants
and Series&nbsp;C Warrants.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The Series&nbsp;A Warrants are exercisable at an
    exercise price of $6.25&nbsp;per share. As of March&nbsp;31,
    2003, Series&nbsp;A Warrants to purchase 9.5&nbsp;million shares
    of New Common Stock are outstanding.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The Series&nbsp;B Warrants are exercisable at an
    exercise price of $7.50&nbsp;per share. As of March&nbsp;31,
    2003, Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock are outstanding.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The Series&nbsp;C Warrants are exercisable at an
    exercise price of $10.00&nbsp;per share. As of March&nbsp;31,
    2003, Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock are outstanding.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each series of warrants expires on
January&nbsp;16, 2010.
</FONT>

<P align="left">
<B><FONT size="2">The Warrant Agreements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Each of the Warrant Agreements relating to each
series of warrants provides that, in the event that
XO&nbsp;Parent issues New Common Stock at prices below the then
prevailing market prices, or securities convertible into shares
of New Common Stock with conversion prices below the then
prevailing market prices, the number of shares of New Common
Stock to be issued upon exercise of a warrant set forth on the
face thereof shall, subject to certain conditions, be adjusted.
In addition the number of shares of New Common Stock to be
issued upon exercise of each warrant shall be adjusted after the
occurrence of certain corporate events with respect to shares of
New Common Stock, including stock splits, certain dividends and
other distributions.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">From the January&nbsp;16, 2003 until
July&nbsp;16, 2004, if XO&nbsp;Parent consummates a merger,
reorganization, reclassification, consolidation or other similar
transaction, the warrant will become exercisable on a per share
basis for the greater of (i)&nbsp;the amount of cash or other
consideration delivered to a non-controlling holder of a
</FONT>

<P align="center"><FONT size="2">103
</FONT>

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<DIV align="left">
<FONT size="2">share of New Common Stock and (ii)&nbsp;the sum
of the exercise price and the option value of the Warrant. After
July&nbsp;16, 2004, the warrants will no longer have this
additional protection. The Rights Offering does not trigger any
adjustment pursuant to the warrant agreement.
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">No fractions of a share of New Common Stock will
be issued upon the exercise of any warrant, but we will pay the
cash value thereof determined as provided in the Warrant
Agreement.
</FONT>

<!-- link1 "CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS" -->
<DIV align="left"><A NAME="019"></A></DIV>

<P align="center">
<B><FONT size="2">CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">The following is a summary of the Certificate
of Incorporation and Bylaws of XO&nbsp;Parent. These provisions
are summaries and are qualified in their entirety by the
Certificate of Incorporation and the Bylaws, which are included
as exhibits to the registration statement of which this
prospectus is a part.</FONT></I>

<P align="left">
<B><FONT size="2">Board of Directors</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Certificate of Incorporation provides that
the number of directors shall be determined in the manner
specified by the Bylaws, and may be increased or decreased from
time to time in the manner prescribed by the Bylaws. Currently,
the Board of Directors consists of seven&nbsp;(7) directors.
</FONT>

<P align="left">
<B><FONT size="2">Amendment of Bylaws</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our Board of Directors and stockholders are
authorized and empowered to adopt, amend and repeal our Bylaws.
</FONT>

<P align="left">
<B><FONT size="2">Section&nbsp;203 Amendment</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Certificate of Incorporation makes the
anti-takeover protection of Section&nbsp;203 of the Delaware
General Corporate Law, which we refer to as the DGCL,
inapplicable to XO&nbsp;Parent. Section&nbsp;203 of the DGCL
provides that a person who acquires fifteen percent (15%) or
more of the outstanding voting stock of a Delaware corporation
becomes an &#147;interested stockholder.&#148; Section&nbsp;203
prohibits a corporation from engaging in mergers or certain
other &#147;business combinations&#148; with an interested
stockholder for a period of three (3)&nbsp;years following the
time that such interested stockholder becomes an interested
stockholder, unless certain conditions are satisfied.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The DGCL defines a &#147;business
combination&#148; broadly to include, among other things, any
merger or consolidation with the interested stockholder, any
merger or consolidation caused by the interested stockholder in
which the surviving corporation will not be subject to Delaware
law, or the sale, lease, exchange, mortgage, pledge, transfer or
other disposition to the interested stockholder of any assets of
the corporation having a market value equal to or greater than
10% of the aggregate market value of the assets of the
corporation.
</FONT>

<DIV>&nbsp;</DIV>

<!-- link1 "PLAN OF DISTRIBUTION" -->
<DIV align="left"><A NAME="020"></A></DIV>

<DIV align="center">
<B><FONT size="2">PLAN OF DISTRIBUTION</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are offering shares of our New Common Stock
directly to eligible participants pursuant to this offering. We
have not employed any brokers, dealers or underwriters in
connection with the solicitation or exercise of Subscription
Rights in this offering and no commissions, fees or discounts
will be paid in connection with it. Certain of our officers and
other employees may solicit responses from you, but such
officers and other employees will not receive any commissions or
compensation for such services other than their normal
employment compensation.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We will pay the fees and expenses of American
Transfer&nbsp;&#38; Trust Company as Rights Agent, and MacKenzie
Partners, Inc., as Information Agent, and also have agreed to
indemnify the Rights Agent and the Information Agent from any
liability they may incur in connection with this offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On or
about &nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;,
we will distribute the rights certificates and copies of this
prospectus to the eligible participants or their record holders.
If you wish to exercise your rights and subscribe for
newly-issued shares of our New Common Stock, you should follow
the procedures described under &#147;The Offering&nbsp;&#151;
Procedure&#148; on page&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;. The
Subscription Rights are not transferable.
</FONT>

<P align="center"><FONT size="2">104
</FONT>

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<P align="left">


<DIV>&nbsp;</DIV>

<!-- link1 "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" -->
<DIV align="left"><A NAME="021"></A></DIV>

<DIV align="center">
<B><FONT size="2">MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following discussion is based on the opinion
of Willkie Farr&nbsp;&#38; Gallagher, counsel to us, and
summarizes certain United States federal income tax
considerations to holders of the exercise or lapse of
Subscription Rights and of the disposition of the New Common
Stock acquired upon the exercise of the Subscription Rights.
This discussion is based on the Internal Revenue Code of 1986,
as amended, or the IRC, regulations promulgated thereunder by
the United States Department of Treasury, published rulings and
pronouncements of the Internal Revenue Service, or the IRS, and
judicial decisions, all as in effect on the date of this
document. Changes in these rules, or new interpretations
thereof, may have retroactive effect and could significantly
affect the federal income tax consequences described below.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">No rulings or determinations of the IRS or any
other taxing authority has been sought or obtained with respect
to the tax considerations described herein, and the discussion
below is not binding upon the IRS or any other taxing authority.
No assurance can be given that the IRS will not assert, or that
a court will not sustain, a different position from any
discussed herein.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following discussion applies only to U.S.
persons who hold the Subscription Rights and New Common Stock
acquired upon the exercise of the Subscription Rights as capital
assets within the meaning of Section&nbsp;1221 of the IRC. This
discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their
particular circumstances or to holders who may be subject to
special rules under the IRC, including, without limitation,
banks and certain other financial institutions, insurance
companies, tax-exempt organizations, persons that are, or hold
Subscription Rights or New Common Stock through, pass-through
entities, persons whose functional currency is not the United
States dollar, foreign persons, dealers in securities or foreign
currency, persons who received their stock pursuant to the
exercise of any employee stock option or otherwise as
compensation and persons holding New Common Stock that is a
hedge against, or that is hedged against, currency risk or that
is part of a straddle, constructive sale or conversion
transaction. Furthermore, the following discussion does not
address foreign, state or local tax consequences and does not
address United States federal taxes other than income taxes.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">THE FOLLOWING SUMMARY OF CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS DOES NOT DISCUSS ALL OF THE
FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE RELEVANT TO A
HOLDER OF SUBSCRIPTION RIGHTS OR A HOLDER OF NEW COMMON STOCK.
HOLDERS OF SUBSCRIPTION RIGHTS OR NEW COMMON STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR
UNITED STATES FEDERAL, STATE, LOCAL AND ANY FOREIGN TAX
CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED ISSUANCE OF
NEW COMMON STOCK TO SUCH HOLDERS.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Exercise of the Subscription
    Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You will not recognize any gain or loss upon the
exercise of the Subscription Rights. The basis of the New Common
Stock acquired through your exercise of the Subscription Rights
will be equal to the sum of the subscription price paid for the
New Common Stock acquired through exercise of the Subscription
Rights and your basis, if any, in the Subscription Rights. The
holding period for the New Common Stock acquired through the
exercise of the Subscription Rights will begin on the date the
Subscription Rights are exercised.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Lapse of the Subscription
    Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you allow your Subscription Rights to lapse,
you will recognize loss equal to the amount of your basis in the
Subscription Rights.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Sale of New Common Stock</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">If you sell your New Common Stock acquired
through the exercise of the Subscription Rights, you will
recognize gain or loss in an amount equal to the difference
between the amount realized on the sale and your basis in the
New Common Stock, which will include the exercise price. If you
hold the shares as a capital
</FONT>

<P align="center"><FONT size="2">105
</FONT>

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<DIV align="left">
<FONT size="2">asset, gain or loss on the sale will be long-term
or short-term capital gain or loss, depending on whether you
have held the shares for more than one year beginning on the
date of the exercise of the rights.
</FONT>
</DIV>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <B><I><FONT size="2">Basis in the Subscription
    Rights</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Your basis in the Subscription Rights will depend
on the treatment of your claims under the Plan of
Reorganization. In some cases, the distribution of Subscription
Rights will taxable, and you will have a fair market value basis
in the Subscription Rights. In other cases, the distribution of
Subscription Rights will be part of a tax-free recapitalization
transaction, and your basis will depend on your basis in the
claims cancelled under the Plan of Reorganization.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(i)&nbsp;Pre-petition common and preferred
    stock&nbsp;&#151; the receipt of Subscription Rights will be
    taxable, and you will have a fair market value basis in the
    Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(ii)&nbsp;Pre-petition subordinated
    notes&nbsp;&#151; because the pre-petition subordinated notes
    should be treated as securities for tax purposes, the receipt of
    Subscription Rights should be part of a tax-free
    recapitalization, and your basis in the subordinated notes
    should be apportioned among the consideration you received. If
    the pre-petition subordinated notes are not treated as
    securities for tax purposes, the receipt of Subscription Rights
    will be taxable, and you will have a fair market value basis in
    the Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(iii)&nbsp;Pre-petition senior unsecured note
    claims&nbsp;&#151; the treatment of the receipt of Subscription
    Rights will depend on whether the senior unsecured note claims
    are securities for tax purposes. If such claims were securities
    for tax purposes, the receipt of Subscription Rights is part of
    a tax-free recapitalization, and your basis in the senior note
    claims would be apportioned among the consideration you received
    (Subscription Rights, Warrants and New Common Stock). If such
    claims were not securities for tax purposes, the receipt of
    Subscription Rights will be taxable, and you will have a fair
    market value basis in the Subscription Rights.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(iv)&nbsp;Pre-petition Credit
    Facility&nbsp;&#151; the treatment of the receipt of
    Subscription Rights will depend on whether claims under the
    Pre-Petition Credit Facility are securities for tax purposes. If
    such claims were not securities for tax purposes, the receipt of
    Subscription Rights will be taxable, and you will have a fair
    market value basis in the Subscription Rights. If such claims
    were securities for tax purposes, your basis in the Subscription
    Rights will depend on your basis in the claims, apportioned
    among the consideration received under the Plan of
    Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(v)&nbsp;General unsecured claims&nbsp;&#151; the
    receipt of Subscription Rights will be taxable, and you will
    have a fair market value basis in the Subscription Rights.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">LEGAL MATTERS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The validity of the New Common Stock offered in
this registration statement on form&nbsp;S-1 will be passed upon
for us by Willkie Farr&nbsp;&#38; Gallagher, New&nbsp;York,
New&nbsp;York.
</FONT>

<P align="left">


<!-- link1 "EXPERTS" -->
<DIV align="left"><A NAME="022"></A></DIV>

<DIV align="center">
<B><FONT size="2">EXPERTS</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements of XO
Communications, Inc. at December&nbsp;31, 2002, and for the year
then ended, appearing in this Prospectus and the Registration
Statement, have been audited by Ernst&nbsp;&#38; Young LLP,
independent auditors, and at December&nbsp;31, 2001, and for
each of the two years in the period ended December&nbsp;31,
2001, by Arthur Andersen, LLP, independent public accountants,
as set forth in their respective reports thereon (the 2001
Arthur Andersen, LLP report contains an explanatory paragraph
describing conditions that raise substantial doubt about the
Company&#146;s ability to continue as a going concern) appearing
elsewhere herein, and are included in reliance upon such reports
given on the authority of such firms as experts in accounting
and auditing.
</FONT>

<P align="center"><FONT size="2">106
</FONT>

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<P align="left">


<!-- link1 "WHERE YOU CAN FIND MORE INFORMATION" -->
<DIV align="left"><A NAME="023"></A></DIV>

<DIV align="center">
<B><FONT size="2">WHERE YOU CAN FIND MORE INFORMATION</FONT></B>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">This prospectus is part of a registration
statement on Form&nbsp;S-1 that was filed with the Securities
and Exchange Commission. This prospectus does not contain all of
the information set forth in the registration statement. Some
items may have been omitted from the prospectus as permitted by
the rules and regulations of the Securities and Exchange
Commission. You should refer to the registration statement and
its accompanying exhibits for further information with respect
to the Company and the Plan of Reorganization. Statements made
in this prospectus as to the provisions of any contract,
agreement or other document are summaries of the material terms
of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the
registration statement, please refer to the exhibit for a more
complete description of the matter involved.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended or the
Exchange Act, and, in accordance therewith, file reports and
other information with the SEC. Our reports and other
information we file can be inspected and copied at the Public
Reference Section of the SEC located at Room&nbsp;1024,
Judiciary Plaza, 450&nbsp;Fifth Street, N.W., Washington, D.C.
20549. Copies of these materials can be obtained from the Public
Reference Section of the SEC at prescribed rates. Please call
the SEC at 1-800-SEC-0330 for more information on the Public
Reference Section. The SEC maintains a web site at www.sec.gov
that contains reports, proxy and information statements and
other information on a delayed basis regarding registrants,
including us, that file electronically with the SEC.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective as of October&nbsp;25, 2000 we changed
our name from NEXTLINK Communications, Inc. to XO
Communications, Inc. The reports and other information that we
filed with the SEC prior to October&nbsp;25, 2000 will be under
the NEXTLINK name.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We also post our most recent Exchange Act filings
on our website at www.xo.com.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Quotations for our New Common Stock under the
symbol &#147;XOCM&#148; are available at www.OTCBB.com on the
Nasdaq over-the-counter bulletin board and in the Pink Sheets at
www.pinksheets.com.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">YOU MAY REQUEST A COPY OF OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, AT NO COST, OR AT
WWW.SEC.GOV, OR BY WRITING OR TELEPHONING US AT THE FOLLOWING
ADDRESS:
</FONT>

<P align="center">
<FONT size="2">XO Communications, Inc.
</FONT>

<DIV align="center">
<FONT size="2">11111 Sunset Hills Road
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Reston, Virginia 20190
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Attn: Corporate Secretary
</FONT>
</DIV>

<DIV align="center">
<FONT size="2">Telephone: (703)&nbsp;547-2000
</FONT>
</DIV>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">You should rely only on the information contained
in this prospectus or that we have specifically referred you to.
We have not authorized anyone else to provide you with different
information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the
front of those documents.
</FONT>

<P align="center"><FONT size="2">107
</FONT>
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<P align="center">
<B><FONT size="2">INDEX TO FINANCIAL STATEMENTS</FONT></B>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="89%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Unaudited Interim Condensed Consolidated
    Financial Statements</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Condensed Consolidated Balance Sheets for
    Reorganized XO as of March&nbsp;31, 2003 and January&nbsp;1,
    2003 and for Predecessor&nbsp;XO as of December&nbsp;31, 2002
    (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Condensed Consolidated Statements of Operations
    for Reorganized XO for the Three Months Ended March&nbsp;31,
    2003 and for Predecessor XO for January&nbsp;1, 2003 and for the
    Three Months Ended March&nbsp;31, 2002 (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Condensed Consolidated Statements of Cash Flows
    for Reorganized XO for the Three Months Ended March&nbsp;31,
    2003 and for Predecessor XO for January&nbsp;1, 2003 and for the
    Three Months Ended March&nbsp;31, 2002 (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes to Condensed Consolidated Financial
    Statements (Unaudited)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Audited Consolidated Financial
    Statements</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Report of Ernst &#38; Young LLP, Independent
    Auditors
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-19</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Report of Independent Public Accountants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-20</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Balance Sheets as of
    December&nbsp;31, 2002 and 2001 and Pro&nbsp;Forma Unaudited
    Balance Sheet as of December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Operations for the
    Years Ended December&nbsp;31, 2002, 2001<BR>
    and 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-22</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statement of Stockholders&#146;
    Equity (Deficit) for the Years Ended December&nbsp;31, 2002,
    2001 and 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-23</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Consolidated Statements of Cash Flows for the
    Years Ended December&nbsp;31, 2002, 2001<BR>
    and 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-25</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes to Consolidated Financial Statements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-26</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Schedule&nbsp;II&nbsp;&#151; Consolidated
    Valuation and Qualifying Accounts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">F-54</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-1
</FONT>

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<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>

<P align="center">
<B><FONT size="2">CONDENSED CONSOLIDATED BALANCE
SHEETS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Amounts in thousands, except for share and
per share data)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="45%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January&nbsp;1, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="15" align="left" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">288,764</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">249,616</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable, net of allowance for
    doubtful accounts of $38,965 at March&nbsp;31, 2003; $37,030, at
    January&nbsp;1, 2003 and at December&nbsp;31, 2002, respectively
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,549</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,564</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">672,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">712,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">761,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,509</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,588</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses and other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,137</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,678</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,804</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,323,943</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="15" align="left" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; EQUITY
    (DEFICIT)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,304</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">63,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">232,872</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">235,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">266,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">289,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">302,460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,827,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">507,868</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,585</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,630</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">869,629</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">873,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO redeemable preferred stock: par
    value $0.01 per share, 25,000,000&nbsp;shares authorized:
    7,856,918&nbsp;shares issued and outstanding, aggregate
    liquidation preference of $1,693,293, subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Commitments and contingencies
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; equity (deficit):
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganized XO preferred stock: par value $0.01
    per share, 200,000,000&nbsp;shares authorized: none issued
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO common stock, par value $0.02 per
    share, Class&nbsp;A, 1,000,000,000&nbsp;shares authorized:
    331,033,219&nbsp;shares issued and outstanding, Class&nbsp;B,
    120,000,000&nbsp;shares authorized: 104,423,158&nbsp;shares
    issued and outstanding
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganized XO common stock, par value $0.01 per
    share, 1,000,000,000&nbsp;shares authorized:
    95,000,001&nbsp;shares issued and outstanding on March&nbsp;31,
    2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(198</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">454,314</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146; equity
    (deficit)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,323,943</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes to the unaudited condensed
consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">F-2
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>

<P align="center">
<B><FONT size="2">CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Amounts in thousands, except for share and
per share data)</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="44%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January&nbsp;1,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">286,093</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">333,405</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,506</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">140,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating, and general
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">166,235</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">205,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,095</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">516,068</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Income (loss) from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,015</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(182,663</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,210</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,540</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(9,683</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(120,726</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (loss), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(203</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganization gain (expense), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(976</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss) before cumulative effect of
    accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(299,028</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,876,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,175,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,826</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss) applicable to common shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,198,480</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss) per common share, basic and
    diluted:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss) before cumulative effect of
    accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.68</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.92</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.05</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss) per common share, basic and
    diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.97</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares, basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">95,000,001</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">441,964,342</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">442,205,796</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes to the unaudited condensed
consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">F-3
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>

<P align="center">
<B><FONT size="2">CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Amounts in thousands)</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January 1,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">OPERATING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income (loss)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,175,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net income
    (loss)&nbsp;to net cash provided by (used in) operating
    activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash reorganization items
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">26,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">161,356</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,095</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,876,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accretion of interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,897</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in assets and liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">15,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">39,224</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">982</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,164</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,586</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,158</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(607</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,190</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(47,408</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">INVESTING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,377</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(136,454</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from sales of property and equipment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,339</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sales of marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,825</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">278,293</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(33,693</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,224</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net releases (purchases)&nbsp;of escrowed/pledged
    securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,960</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,245</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">159,914</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">FINANCING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayments of capital leases and other obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(219</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,848</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in financing activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(219</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,848</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effect of exchange rate changes on cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease)&nbsp;in cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,274</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">106,402</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, beginning of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,189</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">288,764</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">352,591</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">SUPPLEMENTAL DATA:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash financing and investing activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,357</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes to the unaudited condensed
consolidated financial statements.
</FONT>

<P align="center"><FONT size="2">F-4
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;BASIS OF
PRESENTATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As further discussed in the annual report on
Form&nbsp;10-K of XO Communications, Inc. (&#147;XO
Parent&#148;) and its subsidiaries (together with its
predecessors, collectively referred to as the
&#147;Company&#148; or &#147;XO&#148;) for the year ended
December&nbsp;31, 2002 as filed with the Securities and Exchange
Commission (the &#147;Commission&#148;) on March&nbsp;21, 2003
(the &#147;2002 Annual Report&#148;), XO Parent filed a
voluntary petition for relief under Chapter&nbsp;11 of the
United States Bankruptcy Code (the &#147;Bankruptcy Code&#148;)
with the United States Bankruptcy Court for the Southern
District of New York (the &#147;Bankruptcy Court&#148;), on
June&nbsp;17, 2002 (the &#147;Petition Date&#148;). XO Parent
emerged from the Bankruptcy Court proceedings pursuant to the
terms of its third amended plan of reorganization (the
&#147;Plan of Reorganization&#148;) on January&nbsp;16, 2003
(the &#147;Effective Date&#148;). As discussed in note 2, the
Company implemented the fresh start accounting provisions
(&#147;fresh start&#148;) of the American Institute of Certified
Public Accountants Statement of Position 90-7, &#147;Financial
Reporting by Entities in Reorganization under the Bankruptcy
Code,&#148; (&#147;SOP&nbsp;90-7&#148;) as of January&nbsp;1,
2003. Under fresh start, the fair value of the reorganized
Company was allocated among its assets and liabilities, and its
accumulated deficit as of January&nbsp;1, 2003 was eliminated.
As discussed in note&nbsp;2, the implementation of fresh start
has resulted in a substantial reduction in the carrying value of
the Company&#146;s long-lived assets, including property and
equipment, fixed wireless licenses, other intangible assets and
other noncurrent assets. As a result, the predecessor financial
statements are not comparable to financial statements of the
reorganized Company.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The condensed consolidated financial statements
of XO are unaudited and have been prepared in accordance with
generally accepted accounting principles in the United States
for interim financial statements and the Commission&#146;s
instructions to Form&nbsp;10-Q and Article&nbsp;10 of
Regulation&nbsp;S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles in the United States for complete
financial statements. As discussed further in note 2, the
condensed consolidated statements of operations and cash flows
for Reorganized XO for the three months ended March&nbsp;31,
2003, show the operations of the reorganized Company from and
including January&nbsp;1, 2003, the date that the reorganized
Company applied fresh start, through March&nbsp;31, 2003.
Predecessor XO&#146;s January&nbsp;1, 2003 statements of
operations and cash flows reflect only the effect of the
reorganization and application of fresh start as of such date
and do not reflect any operating results. Operating results for
the three month period ended March&nbsp;31, 2003 are not
necessarily indicative of the results that may be expected for
any subsequent quarterly period, or for the year ending
December&nbsp;31, 2003.
</FONT>

<P align="left">
<B><FONT size="2">2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;REORGANIZATION
AND FRESH START ACCOUNTING</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On the Effective Date, XO Parent consummated the
Plan of Reorganization and it emerged from its Chapter&nbsp;11
reorganization proceedings with a significantly restructured
balance sheet. As described in more detail in the 2002 Annual
Report, the consummation of the Plan of Reorganization resulted
in the following changes in XO Parent&#146;s capital structure:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The conversion of $1.0&nbsp;billion of loans
    under its pre-petition secured credit facility into
    $500.0&nbsp;million of outstanding principal amount under a new
    credit agreement (the &#147;New Credit Agreement&#148;);
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The extinguishment of all amounts due under its
    pre-petition unsecured senior and subordinated notes and certain
    general unsecured obligations;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The cancellation of all outstanding shares and
    interests in its pre-petition preferred stock and pre-petition
    common stock; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">The issuance of approximately 95.0&nbsp;million
    shares of common stock of the reorganized Company (&#147;New
    Common Stock&#148;) and warrants to purchase up to an additional
    23.75&nbsp;million shares of New Common Stock of the reorganized
    Company.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-5
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company adopted fresh start as of
January&nbsp;1, 2003. Although the Effective Date of the Plan of
Reorganization was January&nbsp;16, 2003, due to the
immateriality of the results of operations for the period
between January&nbsp;1, 2003 and the Effective Date, the Company
has accounted for the consummation of the Plan of Reorganization
as if it had occurred on January&nbsp;1, 2003 and implemented
fresh start as of that date. Fresh start required that the
Company adjust the historical cost of its assets and liabilities
to their fair values as determined by the reorganization value
of the Company and that the reorganization value be allocated
among the reorganized entity&#146;s net assets in conformity
with procedures specified by Statement of Financial Accounting
Standards (&#147;SFAS&#148;) No.&nbsp;141, &#147;Business
Combinations,&#148; (&#147;SFAS No.&nbsp;141&#148;). The Company
engaged an independent appraiser to assist in the allocation of
the reorganization value to the reorganized Company&#146;s
assets and liabilities by determining the fair market value of
its property and equipment, intangible assets and certain
obligations related to its facility leases. The accompanying
January&nbsp;1, 2003 statement of operations and balance sheet
show the impact of this valuation, but do not reflect any of the
Company&#146;s operating results as attributable to that date. A
reconciliation of the adjustments recorded in connection with
the reorganization and the adoption of fresh start is presented
below (in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="30%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor&nbsp;XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized&nbsp;XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January&nbsp;1,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fresh Start</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Audited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Adjustments(d)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">761,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(48,288</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">712,716</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,304,001</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,588</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses and other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(848,936</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,678</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,237,406</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-6
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="30%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor&nbsp;XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized&nbsp;XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January&nbsp;1,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fresh Start</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Audited)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Adjustments(d)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146;
    (DEFICIT)&nbsp;EQUITY</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">63,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,539</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,268</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">266,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,910</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">235,192</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,466,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,540</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,827,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,466,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(57,911</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">302,460</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;<FONT size="2">(b)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,612</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,630</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,182</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,966,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(69,705</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">873,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO redeemable preferred
    stock&nbsp;&#151; subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,708,316</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; (deficit)&nbsp;equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,628,139</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganized XO common stock and warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap>&nbsp;<FONT size="2">(c)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,512</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,199,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,454,450</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,674,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,167,701</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">Total liabilities and stockholders&#146;<BR>
    (deficit)&nbsp;equity
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,237,406</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,348,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the discharge of pre-petition
    indebtedness, including a $1.0&nbsp;billion credit facility,
    $4.2&nbsp;billion of senior and convertible subordinated notes,
    $245.2&nbsp;million of accrued interest, the elimination of
    $1.7&nbsp;billion of pre-petition redeemable preferred stock and
    $50.6 million of accrued dividends all in accordance with the
    Plan of Reorganization.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(c)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the issuance of New Common Stock and
    warrants in accordance with the Plan of Reorganization.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(d)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To adjust the carrying value of assets,
    liabilities and stockholders&#146; equity to fair value, in
    accordance with fresh start.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Reorganization gain on January&nbsp;1, 2003
consisted of the following (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="80%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain resulting from reorganization of debt,
    preferred stock and equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,199,983</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss resulting from fresh start fair value
    adjustments to assets and liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,167,701</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total reorganization gain, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,032,282</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, the Company had
incurred $91.1&nbsp;million in net reorganization expenses which
included the write-off of deferred financing fees associated
with the issuance of XO&#146;s pre-petition debt and
professional fees incurred in conjunction with the
Company&#146;s recapitalization.
</FONT>

<P align="center"><FONT size="2">F-7
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Review of Significant Accounting
    Policies</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;2, the Company adopted
fresh start as of January&nbsp;1, 2003, creating, in substance,
per SOP&nbsp;90-7, a new reporting entity. The reorganized
Company has adopted the policy of expensing customer
installation costs and internal labor directly associated with
network construction in the period in which the costs are
incurred. The predecessor Company capitalized and amortized
these costs. In accordance with SOP&nbsp;90-7, the reorganized
Company was also required to implement newly issued accounting
pronouncements that would require adoption within twelve months
of applying fresh start.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Principles of Consolidation</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s condensed consolidated
financial statements include all of the assets, liabilities and
results of operations of subsidiaries in which the Company has a
controlling interest. All inter-company accounts and
transactions among consolidated entities have been eliminated.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Preparation of Condensed Consolidated
    Financial Statements</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The preparation of condensed consolidated
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. Management periodically
assesses the accuracy of these estimates and assumptions. Actual
results could differ from those estimates.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Cash and Cash Equivalents</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company considers all highly liquid
investments with maturities of three months or less at the time
of purchase to be cash equivalents. Cash equivalents consist
primarily of money market accounts that are available on demand.
The carrying amount of these instruments approximates fair value
due to their short maturities.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Marketable Securities</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Substantially all of the Company&#146;s
marketable securities currently consist of U.S.&nbsp;government
agency issued and other high-grade and highly-liquid securities
with original maturities beyond three months. The Company
classifies investments in debt and equity securities as
available-for-sale and records such investments at fair value.
The fair values are based on quoted market prices. Unrealized
gains and losses on available-for-sale marketable securities are
reported as a separate component of comprehensive income.
Realized gains and losses for available-for-sale securities are
recognized in interest income.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Long-Lived Assets</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Long-lived assets includes property and
equipment, fixed wireless licenses, and intangible assets to be
held and used. Long-lived assets, excluding intangible assets
with indefinite useful lives, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS
No.&nbsp;144, &#147;Accounting for the Impairment or Disposal of
Long-Lived Assets,&#148; (&#147;SFAS No.&nbsp;144&#148;). The
criteria for determining impairment for such long-lived assets
to be held and used is determined by comparing the carrying
value of these long-lived assets to management&#146;s best
estimate of future undiscounted cash flows expected to result
from the use of the assets. The Company believes that no
impairment existed under SFAS No.&nbsp;144 as of March&nbsp;31,
2003. In the event that there are changes in the planned use of
the Company&#146;s long-lived assets or its expected future
undiscounted cash flows are reduced
</FONT>

<P align="center"><FONT size="2">F-8
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">significantly, the Company&#146;s assessment of
its ability to recover the carrying value of these assets under
SFAS No.&nbsp;144 could change.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Intangible assets with indefinite useful lives
are tested for impairment annually or more frequently if an
event indicates that the asset might be impaired. In accordance
with SFAS No.&nbsp;142, the fair value of these intangible
assets is determined based on a discounted cash flow methodology.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Property and Equipment</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment acquired prior to
December&nbsp;31, 2002 is stated at its fair value at
January&nbsp;1, 2003, as required by fresh start, net of
subsequent depreciation. Additions to property and equipment
during 2003 are stated at cost, net of accumulated depreciation.
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets beginning in the month
telecommunications networks and acquired bandwidth are
substantially complete and available for use and in the month
equipment and furniture are acquired. Telecommunications
networks and bandwidth include the deployment of fiber optic
cable and telecommunications hardware and software for the
expressed purpose of delivering telecommunications services.
Costs of additions and improvements are capitalized, and repairs
and maintenance are charged to expense as incurred. Direct
external costs of constructing property and equipment are
capitalized including interest costs related to construction.
The reorganized Company has adopted the policy of expensing
internal labor directly associated with network construction in
the period in which the costs are incurred.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Equipment held under capital leases is stated at
the lower of the fair value of the asset or the net present
value of the minimum lease payments at the inception of the
lease. For equipment held under capital leases, depreciation is
provided using the straight-line method over the shorter of the
estimated useful lives of the assets owned or the related lease
term.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The estimated useful lives of property and
equipment are as follows:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Telecommunications networks and acquired bandwidth
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">3-20&nbsp;years
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture, fixtures, equipment, and other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">5-7&nbsp;years
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">the shorter of the estimated useful lives or the
    terms of the leases
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry, which could impact the
network architecture and asset utilization. Accordingly, in
making this assessment, the Company considers its planned use of
the assets, the views of experts within the Company and outside
sources regarding the impact of technological advances and
trends in the industry on the value and useful lives of its
network assets.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Fixed Wireless Licenses and Other
    Intangibles</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fixed wireless licenses acquired prior to
December&nbsp;31, 2002 are stated at their fair values at
January&nbsp;1, 2003, as required by fresh start, net of
subsequent amortization. The Company is amortizing these
licenses over an estimated useful life of 10&nbsp;years based on
the initial license term granted by the Federal Communications
Commission. Amortization commences when commercial service using
fixed wireless technology is deployed in the license&#146;s
geographic area.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other intangibles of the Company are valued at
fair value as required by the provisions of fresh start and SFAS
No.&nbsp;141 and consist of customer relationships, internally
developed technology and XO&#146;s trade name. The customer
relationships and internally developed technology are being
amortized using the straight-line method over their estimated
useful lives of three years. The XO trade name was determined to
have an
</FONT>

<P align="center"><FONT size="2">F-9
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">indefinite life. Accordingly, it is not subject
to amortization; however, it is reviewed at least annually for
impairment as required under SFAS No.&nbsp;142, &#147;Goodwill
and Other Intangible Assets,&#148; (&#147;SFAS
No.&nbsp;142&#148;).
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Other Assets</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other assets consist primarily of escrow and
security deposits, investments in publicly traded companies and
pledged securities. The escrow and security deposits and pledged
securities are stated at cost, and their fair value approximates
their carrying value. Investments in publicly traded companies
are stated at fair value.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Income Taxes</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company accounts for income taxes in
accordance with the provisions of SFAS No.109, &#147;Accounting
for Income Taxes,&#148; (&#147;SFAS No.&nbsp;109&#148;) which
requires that deferred income taxes are determined based on the
estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities
given the provisions of the enacted tax laws. Valuation
allowances are used to reduce deferred tax assets to the amount
considered likely to be realized.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, the Company had
capital loss carryforwards of approximately $0.5&nbsp;billion
and net operating loss carryforwards of approximately
$4.0&nbsp;billion. As of the Effective Date, the Company
recognized a substantial amount of taxable income from the
cancellation of indebtedness. Accordingly, a substantial portion
of the Company&#146;s $4.5&nbsp;billion of capital and net
operating loss carryforwards have been eliminated. Other tax
attributes, including property bases, have also been reduced.
Any surviving capital or net operating loss carryforwards will
be subject to limitations imposed under the ownership change
rules in the U.S. Internal Revenue Code. As discussed in more
detail in note&nbsp;10, the Company will join with the
affiliated group of corporations controlled by Mr.&nbsp;Carl C.
Icahn in filing a consolidated federal income tax return for
periods following the Effective Date.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Revenue Recognition</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenues from telecommunication services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. In circumstances when these criteria
are not met, revenue recognition is deferred until resolution
occurs.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Service discounts and incentives related to
telecommunication services are recorded as a reduction of
revenue when granted or ratably over a contract period. Fees
billed in connection with customer installations and other
upfront charges are deferred and recognized ratably over the
estimated customer life.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenue from the sale or lease of unlit network
capacity is recognized upon consummation of the transaction and
the acquirer&#146;s acceptance of the capacity in instances when
the Company receives upfront cash payments and is contractually
obligated to transfer title to the specified capacity at the end
of the contract term. If the transaction does not meet these
criteria, revenue is recognized ratably over the contract term.
There were no sales of unlit capacity during the three months
ended March&nbsp;31, 2003 and March&nbsp;31, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company establishes allowances for collection
of doubtful accounts and other sales credit adjustments.
Allowances for sales credits are established through a charge to
revenue, while allowances for doubtful accounts are established
through a charge to selling, operating and general expense. The
Company assesses the adequacy of these reserves monthly by
considering general factors, such as the length of time
individual receivables are past due, historical collection
experience, the economic and competitive environment, and
changes in the credit worthiness of its customers. The Company
believes that the established valuation allowances were adequate
as of March&nbsp;31, 2003 and December&nbsp;31, 2002. If
circumstances relating to specific customers change or economic
conditions worsen such that the Company&#146;s past collection
experience and assessment of the economic environment are no
longer relevant, XO&#146;s estimate of the recoverability of its
trade receivables could be further reduced.
</FONT>

<P align="center"><FONT size="2">F-10
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Cost of Service</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Cost of service includes expenses directly
associated with providing telecommunications services to
customers, including, among other items, the cost of connecting
customers to the Company&#146;s networks via leased facilities,
the costs of leasing components of our network facilities and
costs paid to third party providers for interconnect access and
transport services. All such costs are expensed as incurred. The
Company accrues for the expected costs of services received from
third party telecommunications providers during the period the
services are rendered. Invoices received from the third party
telecommunications providers are often disputed due to billing
discrepancies. The Company accrues for all invoiced amounts,
even amounts in dispute, as these amounts represent contingent
liabilities that are considered probable and measurable.
Disputes resolved in the Company&#146;s favor may reduce cost of
service in the period the dispute is settled and typically
reflect costs paid in the prior periods. Because the period of
time required to resolve these types of disputes often lapses
over several quarters, the benefits associated with the
favorable resolution of such disputes normally are realized in
periods subsequent to the accrual of the disputed invoice.
During the first quarter of 2003, the settlements resulted in
approximately $6.4&nbsp;million of net benefit to cost of
service.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Net Income
(Loss) Per Share</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net income (loss)&nbsp;per common share, basic
and diluted, is computed by dividing income
(loss)&nbsp;applicable to common shares by the weighted average
number of common shares outstanding for the period. In periods
of net loss, the assumed common share equivalents for options
and warrants are anti-dilutive.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Stock-Based
Compensation</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2003, the Company
adopted the disclosure provisions of SFAS No.&nbsp;148,
&#147;Accounting for Stock-Based Compensation-Transition and
Disclosure,&#148; (&#147;SFAS No.&nbsp;148&#148;). This
statement amends SFAS No.&nbsp;123, &#147;Accounting for
Stock-Based Compensation,&#148; (&#147;SFAS No.&nbsp;123&#148;),
to provide for alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement
amends the disclosure provisions of SFAS No.&nbsp;123 and
Accounting Principles Board Opinion (&#147;APB&#148;)
No.&nbsp;28, &#147;Interim Financial Reporting,&#148; (&#147;APB
No.&nbsp;28&#148;) to require disclosure in the summary of
significant accounting policies of the effects of an
entity&#146;s accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As allowed by SFAS No.&nbsp;148, the Company has
chosen to continue to account for compensation cost associated
with its employee stock plans in accordance with the intrinsic
value method prescribed by APB No.&nbsp;25, &#147;Accounting for
Stock Issued to Employees,&#148; (&#147;APB No.&nbsp;25&#148;)
adopting the disclosure-only provisions of SFAS No.&nbsp;123.
Under this method, no compensation expense is recorded if stock
options are granted at an exercise price equal to the fair
market value of the Company&#146;s stock on the grant date. If
the Company had adopted the fair value method of accounting for
its stock awards, stock-based compensation would have been
determined based on the fair value for all stock awards at the
grant date using a Black-Scholes pricing model and the
assumptions noted below. The Company&#146;s pro forma net loss
applicable to
</FONT>

<P align="center"><FONT size="2">F-11
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">common shares, and pro forma net loss per common
share, basic and diluted, under the fair value method would have
been as follows (dollars in thousands, except per share data):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31, 2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(20,488</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,198,480</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Add: Stock-based employee compensation expense
    included in net loss applicable to common shares, as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,095</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deduct: Total stock-based employee compensation
    expense determined under fair value based methods for all stock
    awards, net of related tax effects
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,038</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(366</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pro forma net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24,526</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,189,751</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share, basic and diluted:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share, basic and
    diluted&nbsp;&#151; as reported
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.22</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.97</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share, basic and
    diluted&nbsp;&#151; pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.26</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.95</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">Black Scholes Assumptions:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expected volatility
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Risk free interest rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.6</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividend yield
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expected life (range in years)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average fair value per share at grant
    date
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2.85</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Comprehensive
Loss</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Comprehensive loss includes the Company&#146;s
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and, for any
periods prior to second quarter 2002, foreign currency
translation adjustments relating to the Company&#146;s European
operations, which were disposed of in February 2002.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Concentration of
Credit Risk</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of trade receivables. Although the Company&#146;s trade
receivables are geographically dispersed and include customers
in many different industries, a portion of the Company&#146;s
revenue is generated from services provided to other
telecommunications service providers. Several of these companies
have filed for protection under Chapter&nbsp;11 of the
Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of
March&nbsp;31, 2003 to cover these risks. The Company&#146;s
Board of Directors has recently taken actions that would permit
the Company to make investments in a broader range of
securities, including securities that may increase the
Company&#146;s credit risk.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fair Value of
Financial Instruments</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">SFAS No.&nbsp;107, &#147;Disclosure about Fair
Value of Financial Instruments&#148; (&#147;SFAS
No.&nbsp;107&#148;), requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Company&#146;s financial instruments classified as current
assets and liabilities approximate their fair value due to their
short maturities.
</FONT>

<P align="center"><FONT size="2">F-12
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Recent
Accounting Pronouncements</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2003, the Company
adopted SFAS No.&nbsp;145, &#147;Rescission of the Financial
Accounting Standards Board (the &#147;FASB&#148;) Statements
No.&nbsp;4, 44, and 64, Amendment of FASB Statement No.&nbsp;13,
and Technical Corrections as of April 2002&#148; (&#147;SFAS
No.&nbsp;145&#148;), which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity&#146;s statement of operations. SFAS No.&nbsp;145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an extraordinary item only when
the extinguishment meets the criteria of both &#147;unusual in
nature&#148; and &#147;infrequent in occurrence&#148; as
prescribed under APB Opinion No.&nbsp;30, &#147;Reporting the
Results of Operations&nbsp;&#151; Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions&#148;
(&#147;APB No.&nbsp;30&#148;). The adoption of SFAS No.&nbsp;145
had no effect on the Company&#146;s financial position or
results of operations for the three months ended March&nbsp;31,
2003 and 2002. The Company recognized extraordinary gains from
debt repurchases in the third and fourth quarters of 2001. In
the future, such gains will be reclassified in the respective
consolidated statements of operations in accordance with SFAS
No.&nbsp;145.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Effective January&nbsp;1, 2003, the Company
adopted SFAS No.&nbsp;146, &#147;Accounting for Costs Associated
with Exit or Disposal Activities&#148; (&#147;SFAS
No.&nbsp;146&#148;), which requires that costs, including
severance costs, associated with exit or disposal activities be
recorded at their fair value when a liability has been incurred.
Under previous guidance, certain exit costs, including severance
costs, were accrued upon managements&#146; commitment to an exit
plan, which is generally before an actual liability has been
incurred. In the first quarter of 2003, the Company did not have
any exit or disposal activities after December 31, 2002;
however, the provisions of SFAS No.&nbsp;146 were implemented in
conjunction with the Company&#146;s implementation of fresh
start. Accordingly, as discussed in note 6, the Company&#146;s
remaining restructuring accrual has been reduced to its net
present value.
</FONT>

<P align="left">
<B><FONT size="2">4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;LONG-LIVED
ASSETS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;2, the Company applied
fresh start on January&nbsp;1, 2003. Accordingly its property
and equipment, fixed wireless licenses and other intangible
assets, have been recorded at their then fair values.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of March&nbsp;31, 2003, the Company had
approximately $606&nbsp;million of long-lived assets, including
approximately $94&nbsp;million of construction-in-progress and
certain fixed wireless licenses that are not currently ready for
their intended use. Accordingly, these long-lived assets are not
being depreciated or amortized.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and
Equipment</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment consisted of the following
components (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January&nbsp;1,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Telecommunications networks and acquired bandwidth
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">358,368</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">359,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,920,819</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture, fixtures, equipment, and other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,301</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">61,501</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">656,994</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">425,669</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">420,748</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,577,813</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated depreciation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,890</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,165,216</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">405,779</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">420,748</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,412,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Network construction-in-progress
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">70,730</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,840</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">367,992</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,509</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">476,588</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-13
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Depreciation expense related to property and
equipment for the reorganized Company&#146;s three months ended
March&nbsp;31, 2003 was $19.9&nbsp;million and for the
predecessor Company&#146;s three months ended March&nbsp;31,
2002 was $135.1&nbsp;million.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fixed Wireless
Licenses and Other Intangibles</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fixed wireless licenses and intangible assets
consisted of the following components (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">January 1,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">997,942</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Customer relationships
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,987</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">49,987</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">123,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Internally developed technology
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,521</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,521</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired technology
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,515</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,413</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">119,016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">119,016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,287,615</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,541</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(303,001</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">112,475</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">119,016</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">XO Trade name&nbsp;&#151; indefinite life asset
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,662</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,662</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,137</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,678</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">984,614</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Amortization expense related to intangible assets
for the reorganized Company&#146;s three months ended
March&nbsp;31, 2003 was $6.5&nbsp;million and for the
predecessor Company&#146;s three months ended March&nbsp;31,
2002 was $26.3&nbsp;million.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Goodwill</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2001, the FASB issued SFAS No.&nbsp;142,
&#147;Goodwill and Other Intangible Assets,&#148; (&#147;SFAS
No.&nbsp;142&#148;) which revises the accounting for purchased
goodwill and intangible assets and supersedes APB Opinion
No.&nbsp;17, &#147;Intangible Assets&#148; (&#147;APB
No.&nbsp;17&#148;). As described in greater detail in the 2002
Annual Report, the predecessor Company performed the required
impairment tests of goodwill as of January&nbsp;1, 2002, and as
a result, during the first quarter of 2002, the predecessor
Company recorded a $1,876.6&nbsp;million adjustment as a
cumulative effect of accounting change to write-off all of its
goodwill.
</FONT>

<P align="left">
<B><FONT size="2">5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the FASB issued SFAS No.&nbsp;143,
&#147;Accounting for Asset Retirement Obligations,&#148;
(&#147;SFAS No.&nbsp;143&#148;) which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which the entity makes the legal or
contractual commitment related to the removal obligation if a
reasonable estimate of fair value can be made. The Company
implemented SFAS No.&nbsp;143 on January&nbsp;1, 2003 in
conjunction with its implementation of fresh start.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company leases Internet data center
facilities and various technical sites. Terminating and
decommissioning these locations would require the removal of any
XO assets and restoration of the leased space to its original
condition. Accordingly, upon adoption of SFAS No.&nbsp;143, the
Company recorded an estimated asset retirement obligation of
$12.0&nbsp;million, which was estimated using the weighted
average probability of incurring these costs in the future. The
present value of the asset retirement obligation was calculated
using a discount rate of 8.0% over a period of 5-20&nbsp;years,
which is representative of the estimated remaining period XO
will occupy its data centers and technical facilities.
</FONT>

<P align="center"><FONT size="2">F-14
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;RESTRUCTURING
CHARGES AND ASSET WRITE-DOWNS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the second half of 2001, and the first
half of 2002, the Company implemented a plan to restructure
certain of its business operations. The restructuring plan
included reducing the Company&#146;s discretionary spending,
capital expenditures and workforce based on its assessment at
that time of then current and expected future market conditions
and the divestiture of its European operations. As of
March&nbsp;31, 2003, the remaining restructuring accrual was
$37.8&nbsp;million, which relates primarily to payments due to
landlords on exited leased facilities. The restructuring accrual
has decreased from $125.8&nbsp;million as of December&nbsp;31,
2001, primarily due to payments associated with exited leased
facilities and adjustments made in conjunction with the
Company&#146;s implementation of fresh start to appropriately
reflect the remaining accrual at its net present value in
accordance with the provisions of SFAS No.&nbsp;146.
</FONT>

<P align="left">
<B><FONT size="2">7.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;LONG-TERM
DEBT</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in the 2002 Annual Report and in
note 2, upon the Effective Date the $1.0&nbsp;billion of loans
under the pre-petition senior secured credit facility were
converted into 90.25&nbsp;million shares of New Common Stock of
the reorganized Company and $500.0&nbsp;million of outstanding
principal amount of loans under the New Credit Agreement. The
maturity date of the outstanding principal under the New Credit
Agreement is July&nbsp;15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on
October&nbsp;15, 2007. The security for the New Credit Agreement
consists of all assets of XO Parent, including stock of its
direct and indirect subsidiaries, and all assets of virtually
all of those subsidiaries. The New Credit Agreement limits
additional indebtedness, liens, dividend payments and certain
investments and transactions, and contains certain covenants
with respect to minimum cash balance and EBITDA (earnings before
interest, taxes, depreciation and amortization) requirements and
maximum capital expenditures. Under certain circumstances, the
New Credit Agreement permits the Company to obtain a senior
secured facility of up to $200.0&nbsp;million, subject to
reduction in an amount equal to any proceeds received from the
exercise of rights in a rights offering to be undertaken in
accordance with the Plan of Reorganization. At March&nbsp;31,
2003, long-term debt totaled $507.9&nbsp;million including
$500.0&nbsp;million principal amount outstanding on the New
Credit Agreement and accrued interest thereon totaling
$7.9&nbsp;million. Approximately 85% of the underlying loans of
the New Credit Agreement are held by Arnos Corp., an entity
controlled by Mr.&nbsp;Carl&nbsp;C. Icahn.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is not required to pay interest
accrued on the principal amount under the New Credit Agreement
until it meets certain financial ratios; however the Company can
elect to begin paying interest in cash prior to the required
date. Loans under the New Credit Agreement bear interest, at the
Company&#146;s option, at an alternate base rate, as defined, or
a Eurodollar rate, plus in each case, applicable margins. Once
the Company begins to pay accrued interest in cash, the
applicable margins are reduced. At March&nbsp;31, 2003, the
annualized weighted average interest rate applicable to
outstanding borrowings under the New Credit Agreement was 7.66%.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Also upon the Effective Date, all of XO
Parent&#146;s pre-petition unsecured senior notes and
pre-petition general unsecured claims were cancelled in exchange
for (i)&nbsp;4,750,000 shares of New Common Stock of the
reorganized Company, (ii)&nbsp;warrants to purchase shares up to
an additional 23,750,000 shares of New Common Stock of the
reorganized Company (iii)&nbsp;rights to purchase shares of New
Common Stock in a rights offering to be undertaken in accordance
with the Plan of Reorganization and (iv)&nbsp;a portion of the
cash consideration received by XO Parent in connection with the
settlement and termination of the proposed investment
transaction that was the basis for the first restructuring
alternative contemplated by the Plan of Reorganization,
discussed further in note&nbsp;8. Holders of pre-petition
subordinated notes of XO Parent had their securities cancelled,
and received a cash payment under certain terms as defined by
the Plan of Reorganization and are entitled to participate in a
rights offering to be undertaken in accordance with the Plan of
Reorganization.
</FONT>

<P align="center"><FONT size="2">F-15
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">8.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;STOCKHOLDERS&#146;
EQUITY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the Company&#146;s Certificate of
Incorporation that was adopted in connection with the Plan of
Reorganization, the Company has the authority to issue
1,000.0&nbsp;million shares of New Common Stock and
200.0&nbsp;million shares of new preferred stock. At
March&nbsp;31, 2003, approximately 95.0&nbsp;million shares of
New Common Stock had been issued, more than 80% of which were
owned and controlled by Cardiff Holding LLC
(&#147;Cardiff&#148;), a Delaware limited liability company
controlled by Mr.&nbsp;Icahn.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the cancellation of the
pre-petition senior notes and pre-petition general unsecured
claims, discussed in note 7, pursuant to the Plan of
Reorganization, such holders were granted warrants to purchase
shares up to an additional 23.75&nbsp;million shares of New
Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants consist of:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;A Warrants to purchase
    9.5&nbsp;million shares of New Common Stock at an exercise price
    of $6.25 per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $7.50 per share; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $10.00 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants are included in reorganized
XO&#146;s common stock in the accompanying condensed
consolidated balance sheet. The warrants will expire
7&nbsp;years after the date of issuance. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events. Of the warrants distributed under
the Plan of Reorganization, XO estimates Cardiff received
Series&nbsp;A Warrants to purchase approximately
3.0&nbsp;million shares of New Common Stock, Series&nbsp;B
Warrants to purchase approximately 2.3&nbsp;million shares of
New Common Stock, and Series&nbsp;C Warrants to purchase
approximately 2.3&nbsp;million shares of New Common Stock.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s pre-petition Class&nbsp;A
common stock stopped trading on the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board (the
&#147;OTCBB&#148;) as of the Effective Date, and the
Company&#146;s New Common Stock began trading on the OTCBB and
the pink sheets (www.pinksheets.com) under the symbol
&#147;XOCM&#148; shortly thereafter. Pursuant to the Plan of
Reorganization, all interests in the Company&#146;s pre-petition
Class&nbsp;A and Class&nbsp;B common stock were terminated as of
the Effective Date. As discussed in note 2, the Company&#146;s
pre-petition redeemable preferred stock was cancelled and
discharged and the holders of such securities received no
distribution under the Plan of Reorganization, but are entitled
to participate in a rights offering to be undertaken in
accordance with the Plan of Reorganization.
</FONT>

<P align="left">
<B><FONT size="2">9.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;OPERATING
SEGMENTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company operates its business as one
communications segment and classifies its products and services
revenues offered by its communications services segment into
voice services, data services and integrated voice and data
services (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Three Months Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March&nbsp;31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2003</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Voice services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,723</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">168,834</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101,977</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,761</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Integrated voice and data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,393</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,810</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">286,093</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">333,405</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-16
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<B><FONT size="2">10.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;RELATED PARTY
TRANSACTIONS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2003, Dixon Properties, LLC
(&#147;Dixon&#148;), which is controlled by Mr.&nbsp;Icahn,
acquired ownership of the building in which XO headquarters is
located in a transaction that was approved by the Bankruptcy
Court. XO currently leases approximately 170,000 square feet of
space in that building. In connection with Dixon&#146;s purchase
of the building, it assumed the Company&#146;s existing lease
agreement and amended the lease to include certain terms that
are more favorable to the Company. Pursuant to the assumed lease
agreement, XO is obligated to pay approximately
$19.0&nbsp;million in the aggregate to Dixon through the
expiration of the initial term of the lease, which is
November&nbsp;30, 2007.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO Parent has entered into a Tax Allocation
Agreement, dated January&nbsp;16, 2003, between XO Parent and
Starfire Holding Corporation (&#147;Starfire&#148;), the parent
entity of the affiliated group of corporations controlled by
Mr.&nbsp;Icahn, which in turn indirectly controls Cardiff,
because it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with XO
Parent&#146;s Chapter&nbsp;11 proceedings, establishes the
methodology for the calculation and payment of income taxes in
connection with the consolidation of the Company with Starfire
for income tax purposes. Generally, the Tax Allocation Agreement
provides that Starfire will pay all consolidated federal income
taxes on behalf of the consolidated group that includes the
Company, and the Company will make payments to Starfire in an
amount equal to the tax liability, if any, that it would have if
it were to file as a consolidated group separate and apart from
Starfire.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company provides certain telecommunications
services to affiliates of Mr.&nbsp;Icahn at rates that the
Company believes are comparable to rates charged other customers
that purchase similar services and volumes. For the three months
ended March&nbsp;31, 2003, the Company recognized revenue of
approximately $88&nbsp;thousand with respect to these services
and had outstanding receivables for such services at
March&nbsp;31, 2003 of approximately $83&nbsp;thousand.
</FONT>

<P align="left">
<B><FONT size="2">11.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;STOCK-BASED
COMPENSATION</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Upon the Effective Date of the Plan of
Reorganization, all options under the predecessor XO stock
option plans were cancelled and the plans were terminated. Upon
consummation of the Plan of Reorganization, on the Effective
Date, the XO Communications, Inc. 2002 Stock Incentive Plan
(&#147;the 2002 Stock Incentive Plan&#148;) was adopted. Under
the 2002 Stock Incentive Plan, the Company is authorized to
issue awards in the form of restricted stock or options to
purchase stock, pursuant to which up to 17.6&nbsp;million shares
of New Common Stock may be issued. Non-qualified options to
purchase 11.4&nbsp;million shares of New Common Stock have been
granted and are outstanding as of March&nbsp;31, 2003.
</FONT>

<P align="left">
<B><FONT size="2">12.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;COMMITMENTS
AND CONTINGENCIES</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Legal Proceedings</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is not currently a party to any legal
proceedings, other than regulatory and other proceedings that
are in the normal course of business. However, as discussed
above, although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter&nbsp;11 proceedings,
disputes with respect to the amount of allowed claims owed by XO
Parent to certain of its general unsecured creditors, and claims
of certain professionals remain outstanding. In addition, a
party has filed a complaint in the Bankruptcy Court seeking
relief from the court&#146;s order confirming the Plan of
Reorganization and a declaratory judgment that such party&#146;s
derivative suit for the benefit of the Company against a former
director of XO Parent and an affiliate of that director should
not be released by the confirmation order. While the outcome of
these matters, or any other relief that may be granted, is
currently not determinable, management does not expect that the
</FONT>

<P align="center"><FONT size="2">F-17
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC. AND
SUBSIDIARIES</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS&nbsp;&#151; (Continued)</FONT></B>

<P align="left">
<FONT size="2">ultimate costs to resolve these matters will have
a material adverse effect on the Company&#146;s consolidated
financial position, results of operations, or cash flows.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Prepaid Calling Card Tax Matter</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;26, 2002, the Company was advised by
the staff of the Commission that it was conducting an informal
inquiry primarily relating to the Company&#146;s obligations
with respect to, and its accrual of liabilities for, specified
federal excise and state sales tax and similar tax obligations
arising in connection with prepaid calling card services and
relating to certain other matters. Sales from prepaid calling
card services that are potentially subject to these taxes
accounted for approximately $56&nbsp;million of the
Company&#146;s total revenues from 1999, when the Company began
providing these services, through June&nbsp;30, 2002. The
Company believes that its accounting for these potential tax
obligations is appropriate and that its accruals of liabilities
relating to these obligations are adequate.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Unfunded Affiliate Pension
    Obligation</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As affiliates of Mr.&nbsp;Icahn hold over 80% of
the outstanding New Common Stock of XO Parent, applicable
pension and tax laws make each member of a plan sponsor&#146;s
&#147;controlled group&#148; (generally defined as entities in
which there is at least an 80% common ownership interest)
jointly and severally liable for certain pension plan
obligations of the plan sponsor. These pension obligations
include ongoing contributions to fund the plan, as well as
liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay
these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, (the &#147;PBGC&#148;) against the assets
of each member of the plan sponsor&#146;s controlled group.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn&#146;s affiliates, XO Parent
and its subsidiaries will be subject to the pension liabilities
of any entities in which Mr.&nbsp;Icahn has a direct or indirect
ownership interest of at least 80%, which includes ACF
Industries, Inc. (&#147;ACF&#148;), which is the sponsor of
certain pension plans. As most recently determined by the ACF
plans&#146; actuaries, pension plans maintained by ACF are
underfunded in the aggregate by approximately $14&nbsp;million
on an ongoing actuarial basis and by approximately
$102&nbsp;million if those plans were terminated. As a member of
the same controlled group, XO Parent and each of its
subsidiaries would be liable for any failure of ACF to make
ongoing pension contributions or to pay the unfunded liabilities
upon a termination of the ACF pension plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other &#147;reportable events,&#148;
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
</FONT>

<P align="center"><FONT size="2">F-18
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">REPORT OF ERNST &#38; YOUNG LLP, INDEPENDENT
AUDITORS</FONT></B>

<P align="left">
<FONT size="2">To the Board of Directors of XO Communications,
Inc.:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have audited the accompanying consolidated
balance sheet of XO Communications, Inc. (the
&#147;Company&#148;) as of December&nbsp;31, 2002, and the
related consolidated statements of operations,
stockholders&#146; equity (deficit)&nbsp;and cash flows for the
year then ended. Our audit also included the financial statement
schedule listed in the Index. These financial statements and
schedule are the responsibility of the Company&#146;s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. The
consolidated financial statements and schedule of the Company
for each of the two years in the period ended December&nbsp;31,
2001, were audited by other auditors who have ceased operations,
and whose report dated February&nbsp;6, 2002, expressed an
unqualified opinion on those consolidated financial statements
and schedules before the restatement adjustments described in
Note 5 and included an explanatory paragraph that discussed the
substantial doubt about the Company&#146;s ability to continue
as a going concern.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In our opinion, the 2002 financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of XO Communications, Inc. at
December&nbsp;31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in Note&nbsp;5 to the consolidated
financial statements, effective January&nbsp;1, 2002, the
Company adopted Statement of Financial Accounting Standards
No.&nbsp;142, &#147;Goodwill and Other Intangible Assets&#148;.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in Note&nbsp;1 to the consolidated
financial statements, effective January&nbsp;16, 2003, the
Company was reorganized under a plan of reorganization confirmed
by the United States Bankruptcy Court for the Southern District
of New&nbsp;York. In connection with its reorganization, the
Company will apply fresh start accounting in the first quarter
of 2003.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed above, the financial statements of
XO Communications, Inc. for the years ended December&nbsp;31,
2001 and 2000 were audited by other auditors who have ceased
operations. As described in Note&nbsp;5, these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No.&nbsp;142, &#147;Goodwill and Other Intangible
Assets&#148;, which was adopted by the Company as of
January&nbsp;1, 2002. Our audit procedures with respect to the
disclosures in Note&nbsp;5 with respect to 2001 and 2000
included (a)&nbsp;agreeing the previously reported net loss to
the previously issued financial statements and the adjustments
to reported net loss representing amortization expense
recognized in those periods related to goodwill and intangible
assets that are no longer being amortized to the Company&#146;s
underlying records obtained from management, and
(b)&nbsp;testing the mathematical accuracy of the reconciliation
of adjusted net loss to reported net loss, and the related
loss-per-share amounts. In our opinion, the disclosures for 2001
and 2000 in Note&nbsp;5 are appropriate. However, we were not
engaged to audit, review, or apply any procedures to the 2001 or
2000 financial statements of the Company other than with respect
to such disclosures and, accordingly, we do not express an
opinion or any form of assurance on the 2001 or 2000 financial
statements taken as a whole.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">/S/ ERNST &#38; YOUNG LLP
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">February&nbsp;28, 2003
</FONT>

<DIV align="left">
<FONT size="2">Baltimore, Maryland
</FONT>
</DIV>

<P align="center"><FONT size="2">F-19
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<B><FONT size="2">The following report is a copy of a report
previously issued by Arthur Andersen LLP (&#147;Andersen&#148;),
whose report has not been reissued by Andersen. Certain
financial information for each of the two years in the period
ended December&nbsp;31, 2001, was not reviewed by Andersen and
includes additional disclosures to conform with new accounting
pronouncements and SEC rules and regulations issued during such
fiscal year, see Item&nbsp;1, &#147;Business&#148;, for
discussion of risks.</FONT></B>

<P align="center">
<B><FONT size="2">REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS</FONT></B>

<P align="left">
<FONT size="2">To the Stockholders of XO Communications, Inc.:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We have audited the accompanying consolidated
balance sheets of XO Communications, Inc. (&#147;XO
Parent,&#148; a Delaware corporation) and subsidiaries
(collectively the &#147;Company&#148;) as of December&nbsp;31,
2001 and 2000, and the related consolidated statements of
operations, stockholders&#146; equity and cash flows for each of
the three years in the period ended December&nbsp;31, 2001.
These financial statements are the responsibility of the
Company&#146;s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of XO Communications, Inc. and
subsidiaries as of December&nbsp;31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December&nbsp;31, 2001, in
conformity with accounting principles generally accepted in the
United States.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note&nbsp;1 to the
consolidated financial statements, the Company has incurred
recurring operating losses and negative cash flows from
operating activities, has defaulted on its debt obligations and
has begun to implement a proposed recapitalization that
contemplates XO Parent filing a voluntary petition for relief
under chapter&nbsp;11 of the United States Bankruptcy Code.
These matters, among others, raise substantial doubt about the
Company&#146;s ability to continue as a going concern.
Management&#146;s plans in regard to these matters are also
described in Note&nbsp;1. The accompanying consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might
otherwise be necessary should the Company be unable to continue
as a going concern.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and
Exchange Commission&#146;s rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="right">
    <FONT size="2">/S/ ARTHUR ANDERSEN LLP
    </FONT></TD>
</TR>

</TABLE>

<P align="left">
<FONT size="2">Vienna, VA
</FONT>

<DIV align="left">
<FONT size="2">February&nbsp;6, 2002
</FONT>
</DIV>

<P align="center"><FONT size="2">F-20
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED BALANCE SHEETS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Dollars in thousands, except for
per&nbsp;share&nbsp;data)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="9%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro forma Unaudited</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized Company</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31, 2002(a)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">ASSETS</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,189</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">508,978</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable, net of allowance for
    doubtful accounts of $37,030 and $32,492, respectively
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">216,753</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">101,760</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">710,178</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">761,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,073,680</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">502,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,742,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">911,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">947,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,876,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,171</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">136,633</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,371,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,930,465</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146;
    (DEFICIT)&nbsp;EQUITY</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities not subject to compromise:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">63,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">156,488</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">265,889</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">341,094</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued interest payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">114,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt in default
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,109,503</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">315,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">329,831</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,721,967</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">315,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,827,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,721,967</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">129,092</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">80,151</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">896,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,851,059</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable preferred stock: par value
    $0.01&nbsp;per share, 25,000,000&nbsp;shares authorized:
    7,856,918 and 7,857,612 shares issued and outstanding on
    December&nbsp;31, 2002 and December&nbsp;31, 2001, respectively;
    aggregate liquidation preference of $1,693,293 and $1,693,328 on
    December&nbsp;31, 2002 and December&nbsp;31, 2001, respectively
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,781,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Commitments and contingencies
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; (deficit)&nbsp;equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock, par value $0.02&nbsp;per share,
    stated at amounts paid in Class&nbsp;A,
    1,000,000,000&nbsp;shares authorized: 331,033,219 and
    337,774,204 shares issued and outstanding on December&nbsp;31,
    2002 and December&nbsp;31, 2001, respectively; Class&nbsp;B,
    120,000,000&nbsp;shares authorized: 104,423,158&nbsp;shares
    issued and outstanding on both December&nbsp;31, 2002 and
    December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,509</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,428</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,304,071</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">297,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146;
    (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,371,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,930,465</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">As discussed in footnote&nbsp;3, the Company
    emerged from bankruptcy on January&nbsp;16, 2003 and will be
    required to adopt the fresh start accounting provisions of
    SOP&nbsp;90-7 in the first quarter of 2003. The pro&nbsp;forma
    balances reflect what the December&nbsp;31, 2002 balances would
    have been had the Company applied fresh start accounting as of
    December&nbsp;31, 2002.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<FONT size="2">See accompanying notes to consolidated financial
statements.
</FONT>

<P align="center"><FONT size="2">F-21
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF
OPERATIONS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Dollars in thousands, except for share and
per share data)</FONT></B>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="54%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,259,853</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,258,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">723,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">522,924</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">527,698</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">302,666</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating and general (excludes
    stock-based compensation)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">736,925</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">971,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">730,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">699,806</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,162,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">617,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restructuring and asset write-downs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">480,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">509,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">In-process research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,468,751</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,208,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,735,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,208,898</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,949,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,011,652</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,938</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">180,905</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense, net (contractual interest was
    $501,118 for the year ended December&nbsp;31, 2002)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(226,451</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(465,401</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(434,122</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other income (loss), net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(200</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(93,781</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">163,570</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganization expense, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(91,121</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before extraordinary item and cumulative
    effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,510,192</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,431,135</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Extraordinary gain on repurchases of debt, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">345,010</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,876,626</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Recognition of preferred stock modification fee,
    net&nbsp;&#151; reorganization item
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,703</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on repurchases of preferred stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">376,879</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net (contractual dividend
    was $98,768 for the year ended December&nbsp;31, 2002)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(42,247</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(129,671</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(146,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,350,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,838,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,247,655</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share, basic and diluted:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before extraordinary item and cumulative
    effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6.02</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Extraordinary gain on repurchases of debt, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.24</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.66</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5.16</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Recognition of preferred stock modification fee,
    net&nbsp;&#151; reorganization item
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.18</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on repurchases of preferred stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.93</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.10</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.32</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.45</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share, basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.58</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.55</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.87</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average shares, basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">441,964,342</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">403,882,956</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">322,089,883</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying Notes to consolidated financial
statements.
</FONT>

<P align="center"><FONT size="2">F-22
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146;
EQUITY (DEFICIT)</FONT></B>

<DIV align="center">
<B><FONT size="2">(Dollars in thousands)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="15%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Class A</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Class B</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Income (Loss)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 1999
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,457,264</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">117,485,100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,139,232</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(85,489</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150,634</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,217,499</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,122</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock, options and warrants in
    acquisitions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77,536,299</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,002,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,002,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of compensatory stock options and
    restricted stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">200,440</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,641</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22,704</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,937</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Compensation attributable to stock options vesting
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,143</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,143</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock through employee benefit
    plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,150,088</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,604</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of Class&nbsp;B common stock into
    Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,070,874</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,070,874</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of 6&nbsp;1/2% redeemable cumulative
    preferred stock into Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,595,750</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(146,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(146,356</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other comprehensive income&nbsp;&#151; net
    unrealized holding gains and foreign currency translation
    adjustments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,870</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,870</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Realized net gains transferred to current period
    earnings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(206,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(206,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,415,330</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">262,010,715</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">105,414,226</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,392,646</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(72,050</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,041</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,465,154</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,838,401</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common and restricted stock in
    acquisitions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,211,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of compensatory stock options
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,551</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,551</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Compensation attributable to stock options and
    restricted stock vesting
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock through employee benefit
    plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,939,685</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,899</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,899</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of Class&nbsp;B common stock into
    Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">991,068</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(991,068</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of 6&nbsp;1/2% redeemable cumulative
    preferred stock into Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,621,320</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock related to equity
    investment, net of offering costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,000,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">155,658</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">155,658</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Gain on repurchases of preferred stock, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">376,879</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">376,879</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(129,671</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(129,671</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other comprehensive income&nbsp;&#151; net
    unrealized holding gains and foreign currency translation
    adjustments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,556</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,556</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Realized net losses transferred to current period
    earnings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,811,470</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">337,774,204</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104,423,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,509</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,428</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,304,071</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">297,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes to consolidated financial
statements.
</FONT>

<P align="center"><FONT size="2">F-23
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF STOCKHOLDERS&#146;
EQUITY (DEFICIT)</FONT></B>

<DIV align="center">
<B><FONT size="2">(Dollars in thousands)</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="13%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Common Stock</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Comprehensive</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deferred</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Income</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Class A</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Class B</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Compensation</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Loss)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Deficit</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Total</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">337,774,204</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104,423,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,509</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(37,428</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,406</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,304,071</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">297,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Compensation attributable to stock options and
    restricted stock vesting
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Issuance of common stock through employee benefit
    plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,854</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of 6&nbsp;1/2% redeemable cumulative
    preferred stock into Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of Preferred Stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,570</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Refund of Employee Stock Purchase Plan funds
    withheld after cancellation(a)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cancellation of Craig McCaw&#146;s Class&nbsp;A
    common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,853,582</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Comprehensive loss:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Recognition of preferred stock modification fee,
    net&nbsp;&#151; reorganization item
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,703</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,703</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(42,247</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(42,247</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Realized net losses and foreign currency
    translation adjustments transferred to current period earnings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,358,256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Balance at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,033,219</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">104,423,158</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">In the latter half of 2001, the Company&#146;s
    Employee Stock Purchase Plan was cancelled; however employee
    salary deferrals continued in December 2001, and were
    subsequently refunded in early 2002.
    </FONT></TD>
</TR>

</TABLE>

<P align="center">
<FONT size="2">See accompanying notes to consolidated financial
statements.
</FONT>

<P align="center"><FONT size="2">F-24
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<P align="center">
<B><FONT size="2">CONSOLIDATED STATEMENTS OF CASH
FLOWS</FONT></B>

<DIV align="center">
<B><FONT size="2">(Dollars in thousands)</FONT></B>
</DIV>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">OPERATING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,386,818</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,086,125</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">699,806</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,162,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">617,714</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28,928</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,173</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,328</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash restructuring charges and asset
    write-downs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">477,250</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">502,737</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash reorganization expense, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">89,448</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">In-process research and development
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,166</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net losses (gains) on impairment or sale of
    investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">95,804</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(162,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Extraordinary gain on repurchases of debt, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(345,010</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,876,626</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in assets and liabilities, net of effects
    from acquisitions:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,514</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(43,254</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(68,761</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(21,572</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(66,566</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(42,167</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">195,904</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(27,484</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">181,693</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">113,034</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) operating
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,602</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(560,877</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(559,414</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">INVESTING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(208,713</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,433,746</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,380,629</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Prepayment for network assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(120,800</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Payments to acquire fixed wireless licenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(206</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,502</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net releases of pledged securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">150</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,386</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Sales of marketable securities and investments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">364,069</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,912,454</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,337,905</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Purchases of marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(103,935</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,031,072</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,381,106</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash received for (paid for) divestitures
    (acquisitions)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(25,203</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,940</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Investments in unconsolidated entities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(10,175</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(71,489</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash provided by (used in) investing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,582</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(708,598</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,464,495</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">FINANCING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net proceeds from issuance of redeemable
    preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,248,901</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Borrowings under senior secured credit facility
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">625,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">375,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from issuance of unsecured notes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">517,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net proceeds from sale of common stock and
    modification of preferred stock agreement
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">248,657</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Proceeds from issuance of common stock under
    employee benefit plans
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,899</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">98,655</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repurchases of senior notes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(201,883</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repurchases of redeemable preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(88,424</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Repayments of capital lease and other obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(44,124</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,809</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividends paid on convertible preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(53,778</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,984</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs incurred in connection with financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(14,200</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(17,100</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash (used in) provided by financing
    activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6,079</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,019,647</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,648,663</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effect of exchange rate changes on cash
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,013</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(213</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease) in cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,849</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(246,815</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(375,459</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, beginning of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,189</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">493,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">868,463</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, end of year
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,189</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">493,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<FONT size="2">See accompanying notes to consolidated financial
statements.
</FONT>

<P align="center"><FONT size="2">F-25
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<DIV>&nbsp;</DIV>

<!-- link1 "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS" -->
<DIV align="left"><A NAME="024"></A></DIV>

<DIV align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">December&nbsp;31, 2002, 2001 and
2000</FONT></B>
</DIV>

<P align="left">
<B><FONT size="2">1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;ORGANIZATION
AND DESCRIPTION OF BUSINESS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Overview</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO Communications Inc. (formerly NEXTLINK
Communications, Inc.), a Delaware corporation
(&#147;XO&nbsp;Parent&#148;), through its subsidiaries, owns and
operates an integrated metropolitan and nationwide fiber optic
network that provides broadband communication services, local
and long distance voice communication services and a wide array
of data and integrated data services to business customers in
over 60&nbsp;United States markets. Voice services include local
and long distance services, calling card and interactive voice
response systems. Data services include Internet access, private
data networking and hosting services. XO&nbsp;Parent, through
its subsidiaries, also offers combined voice and data services
in flat rate &#147;bundled&#148; packages.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<I><FONT size="2">Organization</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consolidated financial statements include the
accounts and activities of XO&nbsp;Parent, and its subsidiaries
(collectively referred to as the &#147;Company&#148; or
&#147;XO&#148;). The consolidated financial statements also
include the results of Concentric Network Corporation
(&#147;Concentric&#148;) commencing June&nbsp;16, 2000, the date
on which Concentric merged with XO. The Company, through
predecessor entities, was formed in September 1994. As of
December&nbsp;31, 2002, the Company was majority controlled by
Craig O. McCaw through shares of Class&nbsp;A and Class&nbsp;B
common stock held by Eagle River Investments, LLC, an entity
controlled by Mr.&nbsp;McCaw, and other shares of the
Company&#146;s Class&nbsp;A and Class&nbsp;B common stock owned
or controlled by Mr.&nbsp;McCaw.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As further discussed in note&nbsp;2, on
June&nbsp;17, 2002 (the &#147;Petition Date&#148;),
XO&nbsp;Parent filed a voluntary petition for relief under
Chapter&nbsp;11 of the United States Bankruptcy Code (the
&#147;Bankruptcy Code&#148;) with the United States Bankruptcy
Court for the Southern District of New York (the
&#147;Bankruptcy Court&#148;). Accordingly, the accompanying
consolidated financial statements have been prepared in
accordance with the American Institute of Certified Public
Accountants Statement of Position&nbsp;90-7, &#147;Financial
Reporting by Entities in Reorganization under the Bankruptcy
Code,&#148; (&#147;SOP&nbsp;90-7&#148;) and on a going concern
basis which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course
of business. In accordance with SOP&nbsp;90-7, the financial
statements for the periods presented distinguish transactions
and events that are directly associated with the reorganization
from the ongoing operations of the Company. The Company conducts
its operations through direct and indirect subsidiaries of
XO&nbsp;Parent. None of these subsidiaries were debtors in the
Chapter&nbsp;11 proceedings.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On January&nbsp;16, 2003 (the &#147;Effective
Date&#148;), XO&nbsp;Parent emerged from the Bankruptcy Court
proceedings pursuant to the terms of its third amended plan of
reorganization (the &#147;Plan of Reorganization&#148;). As
discussed in note&nbsp;3, the Company will implement fresh start
accounting under the provisions of SOP&nbsp;90-7. Under the
fresh start accounting provisions of SOP&nbsp;90-7, the fair
value of the reorganized Company will be allocated to its assets
and liabilities, and its accumulated deficit will be eliminated.
As discussed in the Pro Forma column on the accompanying balance
sheet and in note&nbsp;3, the implementation of fresh start
accounting will result in a substantial reduction in the
carrying value of the Company&#146;s long-lived assets,
including property and equipment, fixed wireless licenses, other
intangible assets and other noncurrent assets. As a result, the
historical financial statements will not be comparable to
financial statements of the Company published for periods
following the implementation of fresh start accounting.
</FONT>

<P align="left">
<B><FONT size="2">2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;REORGANIZATION</FONT></B>

<P align="left">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The
Chapter&nbsp;11 Petition and Plan of Reorganization</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;17, 2002, XO&nbsp;Parent filed for
protection under Chapter&nbsp;11 of the Bankruptcy Code in the
Bankruptcy Court. On November&nbsp;15, 2002, the Bankruptcy
Court confirmed XO&nbsp;Parent&#146;s Plan of Reorganization,
</FONT>

<P align="center"><FONT size="2">F-26
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">and, on January&nbsp;16, 2003, XO&nbsp;Parent
consummated the Plan of Reorganization and emerged from its
Chapter&nbsp;11 reorganization proceedings with a significantly
restructured balance sheet.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the period immediately preceding and after
the filing of XO&nbsp;Parent&#146;s Chapter&nbsp;11 petition,
the Company met with a committee of lenders under the
$1.0&nbsp;billion secured credit facility (the
&#147;Pre-Petition Credit Facility&#148;), an informal committee
of unsecured creditors that represented holders of our senior
unsecured notes (and following the filing of the Chapter&nbsp;11
petition, the official committee of unsecured creditors
appointed in the Chapter&nbsp;11 proceedings) and potential
investors to discuss potential restructuring transactions that
could be implemented to reorganize XO&nbsp;Parent&#146;s capital
structure. These discussions led to an agreement with the
lenders under the Pre-Petition Credit Facility regarding the
terms of a Plan of Reorganization that envisioned two potential
reorganization structures the first of which was based on, among
other things, a proposed cash investment in XO&nbsp;Parent by
third parties, which was ultimately abandoned, and the second of
which contemplated a stand alone restructuring with no new cash
infusion committed in advance. The Plan of Reorganization was
filed on July&nbsp;22, 2002 and distributed to creditors of
XO&nbsp;Parent eligible to vote in the reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr.&nbsp;Carl
Icahn (&#147;High River&#148;), commenced an offer to purchase
loans under the company&#146;s Pre-Petition Credit Facility at a
purchase price of $0.50 for each $1.00 in principal amount
thereof. Purchases made under this offer, together with the
loans under the Pre-Petition Credit Facility that High River
previously had acquired, resulted in High River holding
approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The consummation of the Plan of Reorganization
resulted in the $1.0&nbsp;billion of loans under the
Pre-Petition Credit Facility being converted into the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">90.25&nbsp;million shares of common stock, par
    value $0.01 per share, of reorganized XO&nbsp;Parent (&#147;New
    Common Stock&#148;); and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">$500&nbsp;million of outstanding principal amount
    of loans under a restructured secured credit and guaranty
    agreement (the &#147;New Credit Agreement&#148;).
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Plan of Reorganization also resulted in the
cancellation of all of XO&nbsp;Parent&#146;s pre-bankruptcy
senior notes and pre-bankruptcy general unsecured claims in
exchange for the following:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">4.75&nbsp;million shares of New Common Stock;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">warrants to purchase shares up to an additional
    23.75&nbsp;million shares of New Common Stock described below;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">rights to purchase shares of New Common Stock in
    the rights offering described below; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">a portion of the cash consideration received by
    XO&nbsp;Parent in connection with the settlement and termination
    of the proposed investment transaction that was the basis for
    the first restructuring alternative contemplated by the Plan of
    Reorganization (the &#147;Investment Termination Payment&#148;)
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants consist of:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;A Warrants to purchase
    9.5&nbsp;million shares of New Common Stock at an exercise price
    of $6.25 per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;B Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $7.50 per share; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Series&nbsp;C Warrants to purchase approximately
    7.1&nbsp;million shares of New Common Stock at an exercise price
    of $10.00 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-27
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The warrants will expire 7&nbsp;years after the
date of issuance. Each series of warrants is identical, except
as to the applicable exercise price. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Plan of Reorganization and after the
filing and effectiveness of a registration statement with the
Securities and Exchange Commission, XO&nbsp;Parent will issue to
certain holders of claims of interests in XO&nbsp;Parent, who
hold such claims and/or interests as of the November&nbsp;15,
2002 record date, rights to subscribe for up to 40,000,000
shares of New Common Stock, at $5.00 per share, for an aggregate
purchase price of up to approximately $200.0&nbsp;million
through a rights offering (the &#147;Rights Offering&#148;). In
addition, pursuant to the stipulation relating to the settlement
of a claim made against XO&nbsp;Parent purportedly on behalf of
its stockholders (the &#147;Stockholder Stipulation&#148;),
holders of shares of pre-petition class&nbsp;A common stock of
XO&nbsp;Parent will receive additional nontransferable rights
exercisable for a up to 3,333,333 shares of New Common Stock to
the extent that the rights otherwise allocable to such holders
in the Rights Offering are exercisable for less than 3,333,333
shares of New Common Stock. Accordingly, not less than
40,000,000 and not more than 43,333,333 shares will be offered
in the Rights Offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In addition, under the Plan of Reorganization:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="1%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition subordinated notes of
    XO&nbsp;Parent had their securities cancelled, and received a
    cash payment from High River based upon the amount of the
    Investment Termination Payment that High River would have been
    entitled to receive as a holder of the loans under the New
    Credit Agreement and the right to participate in the Rights
    Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class&nbsp;A common stock
    of XO&nbsp;Parent had their securities cancelled, and received
    the right to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">&#149;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Holders of pre-petition class&nbsp;B common stock
    and holders of all series of pre-petition preferred stock of
    XO&nbsp;Parent had their securities cancelled and received the
    right to participate in the Rights Offering.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Of the 95.0&nbsp;million shares of New Common
Stock distributed on the Effective Date, more than 80% were
issued to High River. Immediately following this distribution,
High River transferred all interest in its New Common Stock to
Cardiff Holding LLC, a Delaware limited liability company also
controlled by Mr.&nbsp;Icahn (&#147;Cardiff&#148;). Of the
warrants to be distributed under the Plan of Reorganization,
XO&nbsp;estimates Cardiff will receive Series&nbsp;A Warrants to
purchase approximately 3.0&nbsp;million shares of New Common
Stock, Series&nbsp;B Warrants to purchase approximately
2.3&nbsp;million shares of New Common Stock, and Series&nbsp;C
Warrants to purchase approximately 2.3&nbsp;million shares of
New Common Stock. High River assigned its approximately 85%
interest in the loans outstanding under the New Credit Agreement
to Chelonian Corp. (&#147;Chelonian&#148;), which subsequently
assigned those loans to Arnos Corp. (&#147;Arnos&#148;). Both
Chelonian and Arnos are controlled by Mr.&nbsp;Icahn.
</FONT>

<P align="left">
<B><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Accounting
Impact of Chapter&nbsp;11 Filing</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Liabilities subject to compromise reflected in
the accompanying consolidated financial statements and the
XO&nbsp;Parent stand-alone financial statements represent the
liabilities of XO&nbsp;Parent incurred prior to the Petition
Date that are with unrelated parties (other than those that are
payable to a subsidiary in the XO&nbsp;Parent Stand-Alone
Balance Sheet). In accordance with SOP&nbsp;90-7, liabilities
subject to compromise were recorded at the amount allowed on
pre-petition claims in the Chapter&nbsp;11 proceedings. Other
obligations that
</FONT>

<P align="center"><FONT size="2">F-28
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">are not subject to compromise have retained their
historical balance sheet classifications and amounts.
Liabilities subject to compromise consisted of the following as
of December&nbsp;31, 2002 (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="81%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,165,718</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued interest and preferred stock dividends
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">295,820</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pre-petition accounts payable and accrued
    liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">33,640</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Capital lease obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,211</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,504,389</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At December&nbsp;31, 2002, there were
approximately $34&nbsp;million of liabilities subject to
compromise that had not been settled by the Bankruptcy Court.
The Company expects to pay approximately $6&nbsp;million to
settle these claims which will result in a reorganization
benefit of approximately $28&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In order to record its debt instruments at the
amount allowed by the Bankruptcy Court in accordance with
SOP&nbsp;90-7, as of the Petition Date, XO&nbsp;Parent wrote off
all of its debt issuance costs and discounts related to debt
(collectively the &#147;Deferred Financing Fees&#148;) as a
component of reorganization expense. Reorganization expense also
includes professional fees incurred in connection with the
Chapter&nbsp;11 proceedings, as well as gains or penalties from
the settlement or rejection of liabilities subject to compromise
and the net gains from the Investment Termination Payment.
Reorganization expenses for the year ended December&nbsp;31,
2002 consisted of the following (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="78%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss from the settlement or rejection of
    liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,916</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net gain from Investment Termination Payment
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(16,667</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred Financing Fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,270</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Professional fees
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,602</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total reorganization expense, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under SOP&nbsp;90-7, XO&nbsp;Parent was required
to accrue interest expense during the Chapter&nbsp;11
proceedings only to the extent that such interest was expected
to be paid pursuant to the proceedings. Under the Plan of
Reorganization, there were no cash payments of interest on the
loans outstanding under the Pre-Petition Credit Facility or
XO&nbsp;Parent&#146;s unsecured notes. Therefore, XO&nbsp;Parent
ceased accruing interest on the Pre-Petition Credit Facility and
on its unsecured notes as of the Petition Date. The contractual
interest amounts parenthetically disclosed on the accompanying
consolidated statement of operations represent the additional
interest expense that would have been accrued under the relevant
financing agreements had the Company not ceased accruing
interest as described above.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with SOP&nbsp;90-7, XO&nbsp;Parent
recorded its preferred stock at the amount allowed by the
Bankruptcy Court. Accordingly, as of the Petition Date,
XO&nbsp;Parent recognized a gain equal to the remaining
$81.5&nbsp;million unamortized balance of a deferred
modification fee and wrote off all issuance costs and discounts
related to its preferred stock, which resulted in a charge of
$2.8&nbsp;million. In addition, the Company stopped accruing
preferred stock dividends subsequent to the Petition Date. The
dividend amounts parenthetically disclosed on the accompanying
consolidated statement of operations represent the additional
dividends that would have been accrued under the terms of the
relevant preferred stock had the Company not ceased accruing
such dividends as described above.
</FONT>

<P align="center"><FONT size="2">F-29
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<B><FONT size="2">XO Parent Stand-Alone Financial
Statements</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In accordance with SOP&nbsp;90-7, stand-alone
financial statements of XO&nbsp;Parent are presented below. Such
financial statements have been prepared using standards
consistent with the Company&#146;s consolidated financial
statements without eliminating intercompany transactions and
without consolidating controlled subsidiaries (dollars in
thousands).
</FONT>

<P align="center">
<B><FONT size="2">XO Communications, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(XO Parent)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">Debtor In Possession</FONT></B>

<DIV align="center">
<B><FONT size="2">Stand-Alone Balance Sheet</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">As of December&nbsp;31, 2002</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="77%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">ASSETS</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Pledged securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,764</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,864</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">65,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">67,039</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">79,711</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Investment in and notes receivable from
    subsidiaries, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,542,749</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">43,638</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,866,655</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="7"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146;
    EQUITY</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,422</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Debt and accrued interest payable to subsidiary
    subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">620,389</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,168,018</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities not subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,633</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,237,833</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable preferred stock held by and payable to
    a subsidiary subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">514,640</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable preferred stock subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,149</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,214,124</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">405,866</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146; equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,866,655</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-30
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="center">
<B><FONT size="2">XO Communications, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(XO Parent)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">Debtor In Possession</FONT></B>

<DIV align="center">
<B><FONT size="2">Stand-Alone Statement of Operations</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="70%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period from the</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Petition Date of</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 17, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">through</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Costs and expenses:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Selling, operating, and general (excludes stock
    based compensation)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,352</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,584</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total costs and expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">134,936</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(134,936</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganization expense, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(91,121</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest income on notes receivable from
    subsidiaries
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">286,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,468</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,677</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Recognition of preferred stock modification fee,
    net&nbsp;&#151; reorganization item
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,703</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income applicable to common shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">135,380</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center">
<B><FONT size="2">XO Communications, Inc.</FONT></B>

<DIV align="center">
<B><FONT size="2">(XO Parent)</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">Debtor In Possession</FONT></B>

<DIV align="center">
<B><FONT size="2">Stand-Alone Statement of Cash Flows</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">(Unaudited)</FONT></B>
</DIV>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="73%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="10%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Period From the</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Petition Date of</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 17, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">through</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31, 2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <B><FONT size="2">OPERATING ACTIVITIES:</FONT></B></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">56,677</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjustments for non-cash items:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Depreciation and amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,584</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganization expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">91,121</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stock-based compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12,352</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest income on notes receivable from
    subsidiaries
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(286,202</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Interest expense
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,468</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Changes in assets and liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Notes receivable from subsidiaries, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net cash used in operating activities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net increase (decrease)&nbsp;in cash and cash
    equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, beginning of the period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents, end of period
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-31
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">3.</FONT></B></TD>
    <TD>
    <B><FONT size="2">FRESH START ACCOUNTING</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company will adopt the fresh start accounting
provisions (&#147;fresh start&#148;) of SOP&nbsp;90-7 during the
first quarter of 2003. Under SOP&nbsp;90-7, the implementation
of fresh start reporting is triggered in part by the emergence
of XO&nbsp;Parent from its Chapter&nbsp;11 proceedings. Although
the effective date of the Plan of Reorganization was
January&nbsp;16, 2003, the Company plans to account for the
consummation of the Plan of Reorganization as if it had occurred
on January&nbsp;1, 2003 and implement fresh start reporting as
of that date. Fresh start requires that the Company adjust the
historical cost of its assets and liabilities to their fair
value. The fair value of the reorganized Company, or the
reorganization value, of approximately $1.4&nbsp;billion was
determined based on the sum of the reorganized Company&#146;s
$500.0&nbsp;million of debt outstanding under the New Credit
Agreement, $475.0&nbsp;million of New Common Stock as approved
by the Bankruptcy Court, and the $425.0&nbsp;million of other
liabilities that were not eliminated or discharged under the
Plan of Reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fresh start requires that the reorganization
value be allocated to the entity&#146;s net assets in conformity
with procedures specified by Accounting Principles Board Opinion
(&#147;APB&#148;) No.&nbsp;16, &#147;Business
Combinations,&#148; (&#147;APB No.&nbsp;16&#148;) as superseded
by Statement of Financial Accounting Standards
(&#147;SFAS&#148;) No.&nbsp;141, &#147;Business
Combinations&#148; (&#147;SFAS No.&nbsp;141&#148;). The Company
engaged an independent appraiser to assist in the allocation of
the reorganization value to the reorganized Company&#146;s
assets and liabilities by determining the fair market value of
its property and equipment, intangible assets and certain
obligations related to its facility leases. The fair value
adjustments impacted current assets, property and equipment,
fixed wireless licenses, intangible assets and accrued
liabilities. A reconciliation of the adjustments to be recorded
in connection with the debt restructuring and the adoption of
fresh start accounting is presented below (in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro forma</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Debt</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fresh Start</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Restructuring</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Adjustments(d)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">ASSETS</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash and cash equivalents
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">314,038</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Marketable securities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts receivable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">116,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">83,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,826</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,654</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">761,004</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,826</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">710,178</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property and equipment, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,278,413</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">502,176</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">911,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(852,324</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,508</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other intangibles, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,389</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,171</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other assets, net
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,289</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(36,181</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,108</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,214,355</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,371,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-32
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reorganized XO</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Pro forma</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Predecessor XO</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Debt</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Fresh Start</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Restructuring</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Adjustments(d)</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">(Unaudited)</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="19" align="left" valign="top">
    <B><FONT size="2">LIABILITIES AND STOCKHOLDERS&#146; (DEFICIT)
    EQUITY</FONT></B></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounts payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">63,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">69,729</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">265,889</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(19,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued interest payable
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">213</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total current liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">329,831</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(13,841</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">315,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Current liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,497,207</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(5,461,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(35,774</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term debt
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">&nbsp;(b)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">500,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other long-term liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">75,242</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,909</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">80,151</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term liabilities subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,182</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,462</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,961,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(51,888</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">896,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO Redeemable preferred
    stock&nbsp;&#151; subject to compromise
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,708,316</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,708,316</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)(a)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="3" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Stockholders&#146; (deficit)&nbsp;equity:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Predecessor XO Common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,628,139</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4,628,139</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reorganized XO Common stock and warrants
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">&nbsp;(c)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,500</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,500</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated other comprehensive income
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,512</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,512</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accumulated deficit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,654,433</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,194,749</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,459,684</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total stockholders&#146; (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,032,282</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,669,749</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,162,467</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">475,000</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total liabilities and stockholders&#146;
    (deficit)&nbsp;equity
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,585,496</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,214,355</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,371,141</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the discharge of indebtedness,
    including Pre-Petition Credit Facility ($1,000.0&nbsp;million),
    pre-petition senior and convertible subordinated notes
    ($4,165.7&nbsp;million), accrued interest ($245.2&nbsp;million),
    and accrued dividends ($50.6&nbsp;million) and the elimination
    of pre-petition Redeemable Preferred Stock
    ($1,708.3&nbsp;million) in accordance with the Plan of
    Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(c)</FONT></TD>
    <TD align="left">
    <FONT size="2">To record the issuance of New Common Stock and
    Warrants.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(d)</FONT></TD>
    <TD align="left">
    <FONT size="2">To adjust the carrying value of assets,
    liabilities and stockholders&#146; equity to fair value, in
    accordance with fresh start accounting.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">4.</FONT></B></TD>
    <TD>
    <B><FONT size="2">SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES</FONT></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Review of Significant Accounting
    Policies</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;3, the Company will
adopt fresh start accounting during the first quarter of 2003,
creating, in substance, per SOP&nbsp;90-7 a new reporting
entity. SOP&nbsp;90-7 also requires that changes in accounting
principles required in the financial statements of the emerging
entity within twelve months of fresh start reporting should be
adopted at the time fresh start reporting is adopted.
</FONT>

<P align="center"><FONT size="2">F-33
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Principles of
Consolidation</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company&#146;s consolidated financial
statements include all of the assets, liabilities and results of
operations of subsidiaries in which the Company has a
controlling interest. All inter-company accounts and
transactions among consolidated entities have been eliminated.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Preparation of
Consolidated Financial Statements</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Management periodically assesses the accuracy
of these estimates and assumptions. Actual results could differ
from those estimates.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Cash and Cash
Equivalents</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company considers all highly liquid
investments with maturities of three months or less at the time
of purchase to be cash equivalents. Cash equivalents consist
primarily of money market accounts that are available on demand.
The carrying amount of these instruments approximates fair value
due to their short maturities.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Marketable
Securities</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Substantially all of the Company&#146;s
marketable securities consist of U.S.&nbsp;government agency
issued and other high-grade and highly-liquid securities with
original maturities beyond three months. The Company classifies
investments in debt and equity securities as available-for-sale
and records such investments at fair value. The fair values are
based on quoted market prices. Unrealized gains and losses on
available-for-sale marketable securities are reported as a
separate component of comprehensive income. Realized gains and
losses for available-for-sale securities are recognized in
interest income.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Long-Lived
Assets</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Long-lived assets, including property and
equipment, fixed wireless licenses, and intangible assets with
definite useful lives to be held and used, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed pursuant to SFAS
No.&nbsp;144, &#147;Accounting for the Impairment or Disposal of
Long-Lived Assets,&#148; (&#147;SFAS No.&nbsp;144&#148;). SFAS
No.&nbsp;144 supersedes SFAS No.&nbsp;121, &#147;Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of,&#148; (&#147;SFAS No.&nbsp;121&#148;). In
accordance with implementation requirements, the Company
implemented the provisions of SFAS No.&nbsp;144 on
January&nbsp;1, 2002. The criteria for determining impairment
for long-lived assets to be held and used are generally
consistent with SFAS No.&nbsp;121. Pursuant to SFAS
No.&nbsp;144, impairment is determined by comparing the carrying
value of these long-lived assets to management&#146;s best
estimate of future undiscounted cash flows expected to result
from the use of the assets. The Company believes that no
impairment existed under SFAS No.&nbsp;144 as of
December&nbsp;31, 2002. In the event that there are changes in
the planned use of the Company&#146;s long-lived assets or its
expected future undiscounted cash flows are reduced
significantly, the Company&#146;s assessment of its ability to
recover the carrying value of these assets under SFAS
No.&nbsp;144 could change. As discussed in note&nbsp;3, the
Company will apply fresh start accounting during the first
quarter of 2003, which will result in a significant write-down
of the Company&#146;s long-lived assets.
</FONT>

<P align="center"><FONT size="2">F-34
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Property and
Equipment</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment is stated at historical
cost net of accumulated depreciation. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the
assets beginning in the month telecommunications networks and
acquired bandwidth are substantially complete and available for
use and in the month equipment and furniture are acquired. The
estimated useful lives of property and equipment are determined
based on historical usage with consideration given to
technological changes and trends in the industry that could
impact the network architecture and asset utilization.
Telecommunications networks and bandwidth include the deployment
of fiber optic cable and telecommunications hardware and
software for the expressed purpose of delivering
telecommunications services. Costs of additions and improvements
are capitalized, and repairs and maintenance are charged to
expense as incurred. Direct costs of constructing property and
equipment are capitalized including interest costs related to
construction. As discussed in note&nbsp;3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of property and
equipment.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Equipment held under capital leases is stated at
the lower of the fair value of the asset or the net present
value of the minimum lease payments at the inception of the
lease. For equipment held under capital leases, depreciation is
provided using the straight-line method over the shorter of the
estimated useful lives of the assets owned or the related lease
term.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The estimated useful lives of property and
equipment are as follows:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="56%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="41%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Telecommunications networks and acquired bandwidth
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">5-20 years
    </FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture, fixtures, equipment, and other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">3-5 years
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Leasehold improvements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <FONT size="2">the shorter of the estimated useful lives or the
    terms of the leases
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because XO&nbsp;operates within an industry in which
new technological changes could render some or all of its
network related equipment obsolete requiring application of a
shorter useful life or, in a worst case, a write off of the
entire value of the asset. Accordingly, in making this
assessment, the Company considers the views of experts within
the Company and outside sources regarding the impact of
technological advances and trend in the industry on the value
and useful lives of its network assets.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Fixed Wireless
Licenses</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Fixed wireless licenses consist of direct costs
to acquire fixed wireless licenses. The estimated useful life is
20&nbsp;years, which represents the original ten year license
term with one ten year renewal. Amortization commences when
commercial service using fixed wireless technology is deployed
in the license&#146;s geographic area. Renewal is conditioned
upon the satisfaction of certain utilization requirements
established by the Federal Communications Commission
(&#147;FCC&#148;). The Company&#146;s current utilization may
not be sufficient to satisfy this FCC condition on certain
licenses which could impact the FCC&#146;s decision to renew. As
discussed in note&nbsp;3, the Company will apply fresh start
accounting during the first quarter of 2003 which will result in
a significant write down of fixed wireless licenses.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Goodwill</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Goodwill consisted primarily of goodwill from the
Concentric merger. Effective January&nbsp;1, 2002, the Company
adopted SFAS No.&nbsp;142, &#147;Goodwill and Other Intangible
Assets&#148; (&#147;SFAS No.&nbsp;142&#148;), in which goodwill
and intangible assets with indefinite lives are no longer
amortized but must be tested for impairment annually or more
frequently if an event indicates that the asset might be
impaired. The Company performed the required transitional
impairment tests of goodwill as of January&nbsp;1, 2002, and
determined that the goodwill
</FONT>

<P align="center"><FONT size="2">F-35
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">was totally impaired. Accordingly, in the first
quarter of 2002 the Company recognized a $1,876.6&nbsp;million
charge as a cumulative effect of accounting change to write off
all of its goodwill.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
Intangibles</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other intangibles consist primarily of
intangibles from the Concentric merger. Such costs are amortized
using the straight line method of accounting over a period of up
to five years. As discussed in note&nbsp;3, the Company will
apply fresh start accounting during the first quarter of 2003
which will result in a net increase to other intangibles.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Other
Assets</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Other assets consist primarily of deferred costs
associated with the installation of customer services,
investments in both publicly traded and privately held companies
and pledged securities. The Company defers direct labor costs
related to customer installations, which are amortized ratably
over the estimated customer service period.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company has investments in entities in which
XO has no significant influence. These investments are accounted
for under the cost method. The Company regularly reviews its
investment portfolio to determine if any declines in value are
other than temporary. During 2000 and 2001, the slowing economy
had a negative impact on the equity value of companies in the
telecommunications sector. In light of these circumstances and
based on the Company&#146;s review of its investment portfolio
in this sector, the Company recorded other than temporary
impairment charges in other income (loss) of $89.0&nbsp;million
in 2001 and $57.7&nbsp;million in 2000 with respect to its
public and private equity investments.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002 and 2001, the
Company had pledged $1.4&nbsp;million and $16.6&nbsp;million,
respectively, in certificates of deposit as collateral for
outstanding letters of credit. The pledged securities are stated
at cost, adjusted for accrued interest. The fair value of the
pledged securities approximates their carrying value.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As disclosed in note&nbsp;3, the Company will
apply fresh start accounting during the first quarter of 2003
which will result in a reduction of other assets.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Income Taxes</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company accounts for income taxes in
accordance with the provisions of SFAS No.&nbsp;109,
&#147;Accounting for Income Taxes,&#148; (&#147;SFAS
No.&nbsp;109&#148;) which requires that deferred income taxes be
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax
laws. Valuation allowances are used to reduce deferred tax
assets to the amount considered likely to be realized.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Revenue Recognition</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Revenues from telecommunication services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. Service discounts and incentives
related to telecommunication services are recorded as a
reduction of revenue when granted or ratably over a contract
period. Fees billed in connection with customer installations
and other upfront charges are deferred and recognized ratably
over the estimated customer life. Revenue from the sale or lease
of unlit network capacity is recognized upon consummation of the
transaction and the acquirer&#146;s acceptance of the capacity
in instances when the Company receives upfront cash payments and
is contractually obligated to transfer title to the specified
capacity at the end of the contract term. If the transaction
does not meet these criteria, revenue is recognized ratably over
the contract term. In 2001, approximately 1.5% of XO&#146;s total
</FONT>

<P align="center"><FONT size="2">F-36
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">revenue was attributed to sales of unlit network
capacity. There were no sales of unlit network capacity during
2002 or 2000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company establishes valuation allowances for
collection of doubtful accounts and other sales credit
adjustments. Valuation allowances for sales credits are
established through a charge to revenue, while valuation
allowances for doubtful accounts are established through a
charge to selling, operating and general expense. The Company
assesses the adequacy of these reserves monthly evaluating
general factors, such as the length of time individual
receivables are past due, historical collection experience, the
economic and competitive environment, and changes in the credit
worthiness of its customers. As considered necessary, the
Company also assesses the ability of specific customers to meet
their financial obligations to XO and establishes specific
valuation allowances based on the amount XO expects to collect
from its customers. The Company believes that the established
valuation allowances were adequate as of December&nbsp;31, 2002
and 2001. If circumstances relating to specific customers change
or economic conditions worsen such that the Company&#146;s past
collection experience and assessment of the economic environment
are no longer relevant, XO estimate of the recoverability of its
trade receivables could be further reduced.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In-Process
Research and Development</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In conjunction with the Concentric merger, the
Company allocated $36.2&nbsp;million of the purchase price to
in-process research and development which represented the
estimated fair value of incomplete projects based on
risk-adjusted future cash flows. At the date of the Concentric
merger, the development of these projects had not yet reached
technological feasibility and the technology had no alternative
future uses. Accordingly, the entire $36.2&nbsp;million of
acquired in-process research and development was expensed as of
the acquisition date.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Net Loss Per Share</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Net loss per common share, basic and diluted, is
computed by dividing loss applicable to common shares by the
weighted average number of common shares outstanding for the
period. In periods of net loss, the assumed common share
equivalents for options, warrants and convertible securities are
anti-dilutive. Assuming exercise or conversion of outstanding
stock options, warrants and convertible securities, calculated
under the treasury method, diluted shares would have been
549.8&nbsp;million for 2002, 512.6&nbsp;million for 2001 and
398.5&nbsp;million for 2000.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;2, the Company emerged
from bankruptcy on January&nbsp;16, 2003 and has a reorganized
equity structure. In particular, implementation of the
Company&#146;s Plan of Reorganization resulted in the
cancellation of all of the shares of all classes of the
Company&#146;s common and preferred stock that were outstanding
prior to the Petition Date.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Stock-Based Compensation</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As allowed by SFAS No.&nbsp;123, &#147;Accounting
for Stock-Based Compensation,&#148; (&#147;SFAS
No.&nbsp;123&#148;) the Company has chosen to account for
compensation cost associated with its employee stock plans in
accordance with the intrinsic value method prescribed by APB
No.&nbsp;25, &#147;Accounting for Stock Issued to
Employees,&#148; (&#147;APB No.&nbsp;25&#148;) adopting the
disclosure-only provisions of SFAS No.&nbsp;123. See
note&nbsp;16 for additional information regarding the
Company&#146;s stock compensation arrangements.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Had compensation costs been recognized based on
the calculated fair value of stock options at the date of grant,
the pro forma amounts of the Company&#146;s net loss applicable
to common shares and net loss per
</FONT>

<P align="center"><FONT size="2">F-37
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">common share for the years ended
December&nbsp;31, 2002, 2001 and 2000 would have been as follows
(dollars in thousands, except for per share data):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares&nbsp;&#151;
    pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,351,824</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,845,882</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,435,253</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share&nbsp;&#151; pro forma
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7.58</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.57</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.46</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Comprehensive Loss</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Comprehensive loss includes the Company&#146;s
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and foreign
currency translation adjustments relating to the Company&#146;s
European operations. Comprehensive loss excludes net realized
gains and losses transferred to current period earnings relating
to the sale of available-for-sale investments and other than
temporary impairment charges.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Concentration of Credit Risk</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of trade receivables. Although the Company&#146;s trade
receivables are geographically dispersed and include customers
in many different industries, a portion of the Company&#146;s
revenue is generated from services provided to other
telecommunications service providers. Several of these companies
have recently filed for protection under Chapter&nbsp;11 of the
Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of
December&nbsp;31, 2002 to cover these risks.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Fair Value of Financial Instruments</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">SFAS No.&nbsp;107, &#147;Disclosure about Fair
Value of Financial Instruments&#148; (&#147;SFAS
No.&nbsp;107&#148;), requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Company&#146;s financial instruments classified as current
assets and liabilities approximate their fair value due to their
short maturities as a result of the Company&#146;s emergence
from bankruptcy, the holders of the Company&#146;s debt and
equity instruments received certain rights and securities as
described further in note&nbsp;2.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">New Accounting Pronouncements</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2001, the Financial Accounting Standards
Board (&#147;FASB&#146;) issued SFAS No.&nbsp;143,
&#147;Accounting for Asset Retirement Obligations,&#148;
(&#147;SFAS No.&nbsp;143&#148;) which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which a legal or contractual removal
obligation is incurred if a reasonable estimate of fair value
can be made. If a reasonable estimate of fair value cannot be
made in the period the asset retirement obligation is incurred,
SFAS No.&nbsp;143 requires the liability to be recognized when a
reasonable estimate of the fair value can be made. The
provisions of SFAS No.&nbsp;143 are effective for financial
statements issued for fiscal years beginning after June&nbsp;15,
2002. As required by SOP&nbsp;90-7, the Company will implement
SFAS No.&nbsp;143 during the first quarter of 2003 in
conjunction with the implementation of fresh start accounting.
The accompanying pro forma balance sheet and note&nbsp;3
includes an estimated asset retirement obligation of
$21.4&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In April 2002, the FASB issued SFAS No.&nbsp;145,
&#147;Rescission of FASB Statements No.&nbsp;4, 44, and 64,
Amendment of FASB Statement No.&nbsp;13, and Technical
Corrections as of April 2002&#148;, (&#147;SFAS
No.&nbsp;145&#148;) which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity&#146;s statement of operations. SFAS No.&nbsp;145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an
</FONT>

<P align="center"><FONT size="2">F-38
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">extraordinary item only when the extinguishment
meets the criteria of both &#147;unusual in nature&#148; and
&#147;infrequent in occurrence&#148; as prescribed under APB
Opinion No.&nbsp;30, &#147;Reporting the Results of
Operations&nbsp;&#151; Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions&#148; (&#147;APB
No.&nbsp;30&#148;). The provisions of SFAS No.&nbsp;145 are
effective for fiscal years beginning after May&nbsp;15, 2002
with respect to the rescission of SFAS No.&nbsp;4 and for
transactions occurring after May&nbsp;15, 2002, with respect to
provisions related to SFAS No.&nbsp;13. The Company has
recognized extraordinary gains from debt repurchases in 2001 and
has determined that the classification of such gains as
extraordinary items will change under SFAS No.&nbsp;145 when XO
implements fresh start accounting in accordance with
SOP&nbsp;90-7.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2002, the FASB issued SFAS No.&nbsp;146,
&#147;Accounting for Costs Associated with Exit or Disposal
Activities&#148;, (&#147;SFAS No.&nbsp;146&#148;) which requires
that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a
liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements&#146; commitment to an exit plan, which is generally
before an actual liability has been incurred. The Company will
apply the provisions of SFAS No.&nbsp;146 to any exit or
disposal activities initiated after December&nbsp;31, 2002.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2002, the FASB issued SFAS
No.&nbsp;148, &#147;Accounting for Stock-Based
Compensation-Transition and Disclosure&#148;, (&#147;SFAS
No.&nbsp;148&#148;) which amends SFAS No.&nbsp;123, to provide
alternative methods of transition to SFAS No.&nbsp;123&#146;s
fair value method of accounting for stock-based employee
compensation. SFAS No.&nbsp;148 also amends the disclosure
provisions of SFAS No.&nbsp;123 and APB Opinion No.&nbsp;28,
&#147;Interim Financial Reporting,&#148; (&#147;APB
No.&nbsp;28&#148;) to require disclosure in the summary of
significant accounting policies of the effects of an
entity&#146;s accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS
No.&nbsp;148 does not amend SFAS No.&nbsp;123 to require
companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No.&nbsp;148 are
applicable to all companies with stock-based employee
compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No.&nbsp;123 or
the intrinsic value method of APB No.&nbsp;28. The provisions of
SFAS No.&nbsp;148 are effective for fiscal years beginning after
December&nbsp;15, 2002 with respect to the amendments of SFAS
No.&nbsp;123 and effective for financial reports containing
condensed financial statements for interim periods beginning
after December&nbsp;15, 2002 with respect to the amendments of
APB No.&nbsp;28. The Company will implement SFAS No.&nbsp;148
effective January&nbsp;1, 2003 regarding disclosure requirements
for condensed financial statements for interim periods.
Management is currently evaluating the impact of the fair value
method of accounting for stock-based compensation on the
Company&#146;s results of operations and financial position.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">5.</FONT></B></TD>
    <TD>
    <B><FONT size="2">CUMULATIVE EFFECT OF ACCOUNTING
    CHANGE</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2001, the FASB issued SFAS No.&nbsp;142,
which revises the accounting for purchased goodwill and
intangible assets and supersedes APB Opinion No.&nbsp;17,
&#147;Intangible Assets&#148; (&#147;APB No.&nbsp;17&#148;).
Under SFAS No.&nbsp;142, goodwill and intangible assets with
indefinite lives are no longer amortized but must be tested for
impairment annually or more frequently if an event indicates
that the asset might be impaired. This impairment test under
SFAS No.&nbsp;142 is based on fair values determined by using
market prices, current prices for similar assets and
liabilities, or a discounted cash flow methodology. Intangible
assets with definite useful lives continue to be amortized over
their useful lives.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">SFAS No.&nbsp;142 required that the initial
impairment analysis of goodwill be completed by June&nbsp;30,
2002. If however, events or changes in circumstances indicate
that goodwill of a reporting unit might be impaired before
June&nbsp;30, 2002, goodwill was required to be tested for
impairment when this indication of possible impairment arises.
The Company performed the required transitional impairment tests
of goodwill as of January&nbsp;1, 2002, and determined that the
value of its goodwill was totally impaired. Accordingly, in the
first quarter of 2002, the Company recorded a
$1,876.6&nbsp;million charge as a cumulative effect of
accounting change
</FONT>

<P align="center"><FONT size="2">F-39
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">to write-off all of its goodwill. The pro forma
impact on net loss before cumulative effect of accounting change
for the year ended December&nbsp;31, 2002, 2001, and 2000
compared to the actual results for the same period is as follows
(dollars in thousands, except for per share data):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="60%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before extraordinary item and cumulative
    effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,510,192</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,431,135</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,101,299</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">595,601</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">323,109</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjusted net loss before extraordinary item and
    cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,510,192</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,835,534</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(778,190</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share before extraordinary
    item and cumulative effect of accounting change, basic and
    diluted:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Reported net loss before extraordinary item and
    cumulative effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(6.02</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Goodwill amortization
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.47</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Adjusted net loss per common share before
    extraordinary item and cumulative effect of accounting change,
    basic and diluted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.55</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2.42</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">6.</FONT></B></TD>
    <TD>
    <B><FONT size="2">RESTRUCTURING CHARGES AND ASSET
    WRITE-DOWNS</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On August&nbsp;8, 2002, the Company entered into
a Master Agreement with Level&nbsp;3 Communications, Inc.
(&#147;Level&nbsp;3&#148;), which amends various agreements
related to XO acquisition of fiber networks in the United States
from Level&nbsp;3 and the recurring maintenance thereon (the
&#147;Master Agreement&#148;). Beginning on January&nbsp;1, 2003
and continuing over the remaining term of the initial agreement,
the Company&#146;s operating and maintenance fees as well as
fiber relocation charges will be reduced from approximately
$17.0&nbsp;million annually to a fixed rate of $5.0&nbsp;million
annually. In exchange for this reduction and certain other
concessions, effective as of February&nbsp;11, 2003, the closing
date for the transaction, the Company surrendered its
indefeasible right to use an empty conduit and six of the
24&nbsp;fibers previously acquired from Level&nbsp;3. Because
the Company had committed to this plan of disposal and believed
at the time that XO entered into the Master Agreement that
consummation of the contemplated transaction was probable, the
Company recorded a $477.3&nbsp;million non-cash write-down of
these assets during the third quarter of 2002. Pursuant to
applicable accounting principles, the write-down is based on the
book value of the surrendered facilities and does not reflect
the future benefits to be received by the Company under the
Master Agreement.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the second half of 2001, the Company
implemented a plan to restructure certain of its business
operations. The restructuring plan included reducing the
Company&#146;s discretionary spending, capital expenditures and
workforce based on its assessment of current and future market
conditions and the divestiture of its European operations. As a
result of the restructuring plan, the Company recorded
$509.2&nbsp;million of estimated restructuring charges during
the year ended December&nbsp;31, 2001. The Company continued to
restructure its operations, reducing its workforce by
approximately 350 additional employees, the majority of which
were employed in network operations, sales and marketing and
information technology, and recorded a $2.9&nbsp;million
restructuring charge related to involuntary termination
severance liabilities in the second quarter of 2002. These
employees were notified of their termination of employment in
the second quarter of 2002 and the employment of the majority of
the notified employees was terminated by June&nbsp;30, 2002. As
of December&nbsp;31, 2002, the remaining restructuring accrual
was $79.0&nbsp;million, which relates primarily to payments due
to landlords on exited leased facilities. The restructuring
accrual has decreased from $125.8&nbsp;million as of
December&nbsp;31, 2001 primarily due to payments associated with
exited leased facilities.
</FONT>

<P align="center"><FONT size="2">F-40
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">7.</FONT></B></TD>
    <TD>
    <B><FONT size="2">MARKETABLE SECURITIES</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Marketable securities consisted of the following
(dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="75%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">U.S. Government and agency notes and bonds
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">242,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Corporate notes and bonds
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">266,930</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">246,945</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">508,978</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">8.</FONT></B></TD>
    <TD>
    <B><FONT size="2">PROPERTY AND EQUIPMENT</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Property and equipment consisted of the following
components (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Telecommunications networks and acquired bandwidth
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,920,819</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,832,878</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Furniture, fixtures, equipment, and other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">656,994</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">758,022</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,577,813</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,590,900</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less accumulated depreciation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,165,216</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">795,739</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,412,597</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,795,161</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Network construction-in-progress
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">367,992</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">947,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,780,589</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,742,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of property and
equipment and the associated depreciation expense in future
periods. During 2002, 2001 and 2000, depreciation expense was
$598.5&nbsp;million, $447.0&nbsp;million and
$223.8&nbsp;million, respectively. During 2002, 2001 and 2000,
the Company capitalized interest on construction costs of
$11.1&nbsp;million, $51.6&nbsp;million, and $31.0&nbsp;million,
respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, the Company owned a
North American inter-city network with a carrying value of
$260.5&nbsp;million. The inter-city network requires the
purchase and installation of optical networking equipment in
order for the fiber to be &#147;lit&#148; and operationally
ready for its intended use. The Company has postponed lighting
this network and in the interim has purchased Level 3 wavelength
capacity to provide inter-city transport. As a result, the
inter-city network has not been placed into service, is not
being depreciated and is included in network
construction-in-progress as of December&nbsp;31, 2002.
</FONT>

<P align="center"><FONT size="2">F-41
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="4%"></TD>
    <TD width="96%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">9.</FONT></B></TD>
    <TD>
    <B><FONT size="2">OTHER INTANGIBLES</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Intangible assets with definite useful lives
consisted of the following (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="38%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31, 2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">December 31, 2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Gross</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net Book</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Carrying</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Accumulated</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Net Book</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amortization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amount</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Amortization</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Value</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Acquired technology
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">130,515</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(84,336</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">46,179</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">141,541</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(56,027</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">85,514</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Customer lists
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">123,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(105,635</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,110</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">124,873</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(80,845</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,028</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35,413</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(26,920</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">48,731</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(24,869</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">23,862</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total intangible assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">289,673</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(216,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">72,782</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">315,145</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(161,741</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,404</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Fixed wireless licenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">997,942</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(86,110</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">911,832</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">997,942</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,397</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">947,545</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of other
intangibles and the associated amortization expense.
Amortization expense for the years ended December&nbsp;31, 2002,
2001 and 2000 was $101.3&nbsp;million, $715.7&nbsp;million and
$393.9&nbsp;million, respectively. Fixed wireless licenses are
amortized when commercial service using the wireless technology
is deployed in the license&#146;s geographic area. At
December&nbsp;31, 2002, $635.3&nbsp;million of the fixed
wireless licenses are being amortized.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">10.</FONT></B></TD>
    <TD>
    <B><FONT size="2">ACCRUED LIABILITIES</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Accrued liabilities consisted of the following
components (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="75%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued compensation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">58,551</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">73,807</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued telecommunications costs
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,803</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">40,955</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued construction
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,123</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,552</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other accrued liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">153,412</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">198,780</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">265,889</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">341,094</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">11.</FONT></B></TD>
    <TD>
    <B><FONT size="2">LONG-TERM DEBT</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, the carrying value
of the Company&#146;s long-term debt was $5.2&nbsp;billion
including $3.7&nbsp;billion in pre-petition senior notes,
$0.5&nbsp;billion in pre-petition convertible subordinated
notes, and $1.0&nbsp;billion outstanding under the Pre-Petition
Credit Facility, all of which are classified as current
liabilities subject to compromise. The Company ceased making all
scheduled interest payments due under the terms of its senior
unsecured notes effective December&nbsp;1, 2001, and its
subordinated unsecured notes in February 2002. Consequently, as
of December&nbsp;31, 2001, the Company was in default on certain
unsecured notes and had triggered cross-default provisions under
the Pre-Petition Credit Facility and the indentures under which
all other senior notes were issued, so the entire
$5.2&nbsp;billion of pre-petition debt was classified as current.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed further in note&nbsp;2, upon the
Company&#146;s consummation of the Plan of Reorganization, all
of XO&nbsp;Parent&#146;s pre-petition senior notes and
pre-petition general unsecured claims were cancelled in exchange
for (i)&nbsp;4,750,000 shares of New Common Stock,
(ii)&nbsp;warrants to purchase shares up to an additional
23,750,000 shares of New Common Stock (iii)&nbsp;rights to
purchase shares of New Common Stock in the Rights Offering and
(iv)&nbsp;a portion of the cash consideration received by
XO&nbsp;Parent from the Investment Termination Payment. Any
holders of pre-petition subordinated notes of XO&nbsp;Parent had
their securities cancelled, and
</FONT>

<P align="center"><FONT size="2">F-42
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">received a cash payment from High River based
upon the amount of the Investment Termination Payment that High
River would have been entitled to receive as holder of the loans
under the New Credit Agreement and the right to participate in
the Rights Offering. The pre-petition senior notes had interest
rates ranging from 9.0% to 12.75% and the interest rate on the
pre-petition convertible subordinated notes was&nbsp;5.75%.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Pre-Petition Credit Facility bore interest at
the Company&#146;s option, at an alternative base rate, as
defined, or at the reserve-adjusted London Interbank Offered
Rate (&#147;LIBOR&#148;), plus in each case, applicable margins.
As discussed further in note 2, upon the Company&#146;s
consummation of the Plan of Reorganization, the
$1.0&nbsp;billion of loans under the Pre-Petition Credit
Facility were converted into 90.25&nbsp;million shares of New
Common Stock and the $500.0&nbsp;million of outstanding
principal amount of loans under the New Credit Agreement. The
maturity date of the outstanding principal under the New Credit
Agreement is July&nbsp;15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on
October&nbsp;15, 2007. The security for the New Credit Agreement
consists of the all assets of XO&nbsp;Parent, including stock of
its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement
limits additional indebtedness, liens, dividend payments and
certain investments and transactions, and contains certain
covenants with respect to minimum cash balance and EBITDA
(earnings before interest, taxes, depreciation and amortization)
requirements and maximum capital expenditures.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is not required to pay interest
accrued on the principal amount under the New Credit Agreement
until it meets certain financial ratios. The Company can elect
to begin paying interest in cash prior to the required date.
Loans under the New Credit Agreement bear interest, at the
Company&#146;s option, at an alternate base rate, as defined, or
LIBOR, plus in each case, applicable margins. Once the Company
begins to pay accrued interest in cash, the applicable margins
are reduced. Under certain circumstances, the New Credit
Agreement permits the Company to obtain a senior secured
facility of up to $200.0&nbsp;million, subject to reduction in
an amount equal to any proceeds received from the exercise of
rights in the Rights Offering.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the second half of 2001, in a series of
transactions, a subsidiary of the Company paid
$201.9&nbsp;million to repurchase $557.1&nbsp;million of the
outstanding principal of certain series of the pre-petition
senior notes at a substantial discount to their respective face
values. As a result of these transactions, during the year ended
December&nbsp;31, 2001, the Company recognized an extraordinary
gain of $345.0&nbsp;million, net of unamortized financing costs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">12.</FONT></B></TD>
    <TD>
    <B><FONT size="2">REDEEMABLE PREFERRED STOCK</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002 and 2001, the
carrying values of the Company&#146;s pre-petition preferred
stock were $1.7&nbsp;billion and $1.8&nbsp;billion,
respectively. As discussed in note&nbsp;2, as a result of the
Company&#146;s emergence from bankruptcy and consummation of the
Plan of Reorganization, the Company&#146;s pre-petition
redeemable preferred stock has been cancelled and discharged and
the holders of such securities will receive no distribution
under the Plan of Reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In conjunction with the implementation of the
transactions that ultimately led to the reorganization of the
Company&#146;s capital structure pursuant to the Plan of
Reorganization, the Company ceased making all scheduled dividend
payments effective December&nbsp;31, 2001 and stopped accruing
preferred stock dividends subsequent to the Petition Date. In
accordance with SOP&nbsp;90-7, during the Chapter&nbsp;11
proceedings, the Company was required to record its preferred
stock at the amount allowed by the Bankruptcy Court.
Accordingly, during the second half of 2002, the Company
recognized a gain equal to the remaining unamortized balance of
a deferred modification fee and wrote off all issuance costs and
discounts related to its preferred stock which resulted in a net
gain of $78.7&nbsp;million.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">During the second half of 2001, in a series of
transactions, a subsidiary of the Company paid
$88.4&nbsp;million to repurchase $301.6&nbsp;million in
liquidation preference of its 14% pre-petition Series&nbsp;A
senior exchangeable redeemable preferred stock and
$171.0&nbsp;million in liquidation preference of its
pre-petition 13&nbsp;1/2% Series&nbsp;E
</FONT>

<P align="center"><FONT size="2">F-43
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">senior redeemable exchangeable preferred stock at
a substantial discount to their respective carrying amounts. As
a result of these transactions, the Company recognized a gain of
$376.9&nbsp;million, net of unamortized financing costs.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">13.</FONT></B></TD>
    <TD>
    <B><FONT size="2">STOCKHOLDERS&#146; EQUITY</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In December 2001, the Company voluntarily
delisted its pre-petition Class A common stock from the Nasdaq
National Market and began trading on the Nasdaq Over-the-Counter
Bulletin Board (&#147;OTCBB&#148;) on December&nbsp;17, 2001
under the symbol &#147;XOXO.&#148; The Company&#146;s
pre-petition Class&nbsp;A common stock stopped trading on the
OTCBB as of the Effective Date and the New Common Stock began
trading on the OTCBB under the symbol &#147;XOCM&#148; shortly
thereafter. As discussed in note&nbsp;2, pursuant to the Plan of
Reorganization, all interests in the Company&#146;s pre-petition
Class&nbsp;A and Class&nbsp;B common stock were terminated as of
the Effective Date.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On June&nbsp;7, 2001, an investment fund
affiliated with Forstmann Little invested $250.0&nbsp;million of
cash in the Company to provide additional funding for general
corporate purposes. In exchange for the investment, the Company
issued 50.0&nbsp;million shares of its pre-petition Class&nbsp;A
common stock to the Forstmann Little fund and amended the terms
of outstanding pre-petition convertible preferred stock held by
various funds affiliated with Forstmann Little to reduce the
share conversion price from $31.625 to $17.00 per share. The
value of the pre-petition Class&nbsp;A common stock issued at
the date the investment closed was $157.5&nbsp;million. The
remaining $92.5&nbsp;million, attributed to the pre-petition
convertible preferred stock amendment, was recorded as a credit
to the preferred stock balance and was being amortized against
the accretion of the preferred stock redemption obligation. As
discussed in note&nbsp;12, during the second half of 2002, the
Company recognized a gain equal to the remaining unamortized
balance of this deferred modification fee.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In June 2000, the Company effected two-for-one
stock splits of the issued and outstanding shares of
pre-petition Class&nbsp;A and Class&nbsp;B common stock, in the
form of stock dividends. The accompanying consolidated financial
statements and the related notes herein have been adjusted
retroactively to reflect the two-for-one stock splits.
</FONT>

<P align="left">
<B><FONT size="2">14.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;INCOME
TAXES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Components of deferred tax assets and liabilities
were as follows (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="66%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax assets:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Provisions not currently deductible
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">123,280</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">41,954</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property, equipment and other long-term assets
    (net)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">367,208</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">348,582</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net operating loss and capital loss carryforwards
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,863,336</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,313,477</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,353,824</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,704,013</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Valuation allowance
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,028,331</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,390,017</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">325,493</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">313,996</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Deferred tax liabilities:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Property, equipment and other long-term assets
    (net)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(101,402</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(72,108</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other identifiable intangibles
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(222,537</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(238,465</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,554</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,423</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total deferred tax liabilities
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(325,493</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(313,996</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net deferred taxes
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-44
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The net change in valuation allowance for the
year ended December&nbsp;31, 2002 was an increase of
$638.3&nbsp;million. The net change in the valuation allowance
for years ended December&nbsp;31, 2001 and 2000 was an increase
of $591.2&nbsp;million and $521.2&nbsp;million, respectively.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002, the Company has
capital loss carryforwards of approximately $0.5&nbsp;billion
and net operating loss carryforwards of approximately
$4.0&nbsp;billion. As discussed in notes&nbsp;2 and 3, upon
consummation of the Plan of Reorganization during the first
quarter of 2003, the Company will recognize a substantial amount
of cancellation of indebtedness income. Accordingly, a
substantial portion of the Company&#146;s $4.5&nbsp;billion of
capital and net operating loss carryforwards are expected to be
eliminated. Other tax attributes, including property bases,
could also be reduced. Any surviving capital or net operating
loss carryforwards will be subject to limitations imposed under
the ownership change rules in the U.S.&nbsp;Internal Revenue
Code.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company will join with the affiliated group
of corporations controlled by Mr.&nbsp;Icahn in filing a
consolidated federal income tax return. As such, the Company
entered into a Tax Allocation Agreement with Starfire Holding
Corporation (&#147;Starfire&#148;), the Parent entity of the
affiliated group of corporations controlled by Mr.&nbsp;Icahn.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes XO, and XO will make payments
to Starfire in an amount equal to the tax liability, if any,
that it would have if it were to file as a consolidated group
separate and apart from Starfire.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">A reconciliation of the Company&#146;s effective
income tax rate and the U.S.&nbsp;federal and state tax rate is
as follows:
</FONT>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="78%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Statutory U.S. federal rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">State income taxes, net of federal benefit
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Valuation allowance for deferred tax assets
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(18.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(29.4</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other identifiable intangibles
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(22.7</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11.6</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Effective income tax rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">15.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;COMPREHENSIVE
LOSS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Comprehensive loss includes the Company&#146;s
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and foreign
currency translation adjustments from the Company&#146;s former
European operations, which were sold in February 2002. The
following table reflects the Company&#146;s calculation of
comprehensive loss for the years ended December&nbsp;31, 2002,
2001 and 2000 (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="57%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,350,362</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,838,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,247,655</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other comprehensive (gains)&nbsp;loss:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net unrealized holding (gains) losses and foreign
    currency translation adjustments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,556</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">38,870</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: Net realized (gains) losses and foreign
    currency translation adjustments transferred to current period
    earnings
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(7,894</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,891</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(206,545</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Comprehensive loss
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,358,256</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,811,470</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1,415,330</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-45
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<B><FONT size="2">16.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;STOCK
COMPENSATION ARRANGEMENTS</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company had an Employee Stock Purchase Plan,
(the &#147;Purchase Plan&#148;), under which 12.0&nbsp;million
shares of Class&nbsp;A common stock were authorized for
issuance. The Purchase Plan was suspended in 2001 in connection
with the commencement of XO&nbsp;Parent&#146;s balance sheet
reorganization, and then was subsequently cancelled. As
discussed in note&nbsp;2, pursuant to the Plan of
Reorganization, all interests in the Company&#146;s pre-petition
Class&nbsp;A common stock were terminated as of the Effective
Date. Prior to the suspension of the Purchase Plan, eligible
employees could purchase the Company&#146;s pre-petition
Class&nbsp;A common shares at 85% of the lower of the average
market value of the Class&nbsp;A common stock on the first and
the last trading day of each calendar quarter. Employees who
owned 5% or more of the voting rights of the Company&#146;s
outstanding common shares could not participate in the Purchase
Plan. During the years ended December&nbsp;31, 2001 and 2000,
employees purchased 6.3&nbsp;million and 0.4&nbsp;million shares
of pre-petition Class&nbsp;A common stock, respectively, under
the Purchase Plan.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to the Effective Date, the Company also
maintained the XO&nbsp;Communications, Inc. Stock Option Plan
(the &#147;Stock Option Plan&#148;) and certain other equity
compensation plans that had been assumed in connection with the
acquisition of Concentric Network (collectively, the &#147;Old
Stock Option Plans&#148;) to provide a performance incentive for
certain officers, employees and individuals or companies who
provide services to the Company. The Old Stock Option Plans
provided for the granting of qualified and non-qualified stock
options. The options became exercisable over vesting periods of
up to four years and expired no later than 10&nbsp;years after
the date of grant.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company had authorized 113.0&nbsp;million
shares of pre-petition Class&nbsp;A common stock for issuance
under the Old Stock Option Plans. In May 2001, the Company
offered its employees the opportunity to exchange certain
options outstanding under the Old Stock Option Plans for new
options equal to 85% of the number of shares tendered. The
Company granted the new options on January&nbsp;17, 2002, the
first business day that was six months and one day following the
closing of this exchange offer. The exercise price of the new
options was the last reported sale price of the pre-petition
Class&nbsp;A common stock on the date of that grant, which was
$0.14 per share. The new options were 30% vested on the date of
grant and the remaining 70% vest monthly in equal installments
over the following 36-month period until fully vested. As of
December&nbsp;31, 2002, 44.0&nbsp;million shares were available
for issuance under the Old Stock Option Plans. However, as
discussed in note&nbsp;2 under the Plan of Reorganization, all
interests in the Company&#146;s pre-petition Class&nbsp;A common
stock including any options or awards granted under the Old
Stock Option Plans, were terminated and cancelled as of the
Effective Date, and holders of such options under such plans
were entitled to no distribution pursuant to the Plan of
Reorganization.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company recorded approximately
$28.9&nbsp;million, $37.2&nbsp;million, and $48.3&nbsp;million
of stock-based compensation expense related to the Old Stock
Option Plan for the years ended December&nbsp;31, 2002, 2001,
and 2000, respectively.
</FONT>

<P align="center"><FONT size="2">F-46
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following two tables summarize information
regarding options under the Company&#146;s Old Stock Option Plan
for the last three years:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="64%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Number of</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Shares</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise Price</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Outstanding at December&nbsp;31, 1999
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,203,534</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.86</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assumed in acquisition
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,086,985</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20.51</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">36,850,732</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35.17</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(12,590,334</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.52</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(11,310,416</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.63</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Outstanding at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">81,240,501</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22.77</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,909,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.72</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,163,452</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">28.32</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(3,677,562</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.36</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Outstanding at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">34,309,296</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13.91</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Granted
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">24,978,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Canceled
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(15,053,582</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.97</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercised
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(35,860</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.01</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Outstanding at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,197,973</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercisable, at December&nbsp;31, 2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16,369,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11.30</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercisable, at December&nbsp;31, 2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">18,902,125</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">12.38</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Exercisable, at December&nbsp;31, 2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,350,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="35%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Options Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Options Exercisable</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Options</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Weighted</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Outstanding</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Remaining</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercisable</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Average</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">at December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Exercise</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Range of Exercise Prices</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Life</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Price</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.01 - $0.16
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">22,929,528</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.12</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">13,097,978</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$0.25 - $6.25
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5,892,586</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.26</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,818,112</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.68</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$6.28 - $14.06
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,416,102</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.61</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,521,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9.39</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">$14.25 - $66.00
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,959,757</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.9</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">31.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,913,483</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30.16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">44,197,973</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.6</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7.37</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,350,882</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company uses the Black-Scholes option-pricing
model to determine the pro forma effect of using the intrinsic
value method rather than the fair value method of accounting for
employee stock options. The model uses certain information, such
as the interest rate on a risk-free security maturing generally
at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires,
to calculate the weighted average fair value per share of
</FONT>

<P align="center"><FONT size="2">F-47
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">stock options granted. This information and the
assumptions used for 2002, 2001, and 2000 are summarized below:
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="71%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expected volatility
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">77.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Risk free interest rate
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.3</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6.2</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Dividend yield
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.0</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">%</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Expected life (range in years)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4.0</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Weighted average fair value per share at grant
    date
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">0.11</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">5.10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19.14</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In connection with the confirmation of the
Company&#146;s Plan of Reorganization, the Bankruptcy Court
approved the adoption of the XO&nbsp;Communications, Inc. 2002
Stock Incentive Plan (the &#147;2002 Stock Incentive
Plan&#148;), as of the Effective Date. Under the 2002 Stock
Incentive Plan, the Company is authorized to issue, in the
aggregate, stock awards of up to 17.6&nbsp;million of shares of
New Common Stock, in the form of options to purchase stock or
restricted stock. Non-qualified options to purchase
11.5&nbsp;million shares of the New Common Stock have been
granted and are outstanding as of March&nbsp;1, 2003, each at a
purchase price of $5.00 per share. Of these options, 25% are
vested and the remainder vest over three years.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The 2002 Stock Incentive Plan is administered by
the Compensation Committee of the Company&#146;s Board of
Directors, which has the discretionary authority to determine
all matters relating to awards of stock options and restricted
stock, including the selection of eligible participants, the
number of shares of common stock to be subject to each option or
restricted stock award, the exercise price of each option,
vesting, and all other terms and conditions of awards.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i)&nbsp;ten
years after the date of grant, (ii)&nbsp;twelve months after
termination of employment with XO due to death or complete and
permanent disability, (iii)&nbsp;immediately upon termination of
employment by XO for cause, or (iv)&nbsp;three months after
termination of employment by the employee or by XO for other
than cause.
</FONT>

<P align="left">
<B><FONT size="2">17.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Supplemental disclosure of the Company&#146;s
cash flow information is as follows (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="80%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Non-cash financing and investing activities were
    as follows:
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Class&nbsp;A common stock, warrants and options
    issued in acquisitions and under lease arrangements
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">29,055</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,002,309</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Redeemable preferred stock dividends, paid in
    shares of redeemable preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">86,237</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">76,671</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,524</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,090</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Assumption of preferred stock and liabilities in
    acquisitions
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,816</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">614,027</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Conversion of 6&nbsp;1/2% redeemable cumulative
    preferred stock to Class&nbsp;A common stock
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">35</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,700</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">93,860</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other obligations assumed
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,119</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cash paid for interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,681</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">313,178</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;2, the Company ceased
paying dividends and interest on its redeemable preferred stock
and its senior unsecured notes during 2001 and its subordinated
unsecured notes in February 2002.
</FONT>

<P align="center"><FONT size="2">F-48
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Employee Savings
and Retirement Plan</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">At December&nbsp;31, 2002, the Company had a
defined contribution plan, generally covering all full time
employees in the United States. The Company provides a company
match to all eligible employees based on certain plan provisions
and the discretion of the Board of Directors. Beginning
November&nbsp;30, 2001, the Company&#146;s pre-petition
Class&nbsp;A common stock was no longer available as an
investment option due to the Company&#146;s pending
reorganization. Effective April&nbsp;1, 2002, the Company
changed its employer matching contribution from a 100% matching
contribution up to 5% of the participant&#146;s compensation to
a 50% matching contribution up to 5% of the participant&#146;s
compensation. Company contributions were $7.0&nbsp;million,
$12.5&nbsp;million and $8.3&nbsp;million during 2002, 2001 and
2000, respectively.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">18.</FONT></B></TD>
    <TD>
    <B><FONT size="2">OPERATING SEGMENTS</FONT></B></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Reportable Segments</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company operates its business as one
communications segment. The Company&#146;s communications
segment includes all of its products and services including
data, voice, integrated voice and data, and other services.
These services have similar network operations and technology
requirements and are sold through similar sales channels to a
similar targeted customer base. Therefore, the Company manages
these services as a single segment that is divided into profit
centers that are focused on geographic areas, or markets, within
the United States, or that are focused on customers with a
presence across geographical markets.
</FONT>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Products and Services</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company classifies its products and services
revenues offered by its communications services segment into
voice services, data services, integrated voice and data
services, and other services (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="63%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><B><FONT size="1">Year Ended December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="11" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2000</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Voice services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">658,453</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">606,848</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">386,796</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">472,247</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">596,664</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,892</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Integrated voice and data services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">128,048</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">52,018</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,693</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Other services
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,105</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">3,037</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,445</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,259,853</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,258,567</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">723,826</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">19.</FONT></B></TD>
    <TD>
    <B><FONT size="2">SELECTED QUARTERLY DATA (Unaudited)</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Quarterly financial information is summarized in
the table below (dollars in thousands, except for share data):
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="50%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Quarter Ended 2002</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">333,405</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">325,480</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">301,526</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">299,442</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">140,367</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">134,346</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">126,215</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">121,996</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations(a)(b)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(182,663</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(176,771</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(673,001</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(176,463</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before extraordinary item and cumulative
    effect of accounting change
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(299,028</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(346,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(695,209</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(169,822</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss(c)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,175,654</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(346,133</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(695,209</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(169,822</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(2,198,480</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(286,851</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(695,209</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(169,822</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share (basic and diluted)(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(4.97</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.65</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.57</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.39</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">F-49
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="51%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">Quarter Ended 2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">March 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">June 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">September 30,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Revenue
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">277,307</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">306,779</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">331,478</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">343,003</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Cost of service
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">114,894</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">122,942</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">138,100</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">151,762</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Loss from operations(a)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(358,248</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(362,418</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(547,285</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(681,940</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss before extraordinary item
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(443,511</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(461,116</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(734,655</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(791,853</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss(c)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(443,511</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(461,116</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(398,917</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(782,581</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss applicable to common shares(d)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(482,552</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(500,722</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(50,752</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(804,891</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Net loss per common share (basic and<BR>
    diluted)(e)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.31</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.32</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(0.12</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(1.84</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>

<DIV>&nbsp;</DIV>

<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="1%"></TD>
    <TD width="1%"></TD>
    <TD width="98%"></TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(a)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In the third quarter of 2002, loss from
    operations includes a non-cash asset write down totaling
    $477.3&nbsp;million resulting from an agreement with
    Level&nbsp;3 to amend various agreements relating to the
    Company&#146;s Level&nbsp;3 inter-city fiber network facilities.
    In the second quarter of 2001, loss from operations includes
    restructuring charges totaling $509.2&nbsp;million associated
    with plans to restructure certain aspects of the Company&#146;s
    business operations.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(b)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">Loss from operations in the quarters ended
    March&nbsp;31, June&nbsp;30, and September&nbsp;30, 2002,
    respectively, reflects the reclassification of reorganization
    expense, net to below loss from operations.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(c)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In the first quarter of 2002, net loss includes a
    $1,876.6&nbsp;million impairment charge to write-off all of
    XO&#146;s goodwill as a cumulative effect of accounting change,
    pursuant to SFAS No.&nbsp;142. In the third quarter of 2001, net
    loss includes an extraordinary gain of $345.0&nbsp;million
    resulting from the repurchase of certain of XO&#146;s senior
    notes and a write-down of $87.0&nbsp;million for an other than
    temporary decline in the value of certain investments.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(d)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">In the second quarter of 2002, net loss
    applicable to common shares includes a net gain of
    $78.7&nbsp;million as XO&#146;s preferred stock was deemed
    subject to compromise under SOP&nbsp;90-7 as of the Petition
    Date, requiring the Company to recognize the remaining
    $81.5&nbsp;million unamortized balance of its deferred
    modification fee and write-off certain issuance costs and
    discounts.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR>
    <TD valign="top">
    <FONT size="2">(e)
    </FONT></TD>
    <TD></TD>
    <TD valign="top">
    <FONT size="2">The net loss per share data has been calculated
    based on the shares outstanding of the Company&#146;s
    pre-petition class&nbsp;A and class&nbsp;B common stock prior to
    the consummation of its Plan of Reorganization. On the Effective
    Date of the Company&#146;s Plan of Reorganization, all interests
    in XO&#146;s pre-petition class&nbsp;A and class&nbsp;B common
    stock were terminated and all outstanding shares were cancelled.
    See note&nbsp;2 for further discussion. The net loss per share
    data has been adjusted for the stock splits effected in 2000 and
    in prior periods.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="5%"></TD>
    <TD width="95%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">20.</FONT></B></TD>
    <TD>
    <B><FONT size="2">RELATED PARTY TRANSACTIONS</FONT></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In February 2003, Dixon Properties, LLC
(&#147;Dixon&#148;), which is controlled by Mr.&nbsp;Icahn,
acquired ownership of the building in which XO&nbsp;headquarters
is located in a transaction that was approved by the Bankruptcy
Court. XO&nbsp;currently leases approximately 170,000 square
feet of space in that building. In connection with the purchase
of the building by Dixon, it assumed the existing lease
agreement. Pursuant to the assumed lease agreement, XO is
obligated to pay $20.4&nbsp;million in the aggregate to Dixon
through the expiration of the initial term of the lease, which
is November&nbsp;30, 2007.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO Parent has entered into a Tax Allocation
Agreement, dated January&nbsp;16, 2003, between XO&nbsp;Parent
and Starfire, a company controlled by Mr.&nbsp;Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
XO&nbsp;Parent&#146;s Chapter&nbsp;11 proceedings, establishes
the methodology for the calculation and payment of income taxes
in connection with the consolidation of the Company with
Starfire for income tax purposes. Generally, the Tax Allocation
Agreement provides that Starfire will pay all consolidated
federal income taxes on behalf of the consolidated group that
includes the Company, and the Company will make payments to
Starfire in an amount equal to the tax liability, if any, that
it would have if it were to file as a consolidated group
separate and apart from Starfire.
</FONT>

<P align="center"><FONT size="2">F-50
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Arnos, which is owned and controlled by
Mr.&nbsp;Icahn, holds approximately 85% of the $500&nbsp;million
in loans outstanding under the New Credit Agreement. Under the
New Credit Agreement, no cash interest payments are required to
be made by the Company until it achieves specified financial
targets.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">In July 2001, the Company executed a multi-year
agreement with Nextel Communications, Inc. (&#147;Nextel&#148;)
pursuant to which XO will provide Nextel telecommunications
services. Individuals who served as members of the
Company&#146;s board of directors prior to the Effective Date of
the Company&#146;s Plan of Reorganization also serve on the
board of directors of Nextel. One of these members,
Craig&nbsp;O. McCaw, along with his affiliates, held a
controlling voting interest in the Company prior to the
Effective Date of the Plan of Reorganization and holds certain
management rights related to his investment in Nextel. Prior to
entering into the agreement with Nextel, the Company
participated in a competitive proposal process initiated by
Nextel, which included numerous national telecommunications
providers. Therefore, in management&#146;s opinion, the
agreement with Nextel was consummated in the normal course of
operations with prices and terms equivalent to those available
to, and transacted with, unrelated parties.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Prior to the Effective Date of the Company&#146;s
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little&nbsp;&#38; Co. had a significant equity
interest in the Company and had designated certain individuals
to serve as members of the Company&#146;s board of directors.
Such investment funds and other entities affiliated with
Forstmann Little&nbsp;&#38; Co. also hold a significant equity
interest in McLeodUSA (&#147;McLeod&#148;). McLeod provides
interconnection and facilities based telecommunications services
to the Company, and the Company provides, on a limited basis,
telecommunications service to McLeod. In addition, during 2001,
XO&nbsp;acquired certain unlit metro network capacity from
McLeod to support infrastructure requirements in a specific
XO&nbsp;market.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following table summarizes the Company&#146;s
transactions with Nextel and McLeod (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="62%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Revenue Recognized</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Payments Made</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">from Services</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">for Services</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Provided for the</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Received for the</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Year Ended</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">McLeod
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">373</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,112</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,953</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,410</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nextel
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">66,852</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">27,599</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,745</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">6,206</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following amounts are outstanding as a result
of the Company&#146;s transactions (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="65%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="2%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="7"></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7"></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Accounts</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Accounts</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Payable as</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">Receivable as of</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">of December</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><B><FONT size="1">31,</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="7" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2002</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">2001</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">McLeod
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Nextel
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,219</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">9,732</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<B><FONT size="2">21.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;COMMITMENTS
AND CONTINGENCIES</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD></TD>
    <TD>
    <I><FONT size="2">Operating Commitments</FONT></I></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is leasing premises under various
noncancelable operating leases for administrative space,
building access, and other leases, which, in addition to rental
payments, require payments for insurance, maintenance, property
taxes and other executory costs related to the leases. The lease
agreements have various expiration dates and renewal options
through 2021. The Company also has various noncancelable
long-term contractual obligations associated with maintenance
and service agreements.
</FONT>

<P align="center"><FONT size="2">F-51
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Future minimum lease commitments required under
noncancelable operating leases and contractual obligations are
as follows (dollars in thousands):
</FONT>

<CENTER>
<TABLE width="90%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="65%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="6%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Operating</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Other Long-Term</FONT></B></TD>
</TR>

<TR>
    <TD></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Lease</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Contractual</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Year Ending December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Obligations</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">62,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">74,126</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">59,045</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">57,612</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">55,600</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,574</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">51,458</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">14,577</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">47,334</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">11,780</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">232,550</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">107,277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total minimum commitments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">508,720</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">282,946</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Rent expense for cancelable and noncancelable
leases totaled approximately $76.4&nbsp;million,
$100.1&nbsp;million, and $54.6&nbsp;million for the years ended
December&nbsp;31, 2002, 2001, and 2000, respectively.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Capital
Leases</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Network assets under capital leases totaled
approximately $16.3&nbsp;million and $27.2&nbsp;million as of
December&nbsp;31, 2002 and 2001, respectively, and are included
in telecommunications networks in property and equipment.
Depreciation on leased assets of $2.0&nbsp;million for the year
ended December&nbsp;31, 2002 is included in depreciation
expense. Future minimum lease payments under capital lease
obligations as of December&nbsp;31, 2002 are as follows (dollars
in thousands):
</FONT>

<CENTER>
<TABLE width="60%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="84%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><B><FONT size="1">Year Ending December 31,</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2003
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">10,031</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2004
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,809</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2005
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,668</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2006
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">2,416</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2007
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">1,733</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Thereafter
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">277</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total minimum capital lease payments
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">19,934</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: imputed interest
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">4,123</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Less: current portion of capital lease obligations
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">8,629</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Long-term portion of capital lease obligation
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,182</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As of December&nbsp;31, 2002 both the current
portion and long-term portions of the capital lease obligation
are classified as subject to compromise, in accordance with
SOP&nbsp;90-7.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Legal
Proceedings</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Company is not currently a party to any legal
proceedings, other than regulatory and other proceedings that
are in the normal course of business.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Prepaid Calling
Card Tax Matter</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">On July&nbsp;26, 2002, the Company was advised by
the staff of the Securities and Exchange Commission that it was
conducting an informal inquiry primarily relating to obligations
with respect to, and XO&#146;s accrual of liabilities for,
specified federal excise and state sales tax and similar tax
obligations arising in connection with
</FONT>

<P align="center"><FONT size="2">F-52
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<DIV align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>
</DIV>

<P align="center">
<B><FONT size="2">NOTES TO CONSOLIDATED
FINANCIAL&nbsp;STATEMENTS&nbsp;&#151;&nbsp;(Continued)</FONT></B>

<P align="left">
<FONT size="2">prepaid calling card services and relating to
certain other matters. Sales from prepaid calling card services
that are potentially subject to these taxes accounted for
approximately $56&nbsp;million of total revenues for 1999, when
the Company began providing these services, through
June&nbsp;30, 2002. The Company believes that its accounting for
these potential obligations is appropriate and that its accruals
of liabilities relating to these obligations are adequate.
</FONT>

<P align="left">
<I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unfunded
Affiliate Pension Obligation</FONT></I>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As discussed in note&nbsp;2, affiliates of
Mr.&nbsp;Icahn hold over 80% of the outstanding New Common Stock
of XO&nbsp;Parent. Applicable pension and tax laws make each
member of a plan sponsor&#146;s &#147;controlled group&#148;
(generally defined as entities in which there is at least an 80%
common ownership interest) jointly and severally liable for
certain pension plan obligations of the plan sponsor. These
pension obligations include ongoing contributions to fund the
plan, as well as liability for any unfunded liabilities that may
exist at the time the plan is terminated. In addition, the
failure to pay these pension obligations when due may result in
the creation of liens in favor of the pension plan or the
Pension Benefit Guaranty Corporation, (the &#147;PBGC&#148;)
against the assets of each member of the plan sponsor&#146;s
controlled group.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">As a result of the more than 80% ownership
interest in XO&nbsp;Parent by Mr.&nbsp;Icahn&#146;s affiliates,
XO&nbsp;Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr.&nbsp;Icahn has
a direct or indirect ownership interest of at least 80%, which
includes ACF Industries Inc. (&#147;ACF&#148;), which is the
sponsor of certain pension plans. As most recently determined by
the ACF plans&#146; actuaries, pension plans maintained by ACF
are underfunded in the aggregate by approximately
$14&nbsp;million on an ongoing actuarial basis and by
approximately $102&nbsp;million if those plans were terminated.
As a member of the same controlled group, XO&nbsp;Parent and
each of its subsidiaries would be liable for any failure of ACF
to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of the ACF pension plans.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO&nbsp;Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other &#147;reportable events,&#148;
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
</FONT>

<P align="left">
<B><FONT size="2">22.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SUBSEQUENT
EVENT</FONT></B>

<P align="left">
<B><I><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Effectiveness
of Bankruptcy Plan</FONT></I></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The Plan of Reorganization that was confirmed by
order of the Bankruptcy Court on November&nbsp;15, 2002 became
effective January&nbsp;16, 2003, and is discussed in more detail
in note&nbsp;2.
</FONT>

<P align="center"><FONT size="2">F-53
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">XO COMMUNICATIONS, INC.</FONT></B>

<DIV>&nbsp;</DIV>

<!-- link1 "SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS" -->
<DIV align="left"><A NAME="025"></A></DIV>

<DIV align="center">
<B><FONT size="2">SCHEDULE&nbsp;II&nbsp;&#151; CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS</FONT></B>
</DIV>

<DIV align="center">
<B><FONT size="2">For The Years Ended December&nbsp;31, 2002,
2001 and 2000</FONT></B>
</DIV>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="50%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="5%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Additions</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Beginning</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Charged to</FONT></B></TD>
    <TD></TD>
    <TD colspan="3"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Ending</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Balance</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Expense</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Reductions</FONT></B></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><B><FONT size="1">Balance</FONT></B></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD colspan="3" align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="15"></TD>
</TR>

<TR>
    <TD colspan="2"></TD>
    <TD></TD>
    <TD colspan="15" align="center" nowrap><B><FONT size="1">(In thousands)</FONT></B></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Allowance for doubtful accounts
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">7,215</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">21,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(8,215</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2001
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">20,999</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">45,757</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(34,264</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,492</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2002
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">32,492</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">53,631</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(49,093</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">37,030</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Restructuring accrual
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2000
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">30,935</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(30,935</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2001(a)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">509,202</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(383,429</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,773</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">2002(b)
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">125,773</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">480,168</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">(526,951</FONT></TD>
    <TD align="left" valign="bottom" nowrap><FONT size="2">)</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">78,990</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(a)</FONT></TD>
    <TD align="left">
    <FONT size="2">Only $16.6&nbsp;million of the reduction in the
    2001 restructuring accrual was for cash payments. The balance
    was associated with the write down for the excess of carrying
    value of assets to be sold or abandoned and was applied to those
    assets.
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">(b)</FONT></TD>
    <TD align="left">
    <FONT size="2">Only $49.7&nbsp;million of the reduction in 2002
    restructuring accrual was for cash payments. The balance was
    associated with the non-cash asset write down resulting from an
    agreement with Level&nbsp;3 to amend various agreements relating
    to XO&#146;s Level&nbsp;3 inter-city fiber network facilities.
    </FONT></TD>
</TR>

</TABLE>

<P align="center"><FONT size="2">F-54
</FONT>

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<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<HR size="1" width="100%" align="center" noshade>

<DIV align="center">
<HR size="1" width="100%" align="center" noshade>
</DIV>

<P align="center">
<B><FONT size="6">XO Communications, Inc.</FONT></B>

<P align="center">
<B><FONT size="4">Rights Offering</FONT></B>

<P align="center">
<B><FONT size="4">43,333,333 Shares of Common Stock, $0.01 par
value</FONT></B>

<P align="center">
<B><FONT size="4">Exercise Price $5.00 per share</FONT></B>

<P align="center">
<HR size="1" width="31%" align="center" noshade>

<P align="center">
<B>PROSPECTUS</B>

<P align="center">
<HR size="1" width="31%" align="center" noshade>

<P align="center">
<FONT size="2">Dated
[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;],
2003
</FONT>

<P align="center">
<HR size="1" width="100%" align="center" noshade>

<DIV align="center">
<HR size="1" width="100%" align="center" noshade>
</DIV>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">PART II</FONT></B>

<P align="center">
<B><FONT size="2">INFORMATION NOT REQUIRED IN
PROSPECTUS</FONT></B>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item 13.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Other Expenses of Issuance and
    Distribution</FONT></I></B></TD>
</TR>

</TABLE>

<CENTER>
<TABLE width="70%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="78%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="8%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="7%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Securities and Exchange Commission Registration
    Fee
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">17,528.33</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Printing Expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">300,000.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Accounting Fees and Expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">[&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;]</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Legal Fees and Expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">185,000.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Rights Agent&#146;s, Information Agent&#146;s and
    Registrar&#146;s Fees and Expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">50,000.00</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2" align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Miscellaneous Expenses
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD align="right" valign="bottom" nowrap><FONT size="2">&#151;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="1" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="top">
    <DIV style="margin-left:10px; text-indent:-10px">
    <FONT size="2">Total
    </FONT></DIV>
    </TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="bottom"><FONT size="2">$</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD colspan="2"><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left"><HR size="4" noshade></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>

</TR>

</TABLE>
</CENTER>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item 14.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Indemnification of Directors and
    Officers.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO&nbsp;Communications, Inc., or XO&nbsp;Parent,
is a Delaware corporation. In its Certificate of Incorporation,
XO&nbsp;Parent has adopted the provisions of
Section&nbsp;102(b)(7) of the Delaware General Corporation Law
(the &#147;Delaware Law&#148;), which enables a corporation in
its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a
director for monetary damages for breach of the director&#146;s
fiduciary duty, except (i)&nbsp;for any breach of the
director&#146;s duty of loyalty to the corporation or its
stockholders, (ii)&nbsp;for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii)&nbsp;pursuant to Section&nbsp;174 of the Delaware
Law (providing for liability of directors for unlawful payment
of dividends or unlawful stock purchases or redemptions) or
(iv)&nbsp;for any transaction from which a director will
personally receive a benefit in money, property or services to
which the director is not legally entitled.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO&nbsp;Parent also has adopted indemnification
provisions pursuant to Section&nbsp;145 of the Delaware Law,
which provides that a corporation may indemnify any person who
is or was a party to any actual or threatened legal action,
whether criminal, civil, administrative or investigative, by
reason of the fact that the person is or was an officer,
director or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer or agent
of another corporation, partnership or other enterprise, against
expenses (including attorney&#146;s fees), judgments, fines and
settlement payments reasonably and actually incurred by him or
her in connection with such proceeding, if he or she acted in
good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe was unlawful, except that, with
respect to any legal action by or in the right of the
corporation itself, an officer, director or agent of the
corporation is entitled to indemnification only for expenses
(including attorney&#146;s fees) reasonably and actually
incurred, and is not entitled to indemnification in respect of
any claim, issue or matter as to which he or she is found liable
to the corporation, unless the court determines otherwise.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">XO&nbsp;Management Services, Inc., a subsidiary
of XO&nbsp;Parent entered into indemnification agreements with
certain the then-existing directors and officers of
XO&nbsp;Parent as of July&nbsp;14, 2002 to indemnify them for
claims against them arising from their employment by
XO&nbsp;Parent, and for payment of related costs and expenses.
Although XO&nbsp;Parent originally planned to provide customary
&#147;tail&#148; insurance coverage to supplement these
indemnification provisions, after reviewing the costs of
insurance in the marketplace, XO&nbsp;Parent and its senior
secured lenders determined that comparable benefits could be
provided at sharply reduced costs by placing $25&nbsp;million of
XO&nbsp;Parent&#146;s cash on hand into escrow as security for
XO&nbsp;Parent&#146;s existing indemnification obligations, in
lieu of purchasing third party coverage. The Escrow Agreement,
dated January&nbsp;15, 2003, by and among
XO&nbsp;Communications, Inc., XO&nbsp;Management Services, Inc.
and U.S.&nbsp;Bank Trust National Association, as escrow agent,
implements this decision, and provides a mechanism for review
and payment of appropriate claims. The Escrow Agreement does not
change any of existing indemnification rights referred to above,
but merely provides funds to secure their payment.
</FONT>

<P align="center"><FONT size="2">II-1
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers or persons controlling the registrant pursuant to the
foregoing provisions, the registrant has been informed that in
the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
</FONT>

<P align="left">
<B><FONT size="2">Item
15.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Recent Sales of Unregistered
Securities</I></FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">The following securities were issued by us within
the past year pursuant to the Plan of Reorganization without
registration under the Securities Act:
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(a)&nbsp;approximately 95&nbsp;million shares of
New Common Stock to our pre-petition senior secured creditors in
exchange for their claims;
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(b)&nbsp;7-year warrants to purchase
approximately:
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="3%"></TD>
    <TD width="97%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(i)&nbsp;9.5&nbsp;million shares of New Common
    Stock at $6.25 per share;
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(ii)&nbsp;7.1&nbsp;million shares of New Common
    Stock at $7.50 per share; and
    </FONT></TD>
</TR>

<TR>
    <TD>&nbsp;</TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
    <FONT size="2">(iii)&nbsp;7.1&nbsp;million shares of New Common
    Stock at $10.00 per share.
    </FONT></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(c)&nbsp;Subscription Rights with basic
subscription privileges and oversubscription privileges in this
Rights Offering to holders of our pre-petition senior notes and
general unsecured creditors in exchange for their claims.
</FONT>

<P align="left">
<FONT size="2">Each of the transactions above is exempt from
registration under the Securities Act pursuant to
Section&nbsp;1145 of the Chapter&nbsp;11 of the United States
Code or, in the case of certain affiliates of XO&nbsp;Parent,
Section&nbsp;4(2) of the Securities Act.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Under the Plan of Reorganization we also issued
Subscription Rights with oversubscription privileges in the
Rights Offering to holders of our pre-petition subordinated
notes, pre-petition preferred stock and pre-petition common
stock. These Subscription Rights were issued for no
consideration and therefore are exempt from registration under
the Securities Act under the no sale doctrine.
</FONT>

<P align="left">
<B><FONT size="2">Item 16.&nbsp;&nbsp;<I>Exhibits and Financial
Statement Schedules</I></FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="88%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Third Amended Plan of Reorganization of
    XO&nbsp;Communications, Inc., dated July&nbsp;22, 2002
    (Incorporated herein by reference to exhibit&nbsp;2.1 filed with
    the Current Report on Form&nbsp;8-K/ A of
    XO&nbsp;Communications, Inc., filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Plan Supplement, dated October&nbsp;23, 3003, to
    the Third Amended Plan of Reorganization of
    XO&nbsp;Communications, Inc., dated July&nbsp;22, 2002
    (Incorporated herein by reference to exhibit&nbsp;2.2 filed with
    the Current Report on Form&nbsp;8-K/ A of
    XO&nbsp;Communications, Inc., filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Order Confirming Third Amended Plan of
    Reorganization, dated November&nbsp;15, 2002 (Incorporated
    herein by reference to exhibit&nbsp;99.1 filed with the Current
    Report on Form&nbsp;8-K/ A of XO&nbsp;Communications, Inc.,
    filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated Certificate of Incorporation
    of XO&nbsp;Communications, Inc. (Incorporated herein by
    reference to exhibit&nbsp;3.1 filed with the Registration
    Statement on Form&nbsp;8-A of XO&nbsp;Communications, Inc.,
    filed on February&nbsp;7, 2003, pursuant to the Securities
    Exchange Act)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated By-laws of
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;3.2 filed with the Registration Statement on
    Form&nbsp;8-A of XO&nbsp;Communications, Inc., filed on
    February&nbsp;7, 2003, pursuant to the Securities Exchange Act)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of stock certificate of New Common Stock
    (Incorporated herein by reference to exhibit&nbsp;4.1 filed with
    the Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2002 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;A Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.1 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-2
</FONT>

<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="88%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;B Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.2 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;C Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.3 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.1&#134;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Opinion of Willkie Farr&nbsp;&#38; Gallagher
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.2&#134;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Tax Opinion of Willkie Farr&nbsp;&#38; Gallagher
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">XO&nbsp;Communications, Inc. 2002 Stock Incentive
    Plan (Incorporated herein by reference to exhibit&nbsp;10.1.1
    filed with the Annual Report for the year ended
    December&nbsp;31, 2002 on Form&nbsp;10-K of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">XO&nbsp;Communications, Inc. Retention Bonus and
    Incentive Plan (Incorporated herein by reference to
    exhibit&nbsp;10.2.1 filed with the Annual Report on
    Form&nbsp;10-K for the year ended December&nbsp;31, 2002 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Registration Rights Agreement, dated as of
    January&nbsp;16, 2003, between XO&nbsp;Communications, Inc. and
    High River Limited Partnership and Meadow Walk Limited
    Partnership (Incorporated herein by reference to
    exhibit&nbsp;10.4 filed with the Current Report on Form&nbsp;8-K
    of XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Tax Allocation Agreement, dated as of
    January&nbsp;16, 2003, between XO&nbsp;Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit&nbsp;10.5 filed with the Current Report on
    Form&nbsp;8-K of XO&nbsp;Communications, Inc., filed on
    January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Term Sheet between
    XO&nbsp;Communications, Inc. and Carl J. Grivner (Incorporated
    herein by reference to exhibit&nbsp;10.1 filed with the
    Quarterly Report on Form&nbsp;10-Q for the quarterly period
    ended March&nbsp;31, 2003 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Change of Control Agreement, dated April&nbsp;25,
    2003, by and between XO&nbsp;Communications, Inc. and Carl J.
    Grivner (Incorporated herein by reference to exhibit&nbsp;10.2
    filed with the Quarterly Report on Form&nbsp;10-Q for the
    quarterly period ended March&nbsp;31, 2003 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Agreement, dated as of January&nbsp;3,
    2000, by and between Nathaniel A. Davis and NEXTLINK
    Communications, Inc. (predecessor to XO&nbsp;Communications,
    Inc.) (Incorporated herein by reference to exhibit&nbsp;10.11
    filed with the Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 1999 of NEXTLINK Communications, Inc.
    and NEXTLINK Capital, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Letter agreement, dated December&nbsp;17, 2002,
    by and among Communications Consultants, Inc.,
    XO&nbsp;Communications, Inc., Eagle River Investments, L.L.C.
    and R.&nbsp;Gerard Salemme (Incorporated herein by reference to
    exhibit&nbsp;10.3.2 filed with the Annual Report of
    Form&nbsp;10-K for the year ended December&nbsp;31, 2002 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Agreement, dated as of
    January&nbsp;13, 2000, by and between Michael S. Ruley and
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;10.3.3 filed with the Annual Report on
    Form&nbsp;10-K for the year ended December&nbsp;31, 2001 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Cost Sharing and IRU Agreement, dated
    July&nbsp;18, 1998, between Level&nbsp;3 Communications, LLC and
    XO&nbsp;Intercity Holdings No.&nbsp;2, LLC (f/k/a INTERNEXT LLC)
    (Incorporated herein by reference to exhibit&nbsp;10.8 filed
    with the quarterly report on Form&nbsp;10-Q for the quarterly
    period ended September&nbsp;30, 1998 of NEXTLINK Communications,
    Inc. and NEXTLINK Capital, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Master Agreement, dated August&nbsp;8, 2002,
    between Level&nbsp;3 Communications, Inc. and
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;10.4.1 filed with the Annual Report on
    Form&nbsp;10-K of XO&nbsp;Communications, Inc., filed on
    March&nbsp;21, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated Credit and Guaranty
    Agreement, dated as of January&nbsp;16, 2003, among
    XO&nbsp;Communications, Inc., certain subsidiaries of
    XO&nbsp;Communications, Inc., the Lenders party thereto from
    time to time, and Mizuho Corporate Bank, as Administrative Agent
    (Incorporated herein by reference to exhibit&nbsp;10.5 filed
    with the Annual Report on Form&nbsp;10-K of
    XO&nbsp;Communications, Inc., filed on March&nbsp;21, 2003)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of Rights Certificate
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-3
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="88%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Letter from Arthur Andersen LLP to the Securities
    and Exchange Commission, dated May&nbsp;15, 2002 (Incorporated
    herein by reference to exhibit&nbsp;16 filed with the Current
    Report on Form&nbsp;8-K of XO&nbsp;Communications Inc. filed on
    May&nbsp;16, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Subsidiaries of the Registrant (Incorporated
    herein by reference to exhibit&nbsp;21 filed with the Annual
    Report on Form&nbsp;10-K for the year ended December&nbsp;31,
    2002 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Consent of Ernst&nbsp;&#38; Young LLP,
    independent auditors
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.2*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Notice Regarding Lack of Consent of Arthur
    Andersen
    </FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#EEEEEE">
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Power of Attorney (See p.&nbsp;II-&nbsp;&nbsp;of
    this Registration Statement)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">99.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of Letter of Instructions from Nominee
    Holders to Beneficial Owners
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="left">
<HR size="1" width="18%" align="left" noshade>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="2%"></TD>
    <TD width="98%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Filed herewith.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="1%"></TD>
    <TD width="99%"></TD>
</TR>

<TR valign="top">
    <TD><FONT size="2">&#134;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by amendment.
    </FONT></TD>
</TR>

</TABLE>

<DIV>&nbsp;</DIV>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="9%"></TD>
    <TD width="91%"></TD>
</TR>

<TR valign="top">
    <TD><B><FONT size="2">Item 17.</FONT></B></TD>
    <TD>
    <B><I><FONT size="2">Undertakings.</FONT></I></B></TD>
</TR>

</TABLE>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(a)&nbsp;Insofar as indemnification for
liabilities arising under the Securities Act of 1933 or the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the
indemnification provisions described herein, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">(b)&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The undersigned
registrant hereby undertakes to supplement the prospectus, after
the expiration of the subscription period of the Rights
Offering, to set forth the results of the Rights Offering and
the terms of any subsequent reoffering thereof. If any public
offering by an underwriter is to be made on terms differing from
those set forth on the cover page of this prospectus, a
post-effective amendment will be filed to set forth the terms of
such offering.
</FONT>

<P align="center"><FONT size="2">II-4
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">SIGNATURES</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Reston and State of Virginia, on the
22nd&nbsp;day of July, 2003.
</FONT>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">XO COMMUNICATIONS, INC.
    </FONT></TD>
</TR>

</TABLE>
<P>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="2%"></TD>
    <TD width="58%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">By:&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">/s/&nbsp;&nbsp;WAYNE M. REHBERGER
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="60%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <HR size="1" align="left" noshade></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD align="left">
    <FONT size="2">Name:&nbsp;Wayne M. Rehberger
    </FONT></TD>
</TR>

</TABLE>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">

<TR>
    <TD width="40%"></TD>
    <TD width="8%"></TD>
    <TD width="52%"></TD>
</TR>

<TR valign="top">
    <TD>&nbsp;</TD>
    <TD><FONT size="2">Title:&nbsp;</FONT></TD>
    <TD align="left">
    <I><FONT size="2">Executive Vice President, <BR>
     Chief Financial Officer</FONT></I></TD>
</TR>

</TABLE>

<P align="center">
<B><FONT size="2">POWER OF ATTORNEY</FONT></B>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">We, the undersigned officers and directors of
XO&nbsp;Communications, Inc., hereby severally and individually
constitute and appoint Wayne&nbsp;M. Rehberger, Noelle&nbsp;N.
Beams, Kathy Isaac and Lee Wiener, and each of them, as true and
lawful attorneys-in-fact for the undersigned, in any and all
capacities, with full power of substitution, to sign any and all
amendments to this Registration Statement (including
post-effective amendments), and to file the same with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to
do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact,
or either of them, may lawfully do or cause to be done by virtue
hereof.
</FONT>

<P align="left">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
<FONT size="2">Pursuant to the requirements of the Securities
Act, this Registration Statement has been signed below on the
22nd day of July, 2003 by the following persons on behalf of the
Registrant and in the capacities indicated:
</FONT>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="36%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="61%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ CARL J. GRIVNER<BR>
    <HR size="1" noshade>Carl J. Grivner
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chief Executive Officer, President and
    Director<BR>
    (Principal Executive Officer)
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ WAYNE M. REHBERGER<BR>
    <HR size="1" noshade>Wayne M. Rehberger
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Executive Vice President, Chief Financial
    Officer<BR>
    (Principal Financial Officer and<BR>
    Principal Accounting Officer)
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ CARL C. ICAHN<BR>
    <HR size="1" noshade>Carl C. Icahn
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Chairman of the Board of Directors
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ ANDREW R. COHEN<BR>
    <HR size="1" noshade>Andrew R. Cohen
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-5
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="48%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="49%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" nowrap><B><FONT size="1">Name</FONT></B></TD>
    <TD></TD>
    <TD align="center" nowrap><B><FONT size="1">Title</FONT></B></TD>
</TR>

<TR>
    <TD align="center" nowrap><HR size="1" noshade></TD>
    <TD></TD>
    <TD align="center" nowrap><HR size="1" noshade></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ ADAM DELL<BR>
    <HR size="1" noshade>Adam Dell
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ VINCENT J. INTRIERI<BR>
    <HR size="1" noshade>Vincent J. Intrieri
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

<TR>
    <TD colspan="3"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD align="center" valign="top">
    <FONT size="2">/s/ KEITH MEISTER<BR>
    <HR size="1" noshade>Keith Meister
    </FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="center" valign="top">
    <FONT size="2">Director
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

<P align="center"><FONT size="2">II-6
</FONT>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center">
<B><FONT size="2">EXHIBIT INDEX</FONT></B>

<CENTER>
<TABLE width="100%" align="center" cellspacing="0" cellpadding="0" border="0">

<TR>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="88%"><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Third Amended Plan of Reorganization of
    XO&nbsp;Communications, Inc., dated July&nbsp;22, 2002
    (Incorporated herein by reference to exhibit&nbsp;2.1 filed with
    the Current Report on Form&nbsp;8-K/ A of
    XO&nbsp;Communications, Inc., filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Plan Supplement, dated October&nbsp;23, 3003, to
    the Third Amended Plan of Reorganization of
    XO&nbsp;Communications, Inc., dated July&nbsp;22, 2002
    (Incorporated herein by reference to exhibit&nbsp;2.2 filed with
    the Current Report on Form&nbsp;8-K/ A of
    XO&nbsp;Communications, Inc., filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Order Confirming Third Amended Plan of
    Reorganization, dated November&nbsp;15, 2002 (Incorporated
    herein by reference to exhibit&nbsp;99.1 filed with the Current
    Report on Form&nbsp;8-K/ A of XO&nbsp;Communications, Inc.,
    filed on November&nbsp;26, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated Certificate of Incorporation
    of XO&nbsp;Communications, Inc. (Incorporated herein by
    reference to exhibit&nbsp;3.1 filed with the Registration
    Statement on Form&nbsp;8-A of XO&nbsp;Communications, Inc.,
    filed on February&nbsp;7, 2003, pursuant to the Securities
    Exchange Act)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated By-laws of
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;3.2 filed with the Registration Statement on
    Form&nbsp;8-A of XO&nbsp;Communications, Inc., filed on
    February&nbsp;7, 2003, pursuant to the Securities Exchange Act)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of stock certificate of New Common Stock
    (Incorporated herein by reference to exhibit&nbsp;4.1 filed with
    the Annual Report on Form&nbsp;10-K for the year ended
    December&nbsp;31, 2002 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;A Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.1 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;B Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.2 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">4.2.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Series&nbsp;C Warrant Agreement, dated as of
    January&nbsp;16, 2003, by and between XO&nbsp;Communications,
    Inc. and American Stock Transfer&nbsp;&#38; Trust Company
    (Incorporated herein by reference to exhibit&nbsp;10.3 filed
    with the Current Report on Form&nbsp;8-K of
    XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.1&#134;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Opinion of Willkie Farr&nbsp;&#38; Gallagher
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">5.2&#134;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Tax Opinion of Willkie Farr&nbsp;&#38; Gallagher
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">XO&nbsp;Communications, Inc. 2002 Stock Incentive
    Plan (Incorporated herein by reference to exhibit&nbsp;10.1.1
    filed with the Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 2002 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.1.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">XO&nbsp;Communications, Inc. Retention Bonus and
    Incentive Plan (Incorporated herein by reference to
    exhibit&nbsp;10.2.1 filed with the Annual Report on
    Form&nbsp;10-K for the year ended December&nbsp;31, 2002 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Registration Rights Agreement, dated as of
    January&nbsp;16, 2003, between XO&nbsp;Communications, Inc. and
    High River Limited Partnership and Meadow Walk Limited
    Partnership (Incorporated herein by reference to
    exhibit&nbsp;10.4 filed with the Current Report on Form&nbsp;8-K
    of XO&nbsp;Communications, Inc., filed on January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.2.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Tax Allocation Agreement, dated as of
    January&nbsp;16, 2003, between XO&nbsp;Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit&nbsp;10.5 filed with the Current Report on
    Form&nbsp;8-K of XO&nbsp;Communications, Inc., filed on
    January&nbsp;30, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Term Sheet between
    XO&nbsp;Communications, Inc. and Carl J. Grivner (Incorporated
    herein by reference to exhibit&nbsp;10.1 filed with the
    Quarterly Report on Form&nbsp;10-Q for the quarterly period
    ended March&nbsp;31, 2003 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Change of Control Agreement, dated April&nbsp;25,
    2003, by and between XO&nbsp;Communications, Inc. and Carl J.
    Grivner (Incorporated herein by reference to exhibit&nbsp;10.2
    filed with the Quarterly Report on Form&nbsp;10-Q for the
    quarterly period ended March&nbsp;31, 2003 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

</TABLE>
</CENTER>

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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

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    <TD width="4%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="1%"><FONT size="2">&nbsp;</FONT></TD>
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    <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
    <TD width="88%"><FONT size="2">&nbsp;</FONT></TD>
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<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.3</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Agreement, dated as of January&nbsp;3,
    2000, by and between Nathaniel A. Davis and NEXTLINK
    Communications, Inc. (predecessor to XO&nbsp;Communications,
    Inc.) (Incorporated herein by reference to exhibit&nbsp;10.11
    filed with the Annual Report on Form&nbsp;10-K for the year
    ended December&nbsp;31, 1999 of NEXTLINK Communications, Inc.
    and NEXTLINK Capital, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.4</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Letter agreement, dated December&nbsp;17, 2002,
    by and among Communications Consultants, Inc.,
    XO&nbsp;Communications, Inc., Eagle River Investments, L.L.C.
    and R.&nbsp;Gerard Salemme (Incorporated herein by reference to
    exhibit&nbsp;10.3.2 filed with the Annual Report of
    Form&nbsp;10-K for the year ended December&nbsp;31, 2002 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.3.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Employment Agreement, dated as of
    January&nbsp;13, 2000, by and between Michael S. Ruley and
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;10.3.3 filed with the Annual Report on
    Form&nbsp;10-K for the year ended December&nbsp;31, 2001 of
    XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4.1</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Cost Sharing and IRU Agreement, dated
    July&nbsp;18, 1998, between Level&nbsp;3 Communications, LLC and
    XO&nbsp;Intercity Holdings No.&nbsp;2, LLC (f/k/a INTERNEXT LLC)
    (Incorporated herein by reference to exhibit&nbsp;10.8 filed
    with the quarterly report on Form&nbsp;10-Q for the quarterly
    period ended September&nbsp;30, 1998 of NEXTLINK Communications,
    Inc. and NEXTLINK Capital, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.4.2</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Master Agreement, dated August&nbsp;8, 2002,
    between Level&nbsp;3 Communications, Inc. and
    XO&nbsp;Communications, Inc. (Incorporated herein by reference
    to exhibit&nbsp;10.4.1 filed with the Annual Report on
    Form&nbsp;10-K of XO&nbsp;Communications, Inc., filed on
    March&nbsp;21, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.5</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Amended and Restated Credit and Guaranty
    Agreement, dated as of January&nbsp;16, 2003, among
    XO&nbsp;Communications, Inc., certain subsidiaries of
    XO&nbsp;Communications, Inc., the Lenders party thereto from
    time to time, and Mizuho Corporate Bank, as Administrative Agent
    (Incorporated herein by reference to exhibit&nbsp;10.5 filed
    with the Annual Report on Form&nbsp;10-K of
    XO&nbsp;Communications, Inc., filed on March&nbsp;21, 2003)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">10.6*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of Rights Certificate
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">16</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Letter from Arthur Andersen LLP to the Securities
    and Exchange Commission, dated May&nbsp;15, 2002 (Incorporated
    herein by reference to exhibit&nbsp;16 filed with the Current
    Report on Form&nbsp;8-K of XO&nbsp;Communications Inc. filed on
    May&nbsp;16, 2002)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">21</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Subsidiaries of the Registrant (Incorporated
    herein by reference to exhibit&nbsp;21 filed with the Annual
    Report on Form&nbsp;10-K for the year ended December&nbsp;31,
    2002 of XO&nbsp;Communications, Inc.)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Consent of Ernst&nbsp;&#38; Young LLP,
    independent auditors
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">23.2*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Notice Regarding Lack of Consent of Arthur
    Andersen
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">24.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Power of Attorney (See p.&nbsp;II-&nbsp;&nbsp;of
    this Registration Statement)
    </FONT></TD>
</TR>

<TR>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="right" valign="top" nowrap><FONT size="2">99.1*</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD><FONT size="2">&nbsp;</FONT></TD>
    <TD align="left" valign="bottom">
    <FONT size="2">Form of Letter of Instructions from Nominee
    Holders to Beneficial Owners
    </FONT></TD>
</TR>

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    <TD><FONT size="2">*&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">Filed herewith.
    </FONT></TD>
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    <TD><FONT size="2">&#134;&nbsp;</FONT></TD>
    <TD align="left">
    <FONT size="2">To be filed by amendment.
    </FONT></TD>
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{"company-data": {"conformed-name": "XO COMMUNICATIONS INC", "cik": "0001111634", "assigned-sic": "4813", "irs-number": "541983517", "state-of-incorporation": "DE", "fiscal-year-end": "1231"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-107254", "film-number": "03797057"}, "business-address": {"street1": "11111 SUNSNET HILLS ROAD", "city": "RESTON", "state": "VA", "zip": "22102", "phone": "7035472000"}, "mail-address": {"street1": "11111 SUNSET HILLS ROAD", "city": "RESTON", "state": "VA", "zip": "20190"}, "former-company": [{"former-conformed-name": "NEXTLINK COMMUNICATIONS INC/NEW", "date-changed": "20000622"}, {"former-conformed-name": "NM ACQUISITION CORP", "date-changed": "20000411"}]}
XO COMMUNICATIONS, INC.
Table of Contents
As filed with the Securities and Exchange
Commission on July 22, 2003
Registration Statement No.
333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
XO Communications, Inc.
(Exact name of Registrant as specified in its
charter)
Delaware
4813
54-1983517
(State or other jurisdiction of incorporation
    or organization of each)
(Primary Standard Industrial Classification
    Code Number of the registrant)
11111 Sunset Hills Road
Reston, Virginia 20190
(703) 547-2000
(I.R.S. Employer Identification No.)
(Address, including zip code, and telephone
number, including area code, of registrant's principal
executive offices)
Wayne M. Rehberger
Executive Vice President, Chief Financial
Officer
XO Communications, Inc.
11111 Sunset Hills Drive
Reston, Virginia 20190
(703) 547-2000
(Name, address, including zip code, and
telephone number,
including area code, of agent for service of
the registrant)
Copy to:
Bruce R. Kraus, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
(212) 728-8000
Approximate date of
commencement of proposed sale to
public:
Approximately 45 days
after the effective date of this Registration Statement
If any of the securities
being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following
box.
o
If this Form is filed to
register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
of the earlier effective registration statement for the same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If this Form is a
post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
effective registration statement for the same
offering.
o
If delivery of the
prospectus is expected to be made pursuant to Rule 434,
check the following
box.
o
CALCULATION OF REGISTRATION FEE
Proposed
Proposed
Maximum
Maximum
Amount of
Title of Each Class Of
Amount to be
Offering Price
Aggregate
Registration
Securities To Be Registered
Registered
Per Unit
Offering Price(2)
Fee(2)
Common Stock, $.01 par value per share
43,333,333(1)
$5.00(1)
$216,666,665
$17,528.33
Total
$17,528.33
(1)
43,333,333 shares of New Common Stock will be
    reserved for issuance upon exercise of the Subscription Rights
    at $5.00 per share (if fully exercised, for an aggregate of
    $216,666,665) in the Rights Offering.
(2)
Estimated solely for purposes of determining the
    registration fee pursuant to Rule 457(f) under the
    Securities Act of 1933, as amended (the "Securities
    Act").
The Registrant hereby
amends this Registration Statement on such date or dates as may
be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933
or until this Registration Statement shall become effective on
such date as the Commission, acting pursuant to said
Section 8(a), may determine.
Table of Contents
The information in this
prospectus is not complete and may be changed. We may not sell
these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED
JULY 22, 2003
PROSPECTUS
XO Communications, Inc.
Rights Offering
43,333,333 Shares of Common Stock, $0.01 par
value,
at $5.00 per share
We are offering up to 43,333,333 shares of our
common stock, $0.01 par value, in a rights offering, which we
refer to as the "Rights Offering". We recently emerged
from Chapter 11 reorganization proceedings, and have
granted non-transferable rights to participate in this offering
to certain of our former creditors and equity security holders
as part of our plan of reorganization. The rights entitle these
holders to purchase shares of our common stock for $5.00 per
share.
We refer to our common stock, par value $0.01, as
the "New Common Stock." We refer to the
non-transferable subscription rights to buy our New Common Stock
at $5.00 per share in this offering as "Subscription
Rights". We refer to this offering of shares of New Common
Stock upon exercise of Subscription Rights as the "Rights
Offering".
Our New Common Stock is quoted on the Nasdaq
over-the-counter bulletin board at www.otcbb.com, or OTCBB, and
in the Pink Sheets at www.pinksheets.com, under the symbol
"XOCM," but is not listed on any national or regional
securities exchange or quoted through NASDAQ. On
[                    ,
2003], the last reported sale price for our New Common Stock on
the OTCBB was
$           per
share, with a bid price of
$                    for
up
to                                shares
of New Common Stock and an ask price of
$                    for
up
to                                shares
of New Common Stock at the close of the market.
The Rights Offering will begin on the date of
this prospectus and continue
until                     ,
2003 (29 days after the date of this Prospectus) at 5 p.m.,
New York City time, the Subscription Rights Expiration Date.
The net proceeds of this offering will be used to
repay and reduce our outstanding secured debt.
The information contained in this information
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus.
In this prospectus, "XO Parent",
"we", "us" and "our" each refers
to XO Communications, Inc., a Delaware corporation, and not to
its current or future subsidiaries unless the context otherwise
requires or as expressly stated. The "Company" refers
to XO Parent and its current subsidiaries, unless the context
otherwise requires or as expressly stated.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION
NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. WE
URGE YOU TO CAREFULLY READ THE "RISK FACTORS" SECTION
BEGINNING ON PAGE [     ] BEFORE YOU
MAKE ANY INVESTMENT DECISION.
The date of this prospectus is
[                      ],
2003
TABLE OF CONTENTS
QUESTIONS AND ANSWERS
PROSPECTUS SUMMARY
THE RIGHTS OFFERING
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
THE OFFERING
DIVIDEND POLICY
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
FRESH START ACCOUNTING INFORMATION
THE BUSINESS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2003 Employee Retention Plan
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
SHARES ELIGIBLE FOR FUTURE SALE
DESCRIPTION OF OUTSTANDING INDEBTEDNESS
DESCRIPTION OF OUTSTANDING EQUITY SECURITIES
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
PLAN OF DISTRIBUTION
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II -- CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FORM OF RIGHTS CERTIFICATE
CONSENT OF ERNST & YOUNG LLP
NOTICE RE LACK OF CONSENT OF ARTHUR ANDERSEN
FORM OF LETTER OF INSTRUCTIONS FROM NOMINEE TO BO
Table of Contents
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS
1
PROSPECTUS SUMMARY
6
RISK FACTORS
16
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
25
THE OFFERING
27
USE OF PROCEEDS
36
DETERMINATION OF OFFERING PRICE
36
PRICE AND RELATED INFORMATION CONCERNING
    REGISTERED SHARES
36
DIVIDEND POLICY
37
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
37
FRESH START ACCOUNTING INFORMATION
40
THE BUSINESS
42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS
68
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
88
EXECUTIVE COMPENSATION
91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
    AND MANAGEMENT
96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
99
SHARES ELIGIBLE FOR FUTURE SALE
101
DESCRIPTION OF OUTSTANDING INDEBTEDNESS
101
DESCRIPTION OF OUTSTANDING EQUITY SECURITIES
103
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
104
PLAN OF DISTRIBUTION
104
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
105
LEGAL MATTERS
106
EXPERTS
106
WHERE YOU CAN FIND MORE INFORMATION
107
INDEX TO FINANCIAL STATEMENTS
F-1
Table of Contents
QUESTIONS AND ANSWERS
Q:
What rights have I received in this Rights
    Offering?
A:
If you are an eligible participant, we have
    issued you a rights certificate entitling you to subscribe for
    shares of XO Parent New Common Stock for $5.00 per share. Your
    rights are not transferable.
Q:
Why is XO Parent making this Rights
    Offering?
A:
We are required to make this Rights Offering as
    part of our Chapter 11 reorganization plan.
Q:
How will you use the proceeds of the Rights
    Offering?
A:
We intend to use all of the proceeds of the
    Rights Offering to repay our outstanding senior secured debt.
Q:
How long do I have to decide whether to
    exercise my rights?
A:
The Subscription Rights expire
    on                     ,
    2003 [29 days after the date of this
    prospectus]                               at
    5:00 p.m., New York City time, which we refer to as the
    Subscription Rights Expiration Date. The Rights Agent must
    receive all required documents and payments before that date and
    time for your exercise to be valid.
Q:
Where is my rights certificate?
A:
If, as of November 15, 2002, you held
    pre-petition securities of XO Parent in your own name, or had a
    pre-petition general unsecured claim against XO Parent in its
    reorganization proceeding, your rights certificate is enclosed
    with this prospectus. If, as of November 15, 2002, you held
    pre-petition securities of XO Parent in street name through a
    broker, your broker should have received the rights certificate,
    and will exercise your Subscription Rights as you direct.
Q:
Who else is receiving Subscription Rights in
    this offering?
A:
We have issued non-transferable Subscription
    Rights to XO Parent's pre-petition general unsecured
    creditors as of November 15, 2002, holders as of that date
    of XO Parent's pre-petition senior notes, pre-petition
    subordinated notes, pre-petition preferred stock, pre-petition
    class A common stock, pre-petition class B common stock, and
    legal counsel for the pre-petition class A common stock.
We, however, are not issuing Subscription Rights
    to security holders who have previously waived in writing their
    rights to participate in this Rights Offering, including holders
    of certain series of XO Parent's pre-petition preferred
    stock and certain holders of pre-petition common stock.
Q:
Are all holders of general unsecured claims
    entitled to Subscription Rights?
A:
No. You are only entitled to Subscription
    Rights in this offering as a holder of a general unsecured claim
    if you:
•
were a general unsecured creditor of XO Parent on
    November 15, 2002;
•
properly filed a claim with the bankruptcy court
    which was not disputed or was approved by or allowed by the
    bankruptcy court; and
•
did not elect to have your claim paid in part as
    a convenience claim under the Plan of Reorganization;
If you do not meet these requirements, you are
    not a holder of a pre-petition general unsecured claim and you
    are not entitled to Subscription Rights.
In this prospectus, when we refer to
    pre-petition holders of general unsecured claims, we are only
    referring to holders of general unsecured claims that meet these
    requirements.
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Table of Contents
Q:
How big is the total Rights
    Offering?
A:
We are initially offering 40,000,000 shares of
    our New Common Stock. We have guaranteed that holders of
    pre-petition class A common stock and their legal counsel will
    receive the opportunity to purchase, in the aggregate, at least
    3,333,333 shares, of New Common Stock in the Rights Offering.
    Thus, it is possible that the Rights Offering will be expanded
    by up to 3,333,333 additional shares, if and to the extent the
    Rights Offering is subscribed by the holders of pre-petition
    senior notes and general unsecured creditors on a pro rata basis
    in amounts that would not leave at least 3,333,333 shares
    available in the rights offer to holders of pre-petition
    Class A common stock and their legal counsel.
Q:
How much is
that on a percentage basis?
A:
As of March 31, 2003, XO Parent had
    95,000,001 shares of New Common Stock outstanding including
    shares held for distribution upon final determination of
    disputed claims in our reorganization proceeding. If the Rights
    Offering were fully subscribed, the 43,333,333 shares issued
    would represent approximately 30% of our outstanding shares of
    New Common Stock, subject to dilution by outstanding warrants
    and employee stock options, each with exercise prices that range
    from $5.00 to $10.00.
Q:
How many shares of New Common Stock are you
    offering to me?
A:
You can request as many shares of New Common
    Stock as you would like to purchase in the Rights Offering, up
    to the full 40,000,000 share amount of the offering, or any
    smaller number. If the offering is not fully subscribed, you
    will receive all the shares of New Common Stock you request. If
    it is over-subscribed, shares of New Common Stock will be
    allocated among the requesting Subscription Rights holders
    according the pro ration procedures described below.
Q:
When is payment for the shares due?
A:
You must send payment for the full number of
    shares of New Common Stock requested at the time you make your
    request, recognizing that your request might not be fulfilled
    completely. If you receive less than all the shares you
    requested because of pro ration, we will refund the excess
    payment to you without interest.
Q:
If the Rights Offering is oversubscribed, how
    will you determine how many shares of New Common Stock I will
    receive in the offering?
A:
The number of shares of New Common Stock you
    receive will depend on the classification under the chapter 11
    reorganization plan of the pre-petition claims or interests of
    XO Parent that you hold, the number of shares of New Common
    Stock you requested, and the number of shares requested by other
    eligible participants participating in the Rights Offering. We
    will make the computations required by the pro ration procedures
    described on
    pages      -      of
    this Prospectus following the conclusion of the Rights Offering,
    and then will notify you of the number of shares you have
    purchased. Our determinations will be final and binding, absent
    manifest error.
Q:
When and how will I receive the shares of New
    Common Stock I have purchased?
A:
We estimate that the shares purchased will be
    issued within two weeks of the Subscription Rights Expiration
    Date. We will mail certificates representing the shares of New
    Common Stock to you, or deposit them in your brokerage account,
    as you request.
Q:
If I subscribe for shares of New Common Stock,
    is there any guaranteed minimum amount of shares I will be
    entitled to buy?
A:
That depends on the class of pre-petition claims
    or interests of XO Parent that you hold. Holders of XO
    Parent's pre-petition senior notes, pre-petition general
    unsecured claims and pre-petition class A common stock will
    receive Subscription Rights to purchase at least a defined
    minimum amount of shares of New Common Stock. The minimum number
    of shares available to these holders will vary depending on the
    size of their holdings. There is no guaranteed minimum for
    holders of pre-petition preferred stock or pre-petition
    subordinated notes.
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Table of Contents
Q:
What is the guaranteed minimum for senior
    noteholders and general unsecured creditors?
A:
Each holder of a pre-petition senior note and
    pre-petition general unsecured claim will have the right to
    subscribe for and receive its pro rata share of the initial
    40,000,000 shares of New Common Stock offered in the Rights
    Offering. We call this number their basic subscription
    privilege. This pro rata share is a percentage equal to the
    amount of the holder's claim divided by the total amount of
    all such claims.
Q:
Where can senior noteholders and unsecured
    creditors find out the amount of their basic subscription
    privileges?
A:
On the upper right hand corner of your rights
    certificate is the amount of shares of New Common Stock
    available pursuant to the basic subscription privileges, if any.
    If you hold your shares through a broker, your broker should
    have supplied you with this information. If your broker did not
    do so, please contact your broker.
Q:
Do holders of pre-petition class A common
    stock also have a minimum guaranteed right to
    subscribe?
A:
Yes. Each holder of pre-petition class A common
    stock will have the right to subscribe for and receive its pro
    rata share of at least 2,500,000 shares of New Common Stock
    offered in the Rights Offering. We call this number their
    minimum over subscription privilege. This pro rata share is a
    percentage equal to the number of shares of pre-petition class A
    common stock the holder holds divided by the total number of
    eligible shares of pre-petition XO Parent class A stock
    outstanding on the record date. Certain holders of pre-petition
    class A common stock, including certain investment funds
    affiliated with Forstmann Little & Co., have declined and
    waived any opportunity they might have been entitled to, or
    offered, to exercise or receive Subscription Rights in the
    Rights Offering. Therefore, the actual number of guaranteed
    rights to subscribe to be distributed to other holders will be
    increased accordingly.
Q:
Do any other classes of creditors and
    stockholders have a guaranteed minimum right to
    subscribe?
A.
No. If all holders of pre-petition senior
    notes and general unsecured creditors exercise all their basic
    subscription privilege in full, holders of pre-petition
    preferred stock, pre-petition subordinated notes and
    pre-petition class B common stock will not receive any New
    Common Stock in the Rights Offering.
Q:
Can senior noteholders subscribe for less than
    their basic subscription privileges?
A.
Yes. They, like all other participants in the
    Rights Offering, may decline to participate in the Rights
    Offering or request any number of shares of New Common Stock
    from one share of New Common Stock up to 40,000,000 shares of
    New Common Stock. We will not permit subscriptions for
    fractional shares, and none will be issued in the Rights
    Offering.
Q:
What will happen if I do not exercise my
    Subscription Rights?
A.
If you do not exercise your rights, you will not
    receive any New Common Stock in this offering. Your pre-petition
    XO Parent claims and securities have been cancelled through the
    Plan of Reorganization and have no value. If you are currently a
    holder of New Common Stock, you will retain your current number
    of shares of New Common Stock whether or not you exercise your
    Subscription Rights. However, if you are currently a holder of
    New Common Stock and do not exercise your Subscription Rights
    and other eligible participants do, the percentage of the
    outstanding shares of New Common Stock of XO Parent that you own
    will diminish.
Q:
Are my Subscription Rights
    transferable?
A.
No. Your Subscription Rights are not
    transferable.
Q:
What will happen to the leftover Subscription
    Rights if the Rights Offering is not fully subscribed?
A.
Our Plan of Reorganization requires that they
    will be converted into transferable rights and awarded to XO
    Parent's senior secured lenders as of the record date.
    Those rights will have an exercise period of an additional
    30 days, and may be exercised by those lenders or by their
    transferees.
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Table of Contents
Q:
How do I exercise my Subscription Rights if I
    elect to purchase shares?
A.
If you are a record holder and your rights
    certificate is enclosed with this prospectus, you should:
(a) complete and sign the original rights
    certificate (copies will not be accepted) and
(b) return the signed original rights
    certificate in the envelope provided, together with payment for
    all shares of New Common Stock subscribed for at the
    subscription price of $5.00 per share in the form of either:
(i) a check, bank draft, cashier's
    check or money order in United States dollars for the full
    number of shares subscribed, including any over-subscription
    shares, payable to: American Stock Transfer & Trust Company
    as Rights Agent – XO Communications or
(ii) a wire transfer of payment and
    notification that payment for the shares was sent prior to the
    final due date via wire transfer directly to a bank account
    maintained by American Stock Transfer & Trust Company at
    Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for credit to
    Account #: 323053785, Contact: XO Communications Rights Offering.
In any event, for your rights exercise to be
    valid you must deliver your subscription request
    before                               ,
    the Subscription Rights Expiration Date.
Q:
What should I do if I want to participate in
    this Rights Offering, but my pre-petition XO Parent securities
    are held in the name of my broker, dealer or other
    nominee?
A.
If you hold your pre-petition XO Parent
    securities through a broker, dealer or other nominee, for
    example, through a custodian bank, then your broker, dealer or
    other nominee is the record holder of the pre-petition XO Parent
    securities you beneficially own. This record holder must
    exercise the Subscription Rights on your behalf for the shares
    of New Common Stock you wish to purchase. Therefore, you will
    need to have your record holder act for you.
Q:
What fees or charges apply if I purchase
    shares of New Common Stock?
A:
We are not charging any fee or sales commission
    to issue rights to you or to issue shares of New Common Stock to
    you if you exercise Subscription Rights. If you exercise
    Subscription Rights through a record holder of your shares, you
    are responsible for paying any fees that person may charge.
Q:
May I change or cancel my exercise of
    Subscription Rights after I send in the required
    forms?
A:
No. Once you send in your rights certificate
    and payment, or your broker, dealer or other nominee sends in a
    rights certificate and such payment on your behalf you cannot
    revoke the exercise of your Subscription Rights.
Q:
What happens if my payment does not correspond
    to the number of shares or New Common Stock that I have
    requested?
A:
If you do not indicate on your rights certificate
    the number shares of New Common Stock you wish to purchase, or
    do not forward sufficient payment for the number of shares of
    New Common Stock that you indicate you wish to purchase, then we
    will accept the rights certificate and payment only for the
    maximum number of shares of New Common Stock that may be
    exercised based on the actual payment delivered.
Q:
I noticed that some Subscription Rights will
    be allocated "Pro Rata By Holdings". What does this
    mean?
A:
"Pro rata by holdings" means that the
    number of Subscription Rights exercisable by any holder in the
    tier in question will equal the total number of Subscription
    Rights allocated to that tier multiplied by A/ B where:
A = the total amount of the holder's
holdings in that tier, and
B = the total amount of all holders'
holdings in that tier.
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Table of Contents
Q:
I noticed that some Subscription Rights will
    be allocated "Pro Rata By Subscription". What does
    this mean?
A:
"Pro rata by subscription" means that
    the number of Subscription Rights exercisable by any holder in
    the tier in question will equal the total number of Subscription
    Rights allocated to that tier multiplied by A/ B where:
A = the total number of shares of New Common
Stock theretofore requested by the holder, and
B = the total amount of all shares of New Common
Stock theretofore requested by all holders in that tier.
Q:
How many shares of New Common Stock will be
    outstanding after the Rights Offering?
A:
If we sell all of the shares of New Common Stock
    offered by this prospectus, then we will issue approximately
    43.3 million shares of New Common Stock and then we will
    have approximately 138.3 million shares of New Common Stock
    outstanding (based on the number of shares of New Common Stock
    outstanding as of March 31, 2003).
Q:
Is this a good investment? Should I subscribe
    to purchase New Common Stock in this offering? Has the board of
    directors made a recommendation regarding this
    offering?
A:
We and our board of directors are making no
    recommendation to holders of Subscription Rights as to whether
    or not they should subscribe for shares of New Common Stock in
    the Rights Offering. You should consult with your own financial
    advisor, refer to current prices for our New Common Stock on the
    OTCBB and in the Pink Sheets (Symbol: XOCM) and read this
    prospectus carefully before considering such an investment.
Q:
What risk factors should I consider in respect
    to this offering?
A:
We urge you to carefully read the "Risk
    Factor" Section beginning on page
    [     ] before you make any investment
    decision.
Q:
Who can answer my other questions about the
    offering?
A:
If you have any questions about (1) the
    procedure for exercising the Subscription Rights in the Rights
    Offering, (2) the number of shares of New Common Stock
    available to you, or (3) a lost rights certificate or a
    damaged rights certificate, please contact the Information Agent:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, NY 10016
Attn: Robert Marese
(212) 929-5500
Toll-Free (800) 322-2885
proxy@mackenziepartners.com
If you have any questions as to whether your
completed rights certificate or payment has been received,
please contact the Rights Agent:
XO Communications, Inc.
c/o American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Attn: Shareholder Relations Department
Phone: (800) 937-5449
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Table of Contents
PROSPECTUS SUMMARY
This summary highlights information contained
elsewhere in this prospectus. We urge you to read the entire
prospectus, including "Risk Factors," and the
information contained in the public documents that we have filed
with the Securities and Exchange Commission.
Our Company
We provide a comprehensive array of voice and
data communications services to business customers. Our voice
services include local and long distance services, both bundled
and stand-alone, other voice-related services such as
conferencing, interactive voice response, domestic and
international toll free services and voicemail, and transactions
processing services for prepaid calling cards. Our data services
include Internet access, private data networking, including
dedicated transmission capacity on our networks, virtual private
network services and Ethernet services, and hosting services. We
also combine many of these services in flat rate service
packages. These services are offered to a variety of customers,
including small, medium and large retail businesses,
multi-location businesses, and carrier or wholesale customers.
To serve our customers' broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmissions
capacity on fiber optic cables, which we refer to as an
intercity network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network and among customers with
multiple locations primarily or entirely over our network.
To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment capable of carrying high volumes of data, voice, video
and Internet traffic. We operate 37 metro fiber networks in 22
states and the District of Columbia, include 25 of the 30
largest metropolitan areas in the U.S. We have constructed or
acquired many of these metro fiber networks, which consist of up
to 432 strands of fiber optic cable and, in some cases,
additional empty conduits through which fiber optic cable can be
deployed. For our inter-city network, we have acquired
dedicated, high-capacity wavelengths of transmission capacity on
fiber optic cables, onto which we have deployed our own
switching, routing and optical equipment, which gives us greater
control over how voice and data information is transmitted. We
also hold indefeasible exclusive rights to use 18 unlit fiber
optic strands on the routes served by our intercity networks
pursuant to arrangements with Level 3 Communications, Inc.
We conduct our business primarily through the
more than 60 subsidiaries we own and manage. Our principal
executive and administrative offices are located at 11111 Sunset
Hills Road, Reston, Virginia 20190, our telephone number is
(703) 547-2000, and our Internet address is www.xo.com.
Our Chapter 11 Reorganization
On June 17, 2002, XO Parent filed for
protection under the Bankruptcy Code. On November 15, 2002,
the Bankruptcy Court confirmed XO Parent's plan of
reorganization, and, on January 16, 2003, XO Parent
consummated the plan of reorganization and emerged from its
Chapter 11 reorganization proceedings with a significantly
restructured balance sheet.
During the period preceding and immediately after
the filing of XO Parent's Chapter 11 petition, we met
with a committee of lenders under XO Parent's
$1.0 billion senior secured credit facility, which we refer
to as the Pre-Petition Credit Facility, an informal committee of
unsecured creditors that represented holders of our unsecured
notes (and following the filing of the Chapter 11 petition,
the official committee of unsecured creditors appointed in the
Chapter 11 proceedings) and potential investors to discuss
potential transactions that could be implemented to reorganize
our capital structure. These discussions led to an agreement with
6
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certain of our creditors regarding the terms of a
plan of reorganization that envisioned two reorganization
structures, the first of which was based on, among other things,
a proposed cash investment in XO Parent by third parties (which
was ultimately abandoned), and the second of which contemplated
a stand-alone restructuring with no new cash infusion committed
in advance. The plan of reorganization, as supplemented, was
filed with the Bankruptcy Court on July 22, 2002 and
distributed to creditors of XO Parent eligible to vote in the
reorganization. We refer to the stand-alone alternative under
the plan of reorganization that ultimately was confirmed by the
Bankruptcy Court as the Plan of Reorganization.
On August 21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr. Carl
Icahn, commenced an offer to purchase loans under the
Pre-Petition Credit Facility at a purchase price of $0.50 for
each $1.00 in principal amount thereof. Purchases made under
this offer, together with the loans under the Pre-Petition
Credit Facility that High River previously had acquired,
resulted in High River holding approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility.
On November 15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January 16, 2003,
XO Parent consummated the Plan of Reorganization and emerged
from its Chapter 11 reorganization proceedings.
Distributions
Under the Plan of Reorganization
After the consummation of the Plan of
Reorganization, and giving effect to the implementation of fresh
start accounting, our capital structure consisted of the
following:
•
$500.0 million in outstanding principal
    amount of loans under a restructured secured credit and guaranty
    agreement, which we refer to as the New Credit Agreement.
•
approximately $70.6 million of other
    long-term liabilities, which include various capital lease
    obligations; and
•
95.0 million outstanding shares of common
    stock, par value $0.01 per share, which we refer to as New
    Common Stock.
We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios.
The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the Pre-Petition
Credit Facility being converted into the following:
•
90.25 million shares of New Common Stock; and
•
$500.0 million of outstanding principal
    amount of loans under the New Credit Agreement.
The Plan of Reorganization also resulted in the
cancellation of all of XO Parent's pre-petition senior
unsecured notes and general unsecured claims in exchange for the
following:
•
4.75 million shares of New Common Stock;
•
warrants to purchase up to an additional
    23.75 million shares of New Common Stock;
•
rights to purchase shares of New Common Stock at
    $5.00 per share in the Rights Offering; and
•
a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination of
    the proposed investment transaction that was the basis for the
    first restructuring alternative contemplated by the Plan of
    Reorganization, which we refer to as the Investment Termination
    Payment.
The warrants consist of:
•
Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;
•
Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
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•
Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.
The warrants will expire on January 16,
2010. Each series of warrants is identical, except as to the
applicable exercise price. The exercise price applicable to each
respective series of warrants is subject to adjustment in
certain events.
In addition, under the Plan of Reorganization:
•
Holders of pre-petition subordinated notes of XO
    Parent had their securities cancelled, and received a cash
    payment from High River based upon the amount of the Investment
    Termination Payment that High River would have been entitled to
    receive as holder of the loans under the New Credit Agreement
    and the right to participate in the Rights Offering;
•
Holders of pre-petition class A common stock of
    XO Parent had their securities cancelled, and received the right
    to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
•
Holders of pre-petition class B common stock
    and holders of all series of pre-petition preferred stock of XO
    Parent had their securities cancelled and received only the
    right to participate in the Rights Offering;
in each case, subject to the pro ration
procedures described on
pages      -     of
this Prospectus. If holders of pre-petition senior notes and
pre-petition general unsecured claims exercise all their basic
subscription privilege in full, holders of pre-petition
preferred stock, pre-petition subordinated notes and
pre-petition class B common stock will not receive any New
Common Stock in the Rights Offering.
Post-Bankruptcy
Interests Held by Entities Owned by Carl Icahn
Of the 90.25 million shares of New Common
Stock distributed to the lenders under the Pre-Petition Credit
Facility, approximately 76.6 million shares were issued to
High River, as owner of approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility, upon
consummation of the stand-alone restructuring under the Plan of
Reorganization. Immediately following this distribution, High
River transferred all such shares of New Common Stock to Cardiff
Holding LLC, a Delaware limited liability company owned by
Mr. Icahn.
Meadow Walk Limited Partnership, a limited
partnership owned by Mr. Icahn, owned over
$1.5 billion in principal amount of various tranches of XO
Parent's pre-petition senior unsecured notes, representing
approximately 33% in principal amount of such notes. Meadow Walk
has transferred beneficial ownership to all distributions with
respect to such notes under the Plan of Reorganization to
Cardiff.
Giving effect to these transactions and the
distributions of New Common Stock pursuant to the Plan of
Reorganization, Cardiff holds over 80% of the outstanding shares
of the New Common Stock. In addition, affiliates of Mr. Icahn
are entitled to participate in the Rights Offering, based on
their ownership of pre-petition XO Parent securities and may
receive additional shares of New Common Stock or warrants as a
result of the resolution of disputed claims of certain creditors
in favor of XO Parent.
Of the warrants distributed under the Plan of
Reorganization to holders of the pre-petition senior unsecured
notes, we estimate Cardiff received Series A Warrants to
purchase approximately 3.0 million shares of New Common
Stock, Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C
Warrants to purchase approximately 2.3 million shares of
New Common Stock.
In connection with the Plan of Reorganization,
High River became the holder of approximately 85% of the loans
outstanding under the New Credit Agreement. In January 2003,
High River assigned all of its rights in the loans outstanding
under the New Credit Agreement to Chelonian Corp., a corporation
owned by Mr. Icahn. Subsequently, these loans were assigned
to Arnos Corp., a corporation owned by Mr. Icahn. As a
result, Arnos now holds approximately 85% of the loans
outstanding under the New Credit Agreement.
8
Table of Contents
THE RIGHTS OFFERING
Eligible Participants
Holders, as of November 15, 2002, of XO
    Parent's pre-petition general unsecured claims,
    pre-petition senior notes, pre-petition subordinated notes,
    pre-petition preferred stock and pre-petition common stock.
Participant Eligibility Date; Non-Transferability
    of Subscription Rights
Only holders of pre-petition XO Parent claims and
    securities as of November 15, 2002 are entitled to
    participate in the Rights Offering. Subscription Rights are not
    transferable and will not be admitted for trading on any
    exchange.
Subscription Rights
Subscription Rights to purchase up to
    43,333,333 shares of New Common Stock shall be issued to
    the Eligible Participants. Fractional shares will not be issued
    upon exercise of any Subscription Rights.
Subscription
    Rights Expiration Date
(1).
Optional
    Exercise
You may exercise your Subscription Rights to
    purchase up to 40,000,000 shares of New Common Stock until the
    Subscription Rights Expiration Date. The Rights Agent will
    determine allocations of any over-subscribed shares after the
    Subscription Rights Expiration Date in accordance with the
    allocation procedures discussed in this Prospectus. Any
    Subscription Rights not exercised prior to 5:00 PM on the
    Subscription Rights Expiration Date will be cancelled.
Rights Exercise Price
$5.00 per share.
Payment
To exercise any Subscription Rights you or your
    broker must:
(a) complete and sign the original rights
    certificate (copies will not be accepted) and
(b) return the signed, original rights
    certificate in the envelope provided, together with payment for
    all shares of New Common Stock subscribed for, including any
    oversubcription shares, in the form of either:
(i)  a
    check, bank draft, cashier's check or money order in United
    States dollars for the full number of shares of New Common Stock
    subscribed, including any over-subscription shares, payable to:
    American Stock Transfer & Trust Company as Rights
    Agent — XO Communications or
(ii) a wire
    transfer of payment and notification that payment for the shares
    of New Common Stock was sent prior to the final due date via
    wire transfer directly to a bank account maintained by American
    Stock Transfer & Trust Company at Chase Manhattan Bank, ABA
    ROUTING #: 021-000-021, for credit to
    Account #: 323053785,
    Contact: XO Communications Rights Offering.
(1) 29 days after the date of this
Prospectus.
9
Table of Contents
Other Terms of the Rights Offering
No Interest on
    Payments
No interest will be paid with respect to any
    amounts received by the Rights Agent.
Overpayments
The Rights Agent will return to you or your
    broker, as applicable, by check or wire transfer any amount
    which you or your broker have overpaid in the Rights Offering,
    within 30 business days after the Subscription Rights Expiration
    Date.
Rights Agent
American Stock Transfer & Trust Company
Information
    Agent
MacKenzie Partners, Inc.
Use of Proceeds
The net proceeds of this offering will be used to
    repay and reduce our outstanding secured debt.
OTCBB and Pink Sheets symbol
"XOCM"
INFORMATION AGENT
The Information Agent for the Rights Offering is:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, NY 10016
Attn: Robert Marese
(212) 929-5500
Toll-Free (800) 322-2885
proxy@mackenziepartners.com
RIGHTS AGENT
The Rights Agent for the Rights Offering is:
XO Communications, Inc.
c/o American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Shareholder Relations Department
Toll Free: (800) 937-5449
IMPORTANT DATES TO REMEMBER
Event
Date
Record Date
November 15, 2002
Subscription Period
,
    2003
    to           2003
Subscription Rights Expiration Date*
,
    2003
Estimated Distribution Date
,
    2003
*
Eligible Participants exercising rights or
    brokers exercising rights on their behalf must deliver to the
    Rights Agent by the expiration date (i) the completed
    original rights certificates and (ii) payment as discussed
    above.
10
Table of Contents
SUMMARY ALLOCATION TABLE
The following categories of holders of the
following XO Parent claims and securities as of
November 15, 2002 will have the opportunity to exercise the
Subscription Rights: (i) holders of pre-petition general
unsecured claims and pre-petition senior notes,
(ii) holders of pre-petition subordinated notes,
(iii) holders of pre-petition preferred stock and
(iv) holders of pre-petition common stock. We refer
collectively to these holders as the "Eligible
Participants". Holders of pre-petition general unsecured
claims, pre-petition senior notes and Class A common stock
will receive basic subscription privileges and oversubscription
privileges. All other Eligible Participants will only receive
oversubscription privileges. Each Eligible Participant will have
the opportunity to specify on its rights certificate the total
number of shares of New Common Stock it wishes to purchase (up
to the full amount of the offering), subject to allocation and
pro ration as set forth below:
First:
to the holders of pre-petition general unsecured
    claims and pre-petition senior notes, pro rata by holdings;
Second:
one-third of any remaining Subscription Rights to
    each of the following groups of holders:
(i) holders of pre-petition subordinated
    notes,
(ii) holders of pre-petition preferred
    stock, and
(iii) holders of pre-petition class A
    common stock (with 25% of the Subscription Rights allocated to
    holders of pre-petition class A common stock reallocated to
    legal counsel to the class of pre-petition class A common
    stockholders as part of their attorney's fees in the
    stockholder class action suit). See "The
    Offering — Fees and Expenses" on
    page   .],
allocated within each of those groups
    pro rata by holdings. However, if, but only to the extent,
    that the category of holders of pre-petition class A common
    stock receive less than 3,333,333 Subscription Rights,
    additional Subscription Rights will be issued so that holders of
    pre-petition class A common stock are entitled to purchase
    at least 3,333,333 shares of New Common Stock (with at
    least 2,500,000 of those shares available for purchase by the
    holders of pre-petition class A common stock with the
    remaining 833,333 shares in the Rights Offering allocated
    to legal counsel for the class of pre-petition class A common
    stockholders).
Any remaining Subscription Rights from such
    initial allocation to the holders of pre-petition class A common
    stock shall subsequently be reallocated to the holders of
    pre-petition class A common stock and the legal counsel for
    the class of pre-petition class A common stockholders, pro
    rata by subscription. Notwithstanding anything herein to the
    contrary, on the Subscription Rights Expiration Date any
    unexercised additional Subscription Rights added to the offering
    to ensure that the holders of pre-petition class A common
    stock receive Subscription Rights for at least
    3,333,333 shares of New Common Stock will be deemed
    cancelled and will not be allocated beyond this Second
    allocation tier;
Third:
any remaining Subscription Rights to the holders
    of pre-petition general unsecured claims and pre-petition senior
    notes, pro rata by subscriptions; and
Fourth:
any remaining Subscription Rights to the holders
    of pre-petition subordinated notes, pre-petition preferred stock
    and pre-petition common stock (including legal counsel for the
    class of pre-petition class A common stockholders),
    pro rata by subscriptions.
As soon as practicable after the Subscription
Rights Expiration Date, if and to the extent that any
outstanding Subscription Rights have not been exercised, XO
Parent will issue and the Rights Agent will deliver to the
holders of senior secured lenders claims an equivalent number of
transferable rights on a pro rata basis, based upon the amount
of each such holder's claims in a non-registered,
supplemental rights offering. Please refer to
page      for a full description
of the Rights Offering and how you may exercise your
Subscription Rights.
11
Table of Contents
The following flow chart graphically sets forth
how the Rights are allocated in the Rights Offering:
(1)
"Pro Rata by Holdings" means that the
    number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
A = the total amount of the
    holder's holdings in that tier, and
B = the total amount of all
    holders' holdings in that tier.
12
Table of Contents
(2)
XO has agreed to add additional rights to the
    rights offering to ensure that holders of Pre-Petition
    Class A Common Stock Interests receive the opportunity to
    subscribe for at least 2,500,000 shares of New Common Stock
    and the class action attorneys will receive the opportunity to
    subscribe for at least 833,333 shares of New Common Stock
    as part of their attorney's fees. On the Subscription
    Rights Expiration Date any unexercised additional Subscription
    Rights added to the offering to ensure that the holders of
    pre-petition class A common stock receive Subscription Rights
    for at least 3,333,333 shares of New Common Stock will be
    deemed cancelled and will not be allocated further in this
    chart. Thus, the holders of pre-petition General Unsecured
    Claims and pre-petition Senior Note Claims will never receive
    such unexercised additional Subscription Rights.
(3)
"Pro Rata by Subscriptions" means that
    the number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
A = the total number of shares
    theretofore duly requested by such holder, and
B = the total amount of all shares
    therefore duly requested by all holders in that tier.
HOLDERS WHO ACQUIRED PRE-PETITION SECURITIES AND
    PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT AFTER
    NOVEMBER 15, 2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE
    RIGHTS OFFERING. ONLY HOLDERS OF PRE-PETITION SECURITIES AND
    PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT ON
    NOVEMBER 15, 2002 ARE ELIGIBLE TO PARTICIPATE IN THE RIGHTS
    OFFERING.
13
Table of Contents
Summary Consolidated Financial Data
Because the Plan of Reorganization was not
consummated and effective until January 16, 2003, the
summary consolidated financial data below as of and for the
years ended December 31, 1998, 1999, 2000, 2001 and 2002
and the financial data as of and for the three months ended
March 31, 2002 does not include the effects of the
"fresh start" accounting provisions of AICPA Statement
of Position, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code," or SOP 90-7, but
the financial data as of and for the three months ended
March 31, 2003 does reflect the impact of adopting fresh
start. Although the effective date of the Plan of Reorganization
was January 16, 2003, due to the immateriality of the
results of operations for the period between January 1,
2003 and the effective date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January 1, 2003 and implemented fresh start as of that
date. Reorganized XO's financial statements issued for
periods beginning after consummating our Plan of Reorganization
and adopting fresh start accounting are not comparable to that
of predecessor XO.
Fresh start required that XO adjust the
historical cost of its assets and liabilities to their fair
values as determined by the reorganization value of XO Parent
and that the reorganization value be allocated among the
reorganized entity's net assets in conformity with
procedures specified by Statement of Financial Accounting
Standards No. 141, "Business Combinations," or
SFAS No. 141. We engaged an independent appraiser to assist
in the allocation of the reorganization value to Reorganized
XO's assets and liabilities by determining the fair market
value of its property and equipment, intangible assets and
certain obligations related to its facility leases.
The following table summarizes our audited
predecessor company financial results as of and for the fiscal
years ended December 31, 1998 through December 31,
2002 and our unaudited results for predecessor XO and
reorganized XO, respectively, for the three months ended
March 31, 2002 and 2003. The consolidated balance sheet
data and the consolidated statement of operations data presented
below as of December 31, 1998, 1999, 2000 and 2001, and for
each of the years in the four-year period ended
December 31, 2001, have been derived from our consolidated
financial statements that have been audited by Arthur Andersen
LLP, independent public accountants. The consolidated balance
sheet data and the consolidated statement of operations data
presented below as of December 31, 2002 and for the year
ended December 31, 2002, have been derived from our
consolidated financial statements which have been audited by
Ernst & Young LLP, independent auditors. You should also
read the section in this prospectus captioned "Selected
Financial Data," our audited and unaudited financial
statements and their accompanying notes, and
"Management's Discussion and Analysis of Financial
Condition and Results of Operation," all of which are
included elsewhere in this prospectus. The consolidated
financial statements of Reorganized XO are not comparable to
that of the predecessor company.
Predecessor XO(a)
Reorganized XO(a)
Three Months
Predecessor XO(a)
Ended
Year Ended December 31,
March 31,
1998
1999
2000(b)
2001
2002
2002
2003(a)
(Dollars in thousands, except per share data)
(unaudited)
(unaudited)
Statement of Operations Data:
Revenue
$
139,667
$
274,324
$
723,826
$
1,258,567
$
1,259,853
$
333,405
$
286,093
Loss from operations(c)
(206,184
)
(366,530
)
(1,011,652
)
(1,949,891
)
(1,208,898
)
(182,663
)
(14,015
)
Net loss(d)
(278,340
)
(558,692
)
(1,101,299
)
(2,086,125
)
(3,386,818
)
(2,175,654
)
(20,488
)
Net loss applicable to common shares(d)(e)
(337,113
)
(627,881
)
(1,247,655
)
(1,838,917
)
(3,350,362
)
(2,198,480
)
(20,488
)
Net loss per common share, basic and diluted(f)
(1.57
)
(2.51
)
(3.87
)
(4.55
)
(7.58
)
(4.97
)
(0.22
)
Statement of Cash Flow Data:
Net cash provided by (used in) operating
    activities
$
(174,484
)
$
(349,192
)
$
(559,414
)
$
(560,877
)
$
17,602
$
(47,408
)
$
24,190
Net cash provided by (used in) investing
    activities
(1,276,747
)
(1,050,344
)
(1,464,495
)
(708,598
)
57,582
159,914
(49,245
)
Net cash (used in) provided by financing
    activities
1,381,653
1,948,503
1,648,663
1,019,647
(6,079
)
(4,848
)
(219
)
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Table of Contents
Predecessor XO(a)
Reorganized XO(a)
Three Months
Predecessor XO(a)
Ended
Year Ended December 31,
March 31,
1998
1999
2000(b)
2001
2002
2002
2003(a)
(Dollars in thousands, except per share data)
(unaudited)
(unaudited)
Balance Sheet Data:
Cash, cash equivalents and marketable securities
$
1,478,062
$
1,881,764
$
1,860,963
$
755,167
$
560,983
$
588,972
$
538,380
Property and equipment, net
594,408
1,180,021
2,794,105
3,742,577
2,780,589
3,633,380
476,509
Investment in fixed wireless licenses, net
67,352
926,389
997,333
947,545
911,832
939,603
57,926
Total assets(d)
2,483,106
4,597,108
9,085,375
7,930,465
4,585,496
5,704,497
1,323,943
Total long-term debt
2,013,192
3,733,342
4,396,596
5,109,503
5,165,718
5,144,851
507,868
Redeemable preferred stock, net of issuance
    costs(e)
556,168
612,352
2,097,016
1,781,990
1,708,316
1,785,960
0
Total stockholders' equity (deficit)
(246,463
)
(13,122
)
1,838,401
297,416
(3,032,282
)
(1,900,899
)
454,314
a.
On June 17, 2002, XO Parent filed for
    protection under Chapter 11 of the United States Code. On
    November 15, 2002, the Bankruptcy Court confirmed XO
    Parent's Plan of Reorganization, and, on January 16,
    2003, XO Parent consummated the Plan of Reorganization. See
    further discussion in Management's Discussion and Analysis
    of Financial Condition and Results of Operations.
b.
The selected financial data includes the accounts
    and activities of Concentric Network Corporation since
    June 16, 2000, the date that we merged with Concentric.
c.
In 2002, loss from operations includes a non-cash
    asset write down totaling $477.3 million resulting from the
    return of previously acquired inter-city fiber in exchange for
    reduced maintenance expenses beginning in 2003. In 2001, loss
    from operations includes restructuring charges totaling
    $509.2 million associated with plans to restructure certain
    aspects of our business operations. In 2000, loss from
    operations includes a $36.2 million charge in connection
    with the June 2000 acquisition of Concentric resulting from the
    allocation of the purchase price to in-process research and
    development. Loss from operations in 1999 includes restructuring
    charges totaling $30.9 million associated with relocating
    our Bellevue, Washington headquarters to Northern Virginia.
d.
In 2002, net loss and total assets reflects a
    $1,876.6 million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to Statement of Financial Accounting Standards No. 142,
    "Goodwill and Other Intangible Assets" or SFAS
    No. 142. In 2002, net loss also includes $91.1 million
    in net reorganization expenses which includes the write-off, in
    accordance with SOP 90-7, of deferred financing fees
    associated with the issuance of XO's pre-petition debt and
    professional fees incurred in conjunction with XO's
    recapitalization. During 2002, we ceased accruing interest and
    penalties on our pre-petition senior unsecured notes,
    subordinated notes and Pre-Petition Credit Facility, and we
    ceased accruing dividends and accreting the redemption
    obligation on all of our outstanding preferred stock as of the
    Petition Date, in accordance with SOP 90-7. In 2001, net
    loss includes a gain of $345.0 million resulting from the
    repurchase of certain of our senior notes and a write-down of
    $89.0 million for an other than temporary decline in the
    value of certain investments. In 2000, net loss includes a
    $57.7 million write-down for an other than temporary
    decline in the value of certain investments and a
    $225.1 million net gain from the sale of an equity
    investment.
e.
The comparability of net loss applicable to
    common shares is impacted by the transactions disclosed in d.
    above. In addition, in 2002, net loss applicable to common
    shares includes a net gain of $78.7 million resulting from
    the recognition of our deferred modification fee less the write
    off our unamortized discounts and issuance costs. In 2001, net
    loss applicable to common shares includes a gain of
    $376.9 million resulting from the repurchase of certain of
    our preferred stock.
f.
The net loss per share data for the years ended
    December 31, 1998, 1999, 2000, 2001 and 2002 and the three
    months ended March 31, 2002 has been calculated based on
    the shares outstanding of our class A and class B common stock
    prior to the consummation of our Plan of Reorganization.
    Effective January 16, 2003, the effective date of the Plan
    of Reorganization, all interests in our class A and
    class B common stock were terminated and all outstanding
    shares were cancelled. For further discussion of our Plan of
    Reorganization, see "Business — Our
    Chapter 11 Reorganization". The net loss per share
    data for the years ended December 31, 1998, 1999 and 2000
    has been adjusted for the splits of our class A and
    class B common stock effected in 2000 and in prior periods.
15
Table of Contents
RISK FACTORS
You should carefully consider the following
risk factors and other information included in this prospectus.
Certain of these risks could materially and adversely affect our
business, financial condition, results or operations and
prospects which could in turn materially and adversely affect
the price of the New Common Stock issuable under the Plan of
Reorganization and in the Rights Offering.
Risks Related to this Offering
If you elect to exercise your
    oversubscription privilege, you will have to make an advance
    deposit of the full amount of the purchase price for all the New
    Common Stock you request, without any assurance as to whether
    you will receive any shares, or any further guidance as to the
    amounts requested by other participants in the
    offering.
The offerings of New Common Stock at $5.00 per
share upon exercise of both the basic subscription privilege and
the oversubscription privilege will be simultaneous. Only those
participants who deliver completed Subscription Rights
Certificates and payment in full by the Subscription Rights
Expiration Date will be entitled to participate. We will not be
in a position to make any announcements during the offering
period of the subscription requests received. Therefore, if you
wish to exercise an oversubscription privilege, you will have to
do so without any further information as to whether and to what
extent the offering will be fully-subscribed. In that case, you
would be advancing funds, subject to refund, without knowing
whether you will receive all the shares you requested, or any
shares at all.
You will not receive interest on
    subscription funds returned to you.
If your participation in the Rights Offering is
cut back because the Rights Offering is oversubscribed, neither
we nor the Rights Agent will have any obligation with respect to
the Subscription Rights except to return to you, without
interest, any subscription payments to you that you have made
for shares you requested but did not receive.
The price of our common stock may decline
    before or after the Subscription Rights expire.
The public trading market price of our New Common
Stock may decline after you exercise your Subscription Rights.
If that occurs, you will have committed to buy New Common Stock
at a price above the prevailing market price and you will have
an immediate unrealized loss. Moreover, you may not be able to
sell any New Common Stock you purchase at a price equal to or
greater than the subscription price. New Common Stock issued in
this offering will be delivered following the Subscription
Rights Expiration Date, after the Rights Agent has examined and
tabulated all Rights Certificates received.
Even if the public trading market price of our
New Common Stock is above $5.00 on the date you exercise your
subscription rights, you might not be able to realize a profit
on your investment. The small existing public float of the New
Common Stock makes it impracticable to sell our stock short in
connection with a Rights exercise, and, therefore, it is very
difficult, if not impossible, to hedge your investment.
Therefore, until the New Common Stock is delivered upon
expiration of this offering, you may not be able to sell the New
Common Stock you purchase in this offering. In the five trading
days
preceding                     ,
2003, closing bid prices were quoted for an average of
only                        shares.
If the market for our New Common Stock remains small and
illiquid after the Rights Offering, your ability sell shares of
New Common Stock at a price at or above $5.00 in substantial
amounts may remain severely limited.
Once you exercise your Subscription Rights,
    you may not revoke your commitment.
Once you exercise your Subscription Rights, you
may not revoke your commitment. Therefore, even if circumstances
arise after you have subscribed in the offering that change your
mind about investing in our New Common Stock, you will
nonetheless be legally bound to proceed.
You will need to act promptly and follow
    instructions carefully if you want to exercise your Subscription
    Rights.
Eligible participants and, if applicable, brokers
acting on their behalf, who desire to purchase New Common Stock
in this Rights Offering must act promptly to ensure that all
required certificates and payments
16
Table of Contents
are actually received by the Rights Agent,
American Stock Transfer & Trust Company, before the
Subscription Rights Expiration Date. If you or your broker fail
to complete and sign the required rights certificate, send an
incorrect payment amount, or otherwise fail to follow the
subscription procedures that apply to your desired transaction,
we may, depending on the circumstances, reject your subscription
or accept it to the extent of the payment received. Neither we
nor the Rights Agent undertake to contact you concerning, or
attempt to correct, an incomplete or incorrect rights
certificate or payment or contact you concerning whether a
broker holds Subscription Rights on your behalf. We have the
sole discretion to determine whether a subscription exercise
properly follows the subscription procedures. Any personal check
used to pay for New Common Stock must clear before the
Subscription Rights Expiration Date, and the clearing process
may require five or more business days.
You should not consider the subscription
    price as an indication of the value of our company or our New
    Common Stock.
The Plan of Reorganization sets forth all the
terms and conditions of the Rights Offering, including the
subscription price. The subscription price was negotiated with
holders of loans under the Pre-Petition Credit Facility in 2002
and does not necessarily bear any relationship to our past or
future operations, cash flows, current financial condition, or
any other established criteria for value including market value
of New Common Stock. As a result, you should not consider the
subscription price as an indication of our value or that of our
New Common Stock.
The Rights Offering could result in a
    dilution to your percentage ownership of XO
    Parent.
If you currently hold shares of New Common Stock
and do not exercise any of your rights, then your percentage
ownership in XO Parent will be reduced if other eligible
participants exercise their rights. Even if you participate in
the Rights Offering, your percentage ownership of XO Parent may
be reduced depending on the number of shares for which you
subscribe relative to the subscriptions of other participants.
Risks Related to Our Operations
The wave of bankruptcies in the Internet
    and communications-related industries has diminished our
    marketing prospects and may have an adverse effect on the
    results of our operations in future periods.
We historically have provided services to, and
generated significant revenues from, customers that conduct
business in the Internet and communications-related segments.
Many businesses that operated in those segments, particularly
start-ups in the Internet service provider segment, have
liquidated, otherwise gone out of business, or modified their
business plans in ways that have significantly reduced their
need for communications services. These developments have
decreased the size of the potential market for many of our
wholesale and carrier-related services, particularly data
transport services. Those of our Internet and
communications-related customers that remain in business and
have not sought bankruptcy protection nevertheless have been
adversely affected by recent business trends in the sectors. To
the extent the credit quality of these customers deteriorates or
these customers seek bankruptcy protection, we may not be able
to collect all amounts due from them and our ability to generate
revenue in future periods from them could be adversely affected.
The failure of our operations support
    systems to perform as we expect could impair our ability to
    retain customers and obtain new customers, or provision their
    services, or result in increased capital expenditures, which
    would adversely affect our revenues or capital
    resources.
Our operations support systems are an important
factor in our success. Critical information systems used in
daily operations perform sales and order entry, provisioning,
billing and accounts receivable functions, and cost of service
verification and payment functions, particularly with respect to
facilities leased from incumbent carriers. If any of these
systems fail or do not perform as expected, it would impact our
ability to process orders and provision sales, and to bill for
services efficiently and accurately, which could cause us to
suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would
adversely affect our revenues. In additional, system failure or
performance issues could impact our ability to effectively audit
and dispute invoicing and provisioning data provided by service
providers from whom we lease
17
Table of Contents
facilities. Furthermore, problems may arise with
higher processing volumes or with additional automation
features, which could potentially result in system breakdowns
and delays and additional unanticipated expense to remedy the
defect or to replace the defective system with an alternative
system.
We are in the process of updating and replacing
software and related systems for sales tracking, order entry and
provisioning and plan to implement changes to our billing
systems later this year to support our growth and improve the
order and provisioning processes. We have experienced, and may
continue to experience, delays and related problems in
processing orders, provisioning sales and billing in connection
with the transition to these new systems. Our ability to
efficiently and accurately provision new orders for services on
a timely basis is necessary for us to begin to generate revenue
related to those services. If the delays or related problems
continue, or if any unforeseen problems emerge in connection
with our migration to the new provisioning software and systems,
delays and errors may occur in the provisioning process, which
could significantly increase the time until an order for new
service can begin to generate revenue, which could have a
material adverse effect on our operations.
It is expensive and difficult to switch new
    customers to our network, and lack of cooperation of the
    incumbent carrier can slow the new customer connection process,
    which could impact our ability to compete.
It is expensive and difficult for us to switch a
new customer to our network because:
•
we charge the potential customer certain one-time
    installation fees, and, although the fees are less than the cost
    to install a new customer, they may act as a deterrent to become
    our customer, and
•
we require cooperation from the incumbent carrier
    in instances where there is no direct connection between the
    customer and our network, which can complicate and add to the
    time that it takes to provision a new customer's service.
Our principal competitors, the incumbent
carriers, are already established providers of local telephone
services to all or virtually all telephone subscribers within
their respective service areas. Their physical connections from
their premises to those of their customers are expensive and
difficult to duplicate. To complete the new customer
provisioning process, we rely on the incumbent carrier to
process certain information. The incumbent carriers have a
financial interest in retaining their customers, which could
reduce their willingness to cooperate with our new customer
provisioning requests.
We depend on our key personnel and
    qualified technical staff and, if we lose their services, our
    ability to manage the day-to-day aspects of our complex network
    will be weakened. We may not be able to hire and retain
    qualified personnel, which could adversely affect our operating
    results.
We are highly dependent on the services of our
management and other key personnel. The loss of the services of
our senior executive management team or other key personnel
could cause us to make less successful strategic decisions,
which could hinder the introduction of new services or make us
less prepared for technological or marketing problems, which
could reduce our ability to serve our customers or lower the
quality of our services.
We believe that a critical component for our
success will be the attraction and retention of qualified,
professional technical and sales personnel. We have experienced
intense competition for qualified personnel in our business with
the sales, technical and other skill sets that we seek. We may
not be able to attract, develop, motivate and retain experienced
and innovative personnel. If we fail to do so, there will be an
adverse effect on our ability to generate revenue and operate
our business.
Our rights to the use of the dark fiber
    that make up our network may be affected by the financial health
    of our fiber providers.
We hold some of the fiber that makes up the
foundation of our network, particularly in our inter-city
network, through long-term leases or indefeasible right of use
agreements. A bankruptcy or financial collapse of one of these
fiber providers could result in a loss of our rights under such
leases and agreements with the
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provider, which in turn could have a negative
impact on the integrity of our network and ultimately on our
results of operations. Since early 2001, there has been
increasing financial pressure on some of our fiber providers as
part of the overall weakening of the telecommunications market.
Several such providers have sought bankruptcy protection. To our
knowledge, the rights of the holder of such rights in strands of
fiber have never been addressed by the judiciary at the state or
federal level in bankruptcy and, therefore, under such
circumstances, our rights under dark fiber agreements would be
unclear.
We may not be able to continue to connect
    our network to the incumbent carrier's network or maintain
    Internet peering arrangements on favorable terms, which would
    impair our growth and performance.
We must be a party to interconnection agreements
with the incumbent carrier and certain independent carriers in
order to connect our customers to the public telephone network.
If we are unable to renegotiate or maintain interconnection
agreements in all of our markets on favorable terms, it could
adversely affect our ability to provide services in the affected
markets.
Peering agreements with Internet service
providers allow us to access the Internet and exchange transit
for free with these providers. Depending on the relative size of
the carriers involved, these exchanges may be made without
settlement charge. Recently, many Internet service providers
that previously offered peering have reduced or eliminated
peering relationships or are establishing new, more restrictive
criteria for peering and an increasing number of these service
providers are seeking to impose charges for transit. Increases
in costs associated with Internet and exchange transit could
have a material adverse effect on our margins for our products
that require Internet access. We may not be able to renegotiate
or maintain peering arrangements on favorable terms, which would
impair our growth and performance.
If our selection of IP technology is
    incorrect, ineffective or unacceptably costly, implementation of
    our business strategy could be delayed, which would adversely
    affect our growth and operating results.
We rely on IP technology as the basis for our
metro and intercity networks. Integrating this technology into
our network may prove difficult and may be subject to delays. In
addition, affordable IP customer premise equipment may not
become available in a timely fashion, if at all. If the
technology choices we make prove to be incorrect, ineffective or
unacceptably costly, our strategy of meeting our customer's
demand for existing and future telecommunications services using
IP technology could fail, which would adversely affect our
growth and operating results.
Physical space limitations in office
    buildings and landlord demands for fees or revenue sharing could
    limit our ability to connect customers to our networks and
    increase our costs, which would adversely impact our
    results.
In some circumstances, connecting a customer who
is a tenant in an office building to our network requires
installation of in-building cabling through the building's
risers from the customer's office to our fiber in the
street or building equipment room, or our antenna on the roof.
In some office buildings, particularly the premier buildings in
the largest markets, the risers are already close to their
maximum physical capacity due to the entry of other competitive
carriers into the market. Fixed wireless direct connections
require us to obtain access to rooftops from building owners.
Moreover, the owners of these buildings are increasingly
requiring competitive telecommunications service providers like
us to pay fees or otherwise share revenue as a condition of
access to risers and rooftops. Although we generally do not
agree to revenue sharing arrangements, we may continue to be
required to pay fees to access buildings, particularly for
building located in larger markets, which would reduce our
operating margins.
Our reliance on third-party DSL service
    providers could affect adversely our ability to provide service
    to our DSL customers.
We provide a significant portion of our DSL
service through wholesale arrangements with incumbent carriers
and other DSL service providers. To the extent that such DSL
service providers are unable to provide wholesale DSL service to
us, we in turn may be unable to provide that service to our
customers if we cannot
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provide service on our own DSL equipment or
obtain wholesale service from another DSL service provider. In
addition, the transition of our DSL customers' services to
another source of DSL service may cause potential disruptions
for the affected DSL customers' services. If we are unable
to serve these customers, we will lose the related revenues.
Risks Related to Competition and Our
Industry
Technological advances and regulatory
    changes are eroding traditional barriers between formerly
    distinct telecommunications markets, which could increase the
    competition we face and put downward pressure on prices, which
    could impair our results.
New technologies, such as voice-over-IP, and
regulatory changes — particularly those permitting
incumbent local telephone companies to provide long distance
services — are blurring the distinctions between
traditional and emerging telecommunications markets. In
addition, the increasing importance of data services has focused
the attention of most telecommunications companies on this
growing sector. As a result, a competitor in any of our business
areas is potentially a competitor in our other business areas,
which could impair our prospects, put downward pressure on
prices and adversely affect our operating results.
We face competition in each of our markets
principally from the incumbent carrier in that market, but also
from recent and potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into
the local exchange marketplace and incumbent carriers seeking to
enter into the long distance market as they are granted the
regulatory authority to do so. This competition places downward
pressure on prices for local and long distance telephone service
and data services, which can adversely affect our operating
results. In addition, we could face competition from other
companies, such as other competitive carriers, cable television
companies, microwave carriers, wireless telephone system
operators and private networks built by large end-users. If we
are not able to compete effectively with these industry
participants, our operating results could be adversely affected.
Many of our competitors have superior
    resources, which could place us at a cost and price
    disadvantage.
Many of our current and potential competitors
have market presence, engineering, technical and marketing
capabilities and financial, personnel and other resources
substantially greater than ours. As a result, some of our
competitors can raise capital at a lower cost than we can, and
they may be able to adapt more swiftly to new or emerging
technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily,
and devote greater resources to the development, marketing and
sale of products and services than we can. Also, our
competitors' greater brand name recognition may require us
to price our services at lower levels in order to win business.
Finally, our competitors' cost advantages give them the
ability to reduce their prices for an extended period of time if
they so choose.
The technologies we use may become
    obsolete, which would limit our ability to compete effectively
    and adversely impact our results.
The telecommunications industry is subject to
rapid and significant changes in technology. Most technologies
and equipment that we use or will use, including wireline and
wireless transmission technologies, circuit and packet switching
technologies, multiplexing technologies, data transmission
technologies, including the DSL, ATM and IP technologies, and
server and storage technologies may become obsolete. If we do
not replace or upgrade technology and equipment that becomes
obsolete, we will be unable to compete effectively because we
will not be able to meet the expectations of our customers,
which could cause our results to suffer.
The introduction of new technologies may reduce
the cost of services similar to those that we plan to provide.
As a result, our most significant competitors in the future may
be new entrants to the telecommunications industry. These new
entrants may not be burdened by an installed base of outdated
equipment and, therefore, may be able to more quickly respond to
customer demands.
Additionally, the markets for data and
Internet-related services are characterized by rapidly changing
technology, evolving industry standards, changing customer
needs, emerging competition and frequent new
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product and service introductions. The future
success of our data services business will depend, in part, on
our ability to accomplish the following in a timely and
cost-effective manner:
•
effectively use leading technologies and update
    or convert from existing technologies and equipment;
•
continue to develop technical expertise;
•
develop new services that meet changing customer
    needs; and
•
influence and respond to emerging industry
    standards and other technological changes.
Our pursuit of necessary technological advances
may require substantial time and expense.
Our company and industry are highly
    regulated, which restricts our ability to compete in our target
    markets and imposes substantial compliance costs on us that
    adversely impact our results.
We are subject to varying degrees of regulation
from federal, state and local authorities. This regulation
imposes substantial compliance costs on us. It also restricts
our ability to compete. For example, in each state in which we
desire to offer our services, we are required to obtain
authorization from the appropriate state commission. If any
required authorization for any of our markets or services is
revoked or otherwise terminated, our ability to operate in the
affected markets would be adversely affected.
Attempts to limit the basic competitive
    framework of the Telecom Act could interfere with the successful
    implementation of our business plan.
Successful implementation of our business plan is
predicated on the assumption that the basic framework for
competition in the local exchange services market established by
the Telecom Act will remain in place. We expect that there will
be attempts to limit or eliminate this basic framework through a
combination of federal legislation, new rulemaking by the FCC
and challenges to existing and proposed regulations by the
RBOCs. It is not possible to predict the nature of any such
action or its impact on our business and operations.
The requirement that we obtain permits and
    rights-of-way to develop our network increases our cost of doing
    business and could adversely affect our performance and
    results.
In order for us to acquire and develop our fiber
networks, we must obtain local franchises and other permits, as
well as rights-of-way and fiber capacity from entities such as
incumbent carriers and other utilities, railroads, long distance
companies, state highway authorities, local governments and
transit authorities. The process of obtaining these permits and
rights-of-way is time-consuming and burdensome and increases our
cost of doing business.
We may not be able to maintain our existing
franchises, permits and rights-of-way that we need for our
business. We may also be unable to obtain and maintain the other
franchises, permits and rights that we require. A sustained and
material failure to obtain or maintain these rights could
materially adversely affect our performance and operating
results in the affected metropolitan area.
Risks Related to Liquidity and Financial
Resources
We incurred a substantial net loss in 2002
    and, in the near term, will not generate funds from operations
    sufficient to meet all of our cash requirements.
For each period since inception, we have incurred
substantial net losses. For 2002, we posted a net loss
attributable to common stockholders of approximately
$3.4 billion and a loss from operations of
$1.2 billion. In the near term, our existing and projected
operations are not expected to generate cash flows sufficient to
pay our expected operating expenses, fund our capital
expenditure requirements.
The covenants in our New Credit Agreement
    restrict our financial and operational flexibility, which could
    have an adverse affect on our results of
    operations.
Our New Credit Agreement contains covenants that
require us to maintain certain amounts of unrestricted cash,
require us to achieve specified operating results, and restrict,
among other things, the amount of our capital expenditures, our
ability to borrow money, grant additional liens on our assets,
make
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particular types of investments or other
restricted payments, sell assets or merge or consolidate. Arnos
Corp., a company owned by Mr. Icahn, holds approximately
85% of the principal amount of the loans outstanding under the
New Credit Agreement. Because amendments to or waivers of
covenants under the New Credit Agreement generally require the
approval or consent of holders of only a majority of the
outstanding principal amount under the New Credit Agreement,
decisions whether to amend or waive compliance with such
covenants by the holders of loans under the New Credit Agreement
can be made by Arnos Corp., and ultimately Mr. Icahn,
whether or not the other holders consent.
The security for the New Credit Agreement
consists of substantially all of the assets of XO Parent and our
subsidiaries. A default under the New Credit Agreement could
adversely affect our rights under other commercial agreements.
The net proceeds of this offering will be used to
repay our outstanding secured debt under the New Credit
Agreement.
The New Credit Agreement and the existence of the
loans under the New Credit Agreement also could affect our
financial and operational flexibility, as follows:
•
they may impair our ability to obtain additional
    financing in the future;
•
they may limit our flexibility in planning for or
    reacting to changes in market conditions; and
•
they may cause us to be more vulnerable in the
    event of a downturn in our business.
Our investment in Global Crossing has
    reduced our cash available for operating needs, and we cannot
    assure you that we will recover the value of that
    investment.
We paid approximately $160.7 million to
purchase $766.6 million principal amount of secured bank
debt of Global Crossing Holdings Ltd. and Global Crossing North
America, Inc., telecommunications companies which are currently
in reorganization proceedings. As a result, we hold
approximately 34.63% of the $2.214 billion principal amount
of such debt outstanding. We made an offer to acquire any and
all of the outstanding senior secured bank debt of Global
Crossing in connection with an attempt to purchase a controlling
interest in those debtors, or their assets and business. We may
in the future make additional offers to acquire control of, or
otherwise invest in, lend to or otherwise do business with
Global Crossing. If we do so, we do not know what the terms of
any such offers would be, or whether any such offers will be
accepted. Any such future offers, if made for cash
consideration, could significantly and adversely affect our
liquidity.
The Global Crossing bankruptcy process remains
subject to significant uncertainties and could continue for a
substantial period of time. If we elect to liquidate our
investment in Global Crossing senior secured debt, we cannot
assure you that we will be able to dispose of that investment
for an amount greater than or equal to the amount we paid for
it, or that any distribution be receive in respect of it upon
consummation of Global Crossing's bankruptcy case will have
a value greater than the amount of our investment.
As a result of the recent investment
    history of the telecommunications sector, the access of
    telecommunications service providers like us to capital for
    growth or acquisitions is likely to be limited.
Telecommunications companies, including us, have
experienced massive defaults on debt securities and bank loans
in recent years, as well as the elimination of equity positions
in the ensuing bankruptcy reorganizations. This experience has
made the industry one of the worst-performing investment sectors
in recent years. We expect that this history has led to
extremely limited, if any, access to the capital markets by
companies in our industry, and that this situation may continue
for some time. As a result, we may have to rely entirely on cash
on hand and internally generated funds from operations to
finance our business in the future, which would diminish our
financial and operational flexibility, and diminish our ability
to take advantage of opportunities for expansion of our network
and for growth through business acquisitions.
We may be required to make cash payments in
    respect of certain disputed administrative claims in our
    bankruptcy proceedings.
Houlihan, Lokey, Howard & Zuchin has
submitted a claim for professional fees in connection with our
reorganization of approximately $18 million, to which we
have filed an objection. If our objection is overruled, we could
be required to pay some or all of the claimed amount in cash.
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In addition, several alleged creditors have
presented claims in our reorganization proceeding whose amounts
we are disputing in whole or in part or which are indeterminate
on their face.
Risks Related to Our New Common
Stock
A company owned and controlled by
    Mr. Carl Icahn is our majority stockholder.
Cardiff, a company owned and controlled by
Mr. Carl Icahn, beneficially owns over 80% of our
outstanding New Common Stock. As a result, Mr. Icahn has
the power to elect all of our directors. Under applicable law
and our certificate of incorporation and by-laws, certain
actions can not be taken without the approval of holders of a
majority of our voting stock including, without limitation,
mergers and the sale of substantially all of our assets and
amendments to our certificate of incorporation and by-laws.
We could be liable for the funding and
    termination liabilities of certain pension plans sponsored by
    affiliates of Mr. Carl Icahn.
As discussed above, affiliates of Mr. Icahn
hold over 80% of the outstanding New Common Stock of XO Parent.
Applicable pension and tax laws make each member of a plan
sponsor's "controlled group" (generally defined
as entities in which there is at least an 80% common ownership
interest) jointly and severally liable for certain pension plan
obligations of a plan sponsor that is a member of the controlled
group. These pension obligations include ongoing contributions
to fund the plan, as well as liability for any unfunded
liabilities that may exist at the time the plan is terminated.
In addition, the failure to pay these pension obligations when
due may result in the creation of liens in favor of the pension
plan or the Pension Benefit Guaranty Corporation, or the PBGC,
against the assets of each member of the plan sponsor's
controlled group.
As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn's affiliates, XO Parent
and its subsidiaries will be subject to the pension liabilities
of any entities in which Mr. Icahn has a direct or indirect
ownership interest of at least 80%, which includes ACF
Industries LLC, which is the sponsor of certain pension plans.
As most recently determined by the ACF plans' actuaries,
pension plans maintained by ACF are underfunded in the aggregate
by approximately $14 million on an ongoing actuarial basis
and by approximately $102 million if those plans were
terminated. As a member of the same controlled group, XO Parent
and each of its subsidiaries would be liable for any failure of
ACF to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of the ACF pension plans.
The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as we remain a member of the ACF controlled
group, certain other "reportable events," including
certain extraordinary dividends and stock redemptions, must be
reported to the PBGC.
Because our New Common Stock is not listed
    for quotation on either the Nasdaq National or Small Cap Market,
    we are not subject to certain reporting and corporate governance
    provisions.
The New Common Stock is not quoted on the Nasdaq
National or SmallCap Markets. Companies whose shares are quoted
on the Nasdaq National Market and the Nasdaq SmallCap Market are
required to comply with the Nasdaq Marketplace Rules, which, as
required by the Sarbanes-Oxley Act of 2002, contain or will
contain corporate governance requirements in addition to those
contemplated by the Delaware General Corporation Law and the
federal securities laws, including requirements related to:
•
Distribution of interim reports
•
Solicitation of proxies
•
Independent directors
•
Audit committees
•
Stockholder approval
•
Stockholder voting rights
•
Auditor peer review
As our New Common Stock is not so quoted, we are
not subject to these requirements. As a result, for example, we
are not required to comply with recently adopted rules that will
require listed companies to have increased independent director
representation on their boards of directors or an audit
committee composed
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solely of independent directors. We do not
currently intend to seek a listing on any exchange or the Nasdaq
National Market or the Nasdaq SmallCap Market.
Limited liquidity of our New Common Stock
    may result in delays in your ability to sell your common stock
    or lower your returns; you should be prepared to hold your
    investment indefinitely.
Although, there currently is a limited trading
market for our New Common Stock on the OTCBB and in the Pink
Sheets, we cannot assure that an active trading market for our
stock will exist in the future. Unlike the Nasdaq National
Market and Small Cap Market where the issuer applies for listing
of its securities, an active and orderly trading market on the
OTCBB and in the Pink Sheets depends on the existence, and
individual decisions, of willing buyers and sellers at any given
time. We will not have any control over the willingness of any
such parties to create a trading market.
As of the date of this prospectus, there were
proposals pending at the OTCBB which would eliminate the OTCBB.
If such proposals are adopted, the only trading market for your
securities would be in the Pink Sheets. If the OTCBB and/or in
the Pink Sheets' trading market does not continue or
becomes more sporadic, the market value of our New Common Stock
could be affected adversely and it would become difficult to buy
or sell shares on short notice. Consequently, you should be
prepared to hold your New Common Stock indefinitely. We
currently have no plans to apply or qualify for listing on any
other market or exchange.
If shares of New Common Stock trade at less than
$5.00 per share on the OTCBB or in the Pink Sheets, under SEC
regulations the New Common Stock may be defined as "penny
stock," which could adversely affect the market liquidity
of our New Common Stock during such period. These rules impose
additional sales practice requirements on broker-dealers that
sell low priced securities to persons other than established
customers and institutional accredited investors and required
the delivery of a disclosure schedule explaining the nature and
risks of the penny stock market. As a result, the ability or
willingness of broker-dealers to sell or make a market in our
New Common Stock may decline.
Future sales of our New Common Stock could
    adversely affect its price and/or our ability to raise
    capital.
Future sales of substantial amounts of New Common
Stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the New Common
Stock and our ability to raise capital.
As of March 31, 2003, there were
approximately 95.0 million shares of New Common Stock
outstanding. The shares of New Common Stock owned by Cardiff, an
entity owned and controlled by Mr. Icahn, are restricted
shares that may be sold only under a registration statement or
an exemption from federal securities registration requirements.
Although Cardiff holds restricted stock, it may cause us to
register sales of that stock at any time, whether pursuant to
its contractual registration rights or otherwise.
Pursuant to our Plan of Reorganization, we have
issued three series of warrants to purchase up to an aggregate
of approximately 9.5 million, 7.1 million and
7.1 million additional shares of New Common Stock, at
exercise prices of $6.25, $7.50 and $10.00 per share,
respectively. The warrants will expire on January 16, 2010.
In addition, if the eligible participants exercise all the
rights in the Rights Offering, up to an additional approximately
43.3 million shares of New Common Stock will be issued to
such eligible holders.
We have options outstanding to purchase
approximately 11.4 million shares of New Common Stock
outstanding under our stock incentive plan as of March 31,
2003, with an exercise price of $5.00 per share. Unless
surrendered or cancelled earlier under the terms of the stock
incentive plan, those options will expire in 2013. In addition,
our stock incentive plan authorizes future grants of options to
purchase New Common Stock, or awards of restricted New Common
Stock, with respect to an additional 6.2 million shares of
New Common Stock in the aggregate.
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Other Risks
Our adoption of fresh start accounting
    makes comparisons of our financial position and results of
    operations with those of prior periods more
    difficult.
Due to our emergence from bankruptcy pursuant to
the Plan of Reorganization, we implemented fresh start
accounting for periods following the restructuring. Fresh start
accounting required us to restate all our assets and liabilities
to reflect their respective fair values. As a result, the
consolidated financial statements for periods after our
emergence from bankruptcy are not comparable to our consolidated
financial statements for the periods prior to our emergence from
bankruptcy, which were prepared on an historical basis. The
application of fresh start accounting may make it more difficult
to compare our post-emergence operations and results to those in
pre-emergence periods.
There may be risks related to our use of
    Arthur Andersen as our independent auditors for the year ended
    December 31, 2001 and prior periods.
Arthur Andersen, LLP, our former independent
public accountants, which audited our financial statements for
the years ended December 31, 2001 and 2000, was found
guilty on June 15, 2002 of federal obstruction of justice
charges in connection with the federal government's
investigation of Enron Corp. Arthur Andersen ceased practicing
before the SEC effective August 31, 2002. Based on our
understanding of Arthur Andersen's financial condition, it
may be unable to satisfy any claims that arise out of its
provision of auditing and other services to us, including claims
that may arise out of Arthur Andersen's audits of our
consolidated financial statements in years prior to 2002. The
SEC has said that it will continue to accept financial
statements audited or reviewed by Arthur Andersen in compliance
with applicable rules and orders issued by the SEC in March 2002
in connection therewith.
When we seek to access the capital markets in an
offering that requires registration of securities under the
Securities Act of 1933, as will be the case in the Rights
Offering, current SEC rules require that three years of audited
financial statements be included or incorporated by reference
into the related prospectus. These rules would require that we
present financial statements for one or more fiscal years that
were audited by Arthur Andersen, until our audited financial
statements for the year ending December 31, 2004 become
available. The SEC recently adopted rules that exempt certain
issuers that file registration statements under the Securities
Act that contain financial statements audited by Arthur Andersen
from having to comply with regulations that require such issuers
to present manually signed accountants' reports and written
consents of Arthur Andersen to include such financial statements
in the registration statement. If the SEC ceases accepting
financial statements audited by Arthur Andersen without such
reports and consents, we could be precluded from filing such a
registration statement, unless our current independent auditors,
Ernst & Young LLP, or another independent accounting firm,
audits the financial statements for the years ended
December 31, 2001 and 2000, which originally were audited
by Arthur Andersen. The time to complete such an audit would
delay, and could prevent, us from accessing the capital markets.
SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION
Some statements and information contained in this
Prospectus are not historical facts, but are
"forward-looking statements," as such term is defined
in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can be identified by the use of
forward-looking terminology such as "believes,"
"expects," "plans," "may,"
"will," "would," "could,"
"should," or "anticipates" or the negative
of these words or other variations of these words or other
comparable words, or by discussions of strategy that involve
risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding:
•
our services, including the development and
    deployment of data products and services based on IP, Ethernet
    and other technologies and strategies to expand our targeted
    customer base and broaden our sales channels;
•
the operation of our network, including with
    respect to the development of IP protocols;
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•
liquidity and financial resources, including
    anticipated capital expenditures, funding of capital
    expenditures and anticipated levels of indebtedness; and
•
trends related to and expectations regarding the
    results of operations in future periods, including but not
    limited to those statements set forth in "Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations" below.
All such forward-looking statements are qualified
by the inherent risks and uncertainties surrounding expectations
generally, and also may materially differ from our actual
experience involving any one or more of these matters and
subject areas. The operation and results of our business also
may be subject to the effect of other risks and uncertainties,
in addition to the relevant qualifying factors identified in the
above "Risk Factors" section and elsewhere in this
annual report and in the documents incorporated by reference in
this annual report, including, but not limited to:
•
general economic conditions in the geographic
    areas that we are targeting for communications services;
•
the ability to achieve and maintain market
    penetration and average per customer revenue levels sufficient
    to provide financial viability to our business;
•
the quality and price of similar or comparable
    communications services offered or to be offered by our current
    or future competitors; and
•
future telecommunications-related legislation or
    regulatory actions.
Many factors mentioned in our discussion in this
prospectus will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed.
Actual future results may vary materially.
We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future events or otherwise. You are advised,
however, to consult any additional disclosures we make in our
Forms 10-K, 10-Q and 8-K reports to the SEC. Also note that we
provide a cautionary discussion of risks and uncertainties under
"Risk Factors" on page
[     ] of this prospectus. These are
factors that we think could cause our actual results to differ
materially from expected results. Other factors besides those
listed here could also adversely affect us.
26
Table of Contents
THE OFFERING
Before exercising any rights, you should read
carefully the information set forth under the "Risk
Factors" beginning on
page                               .
The Rights
We are offering up to 43,333,333 shares of our
common stock, $0.01 par value, which we refer to as New Common
Stock, in a Rights Offering. Certain of our pre-petition
unsecured creditors and equity security holders as of November
15, 2002, whose claims and interests were discharged or
cancelled by the confirmation of our Plan of Reorganization, are
entitled to participate in the Rights Offering pursuant to the
terms of our Plan of Reorganization. Each Subscription Right
entitles a holder to purchase one share of New Common Stock for
a subscription price of $5.00 per share. On
[                    ,
2003] the last reported sale price for our New Common Stock on
the OTCBB was
$[          ] per
share, with a bid price of
$          for
up
to                       shares
of New Common Stock and an ask price of
$          for
up
to                       shares
of New Common Stock at the close of the market.
Subscription Rights may be exercised at any time
during the subscription period, which commences on the date of
this Prospectus and ends at 5:00 p.m., New York City Time,
on                     ,
2003.
Subscription Rights are evidenced by rights
certificates. As explained in "Subscription Rights"
below, certain eligible participants are entitled to
Subscription Rights that include both basic subscription
privileges and oversubscription privileges while Subscription
Rights available to others include only oversubscription
privileges. If you are entitled to basic subscription
privileges, your rights certificate specifies the number of
shares of New Common Stock you are entitled to purchase pursuant
to those privileges. All eligible participants electing to
purchase New Common Stock in the Rights Offering are asked to
indicate the total number of shares of New Common Stock they
wish to purchase on their rights certificate. The method by
which Subscription Rights may be exercised and shares of New
Common Stock paid for is explained in the sections below
entitled "Procedure."
Subscription Rights are non-transferable. Shares
of New Common Stock issued in the Rights Offering are not listed
or quoted on any exchange, but there currently is a limited
trading market for the New Common Stock on the OTCBB and in the
Pink Sheets. Fractional shares will not be issued upon exercise
of Subscription Rights.
The net proceeds of this offering will be used to
repay our outstanding senior secured debt.
Record Date and Eligible
Participants
The record date of the Rights Offering is
November 15, 2002. Only holders of pre-petition senior
notes, general unsecured claims, pre-petition subordinated
notes, pre-petition preferred stock and pre-petition common
stock on November 15, 2002 will have the opportunity to
exercise Subscription Rights to subscribe for any or all of the
New Common Stock in the Rights Offering, subject to the priority
and allocation rules described below.
The following series of pre-petition senior notes
of XO Parent were outstanding as of November 15, 2002:
•
12 1/2% Senior Notes due 2006 (CUSIP Nos.
    65333A AC 2, 65333A AA 6 and 65333A AB 4);
•
9 5/8% Senior Notes due 2007 (CUSIP
    No. 65333H AA 1);
•
9% Senior Notes due 2008 (CUSIP Nos. 65333H AB 9,
    65333H AC 7 and 65333H AD 5);
•
9.45% Senior Discount Notes due 2008 (CUSIP Nos.
    65333H AE 3, 65333H AF 0 and 65333H AG 8);
•
10 3/4% Senior Notes due 2008 (CUSIP Nos.
    65333H AH 6 and 65333H AJ 2);
•
12 1/4% Senior Discount Notes due 2009
    (CUSIP No. 65333H AL 7);
27
Table of Contents
•
10 3/4% Senior Notes due 2009 (CUSIP
    No. 65333H AK 9);
•
12 1/8% Senior Discount Notes due 2009
    (CUSIP Nos. 65333H AN 3 and 65333H AQ 6);
•
10 1/2% Senior Notes due 2009 (CUSIP Nos.
    65333H AP 8 and 65333H AM 5); and
•
12 3/4% Senior Notes due 2007 (CUSIP Nos.
    65333H AR 4 and 20589R AC 1).
The following series of pre-petition subordinated
notes of XO Parent was outstanding as of November 15, 2002:
•
5 3/4% Convertible Subordinated Notes due
    2009 (CUSIP Nos. 983764 AC 5, 983764 AA9 and 983764 AB5)
The following series of pre-petition preferred
stock of XO Parent were outstanding as of November 15, 2002
and are eligible to participate in the Rights Offering:
•
14% Series A Senior Exchangeable Preferred
    Stock (CUSIP Nos. 983764 20 0, 983764 30 9 and 983764 40 8,
    983764 86 1 and 983764 87 9);
•
6 1/2% Series B Convertible Preferred
    Stock (CUSIP Nos. 983764 80 4 and 983764 85 3);
•
13 1/2% Series E Senior Exchangeable
    Preferred Stock Due 2010 (CUSIP Nos. 983764 50 7, 983764 60 6
    and 983764 70 5);
•
7% Series F Convertible Redeemable Preferred
    Stock Due 2010;
Certain investment funds affiliated with
Forstmann Little & Co., which collectively held all
outstanding shares of XO Parent's pre-petition
Series C Cumulative Convertible Participating Preferred
Stock, Series D Convertible Participating Preferred Stock,
Series G Cumulative Convertible Participating Preferred
Stock and Series H Convertible Participating Preferred
Stock, have declined and waived any opportunity they might have
been entitled to, or offered, to exercise or receive
Subscription Rights in the Rights Offering.
The following series of pre-petition common stock
of XO Parent were outstanding as of November 15, 2002:
•
class A common stock, par value $0.02 per share
    (CUSIP Nos. 983764 10 1 and 983764 88 7); and
•
class B common stock, par value $0.02 per share.
Certain holders of pre-petition class A common
stock, including certain investment funds affiliated with
Forstmann Little & Co., have declined and waived any
opportunity they might have been entitled to, or offered, to
exercise or receive Subscription Rights in the Rights Offering.
Therefore, the actual amount of guaranteed rights to subscribe
to be distributed to other holders will be increased accordingly.
Subscription Price
The subscription price is $5.00 per share,
payable in United Stated dollars by personal check,
cashier's check, money order or wire transfer. All payments
must be delivered to the Rights Agent and cleared on or before
the Subscription Rights Expiration Date.
Subscription Rights
If you are an eligible participant in the Rights
Offering you will receive Subscription Rights with either
(a) a basic subscription privilege and an oversubscription
privilege or (b) an oversubscription privilege.
Basic
Subscription Privilege
A basic subscription privilege in a Subscription
Right entitles eligible participants have their Subscription
Right exercisable into a fixed minimum number of shares of New
Common Stock in the initial allocation of the Rights Offering.
Only eligible participants who, as of November 15, 2002,
held claims in our Chapter 11
28
Table of Contents
reorganization proceedings as holders of general
unsecured claims and holders of pre-petition senior notes will
be allocated Subscription Rights with basic subscription
privileges.
Oversubscription
Privilege
All Subscription Rights have oversubscription
privileges, which entitle the holder to a portion of the shares
remaining after exercise of the basic subscription privilege.
If any eligible participant does not exercise its
basic subscription privileges in full (by non-payment, failing
to timely return the rights certificate or otherwise), other
eligible participants will have the opportunity to exercise
their oversubscription privileges in accordance with their
position in the pro ration procedures described on
pages   -  .
Holders of pre-petition class A common stock will
receive Subscription Rights with oversubscription privileges
exercisable for at least 2,500,000 shares of New Common Stock.
Legal counsel for the class of pre-petition class A common
stockholders will receive Subscription Rights of 25% of such
initial distribution to the category of pre-petition class A
common stock as part of their attorney's fees in the
settlement of certain stockholder class action litigation. See
"The Offering — Fees and Expenses" on
page   .
In exercising your oversubscription privileges,
you must specify the number of shares of New Common Stock that
you elect to purchase pursuant to the oversubscription privilege
and must pay the full subscription price for all the shares of
New Common Stock you are electing to purchase. If we do not
allocate to you all of the shares of New Common Stock you have
subscribed for under your oversubscription privileges, we expect
to refund by mail to you any payment you have made for shares
which are not available to issue to you within fifteen business
days after the Subscription Rights Expiration Date. Interest
will not be payable on amounts refunded.
Expiration Time and Date.
The Subscription Rights expire
on                               at
5:00 p.m. New York City time, the Subscription Rights Expiration
Date. Subscription Rights (including the basic subscription
privileges and/or oversubscription privileges contained therein)
must be exercised prior to the Subscription Rights Expiration
Date to be valid. Any Subscription Right not exercised by the
Subscription Rights Expiration Date will be null and void.
In order to exercise Subscription Rights in a
timely manner, you must ensure that the Rights Agent actually
receives, prior to Subscription Rights Expiration Date, the
properly executed and completed rights certificate together with
full payment for all New Common Stock you wish to purchase.
No Revocation
You will not be allowed to revoke or change your
exercise of Subscription Rights after you send in your
subscription forms and payment, even if you later learn new or
additional information about us that you consider to be
unfavorable.
Not Transferable
Your rights certificates are not transferable and
are only exercisable by the record holder of such certificate.
Mailing of Rights Certificates and Record
Holders
The Rights Agent will be sending a rights
certificate to each eligible participant or record holder, as
applicable, along with this prospectus and related instructions
to evidence the Subscription Rights. To exercise Subscription
Rights, you must fill out and sign the rights certificate and
timely deliver it with full payment for the shares of New Common
Stock to be purchased.
If you own pre-petition XO Parent securities held
in a brokerage, bank or other custodial or nominee account, to
exercise your Subscription Rights you must promptly send the
proper instruction form to the
29
Table of Contents
person holding your securities. Your broker,
dealer, depository or custodian bank or other person holding
your securities is the record holder of your securities and will
have to act on your behalf in order for you to exercise your
Subscription Rights. We have asked your broker, dealer or other
nominee holders of certain categories of our pre-petition
securities to contact the beneficial owners to obtain
instructions concerning Subscription Rights the beneficial
owners it represents are entitled to exercise.
If you are a holder of a claim or security
entitled to receive Subscription Rights in the Plan of
Reorganization and did not receive a Rights Certificate,
received a damaged Rights Certificate or lost your Rights
Certificate, or if you have any questions concerning the
procedures for exercising your Rights, please call the
Information Agent at (212) 929-5500 or Toll-Free (800)
322-2885.
Foreign and Unknown Addresses
We are not mailing rights certificates to
stockholders whose addresses are outside the United States or
who have an APO or FPO address. In those cases, the rights
certificates will be held by the Rights Agent for those eligible
participants. To exercise their Subscription Rights, these
eligible participants must notify the Rights Agent prior to
11:00 a.m., New York City time, on the third business day
prior to the Subscription Rights Expiration Date.
Right to Block Exercise Due to Regulatory
Issues
We reserve the right to refuse the exercise of
Subscription Rights by any holder of Subscription Rights who
would, in our opinion, be required to obtain prior clearance or
approval from any U.S. state or federal or regulatory
authorities for the exercise of rights or ownership of
additional shares of New Common Stock if, at the Subscription
Rights Expiration Date, this clearance or approval has not been
obtained. We are not undertaking to pay any expenses incurred in
seeking such clearance or approval.
We are not offering or selling, or soliciting any
purchase of, shares in any state or other jurisdiction in which
this offering is not permitted. We reserve the right to delay
the commencement of this offering in certain states or other
jurisdictions if necessary to comply with local laws. However,
we may elect not to offer Subscription Rights to residents of
any state or other jurisdiction whose law would require a change
in this offering in order to carry out this offering in such
state or jurisdiction.
Procedure
Please do not send rights certificates or related
forms to us. Please send the properly completed and executed
form of rights certificate with full payment to the Rights Agent
for this offering, American Transfer & Trust Company.
You should read carefully the rights certificate
and related instructions and forms which accompany this
prospectus. You should call MacKenzie Partners, Inc., the
Information Agent for this offering, at the address and
telephone number listed below under the caption "Questions;
Additional Information" promptly with any questions you may
have.
All shares of New Common Stock issuable upon
exercise of the Subscription Rights will be offered
simultaneously throughout the thirty day period ending on the
Subscription Rights Expiration Date on a contingent basis for
all Subscription Rights other than the first allocation to the
holders of pre-petition general unsecured claims and
pre-petition senior notes pursuant to the basic subscription
privilege described above.
Method of
Exercise of Rights.
If you are entitled to purchase shares of New
Common Stock pursuant to the Rights Offering, you must
(a) complete and sign your original rights
certificate (copies will not be accepted) and
30
Table of Contents
(b) return the signed original rights
certificate in the envelope provided, together with payment for
all shares of New Common Stock subscribed for in the form of
either:
(i) a check, bank draft, cashier's
    check or money order for the full number of shares of New Common
    Stock subscribed, including any over-subscription shares,
    payable to: American Stock Transfer & Trust Company as
    Rights Agent-XO Communications or
(ii) a wire transfer of payment and
    notification that payment for the shares of New Common Stock was
    sent prior to the final due date via wire transfer directly to a
    bank account maintained by American Stock Transfer & Trust
    Company at Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for
    credit to Account #: 323053785, Contact: XO Communications
    Rights Offering.
To have a valid request to subscribe for any
shares of New Common Stock in the Rights Offering you must have
both requested the shares in a Rights Certificate and paid $5.00
per such requested share. Only valid requests will receive
shares in the Rights Offering.
The Rights Agent will deposit all share purchase
funds it receives prior to the final due date into a segregated
account pending proration and distribution of shares of New
Common Stock. The Rights Agent will not accept cash as a means
of payment for shares of New Common Stock.
Any payment required from a holder of
Subscription Rights must be received by the Rights Agent on or
prior to the Subscription Rights Expiration Date. Any excess
payment to be refunded by the Rights Agent to a holder of
Subscription Rights will be mailed by the Rights Agent to the
holder within fifteen business days after the Subscription
Rights Expiration Date.
IN ORDER FOR YOU TO EXERCISE YOUR SUBSCRIPTION
RIGHTS, YOUR RIGHTS CERTIFICATE MUST BE PROPERLY COMPLETED AS
SET FORTH ABOVE AND IN ACCORDANCE WITH THE INSTRUCTIONS THEREON.
ALL RIGHTS CERTIFICATES AND PAYMENT FOR SHARES MUST BE RECEIVED
BY AMERICAN STOCK TRANSFER & TRUST COMPANY, THE RIGHTS
AGENT, NO LATER THAN 5:00 P.M. (EASTERN TIME)
ON                               ,
THE SUBSCRIPTION RIGHTS EXPIRATION DATE.
Incomplete Forms; Insufficient
Payment
If you do not or incorrectly indicate on your
rights certificate the number of shares of New Common Stock you
wish to purchase, or do not forward sufficient payment for the
number of shares of New Common Stock that you indicate you wish
to purchase, then we will accept the rights certificate and
payment only for the maximum number of shares of New Common
Stock that may be exercised based on the actual payment
delivered. We will make this determination as follows:
(1) you will be deemed to have exercised your basic
subscription privileges, if any, to the full extent of the
payment received, and (2) if any funds remain, you will be
deemed to have exercised your oversubscription privileges to the
extent of the remaining funds. We will return any payment not
applied to the purchase of New Common Stock under this offering
within fifteen business days after the Subscription Rights
Expiration Date. Interest will not be paid on amounts refunded.
No Fractional Shares
Each Subscription Right entitles you to purchase
one share of New Common Stock at the subscription price. We will
accept any inadvertent subscription indicating a purchase of
fractional common stock by rounding down to the nearest whole
share and refunding without interest any payment received for a
fractional share within fifteen business days after the
Subscription Rights Expiration Date.
Instructions to Banks, Brokers and other
Nominees
If you are a broker, trustee or depository for
securities or other nominee holder for any eligible participant,
we are requesting that you contact such eligible participants as
soon as possible to obtain instructions and related
certifications concerning their Subscription Rights. Our request
to you is further
31
Table of Contents
explained in the suggested form of letter of
instructions from nominee holders to beneficial owners
accompanying this prospectus.
To the extent so instructed, nominee holders
should complete appropriate rights certificates on behalf of
beneficial owners and submit them on a timely basis to the
Rights Agent with the proper payment.
Banks, brokers and other nominees who exercise
the Subscription Rights on behalf of beneficial owners of
pre-petition XO Parent securities must report certain
information to the Rights Agent and us and record certain other
information received from each beneficial owner exercising
rights. Generally, banks, brokers and other nominees must report
with specificity:
•
the number and type of pre-petition XO Parent
    security held on the record date on behalf of each beneficial
    owner;
•
the number of Subscription Rights as to which the
    basic subscription privileges, if any, has been exercised on
    behalf of each beneficial owner;
•
that each beneficial owner's basic
    subscription privileges held in the same capacity has been
    exercised in full; and
•
the number of shares of New Common Stock
    subscribed for under the oversubscription privileges by each
    beneficial owner.
Risk of Loss on Delivery of Rights certificate
Forms and Payments
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND
PAYMENT OF THE PURCHASE PRICE FOR SHARES OF NEW COMMON STOCK TO
THE RIGHTS AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT
NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE RIGHTS AGENT
AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN TIME,
ON THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR,
YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS
OF A CERTIFIED OR CASHIER'S CHECK OR MONEY ORDER. PERSONAL
CHECKS DRAWN UPON NON-U.S. BANKS WILL NOT BE ACCEPTED.
How Procedural and Other Questions are
Resolved
We are entitled to resolve all questions
concerning the timeliness, validity, form and eligibility of any
exercise of Subscription Rights. Our determination of such
questions will be final and binding. We, in our reasonable
discretion, may waive any defect or irregularity, or permit a
defect or irregularity to be corrected within such time as we
may determine, or reject the purported exercise of any
Subscription Right because of any defect or irregularity.
Rights certificates will not be considered
received or accepted until all irregularities have been waived
or cured within such time as we determine in our reasonable
discretion. Neither we nor the Rights Agent have any duty to
give notification of any defect or irregularity in connection
with the submission of rights certificates or any other required
document. Neither we nor the Rights Agent will incur any
liability for failure to give such notification.
We reserve the right to reject any exercise of
Subscription Rights if the exercise does not comply with the
terms of this offering or is not in proper form or if the
exercise of Subscription Rights would be unlawful or materially
burdensome. See also "Right to Block Exercise Due to
Regulatory Issues."
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Table of Contents
Issuance of New Common Stock
New Common Stock purchased in this Rights
Offering will be issued as soon as practicable after the
Subscription Rights Expiration Date and the Rights Agent's
examination and tabulation of the Rights Certificates received.
The Rights Agent will deliver subscription payments to us only
after consummation of the Rights Offering and the issuance of
certificates to eligible participants that exercised
Subscription Rights. New Common Stock purchased by the exercise
of Subscription Rights will be registered in the name of the
person exercising the Subscription Rights.
Common Stock Outstanding After the Rights
Offering
Assuming we issue all of the New Common Stock
available in the Rights Offering, based on the number of shares
of New Common Stock outstanding as of March 31, 2003,
approximately 138.3 million shares of New Common Stock will
be issued and outstanding after the Rights Offering. Such newly
issued shares would represent approximately 30% of the number of
shares of New Common Stock outstanding thereafter, without
giving effect to any exercise of warrants or options currently
outstanding.
Fees and Expenses
General
We will pay all fees charged by the Rights Agent.
You will be responsible for paying any other commissions, fees,
taxes or other expenses incurred in connection with the exercise
of the Subscription Rights. Neither we nor the Rights Agent will
pay these expenses.
Fees and Expenses of Stockholder
    Settlement
In December 2001 and January 2002, three state
law complaints were filed against XO and/or its directors, among
others, by alleged stockholders of XO, purportedly on behalf of
themselves and others similarly situated in the New York State
Supreme Court for Nassau County. These New York actions were
consolidated by order dated April 5, 2002 with the matter
styled as
Irving Schoenfeld et al v. XO Communications,
Inc. et al.
, Index No. 01-018358.
Pursuant to a Stipulation of Compromise and
Settlement dated July 11, 2002, which we refer to as the
Stockholder Settlement, the Schoenfeld action was settled and
the plaintiff class dismissed and released all claims and causes
of action against the defendants in that action and their
respective affiliates and current and former officers, partners,
directors, employees, agents, members, stockholders, advisors,
including any attorneys, financial advisors, investment bankers
and other professionals retained by such persons, based upon or
relating to XO or any of the facts or events alleged in the
action.
As part of their compensation for legal fees and
expenses incurred pursuant to the
Schoenfeld
action and
the Stockholder Settlement, counsel for the plaintiffs in the
Schoenfeld
action will receive, pursuant to the
Shareholder Settlement, Subscription Rights with basic
subscription privileges for 833,333 shares of New Common
Stock (representing 25% of the basic subscription privileges
allocated to the holders of class A common stock) and the
same oversubscription rights as holders of Common Stock.
Priority and Allocation of Subscription
Rights
The following categories of holders as of
November 15, 2002 will have the opportunity to exercise the
Subscription Rights: (i) holders of pre-petition general
unsecured claims and pre-petition senior notes,
(ii) holders of pre-petition subordinated notes,
(iii) holders of pre-petition preferred stock and
(iv) holders of pre-petition common stock. Holders of
pre-petition general unsecured claims and pre-petition senior
notes will receive basic subscription privileges and
oversubscription privileges. All other eligible participants
will only receive oversubscription privileges.
33
Table of Contents
Allocations of New Common Stock within any tier
and/or category of the priority and allocation table below will
be made either "pro rata by holdings" or
"pro rata by subscription":
•
"Pro rata by holdings" means that the
    number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
A = the total amount of the
holder's holdings in that tier, and
B = the total amount of the
holder's holdings in that tier.
•
"Pro rata by subscription" means that
    the number of rights exercisable by any holder in the tier in
    question will equal the total number of rights allocated to that
    tier multiplied by A/B where:
A = the total number of shares of New
Common Stock theretofore requested by the holder, and
B = the total amount of all shares of
New Common Stock theretofore requested by all holders in that
tier.
Each eligible participant will have the
opportunity to specify on its rights certificate the total
number of shares of New Common Stock it wishes to purchase (up
to the full amount of the offering), subject to allocation and
pro ration as set forth below:
First:
to the holders of pre-petition general unsecured
    claims and pre-petition senior notes, pro rata by holdings;
Second:
one-third of any remaining Subscription Rights to
    each of the following groups of holders:
(i)  holders of pre-petition
    subordinated notes,
(ii)  holders of pre-petition preferred
    stock, and
(iii)  holders of pre-petition
    class A common stock (with 25% of the Subscription Rights
    allocated to holders of pre-petition class A common stock
    reallocated to legal counsel to the class of pre-petition
    class A common stockholders as part of their
    attorney's fees in the stockholder class action suit). See
    "The Offering — Fees and Expenses" on
    page   .,
allocated within each of those groups pro rata by
    holdings. However, if, but only to the extent, that the category
    of holders of pre-petition class A common stock receive
    less than 3,333,333 Subscription Rights, additional Subscription
    Rights will be issued so that holders of pre-petition
    class A common stock are entitled to purchase at least
    3,333,333 shares of New Common Stock (with at least
    2,500,000 of those shares available for purchase by the holders
    of pre-petition class A common stock with the remaining
    833,333 shares in the Rights Offering allocated to legal
    counsel for the class of pre-petition class A common
    stockholders).
Any remaining Subscription Rights from such
    initial allocation to the holders of pre-petition class A
    common stock shall subsequently be reallocated to the holders of
    pre-petition class A common stock and the legal counsel for the
    class of pre-petition class A common stockholders,
    pro rata by subscription. Notwithstanding anything herein
    to the contrary, on the Subscription Rights Expiration Date any
    unexercised additional Subscription Rights added to the offering
    to ensure that the holders of pre-petition class A common
    stock receive Subscription Rights for at least
    3,333,333 shares of New Common Stock will be deemed
    cancelled and will not be allocated beyond this Second
    allocation tier;
Third:
any remaining Subscription Rights to the holders
    of pre-petition general unsecured claims and pre-petition senior
    notes, pro rata by subscriptions; and
Fourth:
any remaining Subscription Rights to the holders
    of pre-petition subordinated notes, pre-petition preferred stock
    and pre-petition common stock (including legal counsel for the
    class of pre-petition class A common stockholders), pro
    rata by subscriptions.
34
Table of Contents
Supplemental offering
As soon as practicable after the Subscription
Rights Expiration Date, if and to the extent that any
outstanding Subscription Rights have not been exercised, we will
issue and the Rights Agent will deliver to the holders of senior
secured lenders claims an equivalent number of transferable
rights on a pro rata basis, based upon the amount of each such
holder's claims in a non-registered, supplemental rights
offering. These transferable rights will be exercisable for a
thirty day period after their issuance.
PERSONS WHO ACQUIRED PRE-PETITION SECURITIES OF
OR GENERAL UNSECURED CLAIMS AGAINST XO PARENT AFTER NOVEMBER 15,
2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL
OFFERING. ONLY SUCH HOLDERS OF AND CLAIMANTS AS OF NOVEMBER 15,
2002 ARE ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL OFFERING.
The Board Makes No Investment Recommendations
to Eligible Participants.
Our board of directors has approved the
registration statement of which this prospectus is a part, but
has and does not make any recommendation to you about whether
you should exercise any Subscription Rights. In making the
decision to exercise or not exercise your Subscription Rights,
you must consider your own best interests.
If you choose not to exercise your Subscription
Rights in full and you currently hold New Common Stock, your
relative ownership interest in us will be diluted. If you
exercise Subscription Rights, you risk investment loss on new
money invested. The trading price of our New Common Stock may
decline below the subscription price. We cannot assure you that
the subscription price will remain below any trading price for
our New Common Stock or that its trading price will not decline
to below the subscription price during or after this Rights
Offering. For a summary of some of the risks a new investment
would entail, see "Risk Factors" beginning on
page      .
IMPORTANT
PLEASE CAREFULLY READ THE INSTRUCTIONS
ACCOMPANYING THE RIGHTS CERTIFICATE AND FOLLOW THOSE
INSTRUCTIONS IN DETAIL. DO NOT SEND RIGHTS CERTIFICATES DIRECTLY
TO US. YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT AND DELIVERY
METHOD FOR YOUR RIGHTS CERTIFICATE, AND YOU BEAR THE RISKS
ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR
RIGHTS CERTIFICATE AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU
USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED. WE ALSO RECOMMEND THAT YOU ALLOW A SUFFICIENT NUMBER
OF DAYS PRIOR
TO                     ,
THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED
PERSONAL CHECKS MAY TAKE AT LEAST FIVE TO TEN BUSINESS DAYS TO
CLEAR, WE STRONGLY URGE YOU TO PAY, OR ARRANGE FOR PAYMENT, BY
MEANS OF CERTIFIED OR CASHIER'S CHECK OR BANK DRAFT DRAWN
UPON A U.S. BANK, OR A U.S. POSTAL MONEY ORDER.
Questions; Additional Information
If you have any questions about (1) the
procedure for exercising the Subscription Rights in the Rights
Offering, (2) the number of shares of New Common Stock
available to you, (3) a lost or damaged rights certificate,
please contact the Information Agent:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, NY 10016
Attn: Robert Marese
(212) 929-5500
Toll-Free (800) 322-2885
proxy@mackenziepartners.com
35
Table of Contents
If you have any questions as to whether your
completed rights certificate or payment has been received,
please contact the Rights Agent:
XO Communications, Inc.
c/o American Stock Transfer & Trust Company
59 Maiden Lane
New York, NY 10038
Attn: Shareholder Relations Department
Phone: (800) 937-5449
USE OF PROCEEDS
We estimate that our net proceeds from this
offering will be approximately $216.7 million if all
holders of Subscription Rights exercise their rights in full.
The net proceeds of this offering will be used to repay and
reduce our outstanding secured debt.
DETERMINATION OF OFFERING PRICE
The Subscription Rights are being issued pursuant
to the Plan of Reorganization. The exercise price of the
Subscription Rights, like all other aspects of our Plan of
Reorganization, was determined through arm's length
negotiations between us and our various creditor constituencies
and approved by the bankruptcy court. This price represents the
same price per share attributed to the shares of New Common
Stock issued under the Plan of Reorganization to our former
senior secured lenders.
PRICE AND RELATED INFORMATION CONCERNING
REGISTERED SHARES
Predecessor Market Information
Our pre-petition class A common stock was traded
on the Nasdaq National Market under the symbol "XOXO"
until December 2001, at which time we voluntarily delisted it
from that market. On December 17, 2001, our pre-petition
class A common stock began trading on the Nasdaq
Over-the-Counter Bulletin Board or OTCBB until January 16,
2003, the effective date of our Plan of Reorganization, at which
time trading was halted on the Nasdaq OTCBB.
The following table shows, for the periods
indicated, the high and low closing bid prices for our
pre-petition class A common stock as reported by the Nasdaq
National Market or Nasdaq Over-the-Counter Bulletin Board, as
applicable.
2002
2001
High
Low
High
Low
First Quarter
$
0.19
$
0.04
$
27.81
$
6.25
Second Quarter
$
0.07
$
0.02
$
5.22
$
1.63
Third Quarter
$
0.08
$
0.02
$
1.97
$
0.33
Fourth Quarter
$
0.15
$
0.02
$
1.72
$
0.08
All interests in our pre-petition class A common
stock were cancelled effective as of January 16, 2003,
pursuant to our Plan of Reorganization.
Successor Market Information
Our New Common Stock trades on the OTCBB and in
the Pink Sheets under the symbol "XOCM". It began
trading shortly after the first distribution of New Common Stock
pursuant to our Plan of Reorganization. On
[                    ,
2003], the last reported sale price for our New Common Stock was
$[                              ]
per share, with a bid price of
$                    for
up to  shares of New Common Stock and an ask
36
Table of Contents
price of
$                    for
up to  shares of New Common Stock at the close of the
market. See also "Risks Related to Our Common Stock"
on page [ ] of this prospectus.
As of [March 1, 2003], the approximate
number of stockholders of record of our New Common Stock was
[                              ].
The following table shows, for the periods
indicated, the high and low closing bid prices for our New
Common Stock as reported by the Nasdaq Over-the-Counter Bulletin
Board.
2003
High
Low
First Quarter
$
4.00
$
0.25
Second Quarter
$
7.80
$
3.95
DIVIDEND POLICY
We have never declared or paid any cash dividends
on our pre-petition class A common stock or our New Common Stock
and do not intend to declare or pay any cash dividends on our
New Common Stock. Covenants within the New Credit Agreement
restrict our ability to pay cash dividends on our capital stock.
SELECTED HISTORICAL FINANCIAL AND OPERATING
DATA
Because the Plan of Reorganization was not
consummated and effective until January 16, 2003, the
summary consolidated financial data below as of and for the
years ended December 31, 1998, 1999, 2000, 2001 and 2002
and the summary consolidated financial information for the three
months ended March 31, 2002 does not include the effects of
the fresh start accounting provisions of SOP 90-7, but the
financial data as of and for the three months ended
March 31, 2003 does reflect the impact of adopting fresh
start. Although the effective date of the Plan of Reorganization
was January 16, 2003, due to the immateriality of the
results of operations for the period between January 1,
2003 and the effective date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January 1, 2003 and implemented fresh start as of that
date.
Fresh start required that XO adjust the
historical cost of its assets and liabilities to their fair
values as determined by the reorganization value of the Company
and that the reorganization value be allocated among the
reorganized entity's net assets in conformity with
procedures specified by SFAS No. 141. We engaged an
independent appraiser to assist in the allocation of the
reorganization value to the reorganized Company's assets
and liabilities by determining the fair market value of its
property and equipment, intangible assets and certain
obligations related to its facility leases. Reorganized
XO's consolidated financial statements issued for
37
Table of Contents
periods beginning after consummating our Plan of
Reorganization and adopting fresh start accounting are not
comparable to that of predecessor XO.
Predecessor XO(a)
Reorganized XO(a)
Three Months
Predecessor XO(a)
Ended
Year Ended December 31,
March 31,
1998
1999
2000(b)
2001
2002
2002
2003(a)
(Dollars in thousands, except per share data)
(unaudited)
(unaudited)
Statement of Operations Data:
Revenue
$
139,667
$
274,324
$
723,826
$
1,258,567
$
1,259,853
$
333,405
$
286,093
Loss from operations(c)
(206,184
)
(366,530
)
(1,011,652
)
(1,949,891
)
(1,208,898
)
(182,663
)
(14,015
)
Net loss(d)
(278,340
)
(558,692
)
(1,101,299
)
(2,086,125
)
(3,386,818
)
(2,175,654
)
(20,488
)
Net loss applicable to common shares(d)(e)
(337,113
)
(627,881
)
(1,247,655
)
(1,838,917
)
(3,350,362
)
(2,198,480
)
(20,488
)
Net loss per common share, basic and diluted(f)
(1.57
)
(2.51
)
(3.87
)
(4.55
)
(7.58
)
(4.97
)
(0.22
)
Statement of Cash Flow Data:
Net cash provided by (used in) operating
    activities
$
(174,484
)
$
(349,192
)
$
(559,414
)
$
(560,877
)
$
17,602
$
(47,408
)
$
24,190
Net cash provided by (used in) investing
    activities
(1,276,747
)
(1,050,344
)
(1,464,495
)
(708,598
)
57,582
159,914
(49,245
)
Net cash (used in) provided by financing
    activities
1,381,653
1,948,503
1,648,663
1,019,647
(6,079
)
(4,848
)
(219
)
Balance Sheet Data:
Cash, cash equivalents and marketable securities
$
1,478,062
$
1,881,764
$
1,860,963
$
755,167
$
560,983
$
588,972
$
538,380
Property and equipment, net
594,408
1,180,021
2,794,105
3,742,577
2,780,589
3,633,380
476,509
Investment in fixed wireless licenses, net
67,352
926,389
997,333
947,545
911,832
939,603
57,926
Total assets(d)
2,483,106
4,597,108
9,085,375
7,930,465
4,585,496
5,704,497
1,323,943
Total long-term debt
2,013,192
3,733,342
4,396,596
5,109,503
5,165,718
5,144,851
507,868
Redeemable preferred stock, net of issuance
    costs(e)
556,168
612,352
2,097,016
1,781,990
1,708,316
1,785,960
—
Total stockholders' equity (deficit)
(246,463
)
(13,122
)
1,838,401
297,416
(3,032,282
)
(1,900,899
)
454,314
a.
On June 17, 2002, XO Parent filed for
    protection under Chapter 11 of the United States Code. On
    November 15, 2002, the Bankruptcy Court confirmed
    XO Parent's Plan of Reorganization, and, on
    January 16, 2003, XO Parent consummated the Plan of
    Reorganization. See further discussion in Management's
    Discussion and Analysis of Financial Condition and Results of
    Operations.
b.
The selected financial data includes the accounts
    and activities of Concentric Network Corporation since
    June 16, 2000, the date that we merged with Concentric.
c.
In 2002, loss from operations includes a non-cash
    asset write down totaling $477.3 million resulting from the
    return of previously acquired inter-city fiber in exchange for
    reduced maintenance expenses beginning in 2003. In 2001, loss
    from operations includes restructuring charges totaling
    $509.2 million associated with plans to restructure certain
    aspects of our business operations. In 2000, loss from
    operations includes a $36.2 million charge in connection
    with the June 2000 acquisition of Concentric resulting from the
    allocation of the purchase price to in-process research and
    development. Loss from operations in 1999 includes restructuring
    charges totaling $30.9 million associated with relocating
    our Bellevue, Washington headquarters to Northern Virginia.
d.
In 2002, net loss and total assets reflects a
    $1,876.6 million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to SFAS No. 142. In 2002, net loss also includes
    $91.1 million in net reorganization expenses which includes
    the write-off, in accordance with SOP 90-7, of deferred
    financing fees associated with the issuance of XO's
    pre-petition debt and professional fees incurred in conjunction
    with XO's
38
Table of Contents
recapitalization. During 2002, we ceased accruing
    interest and penalties on our pre-petition senior unsecured
    notes, subordinated notes and Pre-Petition Credit Facility, and
    we ceased accruing dividends and accreting the redemption
    obligation on all of our outstanding preferred stock as of the
    Petition Date, in accordance with SOP 90-7. In 2001, net
    loss includes a gain of $345.0 million resulting from the
    repurchase of certain of our senior notes and a write-down of
    $89.0 million for an other than temporary decline in the
    value of certain investments. In 2000, net loss includes a
    $57.7 million write-down for an other than temporary
    decline in the value of certain investments and a
    $225.1 million net gain from the sale of an equity
    investment.
e.
The comparability of net loss applicable to
    common shares is impacted by the transactions discussed in d.
    above. In addition, in 2002, net loss applicable to common
    shares includes a net gain of $78.7 million resulting from
    the recognition of our deferred modification fee less the write
    off our unamortized discounts and issuance costs. In 2001, net
    loss applicable to common shares includes a gain of
    $376.9 million resulting from the repurchase of certain of
    our preferred stock.
f.
The net loss per share data for the years ended
    December 31, 1998, 1999, 2000, 2001 and 2002 and the three
    months ended March 31, 2002 has been calculated based on
    the shares outstanding of our class A and class B
    common stock prior to the consummation of our Plan of
    Reorganization. Effective January 16, 2003, the effective
    date of the Plan of Reorganization, all interests in our
    class A and class B common stock were terminated and
    all outstanding shares were cancelled. For further discussion of
    our Plan of Reorganization, see "Business — Our
    Chapter 11 Reorganization". The net loss per share
    data for the years ended December 31, 1998, 1999 and 2000
    has been adjusted for the splits of our class A and
    class B common stock effected in 2000 and in prior periods.
39
Table of Contents
FRESH START ACCOUNTING INFORMATION
XO adopted fresh start as of January 1,
2003. Although the Effective Date of the Plan of Reorganization
was January 16, 2003, due to the immateriality of the
results of operations for the period between January 1,
2003 and the Effective Date, XO has accounted for the
consummation of the Plan of Reorganization as if it had occurred
on January 1, 2003 and implemented fresh start as of that
date. Fresh start required that XO adjust the historical cost of
its assets and liabilities to their fair values as determined by
the reorganization value of XO Parent and that the
reorganization value be allocated among the reorganized
entity's net assets in conformity with procedures specified
by SFAS No. 141. We engaged an independent appraiser to
assist in the allocation of the reorganization value to
reorganized XO's assets and liabilities by determining the
fair market value of its property and equipment, intangible
assets and certain obligations related to its facility leases. A
reconciliation of the adjustments recorded in connection with
our reorganization and the adoption of fresh start is presented
below (in thousands):
Predecessor
Reorganized
XO
XO
December 31,
Fresh Start
January 1,
2002
Reorganization
Adjustments(d)
2003
(Audited)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
314,038
$
—
$
—
$
314,038
Marketable securities
246,945
—
—
246,945
Accounts receivable, net
116,541
—
—
116,541
Other current assets
83,480
—
(48,288
)
35,192
Total current assets
761,004
—
(48,288
)
712,716
Property and equipment, net
2,780,589
—
(2,304,001
)
476,588
Fixed wireless licenses and other intangibles, net
984,614
—
(848,936
)
135,678
Other assets, net
59,289
—
(36,181
)
23,108
Total assets
$
4,585,496
$
—
$
(3,237,406
)
$
1,348,090
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
    EQUITY
Current liabilities:
Accounts payable
$
63,729
$
—
$
3,539
$
67,268
Accrued liabilities
266,102
—
(30,910
)
235,192
Current liabilities subject to compromise
5,497,207
(5,466,667
)(a)
(30,540
)
—
Total current liabilities
5,827,038
(5,466,667
)
(57,911
)
302,460
Long-term debt
—
500,000
(b)
—
500,000
Other long-term liabilities
75,242
—
(4,612
)
70,630
Long-term liabilities subject to compromise
7,182
—
(7,182
)
—
Total liabilities
5,909,462
(4,966,667
)
(69,705
)
873,090
Predecessor XO redeemable preferred
    stock — subject to compromise
1,708,316
(1,708,316
)(a)
—
—
Stockholders' (deficit) equity:
Predecessor XO common stock
4,628,139
—
(4,628,139
)
—
Reorganized XO common stock and warrants
—
475,000
(c)
—
475,000
Deferred compensation
(8,500
)
—
8,500
—
Accumulated other comprehensive income
2,512
—
(2,512
)
—
Accumulated deficit
(7,654,433
)
6,199,983
1,454,450
—
Total stockholders' (deficit) equity
(3,032,282
)
6,674,983
(3,167,701
)
475,000
Total liabilities and stockholders'
    (deficit) equity
$
4,585,496
$
—
$
(3,237,406
)
$
1,348,090
40
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(a)
To record the discharge of pre-petition
    indebtedness, including a $1.0 billion credit facility,
    $4.2 billion of senior and convertible subordinated notes,
    $245.2 million of accrued interest, and the elimination of
    $1.7 billion of pre-petition redeemable preferred stock and
    $50.6 million of accrued dividends, all in accordance with
    the Plan of Reorganization.
(b)
To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
(c)
To record the issuance of New Common Stock and
    warrants in accordance with the Plan of Reorganization.
(d)
To adjust the carrying value of assets,
    liabilities and stockholders' equity to fair value, in
    accordance with fresh start.
Net reorganization gain on January 1, 2003
consisted of the following (dollars in thousands):
Net gain resulting from reorganization of debt,
    preferred stock and equity
$
6,199,983
Net loss resulting from fresh start fair value
    adjustments to assets and liabilities
(3,167,701
)
Total reorganization gain, net
$
3,032,282
As of December 31, 2002, we had incurred
$91.1 million in net reorganization expenses which included
the write-off of deferred financing fees associated with the
issuance of XO's pre-petition debt and professional fees
incurred in conjunction with the Company's recapitalization.
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Table of Contents
THE BUSINESS
The following description of our business
should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this
prospectus. The following contains forward-looking statements
that involve risks and uncertainties. Our actual results could
differ substantially from those anticipated in these
forward-looking statements as a result of several factors,
including those set forth under "Risk Factors" and
elsewhere in this prospectus.
Introduction
XO Communications, Inc., a Delaware corporation,
through its predecessor entities, was formed in 1994. XO Parent
was originally organized as a Washington limited partnership and
in 1995 merged into a Washington limited liability company,
which following several name changes became known as NEXTLINK
Communications, L.L.C. In January 1997, NEXTLINK Communications,
L.L.C. merged into NEXTLINK Communications, Inc., a Washington
corporation, which in June 1998 reincorporated in Delaware under
the same name. On June 16, 2000, in connection with XO
Parent's merger with Concentric Network Corporation,
NEXTLINK Communications, Inc. merged with XO Parent and XO
Parent, as the surviving corporation in the merger, changed its
name to NEXTLINK Communications, Inc. On September 25,
2000, XO Parent began doing business as "XO
Communications" and, on October 25, 2000, XO Parent
changed its name to XO Communications, Inc. We conduct our
business primarily through the more than 50 subsidiaries that XO
Parent owns and manages.
On June 17, 2002, XO Parent filed for
protection under Title 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November 15, 2002, the Bankruptcy Court confirmed
XO Parent's plan of reorganization, and, on
January 16, 2003, XO Parent consummated the plan of
reorganization and emerged from its Chapter 11
reorganization proceedings with a significantly restructured
balance sheet.
In December 2001, XO Parent voluntarily delisted
its pre-petition class A common stock from the Nasdaq
National Market, which was traded under the symbol
"XOXO", and, on December 17, 2001, began trading
on the OTCBB. XO Parent's pre-petition class A common stock
stopped trading on the OTCBB as of January 16, 2003, the
effective date of XO Parent's plan of reorganization, at
which time all interests in XO Parent's pre-petition class
A common stock were terminated pursuant to the plan of
reorganization. The New Common Stock of reorganized XO Parent
issued pursuant to its plan of reorganization began trading on
the OTCBB and in the Pink Sheets under the symbol
"XOCM" shortly after the first distribution of common
stock pursuant to the plan.
Our principal executive and administrative
offices are located at 11111 Sunset Hills Road, Reston, Virginia
20190 and our telephone number is (703) 547-2000. Our
Internet address is www.xo.com, where, under "About
XO-Investor Center", you can find copies of our annual
report as of and for the year ended December 31, 2002 on
Form 10-K, and XO Parent's quarterly reports on
Form 10-Q and current reports on Form 8-K, all of
which we make available as soon as reasonably practicable after
the report is filed with the Securities and Exchange Commission,
or SEC.
Overview of Our Company
We provide business customers with a
comprehensive array of communications services, which include
voice, Internet access, private data networking and hosting
services. Our services are designed to take advantage of our
network assets, which are capable of carrying high volumes of
all types of communications traffic, and to meet the needs of
all sizes of business customers, from small and medium
businesses to large enterprise and carrier and wholesale
customers. Although these services are of significant benefit to
businesses of all sizes, we believe them to be of particular
benefit to multi-location businesses that desire to improve
42
Table of Contents
communications among their locations, whether
within a single metropolitan area or across the country. These
services include the following:
•
Voice services:
•
Local and long distance services, both bundled
    and stand-alone, other voice-related services such as
    conferencing, domestic and international toll free services and
    voicemail, and transaction processing services for prepaid
    calling cards; and
•
Interactive voice response, or IVR, systems that
    we develop, host and manage that enable our customers'
    end-users to order products and services, collect and receive
    information, seek assistance, facilitate bill payment and a host
    of other capabilities over the telephone using natural language
    speech recognition and systems that enable persons to access
    web-based information over the telephone;
•
Internet access:
•
Dedicated Internet access for customers with
    large, high-speed Internet access requirements;
•
Digital subscriber line, or DSL, services for
    businesses that require high-speed Internet access over existing
    copper wire telephone lines; and
•
Dial access, which allows remote users to connect
    to a customer's network;
•
Private data networking:
•
Dedicated transmission capacity on our networks,
    including dedicated circuits and the lease of one or more
    dedicated wavelengths on a fiber optic cable, to customers that
    desire high-bandwidth links between locations;
•
Virtual private network, or VPN, services, which
    provide customers with a managed, private data service over the
    public Internet, designed for medium and large businesses that
    want to create secure, wide-area networks for users at various
    and remote locations; and
•
Ethernet services, which are designed to connect
    the local area networks, or LANs, of medium and large customers
    within and between metropolitan areas at speeds of up to one
    gigabit per second; and
•
Hosting services:
•
Web site services, which allow a customer to
    establish a Web presence;
•
Web hosting, including hosting and web site
    traffic management tools, for Internet-centric businesses, and
    streamed media services designed for small and medium-sized
    businesses; and
•
Server collocation and management and customer
    support to manage a customer's hosting needs.
We also combine many of these services in
integrated, flat rate service packages, known as XOptions that
are tailored to the communications needs of small and
medium-sized businesses and larger businesses with multiple
locations. These packages eliminate the separation between local
and long-distance communications services, and combine this
"all distance" telephone service with high-speed
Internet access and web hosting services, all for one flat
monthly rate. We also offer shared tenant services, which
consist of telecommunications management services provided to
groups of small and medium-sized businesses located in the same
office building.
We believe that one of the significant factors
used by business customers in making purchase decisions relating
to communications services is the quality of service and
customer support offered by the service provider. Our customer
care representatives offer customer support 24 hours a day,
seven days a week. We focus on proactive resolution of customer
issues by training our customer care representatives extensively
on the services that we offer and promoting accountability of
the customer care team. We also have developed a secure, on-line
Business Center, through which many customers can access
information about their accounts and track requests, review
services, analyze trends, make decisions and pay bills.
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Table of Contents
To serve our customers' broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmission
capacity on fiber optic cables, which we refer to as an
inter-city network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network, and among a customer's
multiple locations, primarily or entirely over our network.
To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment (including switches and routers that direct voice and
data traffic to their destinations) capable of carrying high
volumes of data, voice, video and Internet traffic. We operate
37 metro fiber networks in 22 states and the District of
Columbia, including 25 of the 30 largest metropolitan areas in
the U.S. We have constructed or acquired many of these metro
fiber networks, which consist of up to 432 strands of fiber
optic cable and, in some cases, additional empty conduits
through which fiber optic cable can be deployed. For our
inter-city network, we have acquired dedicated, high-capacity
wavelengths of transmission capacity on fiber optic cables, onto
which we have deployed our own switching, routing and optical
equipment, thereby giving us greater control over the
transmission of voice and data information. We also hold
indefeasible exclusive rights to use unlit fiber optic strands
on the routes served by our existing inter-city network.
From time to time we consider merger and
acquisition opportunities in the telecommunications industry and
may use available cash to acquire the securities of entities in
which we have a strategic interest before any public
announcement of our interest.
On May 30, 2003, we made the first of a
series of offers to acquire all of the assets and business of
Global Crossing Ltd. and Global Crossing Holdings, Ltd.
(collectively, "Global Crossing"), a
telecommunications company which is currently in reorganization
proceedings. Thereafter, we made several modifications to, and
enhancements of, our initial offer, and on June 24, 2003,
commenced an offer to purchase any all of the senior secured
bank debt of Global Crossing Holdings Ltd. and Global Crossing
North America, Inc. that we did not already own for an aggregate
maximum purchase price of $472.5 million. As a result of
this offer and our previous purchases, we now own approximately
$766.6 million of the approximately $2.214 billion
principal amount of such debt outstanding. We may in the future
make additional offers to acquire control of, or otherwise
invest in, lend to or otherwise do business with Global
Crossing. If we do so, we do not know what the terms of any such
offers would be, or whether any such offers will be accepted.
On July 1, 2003, the U.S. Bankruptcy Court
for the Southern District of New York approved Global
Crossing's request to extend until October 28, 2003
the exclusivity period of its purchase agreement with Singapore
Technologies Telemedia PTE. We believe that the purchase
agreement nonetheless permits Global Crossing to consider
unsolicited superior offers such as ours pursuant to the
applicable "fiduciary out" provisions of the agreement.
We intend to actively monitor Global
Crossing's reorganization and the regulatory proceedings
that are conditions to any closing under the Singapore
Technologies Telemedia PTE agreement.
Our Chapter 11 Reorganization
On June 17, 2002, XO Parent filed for
protection under the Bankruptcy Code. On November 15, 2002,
the Bankruptcy Court confirmed XO Parent's plan of
reorganization, and, on January 16, 2003, XO Parent
consummated the plan of reorganization and emerged from its
Chapter 11 reorganization proceedings with a significantly
restructured balance sheet.
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Events Leading Up to the Chapter 11
Reorganization
From 1996 through 2001, we financed the
construction and acquisition of our networks, our growth and our
working capital requirements through public and private
offerings of senior and subordinated unsecured notes and common
and preferred equity securities. In addition, in 2000, we
financed certain network acquisitions and some of our working
capital requirements through secured borrowings under XO
Parent's $1.0 billion senior secured credit facility,
which we refer to as the Pre-Petition Credit Facility. As of
December 31, 2001, we had approximately $5.2 billion
in secured and unsecured long term debt obligations and
approximately $1.8 billion in liquidation preference of
preferred stock.
In 2001, market valuations of debt and equity
securities of telecommunications companies, especially emerging
providers such as us, experienced significant declines, leading
to a wave of bankruptcies in the industry. As a result, the
capital markets were largely closed to emerging
telecommunications companies which made it difficult or
impossible for companies like us to obtain additional funding.
In response to these conditions, we implemented stringent
measures in 2001 that were designed to conserve cash and reduce
operating expenses and capital expenditures. Despite these
efforts, we concluded that our cash on hand would not be
sufficient to fund operations, capital expenditures and debt
service until such time as we expected our operations to become
profitable and we determined that a restructuring of our balance
sheet was necessary.
The Chapter 11 Petition and Plan of
Reorganization
During the period preceding and immediately after
the filing of XO Parent's Chapter 11 petition, we met
with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured creditors that
represented holders of our unsecured notes (and following the
filing of the Chapter 11 petition, the official committee
of unsecured creditors appointed in the Chapter 11
proceedings) and potential investors to discuss potential
transactions that could be implemented to reorganize our capital
structure. These discussions led to an agreement with certain of
our creditors regarding the terms of a plan of reorganization
that envisioned two reorganization structures, the first of
which was based on, among other things, a proposed cash
investment in XO Parent by third parties (which was ultimately
abandoned), and the second of which contemplated a stand-alone
restructuring with no new cash infusion committed in advance.
The plan of reorganization, as supplemented, was filed with the
Bankruptcy Court on July 22, 2002 and distributed to
creditors of XO Parent eligible to vote in the reorganization.
We refer to the stand-alone alternative under the plan of
reorganization that ultimately was confirmed by the Bankruptcy
Court as the Plan of Reorganization.
On August 21, 2002, High River Limited
Partnership, a limited partnership owned by Mr. Carl Icahn,
commenced an offer to purchase loans under the Pre-Petition
Credit Facility at a purchase price of $0.50 for each $1.00 in
principal amount thereof. Purchases made under this offer,
together with the loans under the Pre-Petition Credit Facility
that High River previously had acquired, resulted in High River
holding approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.
On November 15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January 16, 2003,
XO Parent consummated the Plan of Reorganization and emerged
from its Chapter 11 reorganization proceedings.
Distributions Under the Plan of
Reorganization
After the consummation of the Plan of
Reorganization, and giving effect to the implementation of fresh
start accounting, our capital structure consists of the
following:
•
$500.0 million in outstanding principal
    amount of loans under a restructured secured credit and guaranty
    agreement, which we refer to as the New Credit Agreement;
•
approximately $70.6 million of other
    long-term liabilities, which include various capital lease
    obligations; and
•
95.0 million outstanding shares of common
    stock, par value $0.01 per share, which we refer to as New
    Common Stock.
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We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios.
The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the Pre-Petition
Credit Facility being converted into the following:
•
90.25 million shares of New Common Stock; and
•
$500.0 million of outstanding principal
    amount of loans under the New Credit Agreement.
The Plan of Reorganization also resulted in the
cancellation of all of XO Parent's pre-petition senior
unsecured notes and general unsecured claims in exchange for the
following:
•
4.75 million shares of New Common Stock;
•
warrants to purchase up to an additional
    23.75 million shares of New Common Stock;
•
rights to purchase shares of New Common Stock at
    $5.00 per share in this Rights Offering; and
•
a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination of
    the proposed investment transaction that was the basis for the
    first restructuring alternative contemplated by the Plan of
    Reorganization, which we refer to as the Investment Termination
    Payment.
The warrants consist of:
•
Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;
•
Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
•
Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.
The warrants will expire on January 16,
2010. Each series of warrants is identical, except as to the
applicable exercise price. The exercise price applicable to each
respective series of warrants is subject to adjustment in
certain events.
In addition, under the Plan of Reorganization:
•
Holders of pre-petition subordinated notes of XO
    Parent had their securities cancelled, and received a cash
    payment from High River based upon the amount of the Investment
    Termination Payment that High River would have been entitled to
    receive as holder of the loans under the New Credit Agreement
    and the right to participate in the Rights Offering;
•
Holders of pre-petition class A common stock of
    XO Parent had their securities cancelled, and received the right
    to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
•
Holders of pre-petition class B common stock and
    holders of all series of pre-petition preferred stock of XO
    Parent had their securities cancelled and received only the
    right to participate in the Rights Offering.
Post-Bankruptcy Interests Held by Entities
Owned by Mr. Carl Icahn
Of the 90.25 million shares of New Common
Stock distributed to the lenders under the Pre-Petition Credit
Facility, approximately 76.6 million shares were issued to
High River upon consummation of the stand-alone restructuring
under the Plan of Reorganization. Immediately following this
distribution, High River transferred all such shares of New
Common Stock to Cardiff Holding LLC, a Delaware limited
liability company owned by Mr. Icahn.
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Meadow Walk Limited Partnership, a limited
partnership owned by Mr. Icahn, owned over
$1.5 billion in principal amount of various tranches of XO
Parent's pre-petition senior unsecured notes, representing
approximately 33% in principal amount of such notes. Meadow Walk
has transferred beneficial ownership to all distributions with
respect to such notes under the Plan of Reorganization to
Cardiff.
Giving effect to these transactions and the
distributions of New Common Stock pursuant to the Plan of
Reorganization, Cardiff holds over 80% of the outstanding shares
of the New Common Stock.
Of the warrants distributed under the Plan of
Reorganization to holders of the pre-petition senior unsecured
notes, we estimate Cardiff received Series A Warrants to
purchase approximately 3.0 million shares of New Common
Stock, Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C
Warrants to purchase approximately 2.3 million shares of
New Common Stock.
In connection with the Plan of Reorganization,
High River became the holder of approximately 85% of the loans
outstanding under the New Credit Agreement. In January 2003,
High River assigned all of its rights in the loans outstanding
under the New Credit Agreement to Chelonian Corp., a corporation
owned by Mr. Icahn. Subsequently, these loans were assigned
to Arnos Corp., a corporation owned by Mr. Icahn. As a
result, Arnos now holds approximately 85% of the loans
outstanding under the New Credit Agreement.
Accounting for Consummation of Plan of
Reorganization
As a result of the consummation of the Plan of
Reorganization, XO Parent was required to implement the fresh
start accounting provisions of SOP 90-7 to its financial
statements. The fresh start accounting provisions required that
we establish a "fair value" basis for the carrying
value of the assets and liabilities for Reorganized XO, the
implementation of which resulted in a substantial reduction in
the carrying value of our long-lived assets, including property
and equipment, fixed wireless licenses, other intangible assets
and other noncurrent assets.
Under SOP 90-7, the implementation of fresh
start accounting was triggered by the emergence of XO Parent
from its Chapter 11 proceedings. Although the effective
date of the Plan of Reorganization was January 16, 2003,
due to the immateriality of the results of operations for the
period between January 1, 2003 and the Effective Date, we
have accounted for the consummation of the Plan of
Reorganization as if it had occurred on January 1, 2003 and
implemented fresh start as of that date.
For further discussion of the effects of our
implementation of the Plan of Reorganization on our financial
condition and results of operations, see "Our
Chapter 11 Reorganization" and "Liquidity and
Capital Resources" in "Management's Discussion
and Analysis of Financial Condition and Results of
Operations."
2002 Capital Conservation
Initiatives
During 2002, in conjunction with the actions
taken in connection with our Chapter 11 reorganization, we
took a number of steps in an effort to conserve our available
funding, including some modest workforce reductions in addition
to those initiated in 2001, and to reduce our long-term
obligations.
Amendment to Level 3 Inter-city Network
Agreement.
In August 2002, we entered
into a Master Agreement with Level 3 Communications, Inc.,
which amends various agreements related to our acquisition of
fiber networks in the United States from Level 3 and the
recurring maintenance charges relating to those networks.
Beginning on January 1, 2003 and continuing over the
remaining term of the initial agreement, Level 3 has
reduced the operating and maintenance fees as well as fiber
relocation charges from approximately $17.0 million
annually to a fixed rate of $5.0 million annually. In
exchange for this reduction and certain other concessions, we
surrendered our indefeasible right to use an empty conduit and
our indefeasible right to use six of the 24 fibers previously
acquired from Level 3.
Sale of European
Business.
In February 2002, we
completed the sale of the European Internet service provider
business that we acquired as part of the 2000 acquisition of
Concentric Network Corporation.
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Applications and Services
We provide business customers with a
comprehensive array of data and voice communications services,
which include voice, Internet access, private data networking
and hosting services. We have designed these communications
services to meet the needs of all sizes of business customers,
from small and medium businesses to multi-location businesses,
and large enterprise, and carrier and wholesale customers.
Voice Applications and Services
Local and Long Distance Voice
    Services
We offer a variety of voice applications and
services, generally to businesses at prices significantly lower
than for comparable local services from the incumbent carrier.
These voice services include:
•
local standard dial tone, including touch-tone
    dialing, 911 access and operator assisted calling;
•
local multi-trunk dial tone services, including
    direct inward dialing, and direct outward dialing;
•
long distance services, including 1+, toll free,
    calling card and operator services;
•
voice messaging with personalized greetings,
    send, transfer, reply and remote retrieval capabilities;
•
conferencing services, including voice and web
    conferencing services; and
•
directory listings and assistance.
In each of our markets, we have negotiated and
entered into interconnection agreements with the incumbent
carrier and certain independent carriers, and implemented
permanent local number portability, which allows customers to
retain their telephone numbers when changing telephone service
providers.
Hosted Interactive Voice
    Response
We develop and manage hosted interactive voice
response, or IVR, systems for customers that enable end users to
order products and services, collect and receive information,
seek assistance, facilitate bill payments, and a host of other
capabilities over the telephone. Our hosted IVR capabilities
utilize a wide range of technologies, from standard touch-tone/
push-button dialing to natural language speech recognition and
extensible markup language, or XML, and VoiceXML technologies,
which are sophisticated systems that enable persons to access
Web-based information over the telephone. We customize for our
clients' particular needs telephony-based software
applications and technologies developed by third parties to
create IVR systems. We integrate these IVR systems with our
clients' other business systems, such as information
databases and customer relationship management systems. We host
and maintain the IVR systems in data centers and deploy them to
clients across a network, thereby alleviating the need for our
clients to purchase, own, install, or maintain these
applications. Clients pay for the use of these customized
solutions through a combination of "upfront" payments
for development and recurring fees based on transaction volume.
We also host and manage personal-identification number, or PIN,
management systems, primarily pre-paid calling card systems for
customers, which includes providing transaction processing
services relating to prepaid calling card services provided by
other telecommunications carriers.
Data Applications and Services
Internet Access
Our Internet access offerings include dedicated
access services targeted at businesses that desire single or
multipoint high-speed, dedicated connections to the Internet, at
speeds ranging from 56 kilobits per second, or kbps, to 155
megabits per second, or mbps, and digital subscriber line, or
DSL, services that include a wide range of dedicated access
speeds. We are a tier-1 Internet backbone provider in the U.S.,
with over 200 public and private peering arrangements with other
Internet backbones.
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Private Data Networking
We provide dedicated transmission capacity on our
networks to customers that desire high-bandwidth links between
locations. We offer special access and point-to-point circuits
to long distance carriers and other high volume customers, which
are used as both primary and back-up circuits. In addition,
fiber optic technology that enables signals to be transmitted at
different wavelengths on a single fiber allows us to lease one
or more dedicated wavelengths to customers that desire
high-bandwidth links between locations. We currently offer these
services with connections of up to 9.6 gigabits per second,
or what our industry refers to as OC-192. This service supports
a variety of transmission protocols, including ATM, Frame Relay
and SONET.
Our virtual private network, or VPN, services
enable customers to deploy tailored, Internet Protocol-based
mission-critical business applications for secure internal
enterprise, business-to-business and business-to-customer data
communications among geographically dispersed locations, while
also affording high-speed access to the Internet. VPN services
also provide secure access for remote users, such as traveling
employees and employees working from home or a remote location,
which is not possible using private line and frame relay
services. We also offer managed firewall services.
Finally, we offer a suite of Ethernet services,
including Gigabit Ethernet, or GigE, in most of our U.S.
markets, as well as inter-city Ethernet services between our
markets. Our Ethernet services are designed to provide
high-speed, high-capacity connections between customers'
local area networks, or LANs, within and between metropolitan
areas, while eliminating the need for ongoing configuration,
management and acquisition of equipment by the customer. These
services are designed to provide private networking data speeds
ranging from 10 or 100 megabits per second to one gigabit per
second connections, to simplify customers' network
connections, and to significantly reduce their costs.
Hosting Services
We offer a range of applications hosting
services, which can manage a customer's web-based
infrastructure and operational needs allowing customers to focus
on their web-based content. In addition, we provide server
management tools and services to manage customers' larger
computers (which are known as servers) for them.
To provide this service, we have equipped our
data centers and have configured the central offices of our
network backbone with electrical and environmental controls and
24-hour maintenance and technical support, to provide an
attractive location for our customers to locate their servers or
from which they can run important applications on servers that
we maintain.
Our hosting services include:
•
Web Hosting:
support
    for customers' websites, including design, maintenance and
    telecommunications services;
•
Server Collocation:
collocation of customers' servers
    in our data centers; and
•
Application Hosting:
running our customers'
    enterprise-wide applications at our data centers and
    distributing them as needed over our network or servers to
    ensure uniformity, reduce costs and implement upgrades on a
    continuous and immediate basis.
As part of some of our XOptions integrated
packages of communications services, we offer web hosting with
Microsoft's bCentral web-based tools and applications,
which enables customers to conduct targeted email marketing,
register their web site with hundreds of Internet search engines
and directories, build catalogues and sell products over the
web, and coordinate meetings and appointments online. We also
offer a suite of hosting outsourcing services that provide
customers web-based access to email, group distribution lists,
calendaring, contacts databases management and file sharing.
Hosting can be "shared", in which we own the equipment
and provide the underlying services, or "dedicated,"
in which we provide some or all of the hosting and services from
our data centers using the customer's own equipment.
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Integrated Voice and Data Services
We offer bundled packages of voice and data
products, known as XOptions, to small and medium-sized
businesses, that include integrated, flat-rate packages for
specified amounts of certain services, including local and long
distance voice services, Internet access and web hosting
services. These services include a variety of service packages
designed to accommodate different sized customers with anywhere
from 10 to 100 employees per location. XOptions eliminates the
complexity of working with multiple service providers for
installation, maintenance and billing, and also can result in
significant savings over the average cost of buying these
services from separate competitive voice and data providers. We
also offer Integrated Access Services, which can reduce telecom
costs by combining local voice, long distance, and dedicated
Internet access on a single facility.
In 2002, we introduced a number of new XOptions
packages designed to meet the needs of larger customers,
specifically, those with small offices at multiple locations,
those desiring to pool hosting and email accounts across
multiple locations under a single account, and those that rely
heavily on voice communications services. We also introduced
XOptions packages that combine the benefits of XOptions'
local and long distance voice, Internet access and web hosting
with Microsoft's bCentral web-based tools and applications.
Our integrated services also include shared
tenant services, which are telecommunications management
services provided to groups of small and medium-sized businesses
located in the same office building. This service enables
businesses too small to justify hiring their own
telecommunications managers to benefit from the efficiencies,
including volume discounts, normally available only to larger
enterprises. We install an advanced telecommunications system
throughout each building we serve, leasing space for on-site
sales and service, and offer tenants products and services such
as telephones, voice mail, local calling lines, discounted long
distance and high-speed Internet connections, all on a single,
detailed invoice.
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XO's Networks
We have built fiber optic networks with robust
capacity in urban centers in North America. Our IP-optimized
inter-city network in North America connects these local
networks to one another.
The following diagram depicts the physical
components of our nationwide networks.
Metro Fiber Optic Networks
The core of each of our metro fiber networks is a
ring of fiber optic cable in a city's central business
district that connects to our central offices. These central
offices contain the switches and routers that direct data and
voice traffic to their destinations, and also have the space to
house the additional equipment necessary for future
telecommunications services. Whenever we can, we build and own
these metro fiber
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networks ourselves or obtain indefeasible rights
to use fiber so that we can control the design and technology
used to best meet our customers' needs. We operate 37 metro
fiber networks serving the cities noted below.
State
Market
Arizona
Phoenix
California
Los Angeles
Orange County: Anaheim; Costa
Mesa; Fullerton;
    Garden
Grove; Huntington
    Beach;
Inglewood; Irvine;
Long
    Beach; Orange;
and Santa Ana
Sacramento
San Diego
San Francisco Bay Area:
Fremont;
    Milpitas;
Mountain View;
    Oakland;
Palo Alto; San Jose;
    San
Francisco; Santa Clara
    and
Sunnyvale
Colorado
Denver
Delaware
Wilmington
District of Columbia
Washington
Florida
Miami
Fort Lauderdale
Orlando
Tampa Bay
Georgia
Atlanta
Marietta
Illinois
Chicago
Maryland
Baltimore
Massachusetts
Boston
Michigan
Detroit
Minnesota
Greater Minneapolis/St. Paul
Missouri
St. Louis
Nevada
Las Vegas
New Jersey
Bergen/Passaic
Middlesex
Newark
New York
Manhattan
Ohio
Cleveland
Columbus
Akron
Canton
Oregon
Portland
Pennsylvania
Central Pennsylvania:
Allentown;
    Harrisburg;
Lancaster; and
    Reading
Philadelphia
Scranton/Wilkes
Barre
Tennessee
Memphis
Nashville
Texas
Austin
Dallas
Houston
San Antonio
Utah
Salt Lake City
Orem/Provo
Washington
Seattle
Spokane
Vancouver
We built our high capacity metro fiber networks
using a backbone density typically ranging between 72 and 432
strands of fiber optic cable. Fiber optic cables have the
capacity, or bandwidth, to carry tens of thousands of times the
amount of traffic as traditionally-configured copper wire. We
believe that installing high-count fiber strands will allow us
to offer a higher volume of broadband and voice services without
incurring significant additional construction costs. To enhance
our ability to economically connect customers to our networks
and services, we design our networks to serve both core downtown
areas and other metropolitan and suburban areas where business
development supports the capital required for the network build.
Inter-City Network
We have created a single, end-to-end network by
linking our metro fiber networks to one another through the use
of an inter-city fiber optic network, largely purchased from
Level 3, which enables us to offer our customers
integrated, end-to-end communications services over facilities
we control. All of our metro networks are connected to this
inter-city network, either directly or through other connections.
Although we own rights to multiple fibers
primarily on the Level 3 network, to conserve capital, we
have delayed "lighting" much of our inter-city fibers
and provide inter-city transport primarily by purchasing
wavelength capacity from Level 3 along the same routes as
our inter-city network assets onto which we have deployed
transmission and routing equipment. By using our own
transmission and routing equipment, we maximize the capacity and
enhance the performance of the network as needed to meet our
customers' current
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and future broadband data and other
communications needs, rather than relying on the owners of
leased lines to make those upgrades.
Using Level 3 wavelength services and our
own routers and transport equipment, we also operate an OC-192
capacity Internet backbone, onto which a substantial amount of
our Internet-related services and customer traffic runs. This
backbone provides our customers with improved network
redundancy, security and performance, and enables us to offer
customers services that take advantage of future Internet
Protocol technologies.
Our inter-city network assets primarily consist
of an exclusive interest in 18 unlit fibers in a shared,
filled conduit in the Level 3 North American network, which
consists of a fiber network that traverses over
16,000 miles and connects more than 60 cities in the United
States and Canada, including most of the major metropolitan
markets served by our metro networks. We will install optical
network equipment to "light" specific segments of this
inter-city fiber where the demand for telecommunications
capacity makes the related capital expenditures economic in
comparison to purchasing wavelength or other capacity. Due to
the need for additional, cost-efficient capacity along the
segment of this network that runs from Los Angeles to San Diego,
we are in the processes of lighting this network segment, which
is the only segment that we have current plans to light. Much of
the equipment used in connection with our inter-city network is
positioned so that we can easily transfer voice and data traffic
from the wavelength capacity purchased from Level 3 to servers
on our inter-city fiber network as portions of that network are
lit.
Connecting Customers to Our Networks
We attempt to connect our customers directly to
our networks where it is economical to do so. We believe that by
deploying direct connections to our customers, rather than
connecting through the incumbent carriers' facilities, we
will reduce our costs and be better positioned to meet our
customers' communications requirements and to more rapidly
deploy our service. We connect customers to our networks by
using fiber optic cable and, in limited circumstances, fixed
wireless spectrum.
In many cases, we must lease facilities from an
incumbent carrier to connect a customer to our network. By
building our metro networks in central business districts, in
many cases we have minimized the distance from our network to a
potential customer, which results in lower costs associated with
these leased facilities because the cost of those facilities is
generally based, in part, on the length of the leased connection.
Fiber Optics.
In
cases where expected revenues justify the construction cost, we
will install a new fiber optic extension from our network to the
customer's premises. Whether it is economical to construct
a fiber optic extension depends, among other things, on:
•
the existing and potential revenue base located
    in the building in question;
•
the building location relative to our network and
    our ability to access the communications equipment in that
    building, and
•
local permit requirements.
Even if we initially determine that it is not
economical to construct a fiber connection to a building, we
will continually reexamine the costs and benefits of a fiber
connection and may at a later date determine that construction
of one is justified.
Broadband Wireless
Spectrum.
In cases where construction
of a fiber optic connection is not practical or economical, in
limited cases we have deployed a high-bandwidth wireless
connection between an antenna on the roof of the customer's
premises and an antenna attached to our fiber rings. We hold
licenses to fixed wireless spectrum in numerous cities, covering
areas where 95% of the population of the 30 largest U.S. cities
live or work.
In those limited cases where we decide to install
equipment to operate fixed broadband licenses, we must secure
roof and other building access rights, including access to
conduits and wiring from the owners of each
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building or other structure on which we propose
to install our equipment, and may need to obtain construction,
zoning, franchise or other governmental permits.
DSL Technology.
We
have also deployed DSL technology to meet the high-bandwidth
needs of those customers located less than three miles from the
incumbent carrier's central office and whose customer
connection remains over copper wire. DSL technology reduces the
bottleneck in the transport of information, particularly for
data services, by increasing the data carrying capacity of
copper telephone lines. We believe that, for many small to
medium sized customers within the geographic areas that can be
served by DSL technology, existing copper connections using DSL
technology from customer buildings to our local fiber optic
networks will offer a lower cost solution for providing
high-quality broadband services than fiber or fixed wireless
connections.
We offer DSL service in numerous markets in the
U.S., mainly through wholesale arrangements with the incumbent
carriers and other DSL service providers. We have introduced our
own DSL equipment and services at many collocation sites,
including central offices of the incumbent carriers that serve a
significant number of business customers.
Network Technology
Overview
The wires, cables and spectrum that comprise the
physical layer of our networks can support a variety of
communications technologies. We seek to offer customers a set of
technology options that can support services that meet their
changing needs and introduce new technologies as necessary.
Specifically, we believe that a service platform based on
Internet Protocol, or IP, will provide us with significant
future opportunities, because it will enable data, voice and
video to be carried inexpensively over our end-to-end,
facilities-based network. Consequently, we have supplemented our
current data and voice switching technology with IP equipment.
Over the past few years, both optical and
IP-based networking technologies have undergone rapid
innovation. These technological developments enable us to offer
our customers numerous high-speed data services. Many of these
innovations have the effect of increasing the efficiency of the
physical components of our network by increasing the effective
capacity of networks for these types of applications. In the
future, we expect that IP-based technology will become the
preferred technology for voice calls and facsimile transmission
as well. We plan to remain flexible in our use of technology, so
that, as underlying communications technology changes, we will
have the ability to take advantage of and implement new
technologies that best meet our network requirements and
customers' needs.
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The illustration below depicts the configured
circuit capacities deployed in the IP network.
Fiber Optic Technology
To enhance the capacity of our metro networks, we
are incorporating dense wavelength division multiplexing
technology, which makes it possible to simultaneously transmit
data at more than one wavelength, thereby allowing the
transmission of multiple signals through the same fiber at
different wavelengths. When applied to the state-of-the-art
optical fiber deployed in many of our metro networks and in our
intercity network, this technology can dramatically increase the
capacity of an optical fiber.
Switching Technology
There are two widely used switching technologies
currently deployed in communications networks: circuit-switching
systems and packet-switching systems. Circuit switch-based
communications systems, which currently dominate the public
telephone network, establish a dedicated channel for each
communication (such as a telephone call for voice or fax),
maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call.
Packet switch-based communications systems, which
format the information to be transmitted into a series of
shorter digital messages called "packets," are the
preferred means of data transmission. Each packet consists of a
portion of the complete message plus the addressing information
to identify the destination and return address. A key feature
that distinguishes Internet architecture from the public
telephone network is that on the packet-switched Internet, a
single dedicated channel between communication points is not
required.
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Packet switch-based systems offer several
advantages over circuit switch-based systems, particularly the
ability to commingle packets from several communications sources
together simultaneously onto a single channel. For most
communications, particularly those with bursts of information
followed by periods of "silence," the ability to
commingle packets provides for superior network utilization and
efficiency, resulting in more information being transmitted
through a given communication channel.
IP technology, an open protocol that allows
unrelated computer networks to exchange data, is the
technological basis of the Internet. The Internet's
explosive growth in recent years has focused intensive efforts
worldwide on developing IP-based networks and applications. In
contrast to protocols like ATM, which was the product of
elaborate negotiations between the world's monopoly
telephone companies, IP is an open standard, subject to
continuous improvement.
We believe that a form of IP-based switching will
eventually replace both ATM and circuit switched technologies,
and will be the foundation of integrated networks that treat all
transmissions — including voice, fax and
video — simply as forms of data transmission. Although
not always the case, voice over IP technology now incorporates
the quality of service necessary for commercial deployments, but
the pricing of equipment that must be installed at customer
locations in order to implement voice over IP applications is
not yet cost-effective for widespread application. We expect
that over time improved technology and the manufacture of
sufficient volumes of equipment will make customer adoption of
voice over IP applications more cost-effective.
We have constructed IP points of presence in all
of our major markets using high-capacity IP routers, through
which we offer Internet-related services. We currently connect
these points of presence with our inter-city fiber network,
which serves as our OC-192 IP backbone.
We have deployed a number of next generation
switching technologies, including soft-switch, optical and
Ethernet switching technologies. The soft-switch is a
distributed computer system that performs the same functions as
a circuit switch. It can route and switch information at an
extremely fast rate. Initially, we will use soft-switch
technology to complement and relieve traffic from our circuit
switches. We have deployed optical switching, routing and
transmission equipment on our inter-city network to create an
all-optical network. This technology is designed to make
significant amounts of bandwidth available to our customers. It
also is designed to enable us to more effectively and
efficiently manage our customers' transmissions and to
enhance our deployment of dense wavelength division multiplexing
technology. Optical switching will support all transmission
protocols, including IP, ATM, and frame relay. We also are
deploying Ethernet switching technology to support and expand
our Ethernet services.
We believe that the deployment of IP and
soft-switch technologies in our network will enable us to
implement new services based on current IP technology, and
position us to adopt future IP technology implementations as
they evolve to support fully integrated communications networks.
Fixed Wireless Technology
We hold licenses for 1,150 to 1,300 MHz of
local multipoint distribution services, or LMDS, spectrum in 58
cities, covering areas where 95% of the population of the 30
largest U.S. cities live or work. Our licenses also include 150
MHz of LMDS spectrum in 10 smaller cities and 300 MHz of
spectrum in the five boroughs that comprise New York City.
We also hold ten fixed wireless licenses in the 39 gigahertz, or
GHz, frequency. Eight such licenses provide from 100 to 300
additional MHz in four cities where we hold a 150 MHz LMDS
license and two 39 GHz licenses provide us with
200 MHz of fixed wireless capacity in Las Vegas, where we
do not hold a LMDS license.
The spectrum under the licenses we hold is not
suitable for mobile telephones, but can transmit voice, data or
video signals from one fixed antenna to one or many others. As
the word "local" in the local multipoint distribution
service name implies, the radio links provided using LMDS
frequencies are of limited distance, typically of a few miles or
less, due to the degradation of these high-frequency signals
over greater distances. The same is true of the 39 GHz
spectrum. Although technology to support the multipoint
characteristics of this spectrum has not been developed, we use
the spectrum for point-to-point connections in those limited
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situations where it is more cost-efficient than
installing a fiber cable or leasing facilities from the
incumbent carrier.
A wireless connection typically consists of
paired antennas placed at a distance of up to 2.5 miles
from one another with a direct, unobstructed line of sight. The
antennas are typically installed on rooftops, towers or windows.
Because these connections are affected by rain attenuation, in
areas of heavy rainfall transmission links are engineered for
shorter distances and greater power to maintain transmission
quality, which tends to increase the cost of service coverage.
With the 39 GHz spectrum, because there are
existing users of that spectrum, we as a new user of the
spectrum will be required to coordinate our use so as not to
interfere with an existing user. We do not believe that the
coordination process will significantly limit our ability to
make use of the spectrum.
The term of the licenses for our fixed wireless
spectrum generally is ten years, and the initial term of a few
licenses expires as early as 2006. Although the licenses are
renewable for an additional ten year term, renewal is
conditioned on us satisfying certain utilization requirements
established by the Federal Communications Commission, or FCC.
Our current utilization may not be sufficient to satisfy this
condition for certain licenses, and, unless we begin to use
substantially more fixed wireless spectrum, the FCC may not
renew one or more of our licenses.
Sales and Customer Care
Overview
Our sales organization includes a direct field
sales force and alternative sales channels. Our direct sales
force for services other than shared tenant services includes
two sales organizations. Our market sales organization focuses
on small to medium-sized customers and larger or growing
businesses within a market and multi-market accounts. Our
national sales organization focuses on targeted larger and
national accounts, and specific enterprise and carrier channels.
Our market sales organization focuses on selling
our full suite of services to small to medium and larger
businesses and multi-market accounts. Our market research
indicates that these customers prefer a single source for all of
their telecommunications requirements, including products,
billing, installation, maintenance, and customer service. By
offering these customers our local and long distance services or
our XOptions packages, which combine local and long distance
voice services, Internet access and web hosting services, we
believe we provide our customers a level of convenience that
generally is unavailable in the communications marketplace.
We market and sell services to other
telecommunications carriers and large commercial users and
national accounts through our national sales team. The expansion
of our data service capabilities has enabled our national sales
team to expand our targeted customers to include larger national
and multi-market accounts customers that can benefit from our
broad range of services.
We market and sell our shared tenant services
through a separate direct sales force, which targets high
concentrations of business customers in multi-tenant commercial
office buildings in the metropolitan areas in which we provide
this service.
Direct Sales Force
We have established highly motivated and
experienced direct sales forces. Our strategy is to design the
structure of our sales efforts so that our sales personnel are
able to establish a direct and personal relationship with our
customers. We seek to recruit salespeople with strong sales and
telecommunications backgrounds, including salespeople from long
distance companies, telecommunications equipment manufacturers,
network systems integrators and the incumbent carriers.
Salespeople are offered incentives through a commission
structure that generally targets 40% to 50% of a
salesperson's total compensation to be based on
performance. The size of our sales organization decreased from
2001 to 2002, from approximately 1,750 employees at
December 31, 2001 to approximately 1,100 employees at
December 31, 2002.
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Other Sales Channels
We have complemented our direct sales force by
developing alternative sales channels to distribute the
increasing number of products and services available to our
broadening customer base. These channels include numerous third
party sales agents. We currently have distribution arrangements
with a number of national, regional and local agents and agency
firms, whose representatives market a broad range of XO Parent
services. We have a staff of approximately 65 employees who
manage our agent relationship and the over 500 indirect agents
in markets throughout the United States. We also sell and market
certain services via our telesales operation and via the
Internet at www.xo.com.
Customer Care
Once a customer's services have been
installed, our customer care operations support customer
retention and satisfaction. Our goal is to provide customers
with a customer care group that has the ability and resources to
respond to and resolve customer questions and issues as they
arise, 24 hours a day, seven days a week. In 2002, although
we conducted much of our customer care operations from four call
centers, we also provided locally-based care for many large
customers. Although we believe that a centralized care structure
not only takes advantage of economies of scale, but also enables
us to provide better customer service, we intend to close one of
our care facilities in 2003 and are evaluating whether to place
additional customer care resources locally. The size of our
customer care organization decreased from 2001 to 2002, from
approximately 1,000 employees at December 31, 2001 to
approximately 700 employees at December 31, 2002.
Regulatory Overview
Overview
The Telecommunications Act of 1996, or the
Telecom Act, which substantially revised the Communications Act
of 1934, has established the regulatory framework for the
introduction of competition for local telecommunications
services throughout the United States by new competitive
entrants such as us. Prior to the passage of the Telecom Act,
states typically granted an exclusive franchise in each local
service area to a single dominant carrier — often a
former subsidiary of AT&T, known as a Regional Bell
Operating Company, or RBOC — which owned the entire
local exchange network and operated a virtual monopoly in the
provision of most local exchange services in most locations in
the United States. The RBOCs, following some recent
consolidation, now consist of the following companies:
BellSouth, Verizon, Qwest Communications and SBC Communications.
Among other things, the Telecom Act preempts
state and local governments from prohibiting any entity from
providing telecommunications service, which has the effect of
eliminating prohibitions on entry that existed in almost half of
the states at the time the Telecom Act was enacted. At the same
time, the Telecom Act preserved state and local jurisdiction
over many aspects of local telephone service, and, as a result,
we are subject to varying degrees of federal, state and local
regulation. Consequently, federal, state and local regulation,
and other legislative and judicial initiatives relating to the
telecommunications industry could significantly affect our
business.
We believe that the Telecom Act provided the
opportunity to accelerate the development of competition at the
local level by, among other things, requiring the incumbent
carriers to cooperate with competitors' entry into the
local exchange market. We have developed our business and
designed and constructed our networks to take advantage of the
features of the Telecom Act that require cooperation from the
incumbent carriers, and believe that the continued viability of
the provisions relating to these matters is critical to the
success of the competitive regime contemplated by the Telecom
Act.
Although the Telecom Act and the related rules
governing competition issued by the FCC, as well as
pro-competitive policies already developed by state regulatory
commissions, have enabled new entrants like us to capture a
portion of the incumbent carriers' market share of local
services, there have been numerous attempts to limit or
eliminate the basic framework for competition in the local
exchange services market established by the Telecom Act through
a combination of federal legislation, new rulemaking by the FCC
and challenges to
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existing and proposed regulations by the
incumbent carriers. We expect these efforts to limit the
benefits of the Telecom Act to continue. Successfully
implementing our business plan is predicated on the assumption
that the basic competitive framework will remain in place.
Federal Regulation
The FCC exercises jurisdiction over our
communication facilities and services. We have authority from
the FCC for the installation, acquisition or operation of our
wireline network facilities to provide facilities-based
international services. In addition, we have obtained FCC
authorizations for the operation of our LMDS and 39 GHz
fixed wireless facilities. Unlike incumbent carriers, we are not
currently subject to price cap or rate of return regulation,
which leaves us free to set our own pricing policies for end
user services subject only to the general federal guidelines
that our charges for interstate and international services be
just, reasonable, and nondiscriminatory. The FCC does authorize
us to file interstate tariffs on an ongoing basis for interstate
access (rates charged among carriers for access to their
networks). The FCC, however, has issued a decision that required
us (with only minor exceptions) to withdraw tariffs for
interstate domestic long distance service and international long
distance service. We, however, still are required to make the
terms, conditions and pricing of the detariffed services
available to the public on our Company web page.
The following is a summary of the interconnection
and other rights granted by the Telecom Act that are most
important for full local competition and our belief as to the
effect of the requirements, if properly implemented:
•
Interconnection with the networks of incumbents
    and other carriers, which permits customers of ours to exchange
    traffic with customers connected to other networks;
•
Local loop unbundling, which allows us to
    selectively gain access to incumbent carriers' facilities
    and wires that connect the incumbent carriers' central
    offices with customer premises, thereby enabling us to serve
    customers on a facilities basis not directly connected to our
    networks;
•
Reciprocal compensation, which mandates
    arrangements for local traffic exchange between us and both
    incumbent and competitive carriers and compensation for
    terminating local traffic originating on other carriers'
    networks, thereby improving our margins for local service;
•
Number portability, which allows customers to
    change local carriers without changing telephone numbers,
    thereby removing a significant barrier for a potential customer
    to switch to our local voice services;
•
Access to phone numbers, which mandates
    assignment of new telephone numbers to our customers, thereby
    enabling us to provide telephone numbers to new customers on the
    same basis as the incumbent carrier; and
•
Collocation of telecommunications equipment in
    incumbent central offices, which enables us to have direct
    access to unbundled loops and other network elements and
    facilitates their efficient integration with our switching and
    other network facilities.
In January 1999, the U.S. Supreme Court upheld
key provisions of the FCC rules implementing the Telecom Act, in
a decision that was generally favorable to competitive telephone
companies such as us. In finding that the FCC has general
jurisdiction to implement the Telecom Act's local
competition provisions, the Supreme Court confirmed the
FCC's role in establishing national telecommunications
policy, and thereby created greater certainty regarding the
rules governing local competition going forward.
Although the rights established in the Telecom
Act are a necessary prerequisite to the introduction of full
local competition, they must be properly implemented and
enforced to permit competitive telephone companies like us to
compete effectively with the incumbent carriers. Discussed below
are several FCC and court proceedings relating to the
application of certain FCC rules and policies that are
significant to our operations.
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Unbundling of Incumbent Network
    Elements
In the January 1999 Supreme Court decision
discussed above, the Court affirmed the FCC's
interpretation of matters related to unbundling of incumbent
carriers' network elements. It held that the FCC correctly
interpreted the meaning of the term "network element",
which defines the parts of an incumbent carrier's
operations that may be subject to the "unbundling"
requirement of the Telecom Act. The Court, however, also held
that the FCC did not correctly determine which network elements
must be unbundled and made available to competitive telephone
companies such as us. In November 1999, the FCC released its
"UNE (unbundled network element) Remand Order", which
addressed the deficiencies in the FCC's original ruling
cited by the Supreme Court. The order generally was viewed as
favorable to us and other competitive carriers because it
ensured that incumbent carriers would be required to continue to
make available those network elements, including unbundled
loops, that are crucial to our ability to provide local and
other services. The UNE Remand Order subsequently was appealed
by the incumbent carriers.
On May 24, 2002, the United States Court of
Appeals for the D.C. Circuit released an opinion remanding the
UNE Remand Order to the FCC for further consideration. The Court
of Appeals stated that it had remanded the order because it felt
that:
•
the FCC had adopted uniform national rules with
    respect to almost every unbundled element for every geographic
    market without regard to the state of competition in any
    particular market; and
•
the FCC's determination of when cost
    disparities impair a competitor's ability to provide
    service without unbundled elements was too broad.
In response to the Court of Appeals'
decision, and as part of its statutorily required periodic
review of its list of unbundled elements, the FCC initiated its
"Triennial Review" proceeding.
On February 20, 2003, the FCC held an open
meeting and adopted its Triennial Review decision. The full text
of what is expected to be a voluminous order is not yet
available, so we have only a broad outline of the FCC's
actions without the detail required to clearly understand all of
the ramifications of this important decision. Based on the
FCC's press release and the comments of each FCC
Commissioner at the meeting, it appears that, under that order,
our ability to obtain access to certain unbundled network
elements and incumbent network upgrades will be curtailed or
more costly in the future. Also, it appears that the order would
delegate to the states the overall responsibility for deciding
what unbundled elements should be available to competitors like
us in local markets of each of the respective states. Delegation
of these determinations creates the risk that some states may
decide to limit or eliminate unbundled elements to which we have
access today and that we will be faced with different sets of
rules and costs if states issue inconsistent decisions.
Based on the FCC's press release announcing
the Triennial Review decision and related comments of the
Commissioners, the following matters may be of relevance to us
once the order is issued:
•
Curtailed Access to Broadband: It appears that
    the order will adopt new rules that would restrict competitive
    carriers from leasing as unbundled elements certain upgrades
    that the incumbent carriers make to their networks, such as the
    deployment of new optical fiber or upgrades from copper to
    optical fiber. For example, a new fiber loop to a customer that
    replaces an existing copper loop could be exempt from
    unbundling, except that incumbents must continue to unbundle the
    pre-existing copper loop or provide a voice channel for us on
    the new fiber loops that is equivalent to the old copper loop.
    Although the imposition of any restrictions on our access to the
    incumbents' broadband networks is not a favorable
    development for us, we believe that the adverse impact is
    partially mitigated by the fact that it appears that incumbents
    would be required to continue to provide us with basic access to
    those facilities that we currently lease from them to serve many
    of our customers.
•
Unbundled Local Loops: It appears that the order
    will make a general, national finding that competitive carriers
    should have access to certain unbundled loops of the incumbent
    carriers. The states, however, may remove competitive
    carriers' access to such loops based on the results of
    specified competitive analyses. Incumbent carriers will no
    longer be required to provide competitive carriers with
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access to certain very high-capacity loops. We
    believe that the net result of such an order would not have a
    significant impact on us, as the access to the vast majority of
    unbundled loops that we use today would be preserved.
•
Unbundled Transport: It appears from the press
    release announcing the Triennial Review decision that the order
    will change the definition of "dedicated transport" in
    such a way that competitive carriers would have to purchase
    certain transport facilities at higher rates than they do today.
    It appears that the order would maintain access to many types of
    transport between incumbent facilities, such as transport
    between incumbent central offices, but it would redefine
    transport to eliminate the unbundling of other transport. It
    also appears that the order would set forth a test that the
    states must follow in considering whether transport should be
    available in local markets within the states. It appears that
    the order will provide that certain very high-capacity transport
    would no longer be available as an unbundled element and that
    shared transport would be unavailable as an unbundled element in
    most business markets. Although it is not possible to gauge the
    full effect of these changes without seeing the text of the
    order, we believe that it is likely that these actions would
    raise our costs for transport services in the future.
•
Enhanced Extended Links and Co-mingling: It
    appears that the order will facilitate the ability of
    competitive carriers like us to obtain a loop and transport
    combination of unbundled elements known as "enhanced
    extended links", provided that the underlying loop and
    transport elements are available on an unbundled basis. It also
    appears that the order will permit competitive carriers to mix
    unbundled network elements with retail services instead of
    requiring them to artificially segregate unbundled elements from
    the remainder of their networks. Because we currently take
    advantage of both services from the incumbent carriers, we
    believe that these developments could result in cost savings for
    us.
•
Calculation of Unbundled Element Rates: It
    appears that the order will allow the incumbent carriers to
    utilize a higher cost of capital and shorter depreciation lives
    to establish rates for unbundled elements. We believe that these
    modifications could raise our costs for leasing unbundled
    elements in the future.
As indicated above, the text of the Triennial
Review decision has not yet been released. We anticipate that,
once the FCC's new unbundling rules are effective,
incumbent carriers will pursue review in courts, institute
administrative proceedings with the FCC and state regulatory
agencies and lobby the United States Congress, all in an effort
to affect laws and regulations in a manner even more favorable
to them and against the interest of competitive carriers. At the
same time, we would anticipate that the competitive carriers
will endeavor to improve their positions and access to the
incumbents' networks through similar means.
Collocation in Incumbent Central
    Offices
Collocation regulations promulgated by the FCC
specify in greater detail obligations that the Telecom Act
imposes upon the incumbent carriers to open their local networks
to competition by providing competitors space to locate their
equipment in incumbent central offices and remote terminals for
the purpose of interconnection. This allows the competitive
carriers to provide local telephone services and to use portions
of the incumbent carriers' existing networks to offer new
and innovative services. Over the past four years, the
FCC's collocation regulations have been the subject of very
contentious proceedings at the FCC and litigation before several
courts. On remand from a March 2000 decision by the U.S. Court
of Appeals for the D.C. Circuit, the FCC issued a decision that
revised its rules in a manner that permits incumbent companies
to exercise more discretion in determining the placement of
competitors' equipment in their central offices, and does
not require the incumbents to allow competitors to install and
maintain cross-connections between other collocated competitors,
but requires the incumbents themselves to provide this as part
of their collocation services. In June, 2002, the D.C. Circuit
Court of Appeals affirmed the FCC's remand order, and the
FCC has since clarified that incumbents should make their
cross-connection service available in the physical collocation
tariffs they file with the FCC.
In October 2002, Verizon filed an application
with the FCC requesting authority to discontinue providing
federally-tariffed physical collocation services, as required
under current FCC regulations applicable to most incumbent
carriers. Verizon asked the FCC to require its competitors
instead to order collocation services
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solely pursuant to terms and conditions approved
by state public service commissions. Verizon's application
remains pending, but if this authority is granted, such
discontinuance would make it more costly and difficult for
competitors such as us to obtain collocation services because
the rates set by state public service commissions are typically
significantly higher than those approved by the FCC, and may
require competitors to engage in costly negotiations in
different states. If Verizon is successful, other large
incumbent providers are likely to seek and receive comparable
relief.
Regulation of the RBOCs' Ability to
    Provide Long Distance Service
The FCC has primary jurisdiction over the
implementation of Section 271 of the Telecom Act, which
provides that the RBOCs cannot offer in-region long distance
services until they have demonstrated that:
•
they have entered into an approved
    interconnection agreement with a facilities-based competitive
    telephone company or that no such competitive telephone company
    has requested interconnection as of a statutorily determined
    deadline;
•
they have satisfied a 14-element checklist
    designed to ensure that the RBOC is offering access and
    interconnection to all local exchange carriers on competitive
    terms; and
•
the FCC has determined that allowing the RBOC to
    offer in-region, long distance services is consistent with the
    public interest, convenience and necessity.
The FCC has granted each of the RBOCs the
authority to provide long distance service in a number of
states. We expect that the RBOCs will have received such
authority with respect to most of the remaining states in the
near term. Although we cannot predict when such approval is
likely to occur, it could have an adverse affect on our ability
to compete if it is not accompanied by safeguards to ensure that
the RBOC continues to comply with the market-opening
requirements of Section 271 or if it is granted prematurely
before the RBOC has completely satisfied the market-opening
requirements.
Provision of Broadband Telecommunications
    Services and Information Services
Current federal and state regulation places
certain restrictions and conditions on the provision of advanced
telecommunications services, or broadband services, such as data
and DSL services, by the RBOCs. Furthermore, the network
elements that RBOCs must make available under the FCC's
unbundling rules to competitors may be used for the provision of
broadband services. However, at the urging of the RBOCs and
other incumbent carriers, the FCC in its Triennial Review
decision, appears to have greatly curtailed the extent to which
the incumbents must unbundle the broadband portion of their
networks for their competitors. Despite this apparent victory,
the RBOCs have vowed to continue to push for further
deregulation through federal and state legislative efforts. For
example, broadband deregulation legislation is currently under
consideration in several states, including Georgia, Texas and
Missouri. In addition, it is anticipated that deregulatory
legislation will be pursued by the RBOCs in Congress. In
addition to possible legislation, the FCC has initiated another
pending proceeding that could result in a further diminishment
of incumbent carriers' requirement to make unbundled
network elements that are used for certain broadband or
information services available to us. The FCC has issued a
Notice of Proposed Rulemaking entitled "Appropriate
Framework for Broadband Access to the Internet Over Wireline
Facilities" that requests comments on the proper
classification of broadband access services as either regulated
telecommunications services or unregulated information services.
The Triennial Review decision significantly restricts the
availability on an unbundled basis of certain network elements
deploying fiber or packet-switching technologies. That decision,
in conjunction with a decision in this proceeding, legislative
change or a court ruling further broadening the definition of
what constitutes unregulated information services could have the
effect of allowing RBOCs to provide terms, conditions and
pricing to their own affiliates that provide data or information
services that are better than those made available to us. Such
developments could also be expected to adversely affect our cost
of doing business by increasing the cost of purchasing or
leasing such facilities from the RBOCs.
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Universal Service
In 1997, the FCC established a significantly
expanded federal telecommunications subsidy regime known as
"universal service". For example, the FCC established
new subsidies for services provided to qualifying schools and
libraries and rural health care providers, and expanded existing
subsidies to low income consumers. Most telecommunications
companies, including us, must pay for these programs based on
their share of interstate and international telecommunications
end user revenues. In a 1999 decision, the Fifth Circuit Court
of Appeals issued a ruling that had the net effect of somewhat
lowering our contribution of revenues to universal service,
which stands at 7.28% of end user telecommunications revenues
for the first quarter of 2003. Now, the FCC has taken further
steps to modify the system for assessment and recovery of
universal service funds. In a December 2002 Notice of Proposed
Rulemaking, the FCC has asked many broad-ranging questions
regarding universal service, including whether to change its
method of assessing contributions due from carriers by basing it
on the number and capacity of connections they provide, rather
than on interstate and international end user revenues they
earn. We cannot be sure that legislation or FCC rulemaking will
not increase the size of our subsidy payments, the scope of the
subsidy program or our costs of calculating, collecting and
remitting the universal service related payments.
Intercarrier Compensation
    Reform
Currently, communications carriers are required
to pay other carriers for interstate access charges and local
reciprocal compensation charges, both of which are being
considered for reform.
Interstate Access
Charges.
Long distance carriers pay
local facilities-based carriers, including us, interstate access
charges for both originating and terminating the interstate
calls of long distance customers on the local carriers'
networks. Historically, the RBOCs set access charges higher than
cost and justified this pricing to regulators as a subsidy to
the cost of providing local telephone service to higher cost
customers. With the establishment of an explicit and
competitively neutral universal service subsidy mechanism,
however, the FCC is under increasing pressure to revise the
current access charge regime to bring the charges closer to the
cost of providing access. In response, the FCC issued a decision
in 2001 setting the interstate rates that competitive local
carriers charge to long distance carriers at a level that will
gradually decrease over three years from a maximum of $0.025 per
minute to the rates charged by incumbent carriers. So long as we
are in compliance with the FCC's rate schedule, the
FCC's order forbids long distance carriers from challenging
our interstate access rates. Although this FCC decision lowering
interstate access charges will reduce our access charge revenues
over time, we do not expect that such a reduction will have a
material impact on our total revenues or financial position. The
FCC is also considering, in a declaratory ruling proceeding
commenced in November 2002, the question of whether voice over
the Internet services or services utilizing an Internet protocol
should be made subject to interstate access charges in the same
manner as traditional telephony. Like a growing number of
carriers, we utilize an Internet protocol for a portion of our
traffic as do some of our customers. The FCC has indicated on
several occasions that such services are exempt from interstate
access charges, but until the FCC issues its ruling in the
current proceeding, it is unclear how such traffic will be
treated for intercarrier compensation purposes.
Local Reciprocal Compensation
Charges.
Local telephone companies
such as us that originate traffic that is terminated on the
network of other carriers typically compensate the other local
carriers for terminating that traffic. These payments flow in
both directions between any two carriers. First, when we
terminate traffic for another local carrier to a customer on our
network, we collect compensation. Second, when we send traffic
to another carrier for termination, we pay compensation. Some
competitors, however, have a customer base that generates many
more minutes of terminating traffic from other carriers than
originating traffic destined for other carriers. For example, a
competitor that has a customer base that has many information
service providers typically will have a large amount of
compensation being paid to it by other carriers, while it will
owe very little reciprocal compensation to other carriers. The
FCC revamped the local reciprocal compensation structure in 2001
on an interim basis for three years to eliminate or reduce the
opportunity for carriers to take advantage of an imbalance of
originating and terminating traffic flows due to traffic
terminated to information service providers. The FCC also
initiated a rulemaking to examine inter-carrier compensation
more comprehensively. Under the decision, at the election of the
incumbent carrier, terminating traffic that is out-
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of-balance by a ratio of more than 3 to 1 can be
compensated at a lower rate, or in some cases, at no charge.
Because the traffic we exchange with other local carriers is
relatively in balance across our markets, however, we do not
expect FCC decisions to restructure reciprocal compensation to
have a material impact on our total revenues or financial
position vis-à-vis other carriers.
Regulation of Business
    Combinations
The FCC, along with the Department of Justice and
state commissions, has jurisdiction over business combinations
involving telecommunications companies. For example, the
FCC's approval was required to implement certain aspects of
our Chapter 11 reorganization. The FCC has reviewed a
number of recent and proposed combinations to determine whether
the combination would undermine the market-opening incentives of
the Telecom Act by permitting the combined company to expand its
operations without opening its local markets to competition or
have other anti-competitive effects on the telecommunications
and Internet access markets. In some cases, the FCC has set
conditions for its approval of the proposed business
combination. We cannot predict whether any conditions imposed
will be effective, nor can we predict whether the FCC will
impose similar conditions should it approve future business
combinations.
State Regulation
State regulatory commissions retain jurisdiction
over our facilities and services to the extent they are used to
provide intrastate communications. We expect that we will be
subject to direct state regulation in most, if not all, states
in which we operate in the future. Many states require
certification before a company can provide intrastate
communications services. We are certified in all states where we
have operations and certification is required. We cannot be sure
that we will retain such certifications or that we will receive
authorization for markets in which we expect to operate in the
future.
Most states require us to file tariffs or price
lists setting forth the terms, conditions and prices for
services that are classified as intrastate. In some states, our
tariff can list a range of prices for particular services. In
other states, prices can be set on an individual customer basis.
Several states where we do business, however, do not require us
to file tariffs. We are not subject to price cap or to rate of
return regulation in any state in which we currently provide
service.
Under the regulatory arrangement contemplated by
the Telecom Act, state authorities continue to regulate matters
related to universal service, public safety and welfare, quality
of service and consumer rights. All of these regulations,
however, must be competitively neutral and consistent with the
Telecom Act, which generally prohibits state regulation that has
the effect of prohibiting us from providing telecommunications
services in any particular state. State commissions also enforce
some of the Telecom Act's local competition provisions,
including those governing the arbitration of interconnection
disputes between the incumbent carriers and competitive
telephone companies and the setting of rates for unbundled
network elements. Finally, the order expected from the
FCC's Triennial Review decision will delegate to the states
important authority to decide what unbundled elements must be
made available to competitive carriers in each of the
states' local markets over a period three to nine months
following the effectiveness of the decision. Consequently, this
authority would give the states a key role regarding our
continuing access to unbundled elements, such as loops and
transport in particular, that are necessary in many cases to
connect our customers to our metro networks.
Local Government Regulation
In certain locations, we must obtain local
franchises, licenses or other operating rights and street
opening and construction permits to install, expand and operate
our fiber-optic networks in the public right-of-way. In some of
the areas where we provide network services, our subsidiaries
pay license or franchise fees based on a percentage of gross
revenues or on a per linear foot basis. Cities that do not
currently impose fees might seek to impose them in the future,
and after the expiration of existing franchises, fees could
increase. Under the Telecom Act, state and local governments
retain the right to manage the public rights-of-way and to
require fair and reasonable compensation from telecommunications
providers, on a competitively neutral and
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nondiscriminatory basis, for use of public
rights-of-way. As noted above, these activities must be
consistent with the Telecom Act, and may not have the effect of
prohibiting us from providing telecommunications services in any
particular local jurisdiction.
If an existing franchise or license agreement
were to be terminated prior to its expiration date and we were
forced to remove our fiber from the streets or abandon our
network in place, our operations in that area would cease, which
could have a material adverse effect on our business as a whole.
We believe that the provisions of the Telecom Act barring state
and local requirements that prohibit or have the effect of
prohibiting any entity from providing telecommunications service
should be construed to limit any such action. Although none of
our existing franchise or license agreements has been
terminated, and we have received no threat of such a
termination, there can be no assurance that one or more local
authorities will not attempt to take such action. Nor is it
clear that we would prevail in any judicial or regulatory
proceeding to resolve such a dispute.
Environmental Regulation
Our switch site and customer premise locations
are equipped with back-up power sources in the event of an
electrical failure. Each of our switch site locations has
battery and diesel fuel powered back-up generators, and we use
batteries to back-up some of our customer premise equipment.
Federal, state and local environmental laws require that we
notify certain authorities of the location of hazardous
materials and that we implement spill prevention plans. We
believe that we currently are in compliance with these
requirements in all material respects.
Competition
The industry environment in which we operate has
changed significantly recently. In particular, with the steep
decline in the market valuations of debt and equity securities
of telecommunications companies, particularly emerging
providers, in the last two years the financial condition of many
competitive and other carriers has deteriorated, and a number of
these competitors have attempted to reorganize, or have
completed reorganizations, under Chapter 11 of the
Bankruptcy Code. Several competitors who have completed these
reorganization efforts, have emerged from bankruptcy with
significant improvements to their financial condition or are
newly formed entities that have acquired the assets of others at
substantial discounts when compared to their original cost basis.
At the same time, the regulatory environment has
changed and continues to change rapidly. Although the Telecom
Act and other actions by the FCC and state regulatory
authorities have had the general effect of promoting competition
in the provision of communications services, it also has allowed
the incumbent carriers to begin to provide long distance
services in many states. These effects, together with new
technologies, such as voice-over-IP, and the importance of data
services, have blurred the distinctions among traditional
communications markets. As a result, a competitor in any of our
business areas potentially is a competitor in our other business
areas.
Many of our existing and potential competitors
have greater market presence, including name recognition,
engineering and marketing capabilities, and financial,
technological and personnel resources, including resources for
the development and deployment of new technology and services,
than those available to us.
Incumbent Carriers
In each market that we serve, we face, and expect
to continue to face, significant competition from the incumbent
carriers, which currently dominate the local telecommunications
markets, primarily the RBOCs, which include BellSouth, Verizon,
Qwest Communications and SBC Communications. We compete with the
incumbent carriers in our markets for local exchange and other
services on the basis of product offerings, quality, capacity
and reliability of network facilities, state-of-the-art
technology, price, route diversity, ease of ordering and
customer service. However, the incumbent carriers have
long-standing relationships with their customers and provide
those customers with various transmission and switching services
that we, in many
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cases, do not currently offer. Competition,
however, is not based on any proprietary technology. Because our
fiber optic networks have been recently installed compared to
those of the incumbent carriers, our networks' dual path
architectures and state-of-the-art technology may provide us
with cost, capacity, and service quality advantages over some
existing incumbent carrier networks. Incumbent carriers also
have received regulatory approval to provide and have begun to
provide long distance voice service in a number of regions.
Other Voice Service Competitors
We face, and expect to continue to face,
competition for local and long distance telecommunications
services from competitors and potential competitors in addition
to the incumbent carriers, primarily AT&T, WorldCom, Inc.
and Sprint Corporation. With respect to local telecommunications
services, we also face, and expect to continue to face,
competition from other carriers and competitors, such as Time
Warner Telecom, Allegiance Telecom Inc., Focal Communications
and McLeodUSA Incorporated. With respect to long distance
telecommunications services, although the market is dominated by
AT&T, WorldCom, and Sprint, hundreds of other companies,
such as Qwest, also compete in the long distance marketplace. In
addition, as the RBOCs continue to receive FCC authorization to
increase the number of states in which they are authorized to
provide long distance telecommunications services, we would
expect them to become increasingly significant competitors for
those services.
Data Service Competitors
We face, and expect to continue to face,
competition for Internet access and other data services from
telecommunications companies, including AT&T, WorldCom, and
Sprint, online service providers, DSL service providers, and
Internet service providers and web hosting providers.
Other Business Competitors
Our enhanced communications service offerings are
also subject to competition. For example, there are several
competitors that offer interactive voice response services
similar to those offered by our Interactive division, such as
Basis, Interactive Telesis and West Corporation, which we
believe focus their sales efforts on large volume interactive
voice response service users, live agent call centers and IVR
hardware sales.
Employees
As of March 31, 2003 we employed
approximately 4,900 people, including full-time and part-time
employees. We consider our employee relations to be good. None
of our employees is covered by a collective bargaining agreement.
Properties
We own or lease, in our operating territories,
telephone property which includes: fiber optic backbone and
distribution network facilities; point-to-point distribution
capacity; central office switching equipment; connecting lines
between customers' premises and the central offices; and
customer premise equipment. Our central office switching
equipment includes electronic switches and peripheral equipment.
The fiber optic backbone and distribution network
and connecting lines include aerial and underground cable,
conduit, and poles and wires. These facilities are located on
public streets and highways or on privately-owned land. We have
permission to use these lands pursuant to consent or lease,
permit, easement, or other agreements.
We, and our subsidiaries, lease facilities for
our and their administrative and sales offices, central
switching offices, network nodes and warehouse space. The
various leases expire in years ranging from 2003 to 2021. Most
have renewal options.
Our headquarters are located in Reston, Virginia,
where we are currently leasing approximately 170,000 square feet
of space. In February 2003, Dixon Properties, LLC, which is
owned by Mr. Carl Icahn, acquired ownership of the building
in which our headquarters is located in a transaction that was
approved by the Bankruptcy Court in our Chapter 11
proceedings.
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Legal Proceedings
Chapter 11 Related Disputes
Although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter 11 proceedings,
disputes with respect to the amount of allowed claims owed by XO
Parent to certain of its general unsecured creditors, and claims
of certain professionals remain outstanding. XO has objected to
the application of Houlihan Lokey Howard & Zukin
Capital for professional fees in the amount of approximately
$18 million. In addition, a party has filed a complaint in
the Bankruptcy Court seeking relief from the court's order
confirming the Plan of Reorganization and a declaratory judgment
that such party's claim under section 16b of the
Exchange Act for the benefit of the Company against a former
director of XO Parent and an affiliate of that director should
not be released by the confirmation order. While the outcome of
these matters, or any other relief that may be granted, is
currently not determinable, management does not expect that the
ultimate costs to resolve these matters will have a material
adverse effect on the Company's consolidated financial
position, results of operations, or cash flows.
Prepaid Calling Card Tax Matter
On July 26, 2002, the Company was advised by
the staff of the Commission that it was conducting an informal
inquiry primarily relating to the Company's obligations
with respect to, and its accrual of liabilities for, specified
federal excise and state sales tax and similar tax obligations
arising in connection with prepaid calling card services and
relating to certain other matters. Sales from prepaid calling
card services that are potentially subject to these taxes
accounted for approximately $56 million of the
Company's total revenues from 1999, when the Company began
providing these services, through June 30, 2002. The
Company believes that its accounting for these potential tax
obligations is appropriate and that its accruals of liabilities
relating to these obligations are adequate.
Unfunded Affiliate Pension
Obligation
As affiliates of Mr. Icahn hold over 80% of
the outstanding New Common Stock of XO Parent, applicable
pension and tax laws make each member of a plan sponsor's
"controlled group" (generally defined as entities in
which there is at least an 80% common ownership interest)
jointly and severally liable for certain pension plan
obligations of the plan sponsor. These pension obligations
include ongoing contributions to fund the plan, as well as
liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay
these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, or the PBGC against the assets of each
member of the plan sponsor's controlled group.
As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn's affiliates,
XO Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr. Icahn has
a direct or indirect ownership interest of at least 80%, which
includes ACF Industries, Inc. or ACF, which is the sponsor of
certain pension plans. As most recently determined by the ACF
plans' actuaries, pension plans maintained by ACF are
underfunded in the aggregate by approximately $14 million
on an ongoing actuarial basis and by approximately
$102 million if those plans were terminated. As a member of
the same controlled group, XO Parent and each of its
subsidiaries would be liable for any failure of ACF to make
ongoing pension contributions or to pay the unfunded liabilities
upon a termination of the ACF pension plans.
The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other "reportable events,"
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and
related notes included elsewhere in this prospectus. The
following contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ substantially
from those anticipated in these forward-looking statements as a
result of several factors, including those set forth under
"Risk Factors" and elsewhere in this
prospectus.
Overview of Our Business
We provide a comprehensive array of voice and
data communications services to business customers. Our voice
services include local and long distance services, both bundled
and stand-alone, other voice-related services such as
conferencing, domestic and international toll free services and
voicemail, and transactions processing services for prepaid
calling cards. Our data services include Internet access,
private data networking, including dedicated transmission
capacity on our networks, virtual private network services and
Ethernet services, and hosting services. We also combine many of
these services in flat rate service packages. These services are
offered to a variety of customers, including small, medium and
large retail businesses, multi-location businesses, and carrier
or wholesale customers.
To serve our customers' broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmission
capacity on fiber optic cables, which we refer to as an
intercity network. By integrating these networks with advanced
communications technologies, we are able to provide a
comprehensive array of communications services primarily or
entirely over a network that we own or control, from the
initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This
capability enables us to provide communication services between
customers connected to our network and among customers with
multiple locations primarily or entirely over our network.
To develop these networks, we have assembled a
collection of metro and inter-city network assets in the United
States, substantially all of which we own or control, making us
a facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission
equipment capable of carrying high volumes of data, voice, video
and Internet traffic. We operate 37 metro fiber networks in
22 states and the District of Columbia, including 25 of the
30 largest metropolitan areas in the U.S. We have
constructed or acquired many of these metro fiber networks,
which consist of up to 432 strands of fiber optic cable
and, in some cases, additional empty conduits through which
fiber optic cable can be deployed. For our inter-city network,
we have acquired dedicated, high-capacity wavelengths of
transmission capacity on fiber optic cables, onto which we have
deployed our own switching, routing and optical equipment, which
gives us greater control over how voice and data information is
transmitted. We also hold indefeasible exclusive rights to use
18 unlit fiber optic strands on the routes served by our
intercity networks pursuant to arrangements with Level 3
Communications, Inc.
Our Chapter 11 Reorganization
The Reorganization Proceedings
On June 17, 2002, XO Parent filed for
protection under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November 15, 2002, the Bankruptcy Court confirmed
XO Parent's Plan of Reorganization, and, on
January 16, 2003, XO Parent consummated the Plan of
Reorganization and it emerged from its Chapter 11
reorganization proceedings with a significantly restructured
balance sheet.
During the period immediately preceding and after
the filing of XO Parent's Chapter 11 petition, we
met with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured
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creditors that represented holders of our senior
unsecured notes (and following the filing of the Chapter 11
petition, the official committee of unsecured creditors
appointed in the Chapter 11 proceedings) and potential
investors to discuss potential restructuring transactions that
could be implemented to reorganize our capital structure. These
discussions led to an agreement with the lenders under the
Pre-Petition Credit Facility regarding the terms of a Plan of
Reorganization that envisioned two potential reorganization
structures the first of which was based on, among other things,
a proposed cash investment in XO Parent by third parties
(which was ultimately abandoned) and the second of which
contemplated a stand alone restructuring with no new cash
infusion. The Plan of Reorganization, as supplemented, was filed
with the Bankruptcy Court on July 22, 2002 and distributed
to creditors of XO Parent eligible to vote in the reorganization.
On August 21, 2002, High River Limited
Partnership, a limited partnership owned by Mr. Carl Icahn,
commenced an offer to purchase loans under our $1.0 billion
secured Pre-Petition Credit Facility at a purchase price of
$0.50 for each $1.00 in principal amount thereof. Purchases made
under this offer, together with the loans under the Pre-Petition
Credit Facility that High River previously had acquired,
resulted in High River holding approximately 85% of the loans
outstanding under the Pre-Petition Credit Facility.
On November 15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January 16, 2003,
XO Parent consummated the Plan of Reorganization and it
emerged from the Chapter 11 reorganization proceedings. The
consummation of the Plan of Reorganization resulted in the
following changes in our debt and equity capital structure:
•
$1.0 billion of loans under the Pre-Petition
    Credit Facility were converted into $500.0 million of
    outstanding principal amount under a New Credit Agreement;
•
The extinguishment of all amounts due under our
    pre-petition unsecured senior and subordinated notes and certain
    general unsecured obligations; and
•
The cancellation of all outstanding shares and
    interest in our pre-petition preferred stock and pre-petition
    class A and class B common stock.
Under our Plan of Reorganization, the following
equity securities have been or will be distributed to holders of
the Pre-Petition Credit Facility and holders of
XO Parent's pre-petition unsecured senior and
subordinated notes and pre-petition general unsecured claims:
•
95.0 million shares of New Common Stock;
•
Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;
•
Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
•
Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.
For more information concerning the terms of the
securities and distributions under our Plan of Reorganization,
see "The Business — Our Chapter 11
Reorganization."
Distributions to and Interests Held by
Entities Owned by Mr. Carl C. Icahn
After the initial distribution of New Common
Stock pursuant to the Plan of Reorganization, Cardiff Holding
LLC, a Delaware limited liability company owned by Mr. Carl
C. Icahn, holds more than 80% of the outstanding shares. Of the
warrants distributed under the Plan of Reorganization to holders
of the pre-bankruptcy senior unsecured notes, we estimate
Cardiff received Series A Warrants to purchase
approximately 3.0 million shares of New Common Stock,
Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C
Warrants to purchase approximately 2.3 million shares of
New Common Stock. High River assigned its 85% interest in the
$500.0 million in loans outstanding under the New Credit
Agreement to Chelonian Corp., an entity which is owned by
Mr. Icahn, which subsequently assigned those loans to Arnos
Corp., an entity which is also owned by Mr. Icahn.
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Accounting
Impact of Implementing the Plan of Reorganization
Due to XO Parent's Chapter 11
filing, our consolidated financial statements included in our
2002 annual report have been prepared in accordance with
SOP 90-7. Pursuant to SOP 90-7, the financial
statements for the periods presented distinguish transactions
and events that are directly associated with our reorganization
from our ongoing operations.
Although the effective date of the Plan of
Reorganization was January 16, 2003, due to the
immateriality of the results of operations for the period
between January 1, 2003 and the Effective Date, we
accounted for the consummation of the Plan of Reorganization as
if it had occurred on January 1, 2003 and implemented fresh
start as of that date. The fresh start accounting provisions
required that we establish a "fair value" basis for
the carrying value of the assets and liabilities for reorganized
XO. As disclosed on the balance sheet included in the
accompanying condensed consolidated financial statements as of
and for the three months ended March 31, 2003, and in
note 2 to such financial statements, the value of our
long-lived assets, including property and equipment, fixed
wireless licenses, other intangibles and other non-current
assets, after implementing SOP 90-7 decreased to
$635.4 million from $3.8 billion. Accordingly,
depreciation and amortization expense will decline significantly
in future periods.
In addition, as described above and in "The
Business — Our Chapter 11 Reorganization,"
implementation of the Plan of Reorganization resulted in the
cancellation of over $6.9 billion in pre-bankruptcy debt
and preferred stock obligations leaving outstanding only the
$500.0 million in debt obligations under the New Credit
Agreement, and $70.6 million of other long term liabilities
including obligations under various capital leases. As a result,
our interest expense and preferred stock dividend obligations in
future periods will decline significantly in comparison to the
interest expense and preferred stock dividend obligations
incurred in periods prior to the consummation of the Plan of
Reorganization. As a result of the gain resulting from the
cancellation of our pre-bankruptcy debt obligations, a
substantial portion of our capital and net operating loss
carryforwards, which totaled approximately $4.5 billion at
December 31, 2002, have been eliminated.
Recent Events in 2003
2003 Employee Retention Plan
In June of 2003, we replaced the Restructuring
Retention Plan with a new Employee Retention and Incentive Plan,
which we refer to as the 2003 Retention Plan to provide
long-term equity incentives to senior management, based on
certain revenue and cash balance performance targets. The 2003
Retention Plan was offered to participants of the Restructuring
Retention Plan as an alternative to the EBITDA targets under the
Restructuring Retention Plan. Participants in the Restructuring
Retention Plan who elected into the 2003 Retention Plan
forfeited their rights under the Restructuring Retention Plan in
exchange for the opportunity to participate in the 2003
Retention Plan.
The 2003 Retention Plan provides for a bonus
award aligned with each of the Company's first two and last
two quarters of 2003.
Each participant received a guaranteed Q1/ Q2
bonus award, regardless of the Company's operating results
for that period. The Q1/ Q2 bonus awards were paid in cash and
options on or after July 11, 2003.
For those participants who received options as
Q1/ Q2 bonus awards, the options were 50% vested on the date of
grant, with the remainder vesting ratably each month over the
next 24 months of employment.
The Q3/ Q4 bonus award under the 2003 Retention
Plan will be tied to the achievement of revenue and cash balance
performance objectives and will be settled fully in stock
options. Under the 2003 Retention Plan, two-thirds of the
participant's Q3/ Q4 bonus award will be based on
achievement of the revenue component, with the remaining
one-third based on the cash balance component. The Q3/ Q4 bonus
awards may be partially earned subject to partial achievement of
the revenue and cash balance goals with an additional
overachievement bonus for overachievement of the revenue goal.
Options distributed in settlement of a Q3/ Q4
bonus award will be 25% vested on the date of grant, with the
remainder vesting ratably each month over the next
36 months of employment. Bonus awards under the
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2003 Retention Plan may be prorated for partial
service during the Q1/ Q2 and/or Q3/ Q4 periods and may be
forfeited in certain circumstances following a termination of
employment.
The options granted for both Q1/ Q2 and Q3/ Q4
bonus awards are options to purchase XO's New Common Stock,
par value $0.01 per share. The options were and will be granted
under the Company's 2002 Stock Incentive Plan, with an
exercise price equal to $5.84, which represents 80% of the
market value of one share of XO's New Common Stock on the
effective date of the 2003 Retention Plan. The stock options
issued in conjunction with the Q1/ Q2 bonus payments will result
in recognition of compensation expense over the options'
vesting period.
Global Crossing Investment
On May 30, 2003, we made the first of a
series of offers to acquire all of the assets and business of
Global Crossing, a telecommunications company which is currently
in reorganization proceedings. Thereafter, we made several
modifications to, and enhancements of, our initial offer, and on
June 24, 2003, commenced an offer to purchase any all of
the senior secured bank debt of Global Crossing Holdings Ltd.
and Global Crossing North America, Inc. that we did not already
own for an aggregate maximum purchase price of
$472.5 million. As a result of this offer and our previous
purchases, we now own approximately $766.6 million of the
approximately $2.214 billion principal amount of such debt
outstanding. We may in the future make additional offers to
acquire control of, or otherwise invest in, lend to or otherwise
do business with Global Crossing. If we do so, we do not know
what the terms of any such offers would be, or whether any such
offers will be accepted.
On July 1, 2003, the U.S. Bankruptcy Court
for the Southern District of New York approved Global
Crossing's request to extend until October 28, 2003
the exclusivity period of its purchase agreement with Singapore
Technologies Telemedia PTE. We believe that the purchase
agreement nonetheless permits Global Crossing to consider
unsolicited superior offers such as ours pursuant to the
applicable "fiduciary out" provisions of the agreement.
We intend to actively monitor Global
Crossing's reorganization and the regulatory proceedings
that are conditions to any closing under the Singapore
Technologies Telemedia PTE agreement.
Significant Transactions and Trends in
2002
Inter-city Network Agreement
On August 8, 2002, we entered into a Master
Agreement with Level 3 Communications, Inc., which amends
various agreements related to XO Parent's acquisition
of fiber networks in the United States from Level 3 and the
recurring maintenance charges relating to those networks.
Beginning on January 1, 2003 and continuing over the
remaining term of the initial agreement, Level 3 will
reduce the operating and maintenance fees as well as fiber
relocation it charges us from approximately $17.0 million
annually to a fixed rate of $5.0 million annually. In
exchange for this reduction and certain other concessions,
effective as of February 11, 2003, the closing date for the
transaction, we surrendered our indefeasible right to use an
empty conduit and our indefeasible right to use six of the 24
fibers previously acquired from Level 3. Because we had
committed to this plan of disposal and believed at the time that
we entered into the Master Agreement that consummation of the
contemplated transaction was probable, we recorded a
$477.3 million non-cash write-down of these assets during
the third quarter of 2002. Pursuant to applicable accounting
principles, the write-down is based on the book value of the
surrendered facilities and does not reflect the future benefits
to be received by us under the Master Agreement.
Operational Restructuring
In the second quarter of 2002, we restructured
our operations by reducing our workforce by approximately 350
employees, the majority of whom were employed in network
operations, sales and marketing and information technology, and
recorded a $2.9 million restructuring charge related to
involuntary termination severance liabilities.
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Prepaid Calling Card Tax Matter
On July 26, 2002, we were advised by the
staff of the SEC that it was conducting an informal inquiry
primarily relating to our obligations with respect to, and our
accrual of liabilities for, specified federal excise and state
sales tax and similar tax obligations arising in connection with
prepaid calling card services and relating to certain other
matters. Sales from prepaid calling card services that are
potentially subject to these taxes accounted for approximately
$56 million of our total revenues from 1999, when we began
providing these services, through June 30, 2002. We believe
that our accounting for these potential obligations is
appropriate and that our accrual of liabilities relating to
these obligations is adequate.
Comparison of Financial Results
Three Months Ended March 31, 2003 versus
Three Months Ended March 31, 2002
As a consequence of our Chapter 11
reorganization, our first quarter financial results have been
separately presented under the label "Reorganized XO"
for the period January 1, 2003 to March 31, 2003. The
results for "Predecessor XO" for January 1, 2003
reflect solely the impact of the application of fresh start on
that date. Reorganized XO has adopted the policy of expensing
customer installation costs and internal labor directly
associated with network construction in the period in which the
costs are incurred. Predecessor XO capitalized and amortized
these costs. In accordance with SOP 90-7, the Reorganized
XO was required to implement newly issued accounting
pronouncements that would require adoption within twelve months
of applying fresh start.
The operational results for the quarter are
discussed below.
Revenue.
Total
revenue for the three months ended March 31, 2003 decreased
14.2% to $286.1 million from $333.4 million in the
same period of 2002. The decline is primarily due to a high
level of customer disconnects due to reduced demand from other
telecommunications companies, customer bankruptcies in the
telecommunication industry, and the weakened economy. In
addition, sales productivity was reduced due to fewer direct
sales representatives and adverse public perception that
accompanied our Chapter 11 proceedings. To increase sales
activity in 2003, we are in the process of hiring additional
direct sales personnel. Programs launched in 2002 to decrease
customer disconnects will continue. New order entry and order
processing systems, which are designed to improve speed and
efficiency of new customer installations, are partially
installed, and we expect to complete installation of these
systems in the second half of 2003. We believe that total
revenue in the near term will remain relatively stable with
first quarter 2003 results. Given our recent emergence from
bankruptcy and continued uncertainty in the economy and our
industry specifically, we are unable to predict revenue trends
in future periods. Revenue was earned from providing the
following services (dollars in thousands):
Reorganized XO
Predecessor XO
Three Months Ended
Three Months Ended
March 31,
March 31,
2003
% of Revenue
2002
% of Revenue
% Change
Voice services
$
150,723
52.7%
$
168,834
50.7%
(10.7
)%
Data services
101,977
35.6%
135,761
40.7%
(24.9
)%
Integrated voice and data
33,393
11.7%
28,810
8.6%
15.9
%
Total revenue
$
286,093
100.0%
$
333,405
100.0%
(14.2
)%
Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
interactive voice response services and stand-alone long
distance services. Voice services revenue in the first quarter
of 2003 decreased to $150.7 million from
$168.8 million in the first quarter of 2002. The decrease
is primarily attributable to customer bankruptcy impacts in the
telecommunications industry, continued customer disconnects due
to the state of the economy and reduced sales productivity in
2002 due to our bankruptcy filing.
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Data services revenue includes revenue from
Internet access, network access and web applications hosting
services. Data services revenue in the first quarter of 2003
decreased to $102.0 million from $135.8 million in the
first quarter of 2002. The decline was attributable to customer
bankruptcies, continued customer disconnects, and a lower demand
from large customers due to reductions in those customers'
data capacity needs. The sale of our European operations in
February 2002 also contributed somewhat to this decline.
Integrated voice and data services revenue is
generated largely from our XOptions service offerings, a
flat-rate bundled package offering a combination of voice and
data services. Integrated voice and data services revenue in the
first quarter of 2003 increased to $33.4 million from
$28.8 million in the first quarter of 2002. The increase is
due to the success of our XOptions service offering.
Costs and expenses.
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
Reorganized XO
Predecessor XO
Three Months Ended
Three Months Ended
March 31,
March 31,
2003
% of Revenue
2002
% of Revenue
% Change
Costs and expenses:
Cost of service
$
107,506
37.6%
$
140,367
42.1%
(23.4
)%
Selling, operating and general
166,235
58.1%
205,250
61.6%
(19.0
)%
Stock-based compensation
—
—
9,095
2.7%
NM
Depreciation and amortization
26,367
9.2%
161,356
48.4%
NM
Total
$
300,108
$
516,068
(41.9
)%
NM — Not Meaningful
Cost of service.
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service for the three months ended
March 31, 2003 of $107.5 million decreased in absolute
dollars and as a percentage of revenue versus
$140.4 million in the period ended March 31, 2002. The
year over year 2003 decline was due primarily to cost
optimization programs which reduced expenses by transferring
traffic from leased facilities onto our owned or controlled
facilities, reduced costs due to customer disconnects and
approximately $6.4 million of net benefit associated with
favorable resolution of disputed third party costs. The decline
was somewhat offset by our adoption of an accounting policy
during the first quarter of 2003, to cease the deferral of costs
associated with the installation of customer services and
expense such installation costs as incurred.
We anticipate that cost of service will increase
to historical levels as a percentage of revenue in future
periods, based on our expectation that the reduction in expenses
resulting from favorable dispute resolutions will be less than
we experienced in the first quarter of 2003. In addition, we
expect cost of service will also fluctuate based on trends in
revenue, product mix, the impact of customer bankruptcies and
regulatory decisions.
Selling, operating and general.
Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, general
corporate office functions and collection risks. Selling,
operating and general expense in the first quarter of 2003 was
$166.2 million versus $205.3 million in the first
quarter of 2002. Selling, operating and general expense
decreased due to the centralization of many functions, cost
reduction and restructuring initiatives that included
significant headcount reductions and savings from the planned
exit of our European operations. In addition, recording our real
estate contracts at their fair value, as required by fresh
start, contributed to the decrease. The decline was somewhat
offset by our adoption of the policy of expensing internal labor
directly associated with the construction of our network, which
resulted in a $5.7 million increase in selling, operating
and general expense in that period.
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We expect selling, operating and general expense
to increase in absolute dollars for the remainder of 2003 due
primarily to new sales incentive programs and increased
compensation costs.
Stock-based
compensation.
Stock-based compensation
expense represents non-cash charges recorded in connection with
the grant of compensatory stock options and restricted stock to
employees whose compensation is included in selling, operating
and general expense. During the first quarter of 2003, we
incurred no stock-based compensation expense as its deferred
compensation balance was eliminated in conjunction with fresh
start. We incurred $9.1 million in deferred compensation expense
in the first quarter of 2002. The reorganized company will
recognize stock-based compensation only with respect to any new
grants of compensatory stock options and restricted stock.
Depreciation and
amortization.
As discussed above, we
implemented fresh start on January 1, 2003 which resulted
in a reduction of the carrying value of our property and
equipment to its estimated fair value which is significantly
lower than historical cost. Consequently, depreciation expense
decreased to $19.9 million in the first quarter of 2003,
versus $135.1 million in the first quarter of 2002.
Amortization expense includes the amortization of fixed wireless
licenses and other intangible assets with definite lives. As a
result of fresh start accounting, the carrying value of fixed
wireless licenses and intangible assets were adjusted to their
estimated fair value. The aggregate estimated fair value of
these assets is significantly lower than their historical cost.
Total amortization expense decreased to $6.5 million for
the first quarter of 2003 versus $26.3 million in the first
quarter of 2002.
We would expect depreciation and amortization
expense for the remainder of the year to continue to track with
the first quarter 2003 amount. As of March 31, 2003, we had
approximately $606 million of long-lived assets, including
approximately $94 million of construction-in-progress and
certain fixed wireless licenses that are not currently ready for
their intended use and accordingly, are not currently being
depreciated or amortized.
Interest income.
Interest income in the first quarter of 2003 decreased to
$3.2 million from $5.5 million in the first quarter of
2002. The decrease in interest income is due to reduced interest
rates.
Interest expense, net.
Interest expense, net in the first
quarter of 2003 decreased to $9.7 million from
$120.7 million in the first quarter of 2002. The
significant reduction was principally caused by the cancellation
of our pre-petition senior notes, pre-petition convertible
subordinated notes and the Pre-Petition Credit Facility upon
consummation of our Plan of Reorganization. Interest expense for
the three months ended March 31, 2003 primarily relates to
interest accreted on the New Credit Agreement.
Other income (loss), net.
Other income (loss), net was zero in
the first quarter of 2003, versus a net loss of
$0.2 million in the first quarter of 2002.
Net income (loss) before cumulative
effect of accounting change
. Net loss
before cumulative effect of accounting change for the
reorganized company in the first quarter of 2003 was
$20.5 million versus a net loss before cumulative effect of
accounting change of $299.0 million for the predecessor
company in the first quarter of 2002, due to the foregoing
factors.
Cumulative effect of accounting change.
We performed the required impairment
tests of goodwill as required by SFAS No. 142 as of
January 1, 2002. Based on these tests, we recorded a
$1,876.6 million impairment charge to write-off all of our
goodwill as a cumulative effect of accounting change during the
first quarter of 2002.
Net income (loss).
Net loss for the reorganized company in the first quarter of
2003 was $20.5 million versus a net loss for the
predecessor company for the first quarter of 2002 of
$2,175.7 million, due to the foregoing factors.
Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
As a result of our implementation of
fresh start, as discussed above, our pre-petition redeemable
preferred stock has been cancelled and discharged. As a result,
the reorganized company recorded no preferred stock dividends
during the first quarter of 2003 versus $22.8 million net
expense for the predecessor company's first quarter
of 2002.
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Table of Contents
Net income (loss) applicable to common
shares.
Net loss applicable to common
shares for the reorganized company in the first quarter of 2003
was $20.5 million. Net loss applicable to common shares for
the predecessor company was $2,198.5 million in the first
quarter of 2002.
Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001
Because our Plan of Reorganization was not
consummated until January 16, 2003, the results of our
operations for 2002 do not include the effects of the resulting
cancellations of pre-petition indebtedness and preferred stock
or the reduction in the carrying value of our long-lived assets
from the implementation of fresh start accounting. As of the
Effective Date the cancellation of our pre-petition indebtedness
and preferred stock resulted in a significant gain that was
partially offset by a loss on the reduction in the carrying
value of our long-lived assets as a result of the application of
fresh start accounting. The net gain and the adjustment to our
financial position are reflected in our financial statements for
the first quarter of 2003. The extinguishment of indebtedness
and preferred stock will result in interest expense and
preferred stock dividends being lower, and the reduction in the
carrying value of our long-lived assets will result in
depreciation and amortization expense being lower in periods
subsequent to the effective date of the Plan of Reorganization.
Revenue.
Total
revenue in 2002 of $1,259.9 million was consistent with
total revenue in 2001 of $1,258.6 million. The weakened
economy and the perceived uncertainties in the market regarding
XO Parent's recently concluded Chapter 11
proceedings had a negative impact on our ability to generate new
sources of revenue. Consequently, we were not able to maintain
the level of growth that we had historically achieved. We
experienced a high level of customer disconnects in 2002 due to
reduced demand from other telecommunications companies and
increased customer bankruptcies in the telecommunications and
dot-com industries. Total revenue declined from
$343.0 million in the fourth quarter of 2001 to
$299.4 million in the fourth quarter of 2002.
Revenue was earned from providing the following
services (dollars in thousands):
Year Ended December 31,
% of 2002
% of 2001
2002
Revenue
2001
Revenue
% Change
Voice services
$
658,453
52.3%
$
606,848
48.2%
8.5%
Data services
472,247
37.5%
596,664
47.5%
(20.9%
)
Integrated voice and data services
128,048
10.2%
52,018
4.1%
146.2%
Other services
1,105
0.0%
3,037
0.2%
(63.6%
)
Total revenue
$
1,259,853
100.0%
$
1,258,567
100.0%
0.1%
Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
interactive voice response services and stand-alone long
distance services. Voice services revenue in 2002 increased to
$658.5 million from $606.8 million in 2001. The
increase was primarily due to more sales to larger business
customers, including the impact of the rollout of our carrier
long distance service. Voice revenue declined from
$166.5 million in the fourth quarter of 2001 to
$157.3 million in the fourth quarter of 2002.
Data services revenue includes revenue from
Internet access, network access and web applications hosting
services. Data services revenue in 2002 decreased to
$472.2 million from $596.7 million in 2001. This
decline was attributable primarily to customer bankruptcies
affecting some large network access customers, increased levels
of customer disconnects, and a lower demand from large customers
due to reductions in those customers' data and fiber
capacity needs. The sale of our European operations in February
2002 also contributed to this decline. Data service revenue
declined from $152.8 million in the fourth quarter of 2001
to $108.0 million in the fourth quarter of 2002.
Integrated voice and data services revenue is
generated largely from our XOptions service offerings, a
flat-rate bundled package offering a combination of voice and
data services. Integrated voice and data services revenue in
2002 increased to $128.0 million from $52.0 million in
2001. The increase is primarily attributed to an increase in the
number of customers to whom we provide XOptions service.
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Table of Contents
Costs and expenses.
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
Year Ended December 31,
% of 2002
% of 2001
2002
Revenue
2001
Revenue
% Change
Costs and expenses:
Cost of service
$
522,924
41.5%
$
527,698
41.9
%
(0.9%
)
Selling, operating and general
736,925
58.5%
971,714
77.2
%
(24.2%
)
Stock-based compensation
28,928
2.3%
37,173
3.0
%
(22.2%
)
Depreciation and amortization
699,806
55.5%
1,162,671
92.4
%
(39.8%
)
Restructuring and asset write-downs
480,168
38.1%
509,202
40.5
%
(5.7%
)
Total
$
2,468,751
$
3,208,458
(23.1%
)
Cost of service.
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2002 was $522.9 million
compared to $527.7 million in 2001. The 2002 decline was
due primarily to cost optimization programs to reduce expenses
by transferring traffic from leased facilities onto facilities
owned or controlled by us. These cost reductions were offset to
some extent by increased costs of service that were attributable
to the increase in voice and integrated services revenue as a
percentage of our total revenue, which generally carry lower
margins when compared to data services because voice and
integrated services are more likely to utilize leased versus
owned network facilities to terminate calls.
Selling, operating and general.
Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, general
corporate office functions and expenses relating to collection
risks. Selling, operating and general expense in 2002 was
$736.9 million compared to $971.7 million in 2001.
Selling, operating and general expense decreased both in
absolute dollars and as a percentage of revenue in 2002 when
compared to 2001 due to efficiencies resulting from the
centralization of and process improvements in many functions and
cost reduction and restructuring initiatives that included
significant headcount reductions and savings from the planned
exit of certain leased facilities, as well as the February 2002
sale of our European operations.
Stock-based
compensation.
Stock-based compensation
expense represents non-cash charges recorded in connection with
the grant of compensatory stock options and restricted stock
grants to employees whose compensation is included in selling,
operating and general expense. Compensation expense is
recognized over the vesting periods of such grants based on the
excess of the fair value of the common stock at the date of
grant (determined by reference to the market price on that date)
over the exercise price. Stock-based compensation in 2002
decreased to $28.9 million from $37.2 million in 2001
primarily due to certain grants becoming fully amortized.
Depreciation and
amortization.
We have constructed an
integrated facilities-based network in the United States.
Primarily in late 2001 and early 2002, we expanded our services
in existing markets, placed more assets into service, and
increased our obsolescence expense, all of which caused
depreciation expense to increase to $598.5 million in 2002
from $447.0 million in 2001.
Amortization expense includes the amortization of
fixed wireless licenses and other intangibles assets with
definite lives and, for 2001, also includes the amortization of
goodwill. Amortization expense decreased to $101.3 million
in 2002 from $715.7 million in 2001. The significant
decrease is primarily due to our implementation of SFAS
No. 142 and the resulting write-off of all our goodwill as
of January 1, 2002.
As of December 31, 2002, our balance sheet
reflected approximately $731.0 million of long-lived
assets, including construction-in-progress and certain fixed
wireless licenses that had not been placed into service and,
accordingly, were not being depreciated or amortized.
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Table of Contents
Restructuring and asset
write-downs.
Restructuring and asset
write-downs were $480.2 million in 2002 and
$509.2 million in 2001. During 2001, restructuring charges
primarily related to the implementation of our plan to
restructure certain of our business operations. The
restructuring plan included divesting certain assets and
businesses, and reducing our discretionary spending, capital
expenditures and workforce, based on our assessment of current
and future market conditions. The 2001 restructuring charges
include a $366.8 million write-down for the excess of
carrying value of assets to be sold or abandoned, including our
European business unit and a $134.4 million restructuring
charge relating to the consolidation and exiting of domestic
facility leases, which was determined based on the future
minimum rent commitments for the buildings that management
intends to exit less estimated sublease rental streams. The 2001
restructuring charges also included an $8.0 million
restructuring charge related to involuntary termination
severance costs with respect to 700 persons whose employment was
terminated in connection with a workforce reduction, the
majority of whom were terminated by December 31, 2001.
During 2002, we continued to restructure our
operations and reduced our workforce by approximately 350
additional employees, the majority of whom were employed in
network operations, sales and marketing and information
technology, and recorded a $2.9 million restructuring
charge related to the involuntary termination severance costs.
In addition, we recorded a $477.3 million non-cash asset
write-down during the third quarter of 2002 as a result of
returning inter-city assets to Level 3 in exchange for
reduced future maintenance expenses beginning in 2003.
Interest income.
Interest income in 2002 decreased to $16.5 million from
$77.9 million in 2001. The decrease in interest income
corresponds to the decrease in our average cash and marketable
securities balances and a reduction in interest rates. The
amount of interest income attributable to increased cash
balances during the bankruptcy proceedings was not material.
Interest expense,
net.
Interest expense, net in 2002
decreased to $226.5 million from $465.4 million in
2001, as we ceased accruing interest and penalties on our
pre-petition senior unsecured, subordinated notes and
Pre-Petition Facility as of the petition date, in accordance
with SOP 90-7. The contractual interest amounts of
$501.1 million reflected on the consolidated statement of
operations represents the interest expense that would have been
accrued under the relevant financing agreements had we not
ceased accruing interest as described above.
Other income (loss), net.
Other income (loss), net was a loss of
$0.2 million in 2002 and a loss of $93.8 million in
2001. The 2001 balance includes an $89.0 million write-down
for an other than temporary decline of the value of certain
equity method investments.
Reorganization.
Reorganization expenses include
adjustments to our financial position and professional service
fees that are a direct result of our June 17, 2002
Chapter 11 filing and our application of the accounting
required by SOP 90-7. Reorganization expense in 2002 was
$91.1 million and included the (i) non-cash charges
relating to the write off of issuance costs, discounts and
purchase accounting adjustments to adjust the historical
carrying amounts of our debt to the allowed claim amount by the
Bankruptcy Court, (ii) professional fees associated with
our Plan of Reorganization, (iii) the penalties from the
rejection of contracts, (iv) adjustments to unpaid
pre-petition accounts payable and accrued expenses to the claim
amounts allowed by the bankruptcy court, and (v) the net
gain resulting from payments received by XO Parent in connection
with the settlement and termination of the proposed investment
transaction that was the basis for the first restructuring
alternative contemplated by the Plan of Reorganization, less
amounts paid to settle certain stockholder claims.
Net loss before extraordinary gain and
cumulative effect of accounting change.
Net loss before extraordinary gain and
cumulative effect of accounting change during 2002 improved to
$1,510.2 million from a net loss of $2,431.1 million
in 2001 due to the foregoing factors.
Extraordinary gain on repurchases of debt,
net.
During 2001, we recorded an
extraordinary gain totaling $345.0 million related to our
repurchase of $557.1 million of senior notes at a
substantial discount from their respective face values.
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Table of Contents
Cumulative effect of accounting change.
We performed the newly required
transitional impairment tests of goodwill as required by SFAS
No. 142 as of January 1, 2002. Based on these tests,
we recorded a $1,876.6 million impairment charge to
write-off all of our goodwill as a cumulative effect of
accounting change during the first quarter of 2002.
Net loss.
Net loss
in 2002 increased to $3,386.8 million from a net loss of
$2,086.1 million in 2001 due to the foregoing factors.
Recognition of preferred stock modification
fee, net- reorganization item.
In
order to adjust the historical carrying amount of our preferred
stock to the amount allowed by the Bankruptcy Court, we
recognized the unamortized balance of a deferred modification
fee with respect to our preferred stock as of the petition date
and wrote off certain unamortized issuance costs and recognized
certain purchase accounting adjustments related to the preferred
stock which netted a $78.7 million gain during 2002.
Gain on repurchases of preferred stock, net.
In 2001, we recorded a net gain
totaling $376.9 million related to our repurchase of
$472.6 million in liquidation preference of our preferred
stock at a substantial discount from the respective carrying
amounts.
Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
As our preferred stock was deemed
subject to compromise under SOP 90-7, we ceased accruing
dividends and accreting the redemption obligation on all of our
outstanding preferred stock as of our petition date. As a
result, we recorded $42.2 million of preferred stock
dividends during 2002 as compared to $129.7 million in such
dividends in 2001. The contractual dividend amount of
$98.8 million reflected on the accompanying condensed
consolidated statement of operations represents the dividends
that would have been accrued under the terms of our preferred
stock had we not ceased accruing such dividends as described
above.
Net loss applicable to common shares.
Net loss applicable to common shares
in 2002 increased to $3,350.4 million from
$1,838.9 million in 2001 due to the foregoing factors.
Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000
Revenue.
Total
revenue in 2001 increased to $1,258.6 million from
$723.8 million in 2000. The increase was primarily due to
the increase in the number of customers and growth in network
traffic and average monthly revenue per customer. The growth in
our customer base was largely due to our penetration of existing
markets, expansion into new markets in 2001 and 2000 and our
June 2000 Concentric acquisition. The growth in network traffic
and average monthly revenue per customer was primarily due to
the expansion of our service offerings and our emphasis on
selling to larger business customers.
Revenue was earned from providing the following
services (dollars in thousands):
Year Ended December 31,
% of 2001
% of 2000
2001
Revenue
2000
Revenue
% Change
Voice services
$
606,848
48.2%
$
386,796
53.4%
56.9
%
Data services
596,664
47.5%
331,892
45.9%
79.8
%
Integrated voice and data services
52,018
4.1%
2,693
0.4%
NM
Other services
3,037
0.2%
2,445
0.3%
24.2
%
Total revenue
$
1,258,567
100.0%
$
723,826
100.0%
73.9
%
*
NM — Not Meaningful
Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
including shared tenant services, interactive voice response
services and stand-alone long distance services. Voice services
revenue in 2001 increased to $606.8 million from
$386.8 million in 2000. The increase was primarily due to
the growth in the number of our voice services customers and our
targeting of larger business customers.
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Table of Contents
Data services revenue includes revenue from
Internet access, network access and applications hosting
services. Data services revenue in 2001 increased to
$596.7 million from $331.9 million in 2000. A primary
contributor to this growth was our migration from voice-centric
service offerings to a more balanced portfolio of voice and data
services, facilitated in large part by our June 2000 acquisition
of Concentric and the integration of its data products with our
pre-existing services and by our development of new and enhanced
data services. Data services revenue increased slightly as a
percentage of total revenue for 2001 compared to 2000 due to a
full year impact of the integration of data products and the new
and enhanced data services we have developed. However, the
majority of the impact realized from fully integrating these
data products was partially offset by new customers choosing our
integrated voice and data services and customer bankruptcies.
Integrated voice and data services revenue is
generated largely from our XOptions product, a flat-rate bundled
package offering a combination of voice and data services.
Integrated voice and data services revenue in 2001 increased to
$52.0 million from $2.7 million in 2000. The increase
is primarily attributable to the addition of XOptions to our
product portfolio beginning in the fourth quarter of 2000.
Costs and expenses.
The table below provides costs and expenses by classification
and as a percentage of revenue (dollars in thousands):
Year Ended December 31,
% of 2001
% of 2000
2001
Revenue
2000
Revenue
% Change
Costs and expenses:
Cost of service
$
527,698
41.9%
$
302,666
41.8
%
74.3
%
Selling, operating and general
971,714
77.2%
730,604
100.9
%
33.0
%
Stock-based compensation
37,173
3.0%
48,328
6.7
%
(23.1
)%
Depreciation and amortization
1,162,671
92.4%
617,714
85.3
%
88.2
%
Restructuring charge
509,202
40.5%
—
—
NM
In-process research and development
—
—
36,166
5.0
%
NM
Total
$
3,208,458
$
1,735,478
84.9
%
*
NM — Not Meaningful
Cost of service.
Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2001 was $527.7 million
compared to $302.7 million in 2000. Cost of service for
2001 was consistent as a percentage of revenue as compared to
2000, but increased in absolute dollars on a period-over-period
comparison due to the corresponding increase in revenue.
Selling, operating and general.
Selling, operating and general expense
includes expenses related to sales and marketing, internal
network operations and engineering, information systems, and
general corporate office functions. Selling, operating and
general expense in 2001 was $971.7 million compared to
$730.6 million in 2000. The majority of the
period-over-period increase was due to the full year impact of
increased sales, network operations and customer support
headcount associated with the expansion of our business and the
June 2000 Concentric acquisition. Selling, operating and general
expense decreased as a percentage of revenue in 2001 compared to
the same period in 2000 due to continued efficiencies generated
by the centralization of many functions.
Stock-based
compensation.
Stock-based compensation
in 2001 decreased to $37.2 million from $48.3 million
in 2000 primarily due to the vesting of a fixed number of shares
of restricted stock issued in 2000 in conjunction with the
Concentric acquisition.
Depreciation and
amortization.
Our net property and
equipment increased to $3,742.6 million as of
December 31, 2001 versus $2,794.1 million as of
December 31, 2000. As we launched and expanded services
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in new and existing markets, more assets were
placed into service, which caused depreciation expense to
increase to $447.0 million in 2001 from $223.8 million
in 2000. Amortization expense increased to $715.7 million
in 2001 from $393.9 million in 2000. Of the total 2001
amortization expense, 83.1% relates to goodwill amortization.
The significant increase is primarily due to the amortization of
additional goodwill and intangible assets recorded as a result
of the June 2000 Concentric acquisition, which are being
amortized over a period of up to five years. In conjunction with
the implementation of SFAS No. 142, we wrote off all of the
carrying value of our goodwill in the first quarter of 2002.
Restructuring
charge.
During 2001, we recorded
$509.2 million of estimated restructuring charges primarily
related to implementation of our plan to restructure certain of
our business operations. The restructuring plan includes
divesting certain assets and businesses, and reducing our
discretionary spending, capital expenditures and workforce,
based on our assessment of current and future market conditions.
The restructuring charges include a $366.8 million
write-down for the excess of carrying value of assets that were
to be sold or abandoned, including our European business unit.
The consolidation and exiting of domestic facility leases
accounted for $134.4 million of the restructuring charges
and was determined based on the future minimum rent commitments
for the buildings management intended to exit less estimated
sublease rental streams. We also reduced our workforce by
approximately 700 employees and recorded an $8.0 million
restructuring charge related to involuntary termination
severance. The employment of the majority of the notified
employees was terminated by December 31, 2001.
In-process research and
development.
As a result of the
Concentric merger in June 2000, we incurred a $36.2 million
one-time charge in the second quarter of 2000 resulting from an
allocation of the purchase price to in-process research and
development. The allocation represents the estimated fair value
based on risk-adjusted future cash flows of Concentric's
incomplete projects at that time.
Interest income.
Interest income in 2001 decreased to $77.9 million from
$180.9 million in 2000. The decrease in interest income
corresponds to the decrease in our 2001 average cash and
marketable securities balances and a reduction in interest rates.
Interest expense,
net.
Interest expense, net in 2001
increased to $465.4 million from $434.1 million in
2000. The increase in interest expense, net was primarily due to
an increase in our average outstanding indebtedness over the
respective periods resulting from our increased borrowings under
our Pre-Petition Credit Facility during 2000 and 2001, the
issuance of $517.5 million of 5 3/4% convertible
subordinated notes in January 2001, and the assumption of
$150.0 million of debt in connection with our June 2000
acquisition of Concentric offset in part by the impact of the
repurchase of certain senior notes discussed below, a reduction
in interest rates and increased capitalized interest on
constructed assets.
Other income (loss), net.
Other income (loss), net decreased
from income of $163.6 million in 2000 to a loss of
$93.8 million in 2001. The 2001 loss relates primarily to
an $89.0 million write down for an other than temporary
decline in the value of certain available-for-sale investments.
The other income in 2000 relates primarily to a
$225.1 million gain on the sale of an equity investment
partly offset by a $57.7 million write-down for an other
than temporary decline in the value of certain
available-for-sale investments.
Extraordinary gain on repurchases of debt,
net.
In the second half of 2001, we
recorded an extraordinary gain totaling $345.0 million
related to our repurchase of $557.1 million of senior notes
at a substantial discount from their respective face values.
Net loss.
Net loss
in 2001 increased to $2,086.1 million from a net loss of
$1,101.3 million in 2000 due to the foregoing factors.
Gain on repurchases of preferred stock, net.
In the second half of 2001, we
recorded a net gain totaling $376.9 million related to our
repurchase of $472.6 million in liquidation preference of
our preferred stock at a substantial discount from their
respective carrying amounts.
Preferred stock dividends and accretion of
preferred stock redemption obligation, net.
Preferred stock dividends and the
accretion of the preferred stock redemption decreased to
$129.7 million in 2001 from
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$146.4 million in 2000 due to the impact of
the repurchase of the preferred stock discussed above offset in
part by the increase in our average outstanding preferred stock
balance during the first half of 2001.
Net loss applicable to common shares.
Net loss applicable to common shares
in 2001 increased to $1,838.9 million from
$1,247.7 million in 2000 due to the foregoing factors.
Liquidity and Capital Resources
Our goal is to provide our customers complete,
integrated, voice and data network applications and services
primarily through networks that we own or control. Historically,
this strategy has increased our operating losses by requiring us
to incur significant costs and to make substantial capital
investments before we realize related revenue. We have completed
much of the construction relating to our metro fiber networks,
which required substantial capital investment. We believe that
the implementation of the restructuring of our debt and capital
under the Plan of Reorganization and the various initiatives we
have undertaken to reduce operating costs and capital
expenditures over the past two years, positions us to be able to
successfully execute our business plans and generate cash flow
over the long term. However, in the near term we expect to incur
net negative cash flows from operating and investing activities.
Reorganization Overview — Changes in
our Capital Structure
As described in our 2002 Annual Report, in light
of conditions in the capital markets and our funding needs,
XO Parent took a number of steps during 2001 to conserve
cash on hand and raise additional capital. However, conditions
in the capital markets for telecommunications companies
continued to deteriorate, and, in late 2001, we determined that,
in light of the substantial declines in market valuation
suffered by telecommunications service providers throughout the
industry in 2001, we would be unable to obtain the additional
funding needed to conduct our business plan without a
significant balance sheet reorganization.
In order to complete this reorganization, on
June 17, 2002, XO Parent filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court. Concurrent with its Chapter 11 filing,
XO Parent submitted a proposed Plan of Reorganization,
which is discussed in detail in the Overview section above, in
note 2 to our consolidated financial statements as of and
for the year ended December 31, 2002 and in "The
Business — Our Chapter 11 Reorganization".
On November 15, 2002, the Plan of Reorganization was
confirmed by the Bankruptcy Court. On January 16, 2003,
XO Parent consummated the transactions contemplated by the
Plan of Reorganization and emerged from Chapter 11
bankruptcy protection. Under the Plan of Reorganization,
XO Parent has emerged from its Chapter 11 proceedings
with:
•
no preferred stock and dividend obligations;
•
significantly reduced debt and interest
    obligations; only $500 million of long-term indebtedness
    remains, pursuant to the New Credit Agreement, which includes:
•
financial covenants generally more favorable than
    those included in the Pre-Petition Credit Facility,
•
amended maturity and principal repayment terms
    modified so that required principal payments are deferred by two
    and a half years when compared to the Pre-Petition Credit
    Facility, and
•
amended interest payment terms modified so that
    no cash interest payments are required to be made by us until we
    achieve specified financial targets.
The maturity date of the outstanding principal
under the New Credit Agreement is July 15, 2009. Automatic
and permanent quarterly reductions of the principal amount
commence on October 15, 2007 with scheduled principal
repayments totaling $25 million in 2007, $150 million
in 2008 and $325 million in 2009. All of the proceeds from
the Rights Offering will be used to prepay a portion of the
principal amount outstanding. To that extent future interest
payments and scheduled principal repayments would be reduced.
The security for the New Credit Agreement
consists of all of the assets of XO Parent, including stock
of its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement
limits additional indebtedness, liens, dividend payments and
certain investments and transactions, and contains certain
covenants with respect to minimum cash balance, minimum EBITDA
(earnings before interest, taxes, depreciation and amortization)
requirements and maximum capital expenditures. Loans under the
New Credit Agreement bear interest, at our option, at an
alternate base rate, as defined, or reserve-
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adjusted London Interbank Offered Rate plus, in
each case, applicable margins. We are not required to pay cash
interest accrued on the principal amount under the New Credit
Agreement until we meet certain financial ratios. Nevertheless,
we may elect to begin paying interest in cash earlier than the
required date, but, based on our current funding requirement, we
would not anticipate making such an election in the foreseeable
future. Once we begin to pay accrued interest in cash, even in
the case of an early election, the applicable margins are
reduced. Approximately 85% of the underlying loans of the New
Credit Agreement are held by Arnos Corp., an entity owned by
Mr. Icahn.
Future Funding Needs, Capital Resources and
Liquidity Assessment
Our balance of cash and marketable securities
decreased to $538.4 million at March 31, 2003 from
$561.0 million at December 31, 2002 and from
$755.2 million at December 31, 2001. This decrease
from December 31, 2001 primarily resulted from capital
expenditures during the early part of 2002 relating to the
completion of ongoing network construction projects. The
transfer of $25.0 million to an escrow deposit in the first
quarter of 2003 in conjunction with an agreement to indemnify
certain former directors and executive officers was the main
cause of cash reduction from December 31, 2002. We have and
will continue to focus on minimizing the rate at which we use
our cash to fund operations and capital expenditures. For the
past year, the reduction in the rate at which we use our cash
has been accomplished by:
•
significantly reducing our capital requirements
    largely due to the completion of several significant technology
    and network enhancements projects and decreases in success-based
    capital spending;
•
ceasing to pay interest on the Pre-Petition
    Credit Facility and our pre-petition senior and subordinated
    unsecured notes and dividends on our preferred stock;
•
improving operational results due to initiatives,
    which have resulted in the reduction of cost of service and
    selling, operating and general expenses in both absolute dollars
    and as a percentage of revenue; and
•
improving working capital mainly through
    aggressive collections of our outstanding accounts receivable,
    and, to a lesser extent, deferred payment of
    XO Parent's pre-petition liabilities.
As discussed in more detail in Credit Risk,
subsequent to March 31, 2003, we liquidated substantially
all of our existing marketable securities for
$249.6 million in cash, of which we paid
$160.7 million to acquire senior secured bank debt of
Global Crossing. We may in the future offers make additional
offers to acquire control of, or otherwise invest in, lend to or
otherwise do business with Global Crossing. If we do so, we do
not know what the terms of any such offers would be, or whether
any such offers will be accepted. Any such future offers, if
made for cash consideration, could significantly and adversely
affect our liquidity.
We expect that, in the near term, our business
will use existing cash primarily to fund capital expenditures,
working capital requirements and possible acquisitions of
businesses or assets, as discussed above. The majority of our
planned capital expenditure requirements will be
"success-based" in that they will be used to purchase
and install optical equipment, channelbanks, routers, servers or
other customer-related equipment and electronics in connection
with adding new customers or increasing the amount of services
provided to existing customers. Much of the remaining planned
capital expenditures will be for the continued development and
implementation of our information systems to support and enhance
the provisioning and billing of new and existing customers. Part
of our working capital requirements are commitments under lease
and contractual obligations for software licenses and ongoing
support of software for information technology and network
applications. As of December 31, 2002, such future minimum
commitments were as follows (dollars in thousands):
Other Long-Term
Total Minimum
Operating Lease
Capital Lease
Contractual
Long-Term
Year Ending December 31,
Obligations
Obligations
Obligations
Obligations
2003
$
62,733
$
10,031
$
74,126
$
146,890
2004
59,045
2,809
57,612
119,466
2005
55,600
2,668
17,574
75,842
2006
51,458
2,416
14,577
68,451
2007
47,334
1,733
11,780
60,847
Thereafter
232,550
277
107,277
340,104
Total future minimum long-term obligations
$
508,720
$
19,934
$
282,946
$
811,600
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There are no additional borrowings available
under our New Credit Agreement, although, under certain
circumstances, the New Credit Agreement permits us to obtain a
senior secured facility of up to $200.0 million, less the
amount of any proceeds from the Rights Offering, so long as the
terms are satisfactory to the administrative agent and holders
of a majority of the principal amount of the loans outstanding
under the New Credit Agreement. We have no current debt service
requirements since automatic and permanent quarterly reductions
of the principal amount outstanding under the New Credit
Agreement do not commence until October 15, 2007. We are
not required to pay cash for interest accrued on the principal
amount under the New Credit Agreement until we meet certain
financial ratios. Nevertheless, we may elect to begin paying
interest in cash earlier than the required date in order to
reduce the effective interest rate, but, based on our current
assessment of our funding requirements, we would not anticipate
making such an election in the foreseeable future. Arnos Corp.,
a company owned by Mr. Icahn, holds approximately 85% of
the principal amount of the loans outstanding under the New
Credit Agreement.
Although we expect that our balance of cash and
marketable securities will decline in the near term to fund
capital expenditures and working capital requirements discussed
above, given (i) our current assumptions with respect to
trends in our business, (ii) our estimates concerning the
substantially lower level of capital expenditures that we will
incur to support our business plan and (iii) the
significant reduction in cash needed to meet our debt service
requirements because we are not required to pay interest accrued
on the New Credit Agreement until we meet certain financial
ratios, we believe that the $538.4 million of cash and
marketable securities on hand as of March 31, 2003 will be
sufficient to fund our operations until the cash flows generated
by our operations are sufficient to fund our capital
expenditures and debt service requirements.
Credit Risk
Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of trade
receivables. Although our trade receivables are geographically
dispersed and include customers in many different industries, a
portion of our revenue is generated from services provided to
other telecommunications service providers. Several of these
companies have recently filed for protection under
Chapter 11 of the Bankruptcy Code. We believe that our
established valuation and credit allowances are adequate as of
March 31, 2003 to cover these risks.
We are permitted under the terms of our Credit
Agreement to make investments in a broad range of securities,
including securities that are not cash equivalents or readily
marketable securities, and which therefore may involve
significant credit risk. At March 31, 2003, we held
investments in marketable securities of $249.6 million,
consisting of U.S. government agency issued and other high-grade
securities with original maturities beyond three months.
Subsequently, we liquidated these marketable securities for cash
and invested $160.7 million of the proceeds in
$766.6 million principal amount of senior secured bank debt
of Global Crossing, a telecommunications company which is
currently in reorganization proceedings. The Global Crossing
debt trades in a thin market primarily between dealers but is
neither listed on any exchange nor on any over-the-counter
NASDAQ or National Quotation Bureau systems. If we choose to
liquidate our investment in this debt, we cannot be assured that
we will be able to dispose of the investment for an amount
greater than or equal to the amount we paid for it, or that any
distribution that may be received upon consummation of Global
Crossing's bankruptcy case will have a greater value than
that of our investment.
Critical Accounting Policies
As discussed in note 2 to the consolidated
condensed consolidated financial statements for the three months
ended March 31, 2003, included in this prospectus, we
adopted fresh start accounting as of January 1, 2003,
creating, in substance per SOP 90-7, a new reporting
entity. SOP 90-7 also requires that changes in accounting
principles that will be required in the financial statements of
the emerging entity within twelve months following the adoption
of fresh start reporting be adopted at the time fresh start
reporting is adopted.
The preparation of the financial statements in
accordance with accounting principles generally accepted in the
United States requires management to make judgments, estimates
and assumptions regarding uncertainties that
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affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Management uses
historical experience and all available information to make
these judgments and estimates and actual results could differ
from those estimates and assumptions that are used to prepare
our financial statements at any given time. Despite these
inherent limitations, management believes that Management's
Discussion and Analysis and the financial statements and
footnotes provide a meaningful and fair perspective of the
Company's financial condition and its operating results.
Management believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements included in
this prospectus.
Long-Lived Assets
Our long-lived assets include property and
equipment, fixed wireless licenses, and identifiable intangible
assets to be held and used. Property and equipment acquired
prior to December 31, 2002 is stated at fair value as
required by fresh start, net of accumulated depreciation.
Additions to property and equipment during 2003 are stated at
historical cost, net of accumulated depreciation. Depreciation
is calculated on a straight-line basis over the estimated useful
lives of the assets. The estimated useful lives of
telecommunications networks and acquired bandwidth are 3 to
20 years and 5 to 7 years for furniture fixtures,
equipment and other. These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because we operate within an industry in which new
technological changes could render some or all of our network
related equipment obsolete requiring application of a shorter
useful life or, in certain circumstances, a write-off of the
entire value of the asset. Accordingly, in making this
assessment, we consider our planned use of the assets, the views
of experts both from internal and outside sources regarding the
impact of technological advances and trends in the industry on
the value and useful lives of our network assets. Costs of
additions and improvements (other than internal labor costs
related to network construction, as discussed below) are
capitalized and repairs and maintenance are charged to expense
as incurred. Direct external costs of constructing property and
equipment are capitalized including interest costs related to
construction. The reorganized Company has adopted the policy of
expensing internal labor directly associated with network
construction in the period in which the costs are incurred.
Investments in fixed wireless licenses acquired
prior to December 31, 2002 are stated at fair value as
required by fresh start, net of accumulated amortization. We are
amortizing these over the license period of 10 years as
determined by the Federal Communications Commission. Other
intangibles consist of customer relationships, internally
developed technology and XO's trade name. The customer
relationships and internally developed technology are being
amortized using the straight-line method over the estimated
useful lives of three years. The XO trade name was determined to
have an indefinite life and is not being amortized, but is
reviewed at least annually for impairment, as required under
SFAS No. 142.
Depreciation or amortization of the long-lived
asset begins when the asset is substantially complete or placed
into service. At March 31, 2003, our balance sheet includes
approximately $606 million of long-lived assets, including
approximately $94 million of construction-in-process and
certain fixed wireless licenses, that were either not ready for
their intended use or not placed into service, and accordingly
are not being depreciated or amortized.
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS
No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," or SFAS No. 144. The criteria for
determining impairment for long-lived assets to be held and used
is determined by comparing the carrying value of these
long-lived assets to management's best estimate of future
undiscounted cash flows expected to result from the use of the
assets and their eventual disposition. We believe that no
impairment existed under SFAS No. 144 as of March 31,
2003. In the event that there are changes in the planned use of
our long-lived assets or our expected future undiscounted cash
flows are reduced significantly, our assessment of our ability
to recover the carrying value of these assets under SFAS
No. 144 could change.
Revenue Recognition
Revenues from telecommunications services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. In circumstances when
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these criteria are not met, revenue recognition
is deferred until resolution occurs. For example, if a customer
files for bankruptcy, we believe the probability of collection
is weakened. Consequently, under such circumstances, although we
continue to bill the customer for all services provided, we do
not recognize revenue until cash is received. In addition,
telecommunications customers often dispute the amounts that we
invoice them due to regulatory issues, late payment fees and
disconnection penalties based on differences of opinion
regarding contract terms or service levels. Accordingly, these
billings are not considered fixed and determinable and
collection of such amounts is not considered probable. Although
these disputed amounts are billed, revenue recognition is
deferred until the dispute is resolved and the cash is collected.
Service discounts and incentives related to
telecommunications services are recorded as a reduction of
revenue when granted or ratably over a contract period. Fees
billed in connection with customer installations and other
upfront fees are deferred and recognized ratably over the
estimated customer life. The estimated customer life is
calculated by analyzing customer disconnects as a percentage of
revenue. This calculation is reviewed every quarter.
Revenue from the sale or lease of unlit network
capacity is recognized upon consummation of the transaction and
the acquirer's acceptance of the capacity in instances when
we receive upfront cash payments and are contractually obligated
to transfer title to the specified capacity at the end of the
contract term. If the transaction does not meet these criteria,
revenue is recognized ratably over the contract term. There were
no sales of unlit capacity during 2002 and the three months
ended March 31, 2003.
We establish an allowance for collection of
doubtful accounts and other sales credit adjustments. Allowances
for sales credits are established through a charge to revenue,
while allowances for doubtful accounts are established through a
charge to selling, operating and general expenses. We assess the
adequacy of these reserves monthly by considering general
factors, such as the length of time individual receivables are
past due, historical collection experience, the economic and
competitive environment, and changes in the credit worthiness of
our customers. As considered necessary, we also assess the
ability of specific customers to meet their financial
obligations to us and establish specific valuation allowances
based on the amount we expect to collect from these customers.
We can and have experienced material changes to our reserve
requirements on a month to month basis as significant customers
have in the past unexpectedly filed for bankruptcy or otherwise
became insolvent. We believe that our established valuation
allowances were adequate as of March 31, 2003. If
circumstances relating to specific customers change or economic
conditions worsen such that our past collection experience and
assessment of the economic environment are no longer valid, our
estimate of the recoverability of our trade receivables could be
changed. If this occurs, we would adjust our valuation allowance
in the period the new information is known.
Cost of Service
Cost of service includes expenses directly
associated with providing telecommunications services to
customers, including, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. All such costs are expensed as incurred. We accrue for
the expected costs of services received from third party
telecommunications providers during the period the services are
rendered. Invoices received from the third party
telecommunications providers are often disputed due to billing
discrepancies. We accrue for all invoiced amounts, even amounts
in dispute, as these amounts represent contingent liabilities
that are considered probable and measurable. Disputes resolved
in our favor may reduce cost of service in the period the
dispute is settled and typically reflect costs paid in prior
periods. Because the period of time required to resolve these
types of disputes often lapses over several quarters, the
benefits associated with the favorable resolution of such
disputes normally are realized in periods subsequent to the
accrual of the disputed invoice.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards
Board, or FASB issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," or SFAS No. 143, which
requires an entity to recognize the fair value of a liability
for an asset retirement obligation in the period in which a
legal or contractual removal obligation is incurred if a
reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset
retirement obligation is incurred, SFAS No. 143 requires
the liability to be
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recognized when a reasonable estimate of the fair
value can be made. As required by SOP 90-7, we implemented
SFAS No. 143 on January 1, 2003, in conjunction with
the implementation of fresh start and recorded an asset
retirement obligation of $12.0 million.
Effective January 1, 2003, we adopted SFAS
No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002" or SFAS
No. 145, which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity's statement of operations. SFAS No. 145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an extraordinary item only when
the extinguishment meets the criteria of both "unusual in
nature" and "infrequent in occurrence" as
prescribed under Accounting Principles Board Opinion, or APB,
No. 30, "Reporting the Results of
Operations — Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions". The
adoption of SFAS No. 145 had no effect on our financial
position or results of operations for the three months ended
March 31, 2003 and 2002. We recognized extraordinary gains
from debt repurchases in the third and fourth quarters of 2001.
In the future, such gains will be reclassified in the respective
consolidated statements of operations in accordance with SFAS
No. 145.
Effective January 1, 2003, we adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" or SFAS No. 146, which requires
that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a
liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements' commitment to an exit plan, which is generally
before an actual liability has been incurred. In the first
quarter of 2003, we did not have any exit or disposal activities
initiated after December 31, 2002; however, the provisions
of SFAS No. 146 were implemented in conjunction with our
implementation of fresh start accounting. Accordingly, our
remaining restructuring accrual has been reduced to its net
present value.
In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure," or SFAS
No. 148 which amends SFAS No. 123, "Accounting
for Stock-Based Compensation," or SFAS No. 123, to
provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and APB
No. 28, "Interim Financial Reporting," or APB
No. 28, to require disclosure in the summary of significant
accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in
annual and interim financial statements. While SFAS No. 148
does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all
companies with stock-based employee compensation, regardless of
whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB
No. 28. Effective January 1, 2003, we adopted the
disclosure provisions of SFAS No. 148. As allowed by SFAS
No. 148, we have chosen to continue to account for
compensation cost associated with our employee stock plans in
accordance with the intrinsic value method prescribed by APB
No. 25, "Accounting for Stock Issued to
Employees," or APB No. 25.
Quantitative and Qualitative Disclosure About
Market Risk
On January 16, 2003, the effective date of
XO Parent's emergence from Chapter 11, we amended
the $1.0 billion Pre-Petition Credit Facility in accordance
with the Plan of Reorganization. As of March 31, 2003, the
New Credit Agreement was comprised of $500.0 million junior
secured loans with principal amounts payable beginning October
2007, and the rate at which interest accrues under the entire
outstanding balance is variable. Currently, we do not pay cash
interest on the New Credit Agreement. However, interest accrues
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based on variable rates. Interest expense and
future cash flow exposure as of December 31, 2002 are
illustrated in the following table (dollars in millions).
No
Annual Interest Expense Given
Change in
Annual Interest Expense Given
an Interest Rate decrease of
Interest
an Interest Rate increase of
X Basis Points
Rates
X Basis Points
Cash Flow Risk
(150 BPS)
(100 BPS)
(50 BPS)
Fair Value
50 BPS
100 BPS
150 BPS
New Credit Agreement
$
29.2
$
31.7
$
34.2
$
36.7
$
39.2
$
41.7
$
44.2
Marketable securities at December 31, 2002
and March 31, 2003 consist of U.S. government agency issued
and other high-grade securities with original maturities beyond
three months. These securities were classified as
"available for sale."
Subsequent to March 31, 2003, we liquidated
these marketable securities for cash and invested a portion of
the proceeds, $160.7 million, in $766.6 million
principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in
reorganization proceedings. The debt trades in a thin market
primarily between dealers but is neither listed on any exchange
nor on any over-the-counter NASDAQ or National Quotation Bureau
systems. If we choose to liquidate our investment in this debt,
we cannot be assured that we will be able to dispose of the
investment for an amount greater than or equal to the amount we
paid for it, or that any distribution that may be received upon
consummation of Global Crossing's bankruptcy case will have
a greater value than that of our investment. If interest rates
had increased or decreased, it would not have had a material
impact on the fair value of these financial instruments or on
the interest we would have earned on our as illustrated in the
following table as of December 31, 2002 (dollars in
millions).
No
Valuation of Securities Given
Change in
Valuation of Securities Given
an Interest Rate decrease of
Interest
an Interest Rate increase of
X Basis Points
Rates
X Basis Points
Fair Value Risk
(150 BPS)
(100 BPS)
(50 BPS)
Fair Value
50 BPS
100 BPS
150 BPS
Financial Assets:
Marketable securities — over 1 year
$
247.9
$
247.5
$
247.2
$
246.9
$
246.6
$
246.2
$
245.8
The sensitivity analyses provide only a limited,
point-in-time view of the market risk sensitivity of certain of
our financial instruments. The actual impact of market interest
rate and price changes on the financial instruments may differ
significantly from those shown in the above sensitivity analyses.
We are not currently engaged in the use of
off-balance sheet derivative financial instruments, to hedge or
partially hedge interest rate exposure.
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
On May 15, 2002, we dismissed our
independent auditors, Arthur Andersen LLP, and appointed
Ernst & Young LLP to serve as our new independent
auditors for the year ending December 31, 2002. Our Board
of Directors approved this decision. We filed a current report
on Form 8-K with the SEC on May 16, 2002, which
included a notification that the change was effective on
May 15, 2002.
Arthur Andersen's report on our financial
statements for the fiscal year ending December 31, 2000 did
not contain an adverse opinion or disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit
scope or accounting principles. Arthur Andersen's report on
the Company's financial statements for the fiscal year
ending December 31, 2001 included an explanatory paragraph
that discussed the substantial doubt concerning our ability to
continue as a going concern.
During each of the two fiscal years ending
December 31, 2000 and 2001, there were: (i) no
disagreements with Arthur Andersen on any matter of accounting
principle or practice, financial statement disclosure or
auditing scope or procedure which, if not resolved to Arthur
Andersen's satisfaction, would have caused them to make
reference to the subject matter in connection with their report
on our financial statements for such years; and (ii) there
were no reportable events as defined in Item 304(a)(1)(v)
of Regulation S-K.
During each of our two fiscal years ending
December 31, 2000 and 2001 and through the date of their
appointment, we did not consult Ernst & Young with
respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on our financial
statements, or any other matters or reportable events as set
forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.
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DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Prior to January 16, 2003, the Effective
Date of our Plan of Reorganization, our Board of Directors was
comprised of the following individuals: Daniel F. Akerson,
Nathaniel A. Davis, Nicolas Kauser, Craig O. McCaw,
Sharon L. Nelson, Henry R. Nothhaft, Jeffrey S.
Raikes, Peter C. Waal, and Dennis M. Weibling.
Additional information concerning these former board members is
included in our Annual Report on Form 10-K for the year
ended December 31, 2001.
The names, ages and positions with XO Parent of
our current directors and executive and other key officers are
listed below.
Name
Age
Position
Carl C. Icahn(1)
67
Chairman of the Board of Directors
Carl J. Grivner
49
Chief Executive Officer, President and Director
Andrew R. Cohen(1)
41
Director
Adam Dell(2)
32
Director
Vincent J. Intrieri(2)(3)
46
Director
Keith Meister(1)(3)
30
Director
John H. Jacquay
50
Executive Vice President, National Sales
Wayne M. Rehberger
47
Executive Vice President, Chief Financial Officer
Mark W. Faris
48
Senior Vice President, Network Operations
William Garrahan
46
Vice President, Corporate Development and
    Strategic Planning
Brian Oliver
47
Executive Vice President, Strategy and Corporate
    Development
Lee Weiner
46
Senior Vice President and General Counsel
Doug Kelly
54
Executive Vice President, Network Services
(1)
Member of the Executive Committee of the Board of
    Directors.
(2)
Member of the Audit Committee of the Board of
    Directors.
(3)
Member of the Compensation Committee of the Board
    of Directors.
Brief biographies of our directors are set forth
below.
Carl C. Icahn.
Mr. Icahn has served as our
Chairman of the Board of Directors since January 2003. Since
1984, he has served as the Chairman of the Board and a Director
of Starfire Holding Corporation (formerly Icahn Holding
Corporation), a privately-held holding company, and Chairman of
the Board and a Director of various subsidiaries of Starfire,
including ACF Industries, Incorporated, a privately-held railcar
leasing and manufacturing company. Since 1968, he served as the
Chairman of the Board and President of Icahn & Co.,
Inc., a registered broker-dealer and a member of the National
Association of Securities Dealers. Since November 1990,
Mr. Icahn has been Chairman of the Board of American
Property Investors, Inc., the general partner of American Real
Estate Partners, L.P., a public limited partnership that invests
in real estate. Since 1993, Mr. Icahn has been a Director
of Cadus Pharmaceutical Corporation, a firm which holds various
biotechnology patents. Since October 1998, Mr. Icahn has
been the President and a Director of Stratosphere Corporation
which operates the Stratosphere Hotel and Casino. Since
September 2000, Mr. Icahn has served as the Chairman of the
Board of GB Holdings, a holding company that owns the Sands
Hotel and Casino in Atlantic City, New Jersey.
Carl J. Grivner.
Mr. Grivner has served as our
Chief Executive Officer and President since May 15, 2003.
From May 1, 2003 to May 15, 2003, he served as a
member of the Office of the Chairman of the Board of XO.
Mr. Grivner has been a member of our Board of Directors
since May 1, 2003. From February 2002 to April 2003, he was
Chief Operating Officer of Global Crossing, Ltd. From June 2000
to February 2002, he was Executive Vice President, Operations of
Global Crossing. On January 28, 2002, Global Crossing and
certain of its subsidiaries filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code. From July
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1999 to April 2000, Mr. Grivner was Chief
Executive Officer of Worldport Communications. From July 1998 to
July 1999, he was Chief Executive Officer, Western Hemisphere of
Cable & Wireless Plc.
Andrew R. Cohen.
Mr. Cohen has been a member of
our Board of Directors since January 2003. Since 2000, he has
served as Chief Technology Officer of Icahn Associates Corp.
From 1999 to 2000, Mr. Cohen served as senior vice
president and chief technology officer of American
Greetings & Americangreetings.com. From 1998 to 1999,
he served as President of CNS Development, which provides
website transaction consulting services. From 1992 to 1998,
Mr. Cohen served as vice president of development of
Micrografx, Inc., a consumer and business enterprise software
company.
Adam Dell.
Mr. Dell has been a member of our
Board of Directors since January 2003. Since January 2000, he
has served as the Managing General Partner of Impact Venture
Partners, a venture capital firm focused on information
technology investments. From October 1998 to January 2000,
Mr. Dell was a Senior Associate and subsequently a Partner
with Crosspoint Venture Partners in Northern California. From
July 1997 to August 1998, he was a Senior Associate with
Enterprise Partners in Southern California. From January 1996 to
June 1997 Mr. Dell was associated with the law firm of
Winstead Sechrest & Minick, in Austin, Texas, where he
practiced corporate law.
Vincent J. Intrieri.
Mr. Intrieri, has been a member
of our Board of Directors since January 2003. Since March 2003,
he has been Managing Director of Icahn Associates Corp. From
1998 to March 2003, he served as a portfolio manager of High
River Limited Partnership. From 1995 to 1998, Mr. Intrieri
served as portfolio manager for distressed investments with
Elliot Associates L.P., a New York investment fund. Prior
to 1995, Mr. Intrieri was a partner at the Arthur Andersen
accounting firm and is a certified public accountant.
Mr. Intrieri currently serves on the board of TransTexas
Gas Corporation.
Keith Meister.
Mr. Meister has been a member of
our Board of Directors since January 2003. Since June 2002, he
has served as senior investment analyst of High River Limited
Partnership. From March 2000 through 2001, Mr. Meister
co-founded and served as co-president of J Net Ventures, a
venture capital fund focused on investments in information
technology and enterprise software businesses. From 1997 through
1999, Mr. Meister served as an investment professional at
Northstar Capital Partners, an opportunistic investment
partnership with assets in excess of $2 billion. From 1995
to 1997, Mr. Meister served as an investment analyst in the
investment banking group at Lazard Freres.
John H. Jacquay.
Mr. Jacquay has been our
Executive Vice President, National Sales since April 2003. From
February 2002 to April 2003, he was our Senior Vice President,
National Sales. From November 1999 to February 2002, he was
Chairman and Chief Executive Officer of Pagoo, Inc. From January
1999 to July 1999, Mr. Jacquay was President and Chief
Operating Officer of GRIC Communications. From 1997 to 1999, he
was Chief Operating Executive — Regulated Industries
unit of MCI Systemhouse. From 1996 to 1997, Mr. Jacquay was
President — Network Services of US ONE Communications.
Wayne M. Rehberger.
Mr. Rehberger has served as our Executive Vice President,
Chief Financial Officer since April 2003. From December 2000 to
April 2003, he was our Senior Vice President, Chief Financial
Officer. From August 2000 to October 2000, Mr. Rehberger
was our Senior Vice President of Finance. From April 2000 to
August 2000, he was Chief Financial Officer of Nettel
Communications. On September 28, 2000, Nettel filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy
Code. From April 1999 to March 2000, Mr. Rehberger was
Senior Vice President of Finance at MCI WorldCom. From June 1986
to March 1999, he held other senior level finance positions at
MCI.
Mark W. Faris.
Mr. Faris has been our Senior Vice President, Network
Operations since April 2001. From September 2000 to April 2001,
he was the Chief Operating Officer of Gemeni Networks. From
March 2000 to September 2000, Mr. Faris was President and
Chief Operating Officer of BlueStar Communications. Prior to
that, he had been employed by Southwestern Bell for over
20 years.
William Garrahan.
Mr. Garrahan has served as our
Vice President, Corporate Development and Strategic Planning
since July 2001. From September 1996 to February 2001, he was a
Senior Vice President with Lehman Brothers, in its equity
research department.
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Brian Oliver.
Mr. Oliver has served as our
Executive Vice President of Strategy and Corporate Development
since May 2003. Prior to joining XO, he was the Founder,
Chairman and CEO of Cambrian Communications, a facilities-based
metropolitan area network provider, delivering end-to-end,
all-optical network solutions between New York and Washington,
DC. Prior to forming Cambrian, Mr. Oliver was the founder,
President and CEO of Wave International, Inc. He also held
various senior positions at Bell Atlantic Corporation including
Vice President of Corporate Development and Vice President of
Federal Regulatory Relations. In addition, Mr. Oliver was a
board member for Pontio Communications.
Lee Weiner.
Mr. Weiner has served as our
Senior Vice President and General Counsel since June 2003. Prior
to joining XO, Mr. Weiner was Executive Vice President,
General Counsel and Secretary at Net2000 Communications, Inc. He
also served as Vice President and Acting General Counsel/ Senior
Associate Counsel at Qwest Communications International, Inc.
after its merger with LCI International, Inc. Prior to that, he
was Vice President and General Counsel at LCI International,
Inc. Mr. Weiner also held several senior positions at MCI
Telecommunications Corporation.
Doug Kelly.
Mr. Kelly is Executive Vice
President of Network Services at XO Communications. In this
role, he oversees all service delivery, service assurance and
network performance functions and is responsible for the
end-to-end customer experience, from order entry, through
service installation, billing and customer care. Prior to
joining XO, Mr. Kelly founded DEK Consulting Services which
provided both technical and business analyses to
telecommunications companies involved in acquisitions, business
development and restructuring strategies. Prior to that, he was
President, Network Services for Global Crossing. He also held
several senior management positions at MCI including Vice
President Network Management, Vice President Central Operations
and Director of West Operations. Mr. Kelly also held
positions at New York Telephone Company and AT&T.
Each director will hold office until the first
meeting of stockholders immediately following expiration of his
one-year term of office and until his successor is qualified and
elected, or until his earlier resignation or removal. We do not
have a classified or staggered board.
As discussed above, on June 17, 2002,
XO Parent filed a voluntary petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of
New York, and emerged from bankruptcy on January 16,
2003. Messrs. Davis, Jacquay, Rehberger, Faris, Salemme and
Garrahan and Ms. Gofus each were executive officers of
XO Parent during the bankruptcy proceedings.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section 16(a) of the Securities Exchange Act
of 1934 requires our directors, executive officers and any
person who owns more than 10% of our common stock, whom were
refer to collectively as the Reporting Persons, to file with the
Securities and Exchange Commission reports of ownership and
reports of changes in ownership of our common stock. Under
Securities and Exchange Commission rules, we receive copies of
all Section 16(a) forms that these Reporting Persons file.
We have reviewed copies of these reports and written
representations from the Reporting Persons. We believe all
Reporting Persons complied with their Section 16(a)
reporting obligations during 2002, except for the following
individuals: Messrs Davis, Rehberger, Salemme, Ms. Gofus
and Gary Begeman, Doug Carter and Scott Macleod, former
executive officers of ours, had a late Form 5 filing with
respect to the cancellation of certain options to purchase
pre-petition class A common stock in connection with our May
2001 option exchange program; Mr. Faris had a late
Form 5 filing with respect to the purchase of shares of
pre-petition class A common stock under our employee stock
purchase plan; and Jeffrey S. Raikes, a former member of our
Board of Directors, had a late Form 4 filing with respect
to the sale of shares of our pre-petition class A common stock.
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EXECUTIVE COMPENSATION
Summary Compensation Table
Predecessor Executive
Compensation.
The following table sets
forth, for the fiscal years ended December 31, 2002, 2001,
and 2000, individual compensation information for our former
Chief Executive Officer, and each of our four most highly
compensated executive officers, each of whom has resigned from
their positions and terminated their employment with us and whom
we refer to collectively as the Named Executive Officers.
Long Term
Compensation Awards
Annual Compensation
Restricted
Securities
All Other
Stock Award(s)
Underlying
Compensation
Name and Principal Position
Year
Salary($)
Bonus($)(1)
($)(2)
Options(#)(3)
($)(4)
Daniel F. Akerson (5)
2002
377,303
(6)
—
(6)
—
—
5,606
Chief Executive Officer
2001
318,006
(6)
—
(6)
—
—
38,331
2000
500,000
477,950
—
500,000
57,580
Nathaniel A. Davis (7)
2002
382,212
—
—
1,423,750
8,769
President and Chief Operating Officer
2001
375,000
296,136
432,500
—
194
2000
375,000
239,524
—
1,975,000
179
R. Gerard Salemme (8)
2002
217,300
85,417
—
59,500
3,224
Senior Vice President, Regulatory and
2001
213,200
223,655
86,500
—
6,787
Legislative Affairs
2000
221,400
205,000
—
70,000
8,687
Michael S. Ruley (9)
2002
280,289
—
—
301,665
9,329
Executive Vice President, Market Sales
2001
268,846
192,653
51,900
—
56,848
Operations Nancy B. Gofus (10)
2000 2002
244,443 275,000
191,648 —
— —
253,100 212,500
36,324 9,489
Executive Vice President, Marketing
2001
275,000
178,503
51,900
—
8,950
and Customer Care
2000
253,846
157,723
—
350,000
3,154
(1)
Includes bonuses earned for the corresponding
    fiscal years that were paid subsequent to the stated calendar
    year end. No bonuses were paid to any Named Executive Officer
    with respect to performance for 2002, other than to
    Mr. Salemme.
(2)
Represents an award of shares of our pre-petition
    class A common stock granted on August 20, 2001, which
    shares were restricted and subject to forfeiture until vested.
    All such shares were forfeited in 2002, and no shares were
    outstanding at December 31, 2002.
(3)
Represents options to acquire shares of
    class A common stock. Share figures have been restated
    retroactively to reflect stock splits with respect to our
    class A common stock. Grants in 2002 were made in
    connection with the Offer to Exchange with respect to
    outstanding options that we undertook in May 2001. See
    "Report on Repricing of Options" in our Annual Report
    on Form 10-K for the year ended December 31, 2001.
    Pursuant to XO Parent's Plan of Reorganization, all
    interests in such stock options and such shares of class A
    common stock issued upon exercise thereof, were cancelled and
    terminated effective January 16, 2003, the date that the
    Plan of Reorganization was consummated.
(4)
For 2002, includes for Mr. Akerson: $5,404
    for contributions made by us on behalf of Mr. Akerson under
    our 401(k) Plan and $202 for premiums for group term life
    insurance paid by us; for Mr. Davis: $8,558 for
    contributions made by us on behalf of Mr. Davis under our
    401(k) Plan and $211 for premiums for group term life insurance
    paid by us; for Mr. Salemme: $3,116 for contributions made by us
    on behalf of Mr. Salemme under our 401(k) Plan and $108 for
    premiums for group term life insurance paid by us; for
    Mr. Ruley: $1,216 for reimbursement of relocation expenses;
    $8,000 for contributions made by us on behalf of Mr. Ruley
    under our 401(k) Plan and $113 for premiums for group term life
    insurance paid by
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us; for Ms. Gofus: $9,309 for contributions
    made by us on behalf of Ms. Gofus under our 401(k) Plan and
    $180 for premiums for group term life insurance paid by us.
(5)
Effective January 17, 2003, Mr. Akerson
    resigned from his position as Chief Executive Officer and
    terminated his employment with us.
(6)
In August 2001, Mr. Akerson elected to forgo
    all of his salary for the period between August 2001 and April
    2002, after which time he elected to receive his salary. For
    2001, he elected not to receive a bonus. In January 2003,
    Mr. Akerson received a payment of $750,000 under the
    XO Communications, Inc. Employee Retention and Incentive
    Plan described below.
(7)
Effective in May 2003, Mr. Davis resigned
    from his position as President and Chief Operating Officer and
    terminated his employment with us. In January 2003,
    Mr. Davis received a payment of $140,625 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below. Mr. Davis also received a separation payment of
    $500,000, pursuant to the mutual release and settlement
    agreement dated as of May 23, 2003, by and among Mr. Davis
    and the Company (the "Davis Settlement Agreement").
    The Davis Settlement Agreement also provides that the vested
    options that Mr. Davis' holds on 325,000 shares of our
    common stock granted to him pursuant to our 2002 Stock Incentive
    Plan will remain exercisable through November 30, 2003, at
    which time the options will expire. In consideration of the
    benefits he will receive under the Davis Settlement Agreement,
    Mr. Davis agreed to provide certain consulting and
    transition services to us until January 31, 2004, and
    agreed not to disclose certain information that was supplied to
    him by us that is confidential, proprietary or otherwise not
    generally available to the public.
(8)
Effective in June 2003, Mr. Salemme resigned
    from his position as Senior Vice President, Regulatory and
    Legislative Affairs and terminated his employment with us.
(9)
Effective in April 2003, Mr. Ruley resigned
    from his position as Executive Vice President, Market Sales
    Operations and terminated his employment with us. In January
    2003, Mr. Ruley received a payment of $85,938 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below.
(10)
Effective in June 2003, Ms. Gofus resigned
    from her position as Executive Vice President, Marketing and
    Customer Care and terminated her employment with us. In January
    2003, Ms. Gofus received a payment of $163,282 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below.
Successor Executive
Compensation.
The following
table sets forth, for the period beginning January 1, 2003 and
ending June 30, 2003, individual compensation information for
our current Chief Executive Officer, and each of our four most
highly compensated executive officers.
Long Term
Annual Compensation
Compensation Awards
Restricted
Securities
Annual
Stock
Underlying
All Other
Name and Principal Position
Year
Salary($)
Bonus($)(1)
Awards(s)($)
Options(#)
Compensation($)
Carl J. Grivner
2003
700,000
—
—
2,000,000
—
Chief Executive Officer, President and Director
Brian D. Oliver
2003
288,000
50,400
(2)
—
400,000
(3)
—
Executive Vice President, Strategy and Corporate
    Development
John H. Jacquay
2003
288,000
148,438
(4)
—
390,000
(5)
—
Executive Vice President, National Sales
Wayne M. Rehberger
2003
287,500
148,438
(4)
—
450,000
(5)
—
Executive Vice President, Chief Financial Officer
Doug Kelly
2003
$
280,000
—
—
350,000
(3)
—
Executive Vice President, Network Services
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(1)
These numbers include bonuses earned for the
    period ending June 30, 2003, but do not include any payments
    which may become due pursuant to the 2003 Employee Retention
    Plan. For more further information about this plan, please see
    "Employee Retention Plan" below.
(2)
Mr. Oliver received $50,400 as a signing bonus.
(3)
These options will be issued pending the approval
    of the Board of Directors of XO Parent.
(4)
Mr. Jacquay and Mr. Rehberger received $78,125 of
    these payments pursuant to the Restructuring Retention Plan upon
    emergence from bankruptcy on January 16, 2003. Both Mr.
    Jacquay and Mr. Rehberger have agreed to withdraw from the
    Restructuring Retention Plan and are now participants in the
    2003 Employee Retention Plan pursuant to which they both earned
    an additional bonus of $70,313 as of June 30, 2003 or any
    additional amounts which may be earned in 2003 pursuant to the
    2003 Employee Retention Plan.
(5)
The numbers do not include 11,452 in options
    which will be issued to each of Mr. Jacquay and Mr. Rehberger in
    2003 or any additional options which may be earned in 2003
    pursuant to the 2003 Employee Retention Plan.
Option Grants in Last Fiscal Year
Share and per share figures (including exercise
or base price figures) have been restated retroactively to
reflect stock splits with respect to our pre-petition class A
common stock. All option grants in 2002 were made in connection
with the Offer to Exchange with respect to outstanding options
that we undertook in May 2001. See "Report on Repricing of
Options" in our Annual Report on Form 10-K for the
year ended December 31, 2001. Pursuant to XO Parent's
Plan of Reorganization, all interests in such stock options and
all such shares issuable upon exercise thereof were cancelled
and terminated effective January 16, 2003, the date that
the Plan of Reorganization was consummated.
Individual Grants(1)
% of Total
Potential Realizable Value at
Number of
Options
Assumed Annual Rates of
Securities
Granted to
Market Price
Stock Price Appreciation for
Underlying
Employees
Exercise or
on Date of
Option Terms($)(2)
Options
in Fiscal
Base Price
Grant
Name
Granted(#)
Year(%)
($/Sh)
($/Sh)
Expiration Date
0%
5%
10%
Daniel F. Akerson
—
—
N/A
N/A
N/A
N/A
N/A
N/A
Nathaniel A. Davis
1,423,750
5.71
0.14
0.14
January 16, 2012
0
125,355
317,673
R. Gerard Salemme
59,500
0.24
0.14
0.14
January 16, 2012
0
5,239
13,276
Michael S. Ruley
301,665
1.21
0.14
0.14
January 16, 2012
0
26,561
67,308
Nancy B. Gofus
212,500
0.86
0.14
0.14
January 16, 2012
0
18,710
47,413
(1)
All options were granted on January 17,
    2002, at which time 30% of the shares subject to the option were
    vested, with the remainder vesting monthly on a ratable basis
    over the 36-month period commencing on the date of grant.
(2)
The potential realizable value illustrates value
    that might be realized upon exercise of the options immediately
    prior to the expiration of their terms, assuming the specified
    compounded rates of appreciation of the market price per share
    from the date of grant to the end of the option term. The gains
    shown are net of the option exercise price, but do not include
    deductions for taxes and other expenses payable upon the
    exercise of the option or for sale of underlying shares of
    pre-petition class A common stock. No Named Executive Officer,
    however, realized or can realize any value with respect to such
    grants because, pursuant to XO Parent's Plan of
    Reorganization, all interests in such stock options and all such
    shares issuable upon exercise thereof were cancelled and
    terminated effective January 16, 2003, the date that the
    Plan of Reorganization was consummated, and no Named Executive
    Officer exercised any such option prior to January 16, 2003.
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Aggregated Option Exercises and Fiscal
Year-End Option Values
Number of Securities
Underlying Unexercised
Value of Unexercised
Options at Fiscal
In-the-Money Options at
Shares
Year-End(#)(1)
Fiscal Year-End($)(2)
Acquired on
Value
Name
Exercise(#)
Realized($)
Exercisable
Unexercisable
Exercisable
Unexercisable
Daniel F. Akerson
—
—
5,200,000
1,000,000
129,600
0
Nathaniel A. Davis
—
—
731,648
892,102
0
9,600
R. Gerald Salemme
—
—
400,876
28,924
0
0
Michael S. Ruley
—
—
561,319
158,646
283
566
Nancy B. Gofus
—
—
159,201
153,299
2,400
2,400
(1)
Pursuant to XO Parent's Plan of
    Reorganization, all interests in such stock options, all such
    shares issued upon exercise thereof, were cancelled and
    terminated effective January 16, 2003, the date that the
    Plan of Reorganization was consummated.
(2)
For purposes of these calculations, the value of
    our pre-petition class A common stock was $0.053 per share,
    which was derived based on trading on the Nasdaq
    Over-the-Counter Bulletin Board. Nevertheless, XO Parent's
    Plan of Reorganization provided that interests in its
    pre-petition class A common stock would be cancelled and
    terminated without any recovery, and none of the Named Executive
    Officers exercised any exercisable options set forth above prior
    to the effective date of such plan.
Employment Agreements and Other
Arrangements
Carl J. Grivner.
We
have entered into an Employment Term Sheet and a Change of
Control Agreement with Mr. Grivner. The Employment Term
Sheet provides for his employment as President and Chief
Executive Officer through April 30, 2004, but renews
annually for an additional one year term unless, prior to
February 1 of the year in which the term sheet or extension
thereof expires, Mr. Grivner notified us, or we notify
Mr. Grivner, that the term sheet will not be renewed. It
provides for an annual base salary of $700,000, which we may
increase annually, and for an annual bonus of up to 100% of base
salary, based on certain revenue, earnings before interest,
taxes, depreciation and amortization, and cash targets to be
mutually agreed upon between us and Mr. Grivner. Pursuant to the
term sheet, in connection with Mr. Grivner's
acceptance of employment with us, we granted him options to
purchase 2,000,000 shares of our New Common Stock, with an
exercise price of $4.80, 25% of which shares are fully vested,
and the remainder of such shares vest in equal annual
installments on the first, second and third anniversary of the
date of grant. The term sheet also provides that we will
reimburse Mr. Grivner for certain relocation and related
costs and expenses.
The Change of Control Agreement generally
provides that if both (i) a Change in Control occurs and
(ii) at any time on or after such Change in Control, but
before the end of the 24-month period immediately thereafter,
the Mr. Grivner's employment with us for any reason
other than (A) by Mr. Grivner without Good Reason,
(B) by us as a result of Mr. Grivner's disability
or with Cause or (C) as a result of the death of
Mr. Grivner, we shall pay him an amount equal to
Mr. Grivner's annual base salary, plus his targeted
annual bonus, reduced by any cash severance benefits paid to
Mr. Grivner. Under such circumstances, we also will provide
Mr. Grivner with certain health and life insurance benefits
for a period of 12 months. In addition, under certain
circumstances, we will make additional payments to
Mr. Grivner for taxes due with respect to any payments or
benefits under this agreement treated as excise taxes under
specified provisions of the Internal Revenue Code.
Under the Change of Control Agreement,
Mr. Grivner will have been deemed to have terminated his
employment for Good Reason if there is:
•
a material change in his duties that is
    inconsistent with his status as one of our key management
    employees or a substantial adverse alteration in the nature or
    status of his responsibilities;
•
a reduction in his annual base salary or target
    annual bonus;
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•
a relocation of his principal place of business
    of more than 35 miles; or
•
a failure by us to provide him with benefits as
    favorable in the aggregate in all material respects as those
    enjoyed by him under applicable plans.
Under the Change of Control Agreement, a Change
of Control means the occurrence of any of the following events:
•
Any person or entity becomes the owners of
    securities of our that represent 50% or more of the voting power
    of our then outstanding securities, other than certain persons
    or entities, including those that owns securities that represent
    more than 10% of the voting power of us as of April 1,
    2003. For purpose of this calculation, securities acquired from
    us are excluded from the determination of the percentage
    ownership of a person or entity, but any such securities shall
    be included in the then total number of securities outstanding.
•
We merge or consolidate with another company,
    other than a merger or consolidation that would result in our
    stockholders holding more than 65% of the combined voting power
    of the company surviving the merger or consolidation;
•
We are liquidated or we sell all or substantially
    all of our assets to any other company.
Despite the occurrence of one of the forgoing
events, no Change of Control will be deemed to have occurred for
purposes of the Change of Control Agreement if Mr. Icahn
and/or his affiliates is our largest stockholder and owns in
excess of 15% of our outstanding shares.
Under the Change of Control Agreement, Cause
means the occurrence of any of the following events:
•
the failure by Mr. Grivner to substantially
    perform his duties, other than a failure resulting from his
    incapacity due to physical or mental illness that continues for
    a period of 30 days;
•
he engages in misconduct that is demonstrably and
    materially injurious to us, monetarily or otherwise; and
•
an act or acts by him that constitutes any felony
    or a misdemeanor involving moral turpitude.
Director Compensation
Each director is entitled to reimbursement for
out-of-pocket expenses incurred for each meeting of the full
Board or a committee of the Board attended. Our pre-petition
stock option plans permitted, and our 2002 Stock Incentive Plan
permits, grants and awards to non-employee directors. We made no
such grants in 2002.
Compensation Committee Interlocks and Insider
Participation
During 2002, Messrs. Jeffrey S. Raikes,
Peter C. Waal and Dennis M. Weibling served on the
Compensation Committee of our Board of Directors. From September
1994 to January 1997, Mr. Weibling was Executive Vice
President of XO Parent. Effective January 16, 2003,
each of Messrs. Raikes, Waal and Weibling resigned from our
Board of Directors and all committees thereof.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information, as of
June 30, 2003, with respect to the beneficial ownership of
our New Common Stock by (1) each member of the Board of
Directors, (2) all directors and executive officers as a
group, and (3) persons known to us to be the beneficial
owners of more than five percent of a class of our New Common
Stock.
Shares Beneficially Owned
Amount and Nature of
Name
Ownership(1)
Percent of Class (%)
Carl Icahn(2)
85,583,827
82.89
Carl J. Grivner(3)
500,000
*
Wayne M. Rehberger
112,500
*
Mark W. Faris
97,500
*
John H. Jacquay
97,500
*
William Garrahan
43,750
*
Andrew R. Cohen
0
—
Adam Dell
0
—
Vincent J. Intrieri
0
—
Keith Meister
0
—
All directors and executive officers as a group
    (13 persons)(4)
86,435,077
83.03
(1)
Under the rules of the Securities and Exchange
    Commission, a person is deemed to be the beneficial owner of a
    security if such person, directly or indirectly, has or shares
    the power to vote or direct the voting of such security or the
    power to dispose or direct the disposition of such security. A
    person is also deemed to be a beneficial owner of any securities
    if that person has the right to acquire beneficial ownership
    within 60 days after June 30, 2003. Accordingly, more
    than one person may be deemed to be a beneficial owner of the
    same securities. Unless otherwise indicated by footnote, the
    named individuals have sole voting and investment power with
    respect to the shares of our common stock beneficially owned.
    Share figures do not represent any right to participate in the
    Rights Offering pursuant to the Plan of Reorganization.
(2)
As reported in the Schedule 13D of
    Mr. Icahn and other parties to a joint filing agreement
    filed with the SEC, represents 78,078,993 shares of New Common
    Stock held by Cardiff Holding LLC, a Delaware limited liability
    company, and 3,001,936 shares of New Common Stock issuable upon
    exercise of Series A warrants, 2,251,449 shares of New
    Common Stock issuable upon exercise of Series B warrants,
    and 2,251,449 shares of New Common Stock issuable upon exercise
    of Series C warrants, all held by Cardiff. Cardiff is
    wholly-owned by ACF Industries Holding Corp., a Delaware
    corporation, which is wholly-owned by Highcrest Investors Corp.,
    a Delaware corporation, which is approximately 99% owned by
    Buffalo Investors Corp., a New York corporation, which is
    wholly-owned by Starfire Holding Corporation, a Delaware
    corporation, which is wholly-owned by Mr. Icahn.
    Mr. Icahn is the chairman and sole director of Starfire
    Holding, and the chairman and a director of each of Cardiff, ACF
    Industries, Highcrest Investors and Buffalo Investors.
    Additional shares of New Common Stock and warrants to purchase
    shares of New Common Stock may be allocated to Cardiff on a pro
    rata basis under the Plan of Reorganization to the extent that
    shares and warrants held back in respect of claims of general
    unsecured creditors of XO Parent ultimately are
    redistributed under the terms of the Plan of Reorganization.
(3)
Represents shares of New Common Stock obtainable
    as of June 30, 2003 or 60 days thereafter by
    Mr. Grivner upon the exercise of nonqualified stock options.
(4)
Represents (a) 78,078,993 shares of New
    Common Stock held by Cardiff, as described in note 2 above,
    (b) warrants to purchase 7,504,834 shares of New Common
    Stock held by Cardiff as described in note 2 above, and
    (c) 851,250 shares of New Common Stock obtainable as of
    June 30, 2003 or 60 days thereafter by executive
    officers as a group upon the exercise of nonqualified stock
    options. See notes (2) and (3) above.
*
Less than 1%
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Equity Compensation Plan Information
Our Pre-Petition Stock Option Plans
As of December 31, 2002, options to purchase
securities had been issued and were outstanding under the
following equity compensation plans: XO Communications,
Inc. Stock Option Plan; and the following stock options plans
assumed in connection with the acquisition of Concentric Network
Corporation: Delta Internet Services, Inc. 1996 Stock Option
Plan; Concentric Network Corporation 1995 Stock Incentive Plan
for Employees and Consultants; Concentric Network Corporation
1996 Stock Plan; Concentric Network Corporation 1997 Stock Plan;
Concentric Network Corporation 1999 Nonstatutory Stock Option
Plan; and certain grants of stock options to Concentric
employees not pursuant to any plan. Pursuant to our Plan of
Reorganization, which became effective as of January 16,
2003, interests in each such plan, and rights to securities to
be issued upon the exercise of options outstanding under each
such plan, were terminated and cancelled, and holders of such
interests and options under each such plan were not entitled to
any distribution pursuant to the Plan of Reorganization. The
table below presents information with respect to the above
referenced plans as of December 31, 2002.
Equity Compensation Plan Information
Number of Securities to be
Number of Securities
Issued Upon Exercise of
Weighted-Average Exercise
Remaining Available for
Outstanding Options,
Price of Outstanding Options,
Future Issuance Under Equity
Plan Category
Warrants and Rights(1)
Warrants and Rights(1)
Compensation Plans
Equity compensation plans approved by security
    holders
41,567,555
$
6.78
43,894,303
Equity compensation plans not approved by
    security holders
0
N/A
0
Total
41,567,555
$
6.78
43,894,303
(1)
Excludes options to purchase
    2,630,417 shares of our pre-petition class A common
    stock granted prior to our June 16, 2000 acquisition of
    Concentric Network Corporation pursuant to various stock option
    plans of Concentric, which options we assumed in connection with
    the Concentric acquisition and have a weighted average exercise
    price of $16.68 per share.
Our 2002 Stock Incentive Plan Under Our Plan
of Reorganization
In connection with the confirmation of our Plan
of Reorganization by the Bankruptcy Court, the Bankruptcy Court
approved the adoption of the XO Communications, Inc. 2002 Stock
Incentive Plan, or the 2002 Stock Incentive Plan, which became
effective as of January 16, 2003, the date that we
consummated our Plan of Reorganization. Under the 2002 Stock
Incentive Plan, we are authorized to issue, in the aggregate,
stock awards with respect of up to 17,590,020 of shares of New
Common Stock, in the form of options to purchase stock or
restricted stock. Of those shares, non-qualified options to
purchase 11.4 million shares of New Common Stock have been
granted and are outstanding as of March 31, 2003 pursuant
to the 2002 Stock Incentive Plan, each at a purchase price of
$5.00 per share. With respect to the underlying shares of
these options, 25% are fully vested and the remainder vest over
a period of three years.
The primary purpose of the 2002 Stock Incentive
Plan is to provide a means through which we may continue to
attract, motivate and retain selected employees, officers and
independent contractors who can materially contribute to our
growth and success, and to encourage stock ownership in us
through granting incentive stock options or nonqualified stock
options, or both, to purchase our common stock or shares of
restricted stock.
The 2002 Stock Incentive Plan is administered by
the Compensation Committee of our Board of Directors, and as
such has the discretionary authority to determine all matters
relating to awards of stock options and restricted stock,
including the selection of eligible participants, the number of
shares of common
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stock to be subject to each option or restricted
stock award, the exercise price of each option, vesting, and all
other terms and conditions of awards.
Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i) ten
years after the date of grant, (ii) twelve months after
termination of employment with XO Parent due to death or
complete and permanent disability, (iii) immediately upon
termination of employment by us for Cause (as defined in the
Stock Incentive Plan), or (iv) three months after
termination of employment by the employee or by us for other
than Cause.
The Compensation Committee may award shares of
restricted stock and may establish terms, conditions and
restrictions applicable thereto. Subject to the restrictions on
restricted stock, award recipients generally will have all the
rights and privileges of a stockholder, including the right to
vote such restricted stock. Restricted stock generally is
subject to restrictions related to transferability and
forfeiture until vested at the expiration of the restricted
period
Upon a merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation of
us as a result of which our stockholders receive cash, stock or
other property in exchange for or in connection with their
shares of common stock, any award granted under the 2002 Stock
Incentive Plan will terminate, and, in the case of options, the
recipients shall have the right immediately prior to any such
event to exercise their vested options. In the event that our
stockholders receive capital stock of another corporation in
exchange for their shares of common stock in any transaction
involving a merger, consolidation, acquisition of property or
stock, separation or reorganization, unless otherwise determined
by us, all awards granted under the 2002 Stock Incentive Plan
shall be converted into awards with respect to shares of such
exchange stock.
Unless otherwise expressly determined by a
resolution of our Board of Directors on the date of grant or
such later date when the Board of Directors may ratify the
award, (i) awards granted to non-affiliated directors will
vest in full immediately upon the occurrence of a change in
control, as defined in the 2002 Stock Incentive Plan, or
(ii) awards granted to employees whose employment is
terminated by us without Cause, and awards granted to certain
officers whose employment is terminated by us without Cause or
by the officer for Good Reason (as defined in the 2002 Stock
Incentive Plan), will vest in full if such termination occurs
within one year following such change in control. In all other
cases, in the event of a change in control, unless otherwise
determined by the Board prior to the occurrence of such change
in control, any unvested awards shall not become fully vested
merely by the occurrence of such change in control. Because the
Stock Incentive Plan took effect in connection with the
consummation of our Plan of Reorganization, the transactions
contemplated thereby were not deemed a change of control for
purposes of the Stock Incentive Plan.
Employee Retention and Incentive
Plans
In connection with our Plan of Reorganization, we
established the XO Communications, Inc. Employee Retention and
Incentive Plan, which we refer to as the Restructuring Retention
Plan. In June of 2003, the Restructuring Retention Plan was
replaced with a new Employee Retention and Incentive Plan, which
we refer to as the 2003 Retention Plan, for all but a few
individuals who are no longer employed by us. Thirty five of our
former employees are entitled to a partial bonus payment under
the Restructuring Retention Plan. Seven hundred and five of our
current and former employees who were participants in the
Restructuring Retention Plan are now participants in or entitled
to partial bonus payments under the 2003 Retention Plan.
Restructuring
Retention Plan
The Restructuring Retention Plan became effective
on October 23, 2002. The primary purposes of the
Restructuring Retention Plan were (a) to encourage certain
of our key employees (including the Named Executive Officers) to
continue their employment with us during the period of our
restructuring and (b) to establish incentives for those
employees to achieve certain corporate performance goals,
including the completion of XO Parent's Chapter 11
reorganization and certain EBITDA earnings objectives. The
maximum amount payable, in the aggregate, to 35 of our former
employees under the Restructuring Retention Plan is $256,000. No
active employees are participants in this plan and no further
bonus awards will be made thereunder.
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2003 Employee
Retention Plan
In June of 2003, we replaced the Restructuring
Retention Plan with the 2003 Retention Plan to provide long-term
equity incentives to senior management, based on certain revenue
and cash balance performance targets. The 2003 Retention Plan
was offered to participants of the Restructuring Retention Plan
as an alternative to the EBITDA targets under the Restructuring
Retention Plan. Participants in the Restructuring Retention Plan
who elected into the 2003 Retention Plan forfeited their rights
under the Restructuring Retention Plan in exchange for the
opportunity to participate in the 2003 Retention Plan.
The 2003 Retention Plan provides for a bonus
award aligned with each of the Company's first two and last
two quarters of 2003.
Each participant received a guaranteed Q1/ Q2
bonus award, regardless of the Company's operating results
for that period. The Q1/ Q2 bonus awards were paid in cash and
options on or after July 11, 2003.
For those participants who received options as
Q1/ Q2 bonus awards, the options were 50% vested on the date of
grant, with the remainder vesting ratably each month over the
next 24 months of employment.
The Q3/ Q4 bonus award under the 2003 Retention
Plan will be tied to the achievement of revenue and cash balance
performance objectives and will be settled fully in stock
options. Under the 2003 Retention Plan, two-thirds of the
participant's Q3/ Q4 bonus award will be based on
achievement of the revenue component, with the remaining
one-third based on the cash balance component. The Q3/ Q4 bonus
awards may be partially earned subject to partial achievement of
the revenue and cash balance goals with an additional
overachievement bonus for overachievement of the revenue goal.
Options distributed in settlement of a Q3/ Q4
bonus award will be 25% vested on the date of grant, with the
remainder vesting ratably each month over the next
36 months of employment. Bonus awards under the 2003
Retention Plan may be prorated for partial service during the
Q1/ Q2 and/or Q3/ Q4 periods and may be forfeited in certain
circumstances following a termination of employment.
The options granted for both Q1/ Q2 and Q3/ Q4
bonus awards are options to purchase XO's New Common Stock,
par value $0.01 per share. The options were and will be granted
under the Company's 2002 Stock Incentive Plan, with an
exercise price equal to $5.84, which represents 80% of the
market value of one share of XO's New Common Stock on the
effective date of the 2003 Retention Plan. The stock options
issued in conjunction with the Q1/ Q2 bonus payments will result
in recognition of compensation expense over the options'
vesting period.
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Pre-Reorganization Relationships and Related
Transactions
Pre-Petition Stockholders.
Prior to the effective date of our
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little & Co. had a significant equity interest in
us and had designated certain individuals to serve as members of
our board of directors. Such investment funds and other entities
affiliated with Forstmann Little & Co. currently hold a
significant equity interest in McLeodUSA Incorporated. McLeod
provides interconnection and facilities based telecommunications
services to us, for which we paid McLeodUSA approximately
$2.0 million in 2002 and $8.4 million in 2001. We
provide limited telecommunications services to McLeodUSA, for
which we received approximately $373,000 in 2002 and
$7.1 million in 2001.
Craig O. McCaw.
In
January 2002, we retained an entity owned by Craig O. McCaw
to act as our agent with respect to the sale of our Falcon 2000
aircraft, for which it received a commission of $161,250. In
March 2000, we retained an entity owned by Craig O. McCaw
to act as our agent with respect to the sale of our
Falcon 50 aircraft, for which it received a commission of
$147,500. In March 2000, we also retained this entity to act as
our agent with respect to the purchase of a Falcon 900
aircraft, for which it received a commission of $50,000.
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In June 2000, as part of the reorganization under
which we acquired Concentric, we acquired from Craig O.
McCaw the 50% interest that we did not already own of XO
Intercity Holdings No. 1, LLC, (f/k/a INTERNEXT, L.L.C.),
the joint venture formed to hold interests in a national fiber
optic network under construction. The purchase price was
approximately 6.8 million shares of our pre-petition
class A common stock and the assumption of approximately
$9.9 million of liabilities.
Craig O. McCaw owns a 20% interest in
Communications Consultants, Inc., which employs Mr. Salemme
and from which we retain Mr. Salemme for service as
XO's Senior Vice President, Regulatory and Legislative
Affairs.
Other Transactions and Relationships.
In April 2001, we lent $700,000 to
Henry R. Nothhaft, a former Vice Chairman of XO Parent, to
provide short term bridge financing to Mr. Nothhaft in
connection with the retirement of amounts due to third parties
that were secured by XO stock. The loan has been paid in full.
The loan had a term of 60 days interest accrued at a per
annual rate of 5%, and was secured by approximately
650,000 shares of our pre-petition class A common
stock owned by Mr. Nothhaft.
Post-Reorganization Relationships and Related
Transactions
Carl C. Icahn.
In
February 2003, Dixon Properties, LLC, which is owned by
Mr. Icahn, acquired ownership of the building in which our
headquarters is located and our lease in a transaction that was
approved by the Bankruptcy Court in our Chapter 11
proceedings. We currently are leasing approximately
170,000 square feet of space in that building. In
connection with the purchase of the building by Dixon
Properties, it assumed the lease agreement under which we lease
the space we occupy. Pursuant to the lease agreement, we are
obligated to pay Dixon Properties lease payments of
approximately $19.0 million in the aggregate (excluding
certain building-related expenses) through the expiration of the
initial term of the lease, which runs through November 30,
2007.
We have entered into a Tax Allocation Agreement,
dated January 16, 2003, between XO Parent and Starfire
Holding Corporation, a company owned by Mr. Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
our Chapter 11 proceedings, establishes the methodology for
the calculation and payment of income taxes in connection with
the consolidation of us with Starfire for income tax purposes.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes us, and we will make payments
to Starfire in an amount equal to the tax liability, if any,
that we would have if we were to file as a consolidated group
separate and apart from Starfire.
Mr. Icahn, through various entities that he
owns and controls, has the right to require us to register,
under the Securities Act of 1933, shares of New Common Stock
held by such entities and to include shares of New Common Stock
held by them in certain registration statements filed by us,
pursuant to a Registration Rights Agreement approved by the
Bankruptcy Court in connection with our Chapter 11
proceedings.
Arnos Corp., which is owned by Mr. Icahn,
holds approximately 85% of the $500 million in loans
outstanding under the New Credit Agreement. Under the New Credit
Agreement, no cash interest payments are required to be made by
us until we achieve specified financial targets.
We provide certain telecommunications services to
affiliates of Mr. Icahn at rates that we believe are
comparable to rates charged other customers that purchase
similar services and volumes. For the three months ended
March 31, 2003, we recognized revenue of approximately
$88,000 with respect to these services and had outstanding
receivables for such services at March 31, 2003 of
approximately $83,000.
Other Transactions and Relationships.
R. Gerard Salemme owns an 80%
interest in Communications Consultants, Inc., which employs
Mr. Salemme and from which we retain Mr. Salemme for
service as XO Parent's Senior Vice President, Regulatory
and Legislative Affairs. See the "Summary Compensation
Table" for information regarding payments to Communications
Consultants.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of New Common
Stock or the perception that such sales could occur, could
adversely affect the prevailing market price of the New Common
Stock. As of March 31, 2003, there were approximately 95
million shares of New Common Stock outstanding. The shares of
New Common Stock owned by Cardiff, an entity owned by
Mr. Icahn, are restricted shares that may be sold only
under a registration statement or an exemption from federal
securities registration requirements. Although Cardiff holds
restricted stock, it may cause us to register sales of that
stock at any time, whether pursuant to its contractual
registration rights or otherwise.
All of the shares offered for sale pursuant to
this prospectus may be sold pursuant to this prospectus under
the Securities Act, and will thereafter be freely tradable so
long as they are not held by affiliates or underwriters, as such
term is defined by the Securities Act. These shares may be sold
under Rule 144 promulgated under the Securities Act.
Rule 144 permits sales by a holder within any three-month
period of a number of shares that does not exceed the greater
of: (1) 1% of the number of shares of New Common Stock then
outstanding or (2) the average weekly trading volume of the
New Common Stock during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to those sales.
Sales under Rule 144 are also governed by manner of sale
provisions and notice requirements, and current public
information about XO Parent must be available.
Pursuant to our Plan of Reorganization, we have
issued three series of warrants to purchase up to an aggregate
of approximately 9.5 million, 7.1 million and
7.1 million additional shares of New Common Stock, at
exercise prices of $6.25, $7.50 and $10.00 per share,
respectively. The warrants will expire on January 16, 2010.
In addition, if the eligible participants exercise all the
rights in the Rights Offering, up to approximately
43.3 million additional shares of New Common Stock will be
issued to such eligible holders.
We have options to purchase approximately
11.4 million shares of New Common Stock outstanding under
our stock incentive plan as of March 31, 2003, with an
exercise price of $5.00 per share. Unless surrendered or
cancelled earlier under the terms of the stock incentive plan,
those options will expire in 2013. Subsequent to March 31,
2003, we issued approximately 200,000 additional options under
our stock incentive plan pursuant to the 2003 Retention Plan
with an exercise price of $5.84 per share in exchange for rights
of certain employees under our Restructuring Retention Plan. In
addition, our stock incentive plan authorizes future grants of
options to purchase New Common Stock, or awards of restricted
New Common Stock, with respect to an additional 6.6 million
shares of New Common Stock in the aggregate. See also
"Risks Related to Our Common Stock" on
page [     ] of this prospectus.
DESCRIPTION OF OUTSTANDING
INDEBTEDNESS
We have summarized some of the terms and
provisions of our New Credit Agreement in this section. The
summary is not complete. You should read the Amended and
Restated Credit and Guarantee Agreement before making any
investment decision.
New Credit Agreement
Loans with an outstanding principal amount of
$500 million are outstanding under the New Credit
Agreement, which we entered into on January 16, 2003 in
connection with the consummation of the Plan of Reorganization.
XO Parent is the borrower under the New Credit Agreement,
and virtually all of its subsidiaries are guarantors of the
facility. Mizuho Corporate Bank, Ltd. is the Administrative
Agent. Approximately 85% of the underlying loans of the New
Credit Agreement are held by Arnos Corp., an entity owned by
Mr. Icahn.
The maturity date of the outstanding principal
under the New Credit Agreement is July 15, 2009. Automatic
and permanent quarterly reductions of the principal amount
commence on October 15, 2007 with scheduled principal
repayments totaling $25 million in 2007, $150 million
in 2008 and $325 million in 2009. The security for the New
Credit Agreement consists of all of the assets of
XO Parent, including stock of its direct and indirect
subsidiaries, and all assets of virtually all of those
subsidiaries. The New Credit Agreement
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limits additional indebtedness, liens, dividend
payments and certain investments and transactions, and contains
certain covenants with respect to minimum cash balance, minimum
EBITDA (earnings before interest, taxes, depreciation and
amortization) requirements and maximum capital expenditures. The
New Credit Agreement permits us to incur new secured debt
ranking senior to the amounts outstanding under the New Credit
Agreement up to a principal amount equal to $200 million
less the proceeds from the Rights Offering, so long as the terms
are satisfactory to the administrative agent and lenders of a
majority of the principal amount of the loan outstanding under
the New Credit Agreement. The New Credit Agreement also requires
prepayments of outstanding principal balances from excess cash
flows, as defined, and from the proceeds of specified types of
transactions. Our ability to comply with the covenants under the
New Credit Agreement is subject to the risks of our business,
including those discussed in this prospectus under "Risk
Factors."
Interest on the amounts outstanding under the New
Credit Agreement is initially payable-in-kind, that is, it will
accrue and be added to principal but not be payable in cash.
Interest will accrue quarterly at a rate of Adjusted Eurodollar
plus 6% or the base rate announced by the administrative agent
from time to time plus 5%, at our election, so long as interest
on the outstanding amounts remains payable-in-kind.
XO Parent may, at its option at any time, elect to begin
paying cash interest on the outstanding amounts and interest on
the outstanding amounts will become automatically payable in
cash once the interest coverage ratio (EBITDA/ interest,
calculated on a trailing 12-month basis) exceeds 4.0. Based
on our current funding requirement, we would not anticipate
making such an election in the foreseeable future. When interest
on the outstanding amounts becomes payable in cash, the
applicable interest rate will fall to Adjusted Eurodollar Rate
plus 4% or the base rate announced by the administrative agent
from time to time plus 3%, payable quarterly.
We will use the net proceeds of this offering to
prepay and reduce indebtedness outstanding under this New Credit
Agreement.
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DESCRIPTION OF OUTSTANDING EQUITY
SECURITIES
We have summarized some of the terms and
provisions of our capital stock and warrants in this section.
The summary is not complete. You should read our amended and
restated Certificate of Incorporation and our restated by-laws
relating to the applicable capital stock and the warrant
agreement with respect to any warrants for additional
information before making any investment decision.
New Common Stock
Total Shares.
We
have the authority to issue a total of 1.0 billion shares
of New Common Stock. As of March 31, 2003, there were
approximately 95.0 million shares of New Common Stock
outstanding.
Voting Rights.
The
New Common Stock has one vote per share and is eligible to vote
on all matters that come before the stockholders, including
without limitation, election of directors to the Board of
Directors. All holders of New Common Stock have the same voting
rights and shall vote together as a single class.
Dividends.
If a
dividend is declared by the Board of Directors, the New Common
Stock is entitled to receive dividends.
Liquidation.
In the
event of any dissolution, liquidation or winding-up of
XO Parent, after payment or provision for payment of our
debts and subject to any amounts that may be payable in respect
of any outstanding preferred class of capital stock of
XO Parent, the remaining assets will be distributed to the
holders of New Common Stock on a per share basis.
Preferred Stock
The Certificate of Incorporation of
XO Parent authorizes the creation of up to
200.0 million shares of undesignated preferred stock,
$0.01 par value. As of the date hereof, XO Parent has
not designated the rights or preferences of any series of
preferred stock and no preferred stock issued or outstanding.
Warrants
Terms
We have issued and are in the process of
distributing three series of warrants under our Plan of
Reorganization: Series A Warrants, Series B Warrants
and Series C Warrants.
•
The Series A Warrants are exercisable at an
    exercise price of $6.25 per share. As of March 31,
    2003, Series A Warrants to purchase 9.5 million shares
    of New Common Stock are outstanding.
•
The Series B Warrants are exercisable at an
    exercise price of $7.50 per share. As of March 31,
    2003, Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock are outstanding.
•
The Series C Warrants are exercisable at an
    exercise price of $10.00 per share. As of March 31,
    2003, Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock are outstanding.
Each series of warrants expires on
January 16, 2010.
The Warrant Agreements
Each of the Warrant Agreements relating to each
series of warrants provides that, in the event that
XO Parent issues New Common Stock at prices below the then
prevailing market prices, or securities convertible into shares
of New Common Stock with conversion prices below the then
prevailing market prices, the number of shares of New Common
Stock to be issued upon exercise of a warrant set forth on the
face thereof shall, subject to certain conditions, be adjusted.
In addition the number of shares of New Common Stock to be
issued upon exercise of each warrant shall be adjusted after the
occurrence of certain corporate events with respect to shares of
New Common Stock, including stock splits, certain dividends and
other distributions.
From the January 16, 2003 until
July 16, 2004, if XO Parent consummates a merger,
reorganization, reclassification, consolidation or other similar
transaction, the warrant will become exercisable on a per share
basis for the greater of (i) the amount of cash or other
consideration delivered to a non-controlling holder of a
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share of New Common Stock and (ii) the sum
of the exercise price and the option value of the Warrant. After
July 16, 2004, the warrants will no longer have this
additional protection. The Rights Offering does not trigger any
adjustment pursuant to the warrant agreement.
No fractions of a share of New Common Stock will
be issued upon the exercise of any warrant, but we will pay the
cash value thereof determined as provided in the Warrant
Agreement.
CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS
The following is a summary of the Certificate
of Incorporation and Bylaws of XO Parent. These provisions
are summaries and are qualified in their entirety by the
Certificate of Incorporation and the Bylaws, which are included
as exhibits to the registration statement of which this
prospectus is a part.
Board of Directors
The Certificate of Incorporation provides that
the number of directors shall be determined in the manner
specified by the Bylaws, and may be increased or decreased from
time to time in the manner prescribed by the Bylaws. Currently,
the Board of Directors consists of seven (7) directors.
Amendment of Bylaws
Our Board of Directors and stockholders are
authorized and empowered to adopt, amend and repeal our Bylaws.
Section 203 Amendment
The Certificate of Incorporation makes the
anti-takeover protection of Section 203 of the Delaware
General Corporate Law, which we refer to as the DGCL,
inapplicable to XO Parent. Section 203 of the DGCL
provides that a person who acquires fifteen percent (15%) or
more of the outstanding voting stock of a Delaware corporation
becomes an "interested stockholder." Section 203
prohibits a corporation from engaging in mergers or certain
other "business combinations" with an interested
stockholder for a period of three (3) years following the
time that such interested stockholder becomes an interested
stockholder, unless certain conditions are satisfied.
The DGCL defines a "business
combination" broadly to include, among other things, any
merger or consolidation with the interested stockholder, any
merger or consolidation caused by the interested stockholder in
which the surviving corporation will not be subject to Delaware
law, or the sale, lease, exchange, mortgage, pledge, transfer or
other disposition to the interested stockholder of any assets of
the corporation having a market value equal to or greater than
10% of the aggregate market value of the assets of the
corporation.
PLAN OF DISTRIBUTION
We are offering shares of our New Common Stock
directly to eligible participants pursuant to this offering. We
have not employed any brokers, dealers or underwriters in
connection with the solicitation or exercise of Subscription
Rights in this offering and no commissions, fees or discounts
will be paid in connection with it. Certain of our officers and
other employees may solicit responses from you, but such
officers and other employees will not receive any commissions or
compensation for such services other than their normal
employment compensation.
We will pay the fees and expenses of American
Transfer & Trust Company as Rights Agent, and MacKenzie
Partners, Inc., as Information Agent, and also have agreed to
indemnify the Rights Agent and the Information Agent from any
liability they may incur in connection with this offering.
On or
about                               ,
we will distribute the rights certificates and copies of this
prospectus to the eligible participants or their record holders.
If you wish to exercise your rights and subscribe for
newly-issued shares of our New Common Stock, you should follow
the procedures described under "The Offering —
Procedure" on page      . The
Subscription Rights are not transferable.
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MATERIAL FEDERAL INCOME TAX
CONSIDERATIONS
The following discussion is based on the opinion
of Willkie Farr & Gallagher, counsel to us, and
summarizes certain United States federal income tax
considerations to holders of the exercise or lapse of
Subscription Rights and of the disposition of the New Common
Stock acquired upon the exercise of the Subscription Rights.
This discussion is based on the Internal Revenue Code of 1986,
as amended, or the IRC, regulations promulgated thereunder by
the United States Department of Treasury, published rulings and
pronouncements of the Internal Revenue Service, or the IRS, and
judicial decisions, all as in effect on the date of this
document. Changes in these rules, or new interpretations
thereof, may have retroactive effect and could significantly
affect the federal income tax consequences described below.
No rulings or determinations of the IRS or any
other taxing authority has been sought or obtained with respect
to the tax considerations described herein, and the discussion
below is not binding upon the IRS or any other taxing authority.
No assurance can be given that the IRS will not assert, or that
a court will not sustain, a different position from any
discussed herein.
The following discussion applies only to U.S.
persons who hold the Subscription Rights and New Common Stock
acquired upon the exercise of the Subscription Rights as capital
assets within the meaning of Section 1221 of the IRC. This
discussion does not address all aspects of federal income
taxation that may be relevant to holders in light of their
particular circumstances or to holders who may be subject to
special rules under the IRC, including, without limitation,
banks and certain other financial institutions, insurance
companies, tax-exempt organizations, persons that are, or hold
Subscription Rights or New Common Stock through, pass-through
entities, persons whose functional currency is not the United
States dollar, foreign persons, dealers in securities or foreign
currency, persons who received their stock pursuant to the
exercise of any employee stock option or otherwise as
compensation and persons holding New Common Stock that is a
hedge against, or that is hedged against, currency risk or that
is part of a straddle, constructive sale or conversion
transaction. Furthermore, the following discussion does not
address foreign, state or local tax consequences and does not
address United States federal taxes other than income taxes.
THE FOLLOWING SUMMARY OF CERTAIN UNITED STATES
FEDERAL INCOME TAX CONSIDERATIONS DOES NOT DISCUSS ALL OF THE
FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE RELEVANT TO A
HOLDER OF SUBSCRIPTION RIGHTS OR A HOLDER OF NEW COMMON STOCK.
HOLDERS OF SUBSCRIPTION RIGHTS OR NEW COMMON STOCK ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR
UNITED STATES FEDERAL, STATE, LOCAL AND ANY FOREIGN TAX
CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED ISSUANCE OF
NEW COMMON STOCK TO SUCH HOLDERS.
Exercise of the Subscription
    Rights
You will not recognize any gain or loss upon the
exercise of the Subscription Rights. The basis of the New Common
Stock acquired through your exercise of the Subscription Rights
will be equal to the sum of the subscription price paid for the
New Common Stock acquired through exercise of the Subscription
Rights and your basis, if any, in the Subscription Rights. The
holding period for the New Common Stock acquired through the
exercise of the Subscription Rights will begin on the date the
Subscription Rights are exercised.
Lapse of the Subscription
    Rights
If you allow your Subscription Rights to lapse,
you will recognize loss equal to the amount of your basis in the
Subscription Rights.
Sale of New Common Stock
If you sell your New Common Stock acquired
through the exercise of the Subscription Rights, you will
recognize gain or loss in an amount equal to the difference
between the amount realized on the sale and your basis in the
New Common Stock, which will include the exercise price. If you
hold the shares as a capital
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asset, gain or loss on the sale will be long-term
or short-term capital gain or loss, depending on whether you
have held the shares for more than one year beginning on the
date of the exercise of the rights.
Basis in the Subscription
    Rights
Your basis in the Subscription Rights will depend
on the treatment of your claims under the Plan of
Reorganization. In some cases, the distribution of Subscription
Rights will taxable, and you will have a fair market value basis
in the Subscription Rights. In other cases, the distribution of
Subscription Rights will be part of a tax-free recapitalization
transaction, and your basis will depend on your basis in the
claims cancelled under the Plan of Reorganization.
(i) Pre-petition common and preferred
    stock — the receipt of Subscription Rights will be
    taxable, and you will have a fair market value basis in the
    Subscription Rights.
(ii) Pre-petition subordinated
    notes — because the pre-petition subordinated notes
    should be treated as securities for tax purposes, the receipt of
    Subscription Rights should be part of a tax-free
    recapitalization, and your basis in the subordinated notes
    should be apportioned among the consideration you received. If
    the pre-petition subordinated notes are not treated as
    securities for tax purposes, the receipt of Subscription Rights
    will be taxable, and you will have a fair market value basis in
    the Subscription Rights.
(iii) Pre-petition senior unsecured note
    claims — the treatment of the receipt of Subscription
    Rights will depend on whether the senior unsecured note claims
    are securities for tax purposes. If such claims were securities
    for tax purposes, the receipt of Subscription Rights is part of
    a tax-free recapitalization, and your basis in the senior note
    claims would be apportioned among the consideration you received
    (Subscription Rights, Warrants and New Common Stock). If such
    claims were not securities for tax purposes, the receipt of
    Subscription Rights will be taxable, and you will have a fair
    market value basis in the Subscription Rights.
(iv) Pre-petition Credit
    Facility — the treatment of the receipt of
    Subscription Rights will depend on whether claims under the
    Pre-Petition Credit Facility are securities for tax purposes. If
    such claims were not securities for tax purposes, the receipt of
    Subscription Rights will be taxable, and you will have a fair
    market value basis in the Subscription Rights. If such claims
    were securities for tax purposes, your basis in the Subscription
    Rights will depend on your basis in the claims, apportioned
    among the consideration received under the Plan of
    Reorganization.
(v) General unsecured claims — the
    receipt of Subscription Rights will be taxable, and you will
    have a fair market value basis in the Subscription Rights.
LEGAL MATTERS
The validity of the New Common Stock offered in
this registration statement on form S-1 will be passed upon
for us by Willkie Farr & Gallagher, New York,
New York.
EXPERTS
The consolidated financial statements of XO
Communications, Inc. at December 31, 2002, and for the year
then ended, appearing in this Prospectus and the Registration
Statement, have been audited by Ernst & Young LLP,
independent auditors, and at December 31, 2001, and for
each of the two years in the period ended December 31,
2001, by Arthur Andersen, LLP, independent public accountants,
as set forth in their respective reports thereon (the 2001
Arthur Andersen, LLP report contains an explanatory paragraph
describing conditions that raise substantial doubt about the
Company's ability to continue as a going concern) appearing
elsewhere herein, and are included in reliance upon such reports
given on the authority of such firms as experts in accounting
and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration
statement on Form S-1 that was filed with the Securities
and Exchange Commission. This prospectus does not contain all of
the information set forth in the registration statement. Some
items may have been omitted from the prospectus as permitted by
the rules and regulations of the Securities and Exchange
Commission. You should refer to the registration statement and
its accompanying exhibits for further information with respect
to the Company and the Plan of Reorganization. Statements made
in this prospectus as to the provisions of any contract,
agreement or other document are summaries of the material terms
of such contracts, agreements or other documents and are not
necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the
registration statement, please refer to the exhibit for a more
complete description of the matter involved.
We are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended or the
Exchange Act, and, in accordance therewith, file reports and
other information with the SEC. Our reports and other
information we file can be inspected and copied at the Public
Reference Section of the SEC located at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of these materials can be obtained from the Public
Reference Section of the SEC at prescribed rates. Please call
the SEC at 1-800-SEC-0330 for more information on the Public
Reference Section. The SEC maintains a web site at www.sec.gov
that contains reports, proxy and information statements and
other information on a delayed basis regarding registrants,
including us, that file electronically with the SEC.
Effective as of October 25, 2000 we changed
our name from NEXTLINK Communications, Inc. to XO
Communications, Inc. The reports and other information that we
filed with the SEC prior to October 25, 2000 will be under
the NEXTLINK name.
We also post our most recent Exchange Act filings
on our website at www.xo.com.
Quotations for our New Common Stock under the
symbol "XOCM" are available at www.OTCBB.com on the
Nasdaq over-the-counter bulletin board and in the Pink Sheets at
www.pinksheets.com.
YOU MAY REQUEST A COPY OF OUR FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION, AT NO COST, OR AT
WWW.SEC.GOV, OR BY WRITING OR TELEPHONING US AT THE FOLLOWING
ADDRESS:
XO Communications, Inc.
11111 Sunset Hills Road
Reston, Virginia 20190
Attn: Corporate Secretary
Telephone: (703) 547-2000
You should rely only on the information contained
in this prospectus or that we have specifically referred you to.
We have not authorized anyone else to provide you with different
information. You should not assume that the information in this
prospectus is accurate as of any date other than the date on the
front of those documents.
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INDEX TO FINANCIAL STATEMENTS
Unaudited Interim Condensed Consolidated
    Financial Statements
Condensed Consolidated Balance Sheets for
    Reorganized XO as of March 31, 2003 and January 1,
    2003 and for Predecessor XO as of December 31, 2002
    (Unaudited)
F-2
Condensed Consolidated Statements of Operations
    for Reorganized XO for the Three Months Ended March 31,
    2003 and for Predecessor XO for January 1, 2003 and for the
    Three Months Ended March 31, 2002 (Unaudited)
F-3
Condensed Consolidated Statements of Cash Flows
    for Reorganized XO for the Three Months Ended March 31,
    2003 and for Predecessor XO for January 1, 2003 and for the
    Three Months Ended March 31, 2002 (Unaudited)
F-4
Notes to Condensed Consolidated Financial
    Statements (Unaudited)
F-5
Audited Consolidated Financial
    Statements
Report of Ernst & Young LLP, Independent
    Auditors
F-19
Report of Independent Public Accountants
F-20
Consolidated Balance Sheets as of
    December 31, 2002 and 2001 and Pro Forma Unaudited
    Balance Sheet as of December 31, 2002
F-21
Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001
and 2000
F-22
Consolidated Statement of Stockholders'
    Equity (Deficit) for the Years Ended December 31, 2002,
    2001 and 2000
F-23
Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001
and 2000
F-25
Notes to Consolidated Financial Statements
F-26
Schedule II — Consolidated
    Valuation and Qualifying Accounts
F-54
F-1
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE
SHEETS
(Amounts in thousands, except for share and
per share data)
Reorganized XO
Reorganized XO
Predecessor XO
March 31, 2003
January 1, 2003
December 31, 2002
(Unaudited)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
288,764
$
314,038
$
314,038
Marketable securities
249,616
246,945
246,945
Accounts receivable, net of allowance for
    doubtful accounts of $38,965 at March 31, 2003; $37,030, at
    January 1, 2003 and at December 31, 2002, respectively
105,549
116,541
116,541
Other current assets
28,564
35,192
83,480
Total current assets
672,493
712,716
761,004
Property and equipment, net
476,509
476,588
2,780,589
Fixed wireless licenses and other intangibles, net
129,137
135,678
984,614
Other assets, net
45,804
23,108
59,289
Total assets
$
1,323,943
$
1,348,090
$
4,585,496
LIABILITIES AND STOCKHOLDERS' EQUITY
    (DEFICIT)
Current liabilities:
Accounts payable
$
56,304
$
67,268
$
63,729
Accrued liabilities
232,872
235,192
266,102
Current liabilities subject to compromise
—
—
5,497,207
Total current liabilities
289,176
302,460
5,827,038
Long-term liabilities not subject to compromise
—
—
75,242
Long-term liabilities subject to compromise
—
—
7,182
Long-term debt
507,868
500,000
—
Other long-term liabilities
72,585
70,630
—
Total liabilities
869,629
873,090
5,909,462
Predecessor XO redeemable preferred stock: par
    value $0.01 per share, 25,000,000 shares authorized:
    7,856,918 shares issued and outstanding, aggregate
    liquidation preference of $1,693,293, subject to compromise
—
—
1,708,316
Commitments and contingencies
Stockholders' equity (deficit):
Reorganized XO preferred stock: par value $0.01
    per share, 200,000,000 shares authorized: none issued
—
—
—
Predecessor XO common stock, par value $0.02 per
    share, Class A, 1,000,000,000 shares authorized:
    331,033,219 shares issued and outstanding, Class B,
    120,000,000 shares authorized: 104,423,158 shares
    issued and outstanding
—
—
4,628,139
Reorganized XO common stock, par value $0.01 per
    share, 1,000,000,000 shares authorized:
    95,000,001 shares issued and outstanding on March 31,
    2003
475,000
475,000
—
Deferred compensation
—
—
(8,500
)
Accumulated other comprehensive income (loss)
(198
)
—
2,512
Accumulated deficit
(20,488
)
—
(7,654,433
)
Total stockholders' equity (deficit)
454,314
475,000
(3,032,282
)
Total liabilities and stockholders' equity
    (deficit)
$
1,323,943
$
1,348,090
$
4,585,496
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-2
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Amounts in thousands, except for share and
per share data)
(Unaudited)
Predecessor XO
Reorganized XO
Three Months Ended
January 1,
Three Months Ended
March 31, 2003
2003
March 31, 2002
Revenue
$
286,093
$
—
$
333,405
Costs and expenses:
Cost of service
107,506
—
140,367
Selling, operating, and general
166,235
—
205,250
Stock-based compensation
—
—
9,095
Depreciation and amortization
26,367
—
161,356
Total costs and expenses
300,108
—
516,068
Income (loss) from operations
(14,015
)
—
(182,663
)
Interest income
3,210
—
5,540
Interest expense, net
(9,683
)
—
(120,726
)
Other income (loss), net
—
—
(203
)
Reorganization gain (expense), net
—
3,032,282
(976
)
Net income (loss) before cumulative effect of
    accounting change
(20,488
)
3,032,282
(299,028
)
Cumulative effect of accounting change
—
—
(1,876,626
)
Net income (loss)
(20,488
)
3,032,282
(2,175,654
)
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
—
—
(22,826
)
Net income (loss) applicable to common shares
$
(20,488
)
$
3,032,282
$
(2,198,480
)
Net income (loss) per common share, basic and
    diluted:
Net income (loss) before cumulative effect of
    accounting change
$
(0.22
)
$
6.86
$
(0.68
)
Cumulative effect of accounting change
—
—
(4.24
)
Net income (loss)
(0.22
)
6.86
(4.92
)
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
—
—
(0.05
)
Net income (loss) per common share, basic and
    diluted
$
(0.22
)
$
6.86
$
(4.97
)
Weighted average shares, basic and diluted
95,000,001
441,964,342
442,205,796
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-3
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Amounts in thousands)
(Unaudited)
Predecessor XO
Reorganized XO
Three Months
Three Months
Ended
January 1,
Ended
March 31, 2003
2003
March 31, 2002
OPERATING ACTIVITIES:
Net income (loss)
$
(20,488
)
$
3,032,282
$
(2,175,654
)
Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities:
Non-cash reorganization items
—
(3,032,282
)
—
Depreciation and amortization
26,367
—
161,356
Stock-based compensation
—
—
9,095
Cumulative effect of accounting change
—
—
1,876,626
Accretion of interest
9,897
—
36,045
Changes in assets and liabilities:
Accounts receivable
15,176
—
39,224
Other assets
982
—
(17,164
)
Accounts payable
(4,586
)
—
23,671
Accrued liabilities
(3,158
)
—
(607
)
Net cash provided by (used in) operating
    activities
24,190
—
(47,408
)
INVESTING ACTIVITIES:
Purchases of property and equipment
(21,377
)
—
(136,454
)
Proceeds from sales of property and equipment
—
—
24,339
Sales of marketable securities
30,825
—
278,293
Purchases of marketable securities
(33,693
)
—
(8,224
)
Net releases (purchases) of escrowed/pledged
    securities
(25,000
)
—
1,960
Net cash provided by (used in) investing
    activities
(49,245
)
—
159,914
FINANCING ACTIVITIES:
Repayments of capital leases and other obligations
(219
)
—
(4,848
)
Net cash used in financing activities
(219
)
—
(4,848
)
Effect of exchange rate changes on cash
—
—
(1,256
)
Net increase (decrease) in cash and cash
    equivalents
(25,274
)
—
106,402
Cash and cash equivalents, beginning of period
314,038
314,038
246,189
Cash and cash equivalents, end of period
$
288,764
$
314,038
$
352,591
SUPPLEMENTAL DATA:
Non-cash financing and investing activities:
Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock
$
—
$
—
$
12,357
Cash paid for interest
$
213
$
—
$
19,192
See accompanying notes to the unaudited condensed
consolidated financial statements.
F-4
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
1.     BASIS OF
PRESENTATION
As further discussed in the annual report on
Form 10-K of XO Communications, Inc. ("XO
Parent") and its subsidiaries (together with its
predecessors, collectively referred to as the
"Company" or "XO") for the year ended
December 31, 2002 as filed with the Securities and Exchange
Commission (the "Commission") on March 21, 2003
(the "2002 Annual Report"), XO Parent filed a
voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code")
with the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"), on
June 17, 2002 (the "Petition Date"). XO Parent
emerged from the Bankruptcy Court proceedings pursuant to the
terms of its third amended plan of reorganization (the
"Plan of Reorganization") on January 16, 2003
(the "Effective Date"). As discussed in note 2, the
Company implemented the fresh start accounting provisions
("fresh start") 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") as of January 1,
2003. Under fresh start, the fair value of the reorganized
Company was allocated among its assets and liabilities, and its
accumulated deficit as of January 1, 2003 was eliminated.
As discussed in note 2, the implementation of fresh start
has resulted in a substantial reduction in the carrying value of
the Company's long-lived assets, including property and
equipment, fixed wireless licenses, other intangible assets and
other noncurrent assets. As a result, the predecessor financial
statements are not comparable to financial statements of the
reorganized Company.
The condensed consolidated financial statements
of XO are unaudited and have been prepared in accordance with
generally accepted accounting principles in the United States
for interim financial statements and the Commission's
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 generally accepted
accounting principles in the United States for complete
financial statements. As discussed further in note 2, the
condensed consolidated statements of operations and cash flows
for Reorganized XO for the three months ended March 31,
2003, show the operations of the reorganized Company from and
including January 1, 2003, the date that the reorganized
Company applied fresh start, through March 31, 2003.
Predecessor XO's January 1, 2003 statements of
operations and cash flows reflect only the effect of the
reorganization and application of fresh start as of such date
and do not reflect any operating results. Operating results for
the three month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for
any subsequent quarterly period, or for the year ending
December 31, 2003.
2.     REORGANIZATION
AND FRESH START ACCOUNTING
On the Effective Date, XO Parent consummated the
Plan of Reorganization and it emerged from its Chapter 11
reorganization proceedings with a significantly restructured
balance sheet. As described in more detail in the 2002 Annual
Report, the consummation of the Plan of Reorganization resulted
in the following changes in XO Parent's capital structure:
•
The conversion of $1.0 billion of loans
    under its pre-petition secured credit facility into
    $500.0 million of outstanding principal amount under a new
    credit agreement (the "New Credit Agreement");
•
The extinguishment of all amounts due under its
    pre-petition unsecured senior and subordinated notes and certain
    general unsecured obligations;
•
The cancellation of all outstanding shares and
    interests in its pre-petition preferred stock and pre-petition
    common stock; and
•
The issuance of approximately 95.0 million
    shares of common stock of the reorganized Company ("New
    Common Stock") and warrants to purchase up to an additional
    23.75 million shares of New Common Stock of the reorganized
    Company.
F-5
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company adopted fresh start as of
January 1, 2003. Although the Effective Date of the Plan of
Reorganization was January 16, 2003, due to the
immateriality of the results of operations for the period
between January 1, 2003 and the Effective Date, the Company
has accounted for the consummation of the Plan of Reorganization
as if it had occurred on January 1, 2003 and implemented
fresh start as of that date. Fresh start required that the
Company adjust the historical cost of its assets and liabilities
to their fair values as determined by the reorganization value
of the Company and that the reorganization value be allocated
among the reorganized entity's net assets in conformity
with procedures specified by Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business
Combinations," ("SFAS No. 141"). The Company
engaged an independent appraiser to assist in the allocation of
the reorganization value to the reorganized Company's
assets and liabilities by determining the fair market value of
its property and equipment, intangible assets and certain
obligations related to its facility leases. The accompanying
January 1, 2003 statement of operations and balance sheet
show the impact of this valuation, but do not reflect any of the
Company's operating results as attributable to that date. A
reconciliation of the adjustments recorded in connection with
the reorganization and the adoption of fresh start is presented
below (in thousands):
Predecessor XO
Reorganized XO
December 31,
January 1,
2002
Fresh Start
2003
(Audited)
Reorganization
Adjustments(d)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
314,038
$
—
$
—
$
314,038
Marketable securities
246,945
—
—
246,945
Accounts receivable, net
116,541
—
—
116,541
Other current assets
83,480
—
(48,288
)
35,192
Total current assets
761,004
—
(48,288
)
712,716
Property and equipment, net
2,780,589
—
(2,304,001
)
476,588
Fixed wireless licenses and other intangibles, net
984,614
—
(848,936
)
135,678
Other assets, net
59,289
—
(36,181
)
23,108
Total assets
$
4,585,496
$
—
$
(3,237,406
)
$
1,348,090
F-6
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Predecessor XO
Reorganized XO
December 31,
January 1,
2002
Fresh Start
2003
(Audited)
Reorganization
Adjustments(d)
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
    (DEFICIT) EQUITY
Current liabilities:
Accounts payable
$
63,729
$
—
$
3,539
$
67,268
Accrued liabilities
266,102
—
(30,910
)
235,192
Current liabilities subject to compromise
5,497,207
(5,466,667
)(a)
(30,540
)
—
Total current liabilities
5,827,038
(5,466,667
)
(57,911
)
302,460
Long-term debt
—
500,000
(b)
—
500,000
Other long-term liabilities
75,242
—
(4,612
)
70,630
Long-term liabilities subject to compromise
7,182
—
(7,182
)
—
Total liabilities
5,909,462
(4,966,667
)
(69,705
)
873,090
Predecessor XO redeemable preferred
    stock — subject to compromise
1,708,316
(1,708,316
)(a)
—
—
Stockholders' (deficit) equity:
Predecessor XO common stock
4,628,139
—
(4,628,139
)
—
Reorganized XO common stock and warrants
—
475,000
(c)
—
475,000
Deferred compensation
(8,500
)
—
8,500
—
Accumulated other comprehensive income
2,512
—
(2,512
)
—
Accumulated deficit
(7,654,433
)
6,199,983
1,454,450
—
Total stockholders' (deficit) equity
(3,032,282
)
6,674,983
(3,167,701
)
475,000
Total liabilities and stockholders'
(deficit) equity
$
4,585,496
$
—
$
(3,237,406
)
$
1,348,090
(a)
To record the discharge of pre-petition
    indebtedness, including a $1.0 billion credit facility,
    $4.2 billion of senior and convertible subordinated notes,
    $245.2 million of accrued interest, the elimination of
    $1.7 billion of pre-petition redeemable preferred stock and
    $50.6 million of accrued dividends all in accordance with the
    Plan of Reorganization.
(b)
To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
(c)
To record the issuance of New Common Stock and
    warrants in accordance with the Plan of Reorganization.
(d)
To adjust the carrying value of assets,
    liabilities and stockholders' equity to fair value, in
    accordance with fresh start.
Reorganization gain on January 1, 2003
consisted of the following (dollars in thousands):
Net gain resulting from reorganization of debt,
    preferred stock and equity
$
6,199,983
Net loss resulting from fresh start fair value
    adjustments to assets and liabilities
(3,167,701
)
Total reorganization gain, net
$
3,032,282
As of December 31, 2002, the Company had
incurred $91.1 million in net reorganization expenses which
included the write-off of deferred financing fees associated
with the issuance of XO's pre-petition debt and
professional fees incurred in conjunction with the
Company's recapitalization.
F-7
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
3.     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Review of Significant Accounting
    Policies
As discussed in note 2, the Company adopted
fresh start as of January 1, 2003, creating, in substance,
per SOP 90-7, a new reporting entity. The reorganized
Company has adopted the policy of expensing customer
installation costs and internal labor directly associated with
network construction in the period in which the costs are
incurred. The predecessor Company capitalized and amortized
these costs. In accordance with SOP 90-7, the reorganized
Company was also required to implement newly issued accounting
pronouncements that would require adoption within twelve months
of applying fresh start.
Principles of Consolidation
The Company's condensed consolidated
financial statements include all of the assets, liabilities and
results of operations of subsidiaries in which the Company has a
controlling interest. All inter-company accounts and
transactions among consolidated entities have been eliminated.
Preparation of Condensed Consolidated
    Financial Statements
The preparation of condensed consolidated
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated
financial statements and the reported amounts of revenue and
expenses during the reporting period. Management periodically
assesses the accuracy of these estimates and assumptions. Actual
results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with maturities of three months or less at the time
of purchase to be cash equivalents. Cash equivalents consist
primarily of money market accounts that are available on demand.
The carrying amount of these instruments approximates fair value
due to their short maturities.
Marketable Securities
Substantially all of the Company's
marketable securities currently consist of U.S. government
agency issued and other high-grade and highly-liquid securities
with original maturities beyond three months. The Company
classifies investments in debt and equity securities as
available-for-sale and records such investments at fair value.
The fair values are based on quoted market prices. Unrealized
gains and losses on available-for-sale marketable securities are
reported as a separate component of comprehensive income.
Realized gains and losses for available-for-sale securities are
recognized in interest income.
Long-Lived Assets
Long-lived assets includes property and
equipment, fixed wireless licenses, and intangible assets to be
held and used. Long-lived assets, excluding intangible assets
with indefinite useful lives, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS
No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," ("SFAS No. 144"). The
criteria for determining impairment for such long-lived assets
to be held and used is determined by comparing the carrying
value of these long-lived assets to management's best
estimate of future undiscounted cash flows expected to result
from the use of the assets. The Company believes that no
impairment existed under SFAS No. 144 as of March 31,
2003. In the event that there are changes in the planned use of
the Company's long-lived assets or its expected future
undiscounted cash flows are reduced
F-8
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
significantly, the Company's assessment of
its ability to recover the carrying value of these assets under
SFAS No. 144 could change.
Intangible assets with indefinite useful lives
are tested for impairment annually or more frequently if an
event indicates that the asset might be impaired. In accordance
with SFAS No. 142, the fair value of these intangible
assets is determined based on a discounted cash flow methodology.
Property and Equipment
Property and equipment acquired prior to
December 31, 2002 is stated at its fair value at
January 1, 2003, as required by fresh start, net of
subsequent depreciation. Additions to property and equipment
during 2003 are stated at cost, net of accumulated depreciation.
Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets beginning in the month
telecommunications networks and acquired bandwidth are
substantially complete and available for use and in the month
equipment and furniture are acquired. Telecommunications
networks and bandwidth include the deployment of fiber optic
cable and telecommunications hardware and software for the
expressed purpose of delivering telecommunications services.
Costs of additions and improvements are capitalized, and repairs
and maintenance are charged to expense as incurred. Direct
external costs of constructing property and equipment are
capitalized including interest costs related to construction.
The reorganized Company has adopted the policy of expensing
internal labor directly associated with network construction in
the period in which the costs are incurred.
Equipment held under capital leases is stated at
the lower of the fair value of the asset or the net present
value of the minimum lease payments at the inception of the
lease. For equipment held under capital leases, depreciation is
provided using the straight-line method over the shorter of the
estimated useful lives of the assets owned or the related lease
term.
The estimated useful lives of property and
equipment are as follows:
Telecommunications networks and acquired bandwidth
3-20 years
Furniture, fixtures, equipment, and other
5-7 years
Leasehold improvements
the shorter of the estimated useful lives or the
    terms of the leases
These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry, which could impact the
network architecture and asset utilization. Accordingly, in
making this assessment, the Company considers its planned use of
the assets, the views of experts within the Company and outside
sources regarding the impact of technological advances and
trends in the industry on the value and useful lives of its
network assets.
Fixed Wireless Licenses and Other
    Intangibles
Fixed wireless licenses acquired prior to
December 31, 2002 are stated at their fair values at
January 1, 2003, as required by fresh start, net of
subsequent amortization. The Company is amortizing these
licenses over an estimated useful life of 10 years based on
the initial license term granted by the Federal Communications
Commission. Amortization commences when commercial service using
fixed wireless technology is deployed in the license's
geographic area.
Other intangibles of the Company are valued at
fair value as required by the provisions of fresh start and SFAS
No. 141 and consist of customer relationships, internally
developed technology and XO's trade name. The customer
relationships and internally developed technology are being
amortized using the straight-line method over their estimated
useful lives of three years. The XO trade name was determined to
have an
F-9
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
indefinite life. Accordingly, it is not subject
to amortization; however, it is reviewed at least annually for
impairment as required under SFAS No. 142, "Goodwill
and Other Intangible Assets," ("SFAS
No. 142").
Other Assets
Other assets consist primarily of escrow and
security deposits, investments in publicly traded companies and
pledged securities. The escrow and security deposits and pledged
securities are stated at cost, and their fair value approximates
their carrying value. Investments in publicly traded companies
are stated at fair value.
Income Taxes
The Company accounts for income taxes in
accordance with the provisions of SFAS No.109, "Accounting
for Income Taxes," ("SFAS No. 109") which
requires that deferred income taxes are determined based on the
estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities
given the provisions of the enacted tax laws. Valuation
allowances are used to reduce deferred tax assets to the amount
considered likely to be realized.
As of December 31, 2002, the Company had
capital loss carryforwards of approximately $0.5 billion
and net operating loss carryforwards of approximately
$4.0 billion. As of the Effective Date, the Company
recognized a substantial amount of taxable income from the
cancellation of indebtedness. Accordingly, a substantial portion
of the Company's $4.5 billion of capital and net
operating loss carryforwards have been eliminated. Other tax
attributes, including property bases, have also been reduced.
Any surviving capital or net operating loss carryforwards will
be subject to limitations imposed under the ownership change
rules in the U.S. Internal Revenue Code. As discussed in more
detail in note 10, the Company will join with the
affiliated group of corporations controlled by Mr. Carl C.
Icahn in filing a consolidated federal income tax return for
periods following the Effective Date.
Revenue Recognition
Revenues from telecommunication services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. In circumstances when these criteria
are not met, revenue recognition is deferred until resolution
occurs.
Service discounts and incentives related to
telecommunication services are recorded as a reduction of
revenue when granted or ratably over a contract period. Fees
billed in connection with customer installations and other
upfront charges are deferred and recognized ratably over the
estimated customer life.
Revenue from the sale or lease of unlit network
capacity is recognized upon consummation of the transaction and
the acquirer's acceptance of the capacity in instances when
the Company receives upfront cash payments and is contractually
obligated to transfer title to the specified capacity at the end
of the contract term. If the transaction does not meet these
criteria, revenue is recognized ratably over the contract term.
There were no sales of unlit capacity during the three months
ended March 31, 2003 and March 31, 2002.
The Company establishes allowances for collection
of doubtful accounts and other sales credit adjustments.
Allowances for sales credits are established through a charge to
revenue, while allowances for doubtful accounts are established
through a charge to selling, operating and general expense. The
Company assesses the adequacy of these reserves monthly by
considering general factors, such as the length of time
individual receivables are past due, historical collection
experience, the economic and competitive environment, and
changes in the credit worthiness of its customers. The Company
believes that the established valuation allowances were adequate
as of March 31, 2003 and December 31, 2002. If
circumstances relating to specific customers change or economic
conditions worsen such that the Company's past collection
experience and assessment of the economic environment are no
longer relevant, XO's estimate of the recoverability of its
trade receivables could be further reduced.
F-10
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Cost of Service
Cost of service includes expenses directly
associated with providing telecommunications services to
customers, including, among other items, the cost of connecting
customers to the Company's networks via leased facilities,
the costs of leasing components of our network facilities and
costs paid to third party providers for interconnect access and
transport services. All such costs are expensed as incurred. The
Company accrues for the expected costs of services received from
third party telecommunications providers during the period the
services are rendered. Invoices received from the third party
telecommunications providers are often disputed due to billing
discrepancies. The Company accrues for all invoiced amounts,
even amounts in dispute, as these amounts represent contingent
liabilities that are considered probable and measurable.
Disputes resolved in the Company's favor may reduce cost of
service in the period the dispute is settled and typically
reflect costs paid in the prior periods. Because the period of
time required to resolve these types of disputes often lapses
over several quarters, the benefits associated with the
favorable resolution of such disputes normally are realized in
periods subsequent to the accrual of the disputed invoice.
During the first quarter of 2003, the settlements resulted in
approximately $6.4 million of net benefit to cost of
service.
Net Income
(Loss) Per Share
Net income (loss) per common share, basic
and diluted, is computed by dividing income
(loss) applicable to common shares by the weighted average
number of common shares outstanding for the period. In periods
of net loss, the assumed common share equivalents for options
and warrants are anti-dilutive.
Stock-Based
Compensation
Effective January 1, 2003, the Company
adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and
Disclosure," ("SFAS No. 148"). This
statement amends SFAS No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123"),
to provide for alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement
amends the disclosure provisions of SFAS No. 123 and
Accounting Principles Board Opinion ("APB")
No. 28, "Interim Financial Reporting," ("APB
No. 28") to require disclosure in the summary of
significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements.
As allowed by SFAS No. 148, the Company has
chosen to continue to account for compensation cost associated
with its employee stock plans in accordance with the intrinsic
value method prescribed by APB No. 25, "Accounting for
Stock Issued to Employees," ("APB No. 25")
adopting the disclosure-only provisions of SFAS No. 123.
Under this method, no compensation expense is recorded if stock
options are granted at an exercise price equal to the fair
market value of the Company's stock on the grant date. If
the Company had adopted the fair value method of accounting for
its stock awards, stock-based compensation would have been
determined based on the fair value for all stock awards at the
grant date using a Black-Scholes pricing model and the
assumptions noted below. The Company's pro forma net loss
applicable to
F-11
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
common shares, and pro forma net loss per common
share, basic and diluted, under the fair value method would have
been as follows (dollars in thousands, except per share data):
Reorganized XO
Predecessor XO
Three Months Ended
Three Months Ended
March 31, 2003
March 31, 2002
Net loss applicable to common shares, as reported
$
(20,488
)
$
(2,198,480
)
Add: Stock-based employee compensation expense
    included in net loss applicable to common shares, as reported
—
9,095
Deduct: Total stock-based employee compensation
    expense determined under fair value based methods for all stock
    awards, net of related tax effects
(4,038
)
(366
)
Pro forma net loss
$
(24,526
)
$
(2,189,751
)
Net loss per common share, basic and diluted:
Net loss per common share, basic and
    diluted — as reported
$
(0.22
)
$
(4.97
)
Net loss per common share, basic and
    diluted — pro forma
$
(0.26
)
$
(4.95
)
Black Scholes Assumptions:
Expected volatility
75.0
%
125.0
%
Risk free interest rate
2.6
%
4.0
%
Dividend yield
0.0
%
0.0
%
Expected life (range in years)
4.0
4.0
Weighted average fair value per share at grant
    date
$
2.85
$
0.11
Comprehensive
Loss
Comprehensive loss includes the Company's
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and, for any
periods prior to second quarter 2002, foreign currency
translation adjustments relating to the Company's European
operations, which were disposed of in February 2002.
Concentration of
Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of trade receivables. Although the Company's trade
receivables are geographically dispersed and include customers
in many different industries, a portion of the Company's
revenue is generated from services provided to other
telecommunications service providers. Several of these companies
have filed for protection under Chapter 11 of the
Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of
March 31, 2003 to cover these risks. The Company's
Board of Directors has recently taken actions that would permit
the Company to make investments in a broader range of
securities, including securities that may increase the
Company's credit risk.
Fair Value of
Financial Instruments
SFAS No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS
No. 107"), requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Company's financial instruments classified as current
assets and liabilities approximate their fair value due to their
short maturities.
F-12
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Recent
Accounting Pronouncements
Effective January 1, 2003, the Company
adopted SFAS No. 145, "Rescission of the Financial
Accounting Standards Board (the "FASB") Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections as of April 2002" ("SFAS
No. 145"), which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity's statement of operations. SFAS No. 145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an extraordinary item only when
the extinguishment meets the criteria of both "unusual in
nature" and "infrequent in occurrence" as
prescribed under APB Opinion No. 30, "Reporting the
Results of Operations — Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions"
("APB No. 30"). The adoption of SFAS No. 145
had no effect on the Company's financial position or
results of operations for the three months ended March 31,
2003 and 2002. The Company recognized extraordinary gains from
debt repurchases in the third and fourth quarters of 2001. In
the future, such gains will be reclassified in the respective
consolidated statements of operations in accordance with SFAS
No. 145.
Effective January 1, 2003, the Company
adopted SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS
No. 146"), which requires that costs, including
severance costs, associated with exit or disposal activities be
recorded at their fair value when a liability has been incurred.
Under previous guidance, certain exit costs, including severance
costs, were accrued upon managements' commitment to an exit
plan, which is generally before an actual liability has been
incurred. In the first quarter of 2003, the Company did not have
any exit or disposal activities after December 31, 2002;
however, the provisions of SFAS No. 146 were implemented in
conjunction with the Company's implementation of fresh
start. Accordingly, as discussed in note 6, the Company's
remaining restructuring accrual has been reduced to its net
present value.
4.     LONG-LIVED
ASSETS
As discussed in note 2, the Company applied
fresh start on January 1, 2003. Accordingly its property
and equipment, fixed wireless licenses and other intangible
assets, have been recorded at their then fair values.
As of March 31, 2003, the Company had
approximately $606 million of long-lived assets, including
approximately $94 million of construction-in-progress and
certain fixed wireless licenses that are not currently ready for
their intended use. Accordingly, these long-lived assets are not
being depreciated or amortized.
Property and
Equipment
Property and equipment consisted of the following
components (dollars in thousands):
Reorganized XO
Reorganized XO
Predecessor XO
March 31,
January 1,
December 31,
2003
2003
2002
Telecommunications networks and acquired bandwidth
$
358,368
$
359,247
$
2,920,819
Furniture, fixtures, equipment, and other
67,301
61,501
656,994
425,669
420,748
3,577,813
Less accumulated depreciation
(19,890
)
—
(1,165,216
)
405,779
420,748
2,412,597
Network construction-in-progress
70,730
55,840
367,992
$
476,509
$
476,588
$
2,780,589
F-13
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Depreciation expense related to property and
equipment for the reorganized Company's three months ended
March 31, 2003 was $19.9 million and for the
predecessor Company's three months ended March 31,
2002 was $135.1 million.
Fixed Wireless
Licenses and Other Intangibles
Fixed wireless licenses and intangible assets
consisted of the following components (dollars in thousands):
Reorganized XO
Reorganized XO
Predecessor XO
March 31,
January 1,
December 31,
2003
2003
2002
Fixed wireless licenses
$
59,508
$
59,508
$
997,942
Customer relationships
49,987
49,987
123,745
Internally developed technology
9,521
9,521
—
Acquired technology
—
—
130,515
Other
—
—
35,413
119,016
119,016
1,287,615
Less accumulated amortization
(6,541
)
—
(303,001
)
112,475
119,016
984,614
XO Trade name — indefinite life asset
16,662
16,662
—
$
129,137
$
135,678
$
984,614
Amortization expense related to intangible assets
for the reorganized Company's three months ended
March 31, 2003 was $6.5 million and for the
predecessor Company's three months ended March 31,
2002 was $26.3 million.
Goodwill
In July 2001, the FASB issued SFAS No. 142,
"Goodwill and Other Intangible Assets," ("SFAS
No. 142") which revises the accounting for purchased
goodwill and intangible assets and supersedes APB Opinion
No. 17, "Intangible Assets" ("APB
No. 17"). As described in greater detail in the 2002
Annual Report, the predecessor Company performed the required
impairment tests of goodwill as of January 1, 2002, and as
a result, during the first quarter of 2002, the predecessor
Company recorded a $1,876.6 million adjustment as a
cumulative effect of accounting change to write-off all of its
goodwill.
5.     ACCOUNTING FOR
ASSET RETIREMENT OBLIGATIONS
In June 2001, the FASB issued SFAS No. 143,
"Accounting for Asset Retirement Obligations,"
("SFAS No. 143") which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which the entity makes the legal or
contractual commitment related to the removal obligation if a
reasonable estimate of fair value can be made. The Company
implemented SFAS No. 143 on January 1, 2003 in
conjunction with its implementation of fresh start.
The Company leases Internet data center
facilities and various technical sites. Terminating and
decommissioning these locations would require the removal of any
XO assets and restoration of the leased space to its original
condition. Accordingly, upon adoption of SFAS No. 143, the
Company recorded an estimated asset retirement obligation of
$12.0 million, which was estimated using the weighted
average probability of incurring these costs in the future. The
present value of the asset retirement obligation was calculated
using a discount rate of 8.0% over a period of 5-20 years,
which is representative of the estimated remaining period XO
will occupy its data centers and technical facilities.
F-14
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
6.     RESTRUCTURING
CHARGES AND ASSET WRITE-DOWNS
During the second half of 2001, and the first
half of 2002, the Company implemented a plan to restructure
certain of its business operations. The restructuring plan
included reducing the Company's discretionary spending,
capital expenditures and workforce based on its assessment at
that time of then current and expected future market conditions
and the divestiture of its European operations. As of
March 31, 2003, the remaining restructuring accrual was
$37.8 million, which relates primarily to payments due to
landlords on exited leased facilities. The restructuring accrual
has decreased from $125.8 million as of December 31,
2001, primarily due to payments associated with exited leased
facilities and adjustments made in conjunction with the
Company's implementation of fresh start to appropriately
reflect the remaining accrual at its net present value in
accordance with the provisions of SFAS No. 146.
7.     LONG-TERM
DEBT
As discussed in the 2002 Annual Report and in
note 2, upon the Effective Date the $1.0 billion of loans
under the pre-petition senior secured credit facility were
converted into 90.25 million shares of New Common Stock of
the reorganized Company and $500.0 million of outstanding
principal amount of loans under the New Credit Agreement. The
maturity date of the outstanding principal under the New Credit
Agreement is July 15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on
October 15, 2007. The security for the New Credit Agreement
consists of all assets of XO Parent, including stock of its
direct and indirect subsidiaries, and all assets of virtually
all of those subsidiaries. The New Credit Agreement limits
additional indebtedness, liens, dividend payments and certain
investments and transactions, and contains certain covenants
with respect to minimum cash balance and EBITDA (earnings before
interest, taxes, depreciation and amortization) requirements and
maximum capital expenditures. Under certain circumstances, the
New Credit Agreement permits the Company to obtain a senior
secured facility of up to $200.0 million, subject to
reduction in an amount equal to any proceeds received from the
exercise of rights in a rights offering to be undertaken in
accordance with the Plan of Reorganization. At March 31,
2003, long-term debt totaled $507.9 million including
$500.0 million principal amount outstanding on the New
Credit Agreement and accrued interest thereon totaling
$7.9 million. Approximately 85% of the underlying loans of
the New Credit Agreement are held by Arnos Corp., an entity
controlled by Mr. Carl C. Icahn.
The Company is not required to pay interest
accrued on the principal amount under the New Credit Agreement
until it meets certain financial ratios; however the Company can
elect to begin paying interest in cash prior to the required
date. Loans under the New Credit Agreement bear interest, at the
Company's option, at an alternate base rate, as defined, or
a Eurodollar rate, plus in each case, applicable margins. Once
the Company begins to pay accrued interest in cash, the
applicable margins are reduced. At March 31, 2003, the
annualized weighted average interest rate applicable to
outstanding borrowings under the New Credit Agreement was 7.66%.
Also upon the Effective Date, all of XO
Parent's pre-petition unsecured senior notes and
pre-petition general unsecured claims were cancelled in exchange
for (i) 4,750,000 shares of New Common Stock of the
reorganized Company, (ii) warrants to purchase shares up to
an additional 23,750,000 shares of New Common Stock of the
reorganized Company (iii) rights to purchase shares of New
Common Stock in a rights offering to be undertaken in accordance
with the Plan of Reorganization and (iv) a portion of the
cash consideration received by XO Parent in connection with the
settlement and termination of the proposed investment
transaction that was the basis for the first restructuring
alternative contemplated by the Plan of Reorganization,
discussed further in note 8. Holders of pre-petition
subordinated notes of XO Parent had their securities cancelled,
and received a cash payment under certain terms as defined by
the Plan of Reorganization and are entitled to participate in a
rights offering to be undertaken in accordance with the Plan of
Reorganization.
F-15
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
8.     STOCKHOLDERS'
EQUITY
Pursuant to the Company's Certificate of
Incorporation that was adopted in connection with the Plan of
Reorganization, the Company has the authority to issue
1,000.0 million shares of New Common Stock and
200.0 million shares of new preferred stock. At
March 31, 2003, approximately 95.0 million shares of
New Common Stock had been issued, more than 80% of which were
owned and controlled by Cardiff Holding LLC
("Cardiff"), a Delaware limited liability company
controlled by Mr. Icahn.
As a result of the cancellation of the
pre-petition senior notes and pre-petition general unsecured
claims, discussed in note 7, pursuant to the Plan of
Reorganization, such holders were granted warrants to purchase
shares up to an additional 23.75 million shares of New
Common Stock.
The warrants consist of:
•
Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;
•
Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
•
Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.
The warrants are included in reorganized
XO's common stock in the accompanying condensed
consolidated balance sheet. The warrants will expire
7 years after the date of issuance. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events. Of the warrants distributed under
the Plan of Reorganization, XO estimates Cardiff received
Series A Warrants to purchase approximately
3.0 million shares of New Common Stock, Series B
Warrants to purchase approximately 2.3 million shares of
New Common Stock, and Series C Warrants to purchase
approximately 2.3 million shares of New Common Stock.
The Company's pre-petition Class A
common stock stopped trading on the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board (the
"OTCBB") as of the Effective Date, and the
Company's New Common Stock began trading on the OTCBB and
the pink sheets (www.pinksheets.com) under the symbol
"XOCM" shortly thereafter. Pursuant to the Plan of
Reorganization, all interests in the Company's pre-petition
Class A and Class B common stock were terminated as of
the Effective Date. As discussed in note 2, the Company's
pre-petition redeemable preferred stock was cancelled and
discharged and the holders of such securities received no
distribution under the Plan of Reorganization, but are entitled
to participate in a rights offering to be undertaken in
accordance with the Plan of Reorganization.
9.     OPERATING
SEGMENTS
The Company operates its business as one
communications segment and classifies its products and services
revenues offered by its communications services segment into
voice services, data services and integrated voice and data
services (dollars in thousands):
Reorganized XO
Predecessor XO
Three Months Ended
Three Months Ended
March 31,
March 31,
2003
2002
Voice services
$
150,723
$
168,834
Data services
101,977
135,761
Integrated voice and data services
33,393
28,810
Total revenue
$
286,093
$
333,405
F-16
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
10.     RELATED PARTY
TRANSACTIONS
In February 2003, Dixon Properties, LLC
("Dixon"), which is controlled by Mr. Icahn,
acquired ownership of the building in which XO headquarters is
located in a transaction that was approved by the Bankruptcy
Court. XO currently leases approximately 170,000 square feet of
space in that building. In connection with Dixon's purchase
of the building, it assumed the Company's existing lease
agreement and amended the lease to include certain terms that
are more favorable to the Company. Pursuant to the assumed lease
agreement, XO is obligated to pay approximately
$19.0 million in the aggregate to Dixon through the
expiration of the initial term of the lease, which is
November 30, 2007.
XO Parent has entered into a Tax Allocation
Agreement, dated January 16, 2003, between XO Parent and
Starfire Holding Corporation ("Starfire"), the parent
entity of the affiliated group of corporations controlled by
Mr. Icahn, which in turn indirectly controls Cardiff,
because it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with XO
Parent's Chapter 11 proceedings, establishes the
methodology for the calculation and payment of income taxes in
connection with the consolidation of the Company with Starfire
for income tax purposes. Generally, the Tax Allocation Agreement
provides that Starfire will pay all consolidated federal income
taxes on behalf of the consolidated group that includes the
Company, and the Company will make payments to Starfire in an
amount equal to the tax liability, if any, that it would have if
it were to file as a consolidated group separate and apart from
Starfire.
The Company provides certain telecommunications
services to affiliates of Mr. Icahn at rates that the
Company believes are comparable to rates charged other customers
that purchase similar services and volumes. For the three months
ended March 31, 2003, the Company recognized revenue of
approximately $88 thousand with respect to these services
and had outstanding receivables for such services at
March 31, 2003 of approximately $83 thousand.
11.     STOCK-BASED
COMPENSATION
Upon the Effective Date of the Plan of
Reorganization, all options under the predecessor XO stock
option plans were cancelled and the plans were terminated. Upon
consummation of the Plan of Reorganization, on the Effective
Date, the XO Communications, Inc. 2002 Stock Incentive Plan
("the 2002 Stock Incentive Plan") was adopted. Under
the 2002 Stock Incentive Plan, the Company is authorized to
issue awards in the form of restricted stock or options to
purchase stock, pursuant to which up to 17.6 million shares
of New Common Stock may be issued. Non-qualified options to
purchase 11.4 million shares of New Common Stock have been
granted and are outstanding as of March 31, 2003.
12.     COMMITMENTS
AND CONTINGENCIES
Legal Proceedings
The Company is not currently a party to any legal
proceedings, other than regulatory and other proceedings that
are in the normal course of business. However, as discussed
above, although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter 11 proceedings,
disputes with respect to the amount of allowed claims owed by XO
Parent to certain of its general unsecured creditors, and claims
of certain professionals remain outstanding. In addition, a
party has filed a complaint in the Bankruptcy Court seeking
relief from the court's order confirming the Plan of
Reorganization and a declaratory judgment that such party's
derivative suit for the benefit of the Company against a former
director of XO Parent and an affiliate of that director should
not be released by the confirmation order. While the outcome of
these matters, or any other relief that may be granted, is
currently not determinable, management does not expect that the
F-17
Table of Contents
XO COMMUNICATIONS, INC. AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ultimate costs to resolve these matters will have
a material adverse effect on the Company's consolidated
financial position, results of operations, or cash flows.
Prepaid Calling Card Tax Matter
On July 26, 2002, the Company was advised by
the staff of the Commission that it was conducting an informal
inquiry primarily relating to the Company's obligations
with respect to, and its accrual of liabilities for, specified
federal excise and state sales tax and similar tax obligations
arising in connection with prepaid calling card services and
relating to certain other matters. Sales from prepaid calling
card services that are potentially subject to these taxes
accounted for approximately $56 million of the
Company's total revenues from 1999, when the Company began
providing these services, through June 30, 2002. The
Company believes that its accounting for these potential tax
obligations is appropriate and that its accruals of liabilities
relating to these obligations are adequate.
Unfunded Affiliate Pension
    Obligation
As affiliates of Mr. Icahn hold over 80% of
the outstanding New Common Stock of XO Parent, applicable
pension and tax laws make each member of a plan sponsor's
"controlled group" (generally defined as entities in
which there is at least an 80% common ownership interest)
jointly and severally liable for certain pension plan
obligations of the plan sponsor. These pension obligations
include ongoing contributions to fund the plan, as well as
liability for any unfunded liabilities that may exist at the
time the plan is terminated. In addition, the failure to pay
these pension obligations when due may result in the creation of
liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, (the "PBGC") against the assets
of each member of the plan sponsor's controlled group.
As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn's affiliates, XO Parent
and its subsidiaries will be subject to the pension liabilities
of any entities in which Mr. Icahn has a direct or indirect
ownership interest of at least 80%, which includes ACF
Industries, Inc. ("ACF"), which is the sponsor of
certain pension plans. As most recently determined by the ACF
plans' actuaries, pension plans maintained by ACF are
underfunded in the aggregate by approximately $14 million
on an ongoing actuarial basis and by approximately
$102 million if those plans were terminated. As a member of
the same controlled group, XO Parent and each of its
subsidiaries would be liable for any failure of ACF to make
ongoing pension contributions or to pay the unfunded liabilities
upon a termination of the ACF pension plans.
The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other "reportable events,"
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
F-18
Table of Contents
REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS
To the Board of Directors of XO Communications,
Inc.:
We have audited the accompanying consolidated
balance sheet of XO Communications, Inc. (the
"Company") as of December 31, 2002, and the
related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the
year then ended. Our audit also included the financial statement
schedule listed in the Index. These financial statements and
schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit. The
consolidated financial statements and schedule of the Company
for each of the two years in the period ended December 31,
2001, were audited by other auditors who have ceased operations,
and whose report dated February 6, 2002, expressed an
unqualified opinion on those consolidated financial statements
and schedules before the restatement adjustments described in
Note 5 and included an explanatory paragraph that discussed the
substantial doubt about the Company's ability to continue
as a going concern.
We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of XO Communications, Inc. at
December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 5 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
As discussed in Note 1 to the consolidated
financial statements, effective January 16, 2003, the
Company was reorganized under a plan of reorganization confirmed
by the United States Bankruptcy Court for the Southern District
of New York. In connection with its reorganization, the
Company will apply fresh start accounting in the first quarter
of 2003.
As discussed above, the financial statements of
XO Communications, Inc. for the years ended December 31,
2001 and 2000 were audited by other auditors who have ceased
operations. As described in Note 5, these financial
statements have been revised to include the transitional
disclosures required by Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible
Assets", which was adopted by the Company as of
January 1, 2002. Our audit procedures with respect to the
disclosures in Note 5 with respect to 2001 and 2000
included (a) agreeing the previously reported net loss to
the previously issued financial statements and the adjustments
to reported net loss representing amortization expense
recognized in those periods related to goodwill and intangible
assets that are no longer being amortized to the Company's
underlying records obtained from management, and
(b) testing the mathematical accuracy of the reconciliation
of adjusted net loss to reported net loss, and the related
loss-per-share amounts. In our opinion, the disclosures for 2001
and 2000 in Note 5 are appropriate. However, we were not
engaged to audit, review, or apply any procedures to the 2001 or
2000 financial statements of the Company other than with respect
to such disclosures and, accordingly, we do not express an
opinion or any form of assurance on the 2001 or 2000 financial
statements taken as a whole.
/S/ ERNST & YOUNG LLP
February 28, 2003
Baltimore, Maryland
F-19
Table of Contents
The following report is a copy of a report
previously issued by Arthur Andersen LLP ("Andersen"),
whose report has not been reissued by Andersen. Certain
financial information for each of the two years in the period
ended December 31, 2001, was not reviewed by Andersen and
includes additional disclosures to conform with new accounting
pronouncements and SEC rules and regulations issued during such
fiscal year, see Item 1, "Business", for
discussion of risks.
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
To the Stockholders of XO Communications, Inc.:
We have audited the accompanying consolidated
balance sheets of XO Communications, Inc. ("XO
Parent," a Delaware corporation) and subsidiaries
(collectively the "Company") as of December 31,
2001 and 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of XO Communications, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred
recurring operating losses and negative cash flows from
operating activities, has defaulted on its debt obligations and
has begun to implement a proposed recapitalization that
contemplates XO Parent filing a voluntary petition for relief
under chapter 11 of the United States Bankruptcy Code.
These matters, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
Management's plans in regard to these matters are also
described in Note 1. The accompanying consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might
otherwise be necessary should the Company be unable to continue
as a going concern.
Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
schedule listed in the index of financial statements is
presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Vienna, VA
February 6, 2002
F-20
Table of Contents
XO COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for
per share data)
Pro forma Unaudited
December 31,
Reorganized Company
December 31, 2002(a)
2002
2001
ASSETS
Current assets:
Cash and cash equivalents
$
314,038
$
314,038
$
246,189
Marketable securities
246,945
246,945
508,978
Accounts receivable, net of allowance for
    doubtful accounts of $37,030 and $32,492, respectively
116,541
116,541
216,753
Other current assets
32,654
83,480
101,760
Total current assets
710,178
761,004
1,073,680
Property and equipment, net
502,176
2,780,589
3,742,577
Fixed wireless licenses, net
59,508
911,832
947,545
Goodwill, net
—
—
1,876,626
Other intangibles, net
76,171
72,782
153,404
Other assets, net
23,108
59,289
136,633
Total assets
$
1,371,141
$
4,585,496
$
7,930,465
LIABILITIES AND STOCKHOLDERS'
    (DEFICIT) EQUITY
Current liabilities not subject to compromise:
Accounts payable
$
69,729
$
63,729
$
156,488
Accrued liabilities
246,048
265,889
341,094
Accrued interest payable
213
213
114,882
Long-term debt in default
—
—
5,109,503
Current liabilities not subject to compromise
315,990
329,831
5,721,967
Current liabilities subject to compromise
—
5,497,207
—
Total current liabilities
315,990
5,827,038
5,721,967
Long-term liabilities not subject to compromise
—
75,242
129,092
Long-term liabilities subject to compromise
—
7,182
—
Long-term debt
500,000
—
—
Other long-term liabilities
80,151
—
—
Total liabilities
896,141
5,909,462
5,851,059
Redeemable preferred stock: par value
    $0.01 per share, 25,000,000 shares authorized:
    7,856,918 and 7,857,612 shares issued and outstanding on
    December 31, 2002 and December 31, 2001, respectively;
    aggregate liquidation preference of $1,693,293 and $1,693,328 on
    December 31, 2002 and December 31, 2001, respectively
Subject to compromise
—
1,708,316
—
Not subject to compromise
—
—
1,781,990
Commitments and contingencies
Stockholders' (deficit) equity:
Common stock, par value $0.02 per share,
    stated at amounts paid in Class A,
    1,000,000,000 shares authorized: 331,033,219 and
    337,774,204 shares issued and outstanding on December 31,
    2002 and December 31, 2001, respectively; Class B,
    120,000,000 shares authorized: 104,423,158 shares
    issued and outstanding on both December 31, 2002 and
    December 31, 2001
475,000
4,628,139
4,628,509
Deferred compensation
—
(8,500
)
(37,428
)
Accumulated other comprehensive income
—
2,512
10,406
Accumulated deficit
—
(7,654,433
)
(4,304,071
)
Total stockholders' (deficit) equity
475,000
(3,032,282
)
297,416
Total liabilities and stockholders'
    (deficit) equity
$
1,371,141
$
4,585,496
$
7,930,465
(a)
As discussed in footnote 3, the Company
    emerged from bankruptcy on January 16, 2003 and will be
    required to adopt the fresh start accounting provisions of
    SOP 90-7 in the first quarter of 2003. The pro forma
    balances reflect what the December 31, 2002 balances would
    have been had the Company applied fresh start accounting as of
    December 31, 2002.
See accompanying notes to consolidated financial
statements.
F-21
Table of Contents
XO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
(Dollars in thousands, except for share and
per share data)
Year Ended December 31,
2002
2001
2000
Revenue
$
1,259,853
$
1,258,567
$
723,826
Costs and expenses:
Cost of service
522,924
527,698
302,666
Selling, operating and general (excludes
    stock-based compensation)
736,925
971,714
730,604
Stock-based compensation
28,928
37,173
48,328
Depreciation and amortization
699,806
1,162,671
617,714
Restructuring and asset write-downs
480,168
509,202
—
In-process research and development
—
—
36,166
Total costs and expenses
2,468,751
3,208,458
1,735,478
Loss from operations
(1,208,898
)
(1,949,891
)
(1,011,652
)
Interest income
16,478
77,938
180,905
Interest expense, net (contractual interest was
    $501,118 for the year ended December 31, 2002)
(226,451
)
(465,401
)
(434,122
)
Other income (loss), net
(200
)
(93,781
)
163,570
Reorganization expense, net
(91,121
)
—
—
Net loss before extraordinary item and cumulative
    effect of accounting change
(1,510,192
)
(2,431,135
)
(1,101,299
)
Extraordinary gain on repurchases of debt, net
—
345,010
—
Cumulative effect of accounting change
(1,876,626
)
—
—
Net loss
(3,386,818
)
(2,086,125
)
(1,101,299
)
Recognition of preferred stock modification fee,
    net — reorganization item
78,703
—
—
Gain on repurchases of preferred stock, net
—
376,879
—
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net (contractual dividend
    was $98,768 for the year ended December 31, 2002)
(42,247
)
(129,671
)
(146,356
)
Net loss applicable to common shares
$
(3,350,362
)
$
(1,838,917
)
$
(1,247,655
)
Net loss per common share, basic and diluted:
Net loss before extraordinary item and cumulative
    effect of accounting change
$
(3.42
)
$
(6.02
)
$
(3.42
)
Extraordinary gain on repurchases of debt, net
—
0.86
—
Cumulative effect of accounting change
(4.24
)
—
—
Net loss
(7.66
)
(5.16
)
(3.42
)
Recognition of preferred stock modification fee,
    net — reorganization item
0.18
—
—
Gain on repurchases of preferred stock, net
—
0.93
—
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
(0.10
)
(0.32
)
(0.45
)
Net loss per common share, basic and diluted
$
(7.58
)
$
(4.55
)
$
(3.87
)
Weighted average shares, basic and diluted
441,964,342
403,882,956
322,089,883
See accompanying Notes to consolidated financial
statements.
F-22
Table of Contents
XO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Common Stock
Accumulated
Shares
Other
Deferred
Comprehensive
Accumulated
Class A
Class B
Amount
Compensation
Income (Loss)
Deficit
Total
Balance at December 31, 1999
150,457,264
117,485,100
$
1,139,232
$
(85,489
)
$
150,634
$
(1,217,499
)
$
(13,122
)
Issuance of common stock, options and warrants in
    acquisitions
77,536,299
—
3,002,309
—
—
—
3,002,309
Issuance of compensatory stock options and
    restricted stock
200,440
—
30,641
(22,704
)
—
—
7,937
Compensation attributable to stock options vesting
—
—
—
36,143
—
—
36,143
Issuance of common stock through employee benefit
    plans
13,150,088
—
126,604
—
—
—
126,604
Conversion of Class B common stock into
    Class A common stock
12,070,874
(12,070,874
)
—
—
—
—
—
Conversion of 6 1/2% redeemable cumulative
    preferred stock into Class A common stock
8,595,750
—
93,860
—
—
—
93,860
Comprehensive loss:
Net loss
—
—
—
—
—
(1,101,299
)
(1,101,299
)
Preferred stock dividends and accretion of
    preferred stock redemption obligation
—
—
—
—
—
(146,356
)
(146,356
)
Other comprehensive income — net
    unrealized holding gains and foreign currency translation
    adjustments
—
—
—
—
38,870
—
38,870
Realized net gains transferred to current period
    earnings
—
—
—
—
(206,545
)
—
(206,545
)
Total comprehensive loss
—
—
—
—
—
—
(1,415,330
)
Balance at December 31, 2000
262,010,715
105,414,226
$
4,392,646
$
(72,050
)
$
(17,041
)
$
(2,465,154
)
$
1,838,401
Issuance of common and restricted stock in
    acquisitions
11,211,416
—
29,055
—
—
—
29,055
Issuance of compensatory stock options
—
—
2,551
(2,551
)
—
—
—
Compensation attributable to stock options and
    restricted stock vesting
—
—
—
37,173
—
—
37,173
Issuance of common stock through employee benefit
    plans
11,939,685
—
30,899
—
—
—
30,899
Conversion of Class B common stock into
    Class A common stock
991,068
(991,068
)
—
—
—
—
—
Conversion of 6 1/2% redeemable cumulative
    preferred stock into Class A common stock
1,621,320
—
17,700
—
—
—
17,700
Issuance of common stock related to equity
    investment, net of offering costs
50,000,000
—
155,658
—
—
—
155,658
Comprehensive loss:
Net loss
—
—
—
—
—
(2,086,125
)
(2,086,125
)
Gain on repurchases of preferred stock, net
—
—
—
—
—
376,879
376,879
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
—
—
—
—
—
(129,671
)
(129,671
)
Other comprehensive income — net
    unrealized holding gains and foreign currency translation
    adjustments
—
—
—
—
22,556
—
22,556
Realized net losses transferred to current period
    earnings
—
—
—
—
4,891
—
4,891
Total comprehensive loss
—
—
—
—
—
—
(1,811,470
)
Balance at December 31, 2001
337,774,204
104,423,158
$
4,628,509
$
(37,428
)
$
10,406
$
(4,304,071
)
$
297,416
See accompanying notes to consolidated financial
statements.
F-23
Table of Contents
XO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY (DEFICIT)
(Dollars in thousands)
Common Stock
Accumulated
Other
Shares
Comprehensive
Deferred
Income
Accumulated
Class A
Class B
Amount
Compensation
(Loss)
Deficit
Total
Balance at December 31, 2001
337,774,204
104,423,158
$
4,628,509
$
(37,428
)
$
10,406
$
(4,304,071
)
$
297,416
Compensation attributable to stock options and
    restricted stock vesting
—
—
—
28,928
—
—
28,928
Issuance of common stock through employee benefit
    plans
85,854
—
24
—
—
—
24
Conversion of 6 1/2% redeemable cumulative
    preferred stock into Class A common stock
3,173
—
35
—
—
—
35
Conversion of Preferred Stock
23,570
—
—
—
—
—
Refund of Employee Stock Purchase Plan funds
    withheld after cancellation(a)
—
(429
)
—
—
—
(429
)
Cancellation of Craig McCaw's Class A
    common stock
(6,853,582
)
—
—
—
—
—
Comprehensive loss:
Net loss
—
—
—
—
—
(3,386,818
)
(3,386,818
)
Recognition of preferred stock modification fee,
    net — reorganization item
—
—
—
—
—
78,703
78,703
Preferred stock dividends and accretion of
    preferred stock redemption obligation, net
—
—
—
—
—
(42,247
)
(42,247
)
Realized net losses and foreign currency
    translation adjustments transferred to current period earnings
—
—
—
—
(7,894
)
—
(7,894
)
Total comprehensive loss
—
—
—
—
—
—
(3,358,256
)
Balance at December 31, 2002
331,033,219
104,423,158
$
4,628,139
$
(8,500
)
$
2,512
$
(7,654,433
)
$
(3,032,282
)
(a)
In the latter half of 2001, the Company's
    Employee Stock Purchase Plan was cancelled; however employee
    salary deferrals continued in December 2001, and were
    subsequently refunded in early 2002.
See accompanying notes to consolidated financial
statements.
F-24
Table of Contents
XO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Dollars in thousands)
Year Ended December 31,
2002
2001
2000
OPERATING ACTIVITIES:
Net loss
$
(3,386,818
)
$
(2,086,125
)
$
(1,101,299
)
Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
Depreciation and amortization
699,806
1,162,671
617,714
Stock-based compensation
28,928
37,173
48,328
Non-cash restructuring charges and asset
    write-downs
477,250
502,737
—
Non-cash reorganization expense, net
89,448
—
—
In-process research and development
—
—
36,166
Net losses (gains) on impairment or sale of
    investments
—
95,804
(162,429
)
Extraordinary gain on repurchases of debt, net
—
(345,010
)
—
Cumulative effect of accounting change
1,876,626
—
—
Changes in assets and liabilities, net of effects
    from acquisitions:
Accounts receivable
85,514
(43,254
)
(68,761
)
Other assets
(21,572
)
(66,566
)
(42,167
)
Other liabilities subject to compromise
195,904
—
—
Other liabilities not subject to compromise
(27,484
)
181,693
113,034
Net cash provided by (used in) operating
    activities
17,602
(560,877
)
(559,414
)
INVESTING ACTIVITIES:
Purchases of property and equipment, net
(208,713
)
(1,433,746
)
(1,380,629
)
Prepayment for network assets
—
(120,800
)
—
Payments to acquire fixed wireless licenses
—
(206
)
(49,502
)
Net releases of pledged securities
3,161
150
33,386
Sales of marketable securities and investments
364,069
2,912,454
19,337,905
Purchases of marketable securities
(103,935
)
(2,031,072
)
(19,381,106
)
Cash received for (paid for) divestitures
    (acquisitions)
3,000
(25,203
)
46,940
Investments in unconsolidated entities
—
(10,175
)
(71,489
)
Net cash provided by (used in) investing
    activities
57,582
(708,598
)
(1,464,495
)
FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable
    preferred stock
—
—
1,248,901
Borrowings under senior secured credit facility
—
625,000
375,000
Proceeds from issuance of unsecured notes
—
517,500
—
Net proceeds from sale of common stock and
    modification of preferred stock agreement
—
248,657
—
Proceeds from issuance of common stock under
    employee benefit plans
—
30,899
98,655
Repurchases of senior notes
—
(201,883
)
—
Repurchases of redeemable preferred stock
—
(88,424
)
—
Repayments of capital lease and other obligations
(6,079
)
(44,124
)
(6,809
)
Dividends paid on convertible preferred stock
—
(53,778
)
(49,984
)
Costs incurred in connection with financing
    activities
—
(14,200
)
(17,100
)
Net cash (used in) provided by financing
    activities
(6,079
)
1,019,647
1,648,663
Effect of exchange rate changes on cash
(1,256
)
3,013
(213
)
Net increase (decrease) in cash and cash
    equivalents
67,849
(246,815
)
(375,459
)
Cash and cash equivalents, beginning of year
246,189
493,004
868,463
Cash and cash equivalents, end of year
$
314,038
$
246,189
$
493,004
See accompanying notes to consolidated financial
statements.
F-25
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2002, 2001 and
2000
1.     ORGANIZATION
AND DESCRIPTION OF BUSINESS
Overview
XO Communications Inc. (formerly NEXTLINK
Communications, Inc.), a Delaware corporation
("XO Parent"), through its subsidiaries, owns and
operates an integrated metropolitan and nationwide fiber optic
network that provides broadband communication services, local
and long distance voice communication services and a wide array
of data and integrated data services to business customers in
over 60 United States markets. Voice services include local
and long distance services, calling card and interactive voice
response systems. Data services include Internet access, private
data networking and hosting services. XO Parent, through
its subsidiaries, also offers combined voice and data services
in flat rate "bundled" packages.
Organization
The consolidated financial statements include the
accounts and activities of XO Parent, and its subsidiaries
(collectively referred to as the "Company" or
"XO"). The consolidated financial statements also
include the results of Concentric Network Corporation
("Concentric") commencing June 16, 2000, the date
on which Concentric merged with XO. The Company, through
predecessor entities, was formed in September 1994. As of
December 31, 2002, the Company was majority controlled by
Craig O. McCaw through shares of Class A and Class B
common stock held by Eagle River Investments, LLC, an entity
controlled by Mr. McCaw, and other shares of the
Company's Class A and Class B common stock owned
or controlled by Mr. McCaw.
As further discussed in note 2, on
June 17, 2002 (the "Petition Date"),
XO Parent filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") with the United States Bankruptcy
Court for the Southern District of New York (the
"Bankruptcy Court"). Accordingly, the accompanying
consolidated financial statements have been prepared in
accordance with 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") and on a going concern
basis which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course
of business. In accordance with SOP 90-7, the financial
statements for the periods presented distinguish transactions
and events that are directly associated with the reorganization
from the ongoing operations of the Company. The Company conducts
its operations through direct and indirect subsidiaries of
XO Parent. None of these subsidiaries were debtors in the
Chapter 11 proceedings.
On January 16, 2003 (the "Effective
Date"), XO Parent emerged from the Bankruptcy Court
proceedings pursuant to the terms of its third amended plan of
reorganization (the "Plan of Reorganization"). As
discussed in note 3, the Company will implement fresh start
accounting under the provisions of SOP 90-7. Under the
fresh start accounting provisions of SOP 90-7, the fair
value of the reorganized Company will be allocated to its assets
and liabilities, and its accumulated deficit will be eliminated.
As discussed in the Pro Forma column on the accompanying balance
sheet and in note 3, the implementation of fresh start
accounting will result in a substantial reduction in the
carrying value of the Company's long-lived assets,
including property and equipment, fixed wireless licenses, other
intangible assets and other noncurrent assets. As a result, the
historical financial statements will not be comparable to
financial statements of the Company published for periods
following the implementation of fresh start accounting.
2.     REORGANIZATION
The
Chapter 11 Petition and Plan of Reorganization
On June 17, 2002, XO Parent filed for
protection under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. On November 15, 2002, the Bankruptcy
Court confirmed XO Parent's Plan of Reorganization,
F-26
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
and, on January 16, 2003, XO Parent
consummated the Plan of Reorganization and emerged from its
Chapter 11 reorganization proceedings with a significantly
restructured balance sheet.
During the period immediately preceding and after
the filing of XO Parent's Chapter 11 petition,
the Company met with a committee of lenders under the
$1.0 billion secured credit facility (the
"Pre-Petition Credit Facility"), an informal committee
of unsecured creditors that represented holders of our senior
unsecured notes (and following the filing of the Chapter 11
petition, the official committee of unsecured creditors
appointed in the Chapter 11 proceedings) and potential
investors to discuss potential restructuring transactions that
could be implemented to reorganize XO Parent's capital
structure. These discussions led to an agreement with the
lenders under the Pre-Petition Credit Facility regarding the
terms of a Plan of Reorganization that envisioned two potential
reorganization structures the first of which was based on, among
other things, a proposed cash investment in XO Parent by
third parties, which was ultimately abandoned, and the second of
which contemplated a stand alone restructuring with no new cash
infusion committed in advance. The Plan of Reorganization was
filed on July 22, 2002 and distributed to creditors of
XO Parent eligible to vote in the reorganization.
On August 21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr. Carl
Icahn ("High River"), commenced an offer to purchase
loans under the company's Pre-Petition Credit Facility at a
purchase price of $0.50 for each $1.00 in principal amount
thereof. Purchases made under this offer, together with the
loans under the Pre-Petition Credit Facility that High River
previously had acquired, resulted in High River holding
approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.
The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the
Pre-Petition Credit Facility being converted into the following:
•
90.25 million shares of common stock, par
    value $0.01 per share, of reorganized XO Parent ("New
    Common Stock"); and
•
$500 million of outstanding principal amount
    of loans under a restructured secured credit and guaranty
    agreement (the "New Credit Agreement").
The Plan of Reorganization also resulted in the
cancellation of all of XO Parent's pre-bankruptcy
senior notes and pre-bankruptcy general unsecured claims in
exchange for the following:
•
4.75 million shares of New Common Stock;
•
warrants to purchase shares up to an additional
    23.75 million shares of New Common Stock described below;
•
rights to purchase shares of New Common Stock in
    the rights offering described below; and
•
a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination
    of the proposed investment transaction that was the basis for
    the first restructuring alternative contemplated by the Plan of
    Reorganization (the "Investment Termination Payment")
The warrants consist of:
•
Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;
•
Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
•
Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.
F-27
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The warrants will expire 7 years after the
date of issuance. Each series of warrants is identical, except
as to the applicable exercise price. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events.
Under the Plan of Reorganization and after the
filing and effectiveness of a registration statement with the
Securities and Exchange Commission, XO Parent will issue to
certain holders of claims of interests in XO Parent, who
hold such claims and/or interests as of the November 15,
2002 record date, rights to subscribe for up to 40,000,000
shares of New Common Stock, at $5.00 per share, for an aggregate
purchase price of up to approximately $200.0 million
through a rights offering (the "Rights Offering"). In
addition, pursuant to the stipulation relating to the settlement
of a claim made against XO Parent purportedly on behalf of
its stockholders (the "Stockholder Stipulation"),
holders of shares of pre-petition class A common stock of
XO Parent will receive additional nontransferable rights
exercisable for a up to 3,333,333 shares of New Common Stock to
the extent that the rights otherwise allocable to such holders
in the Rights Offering are exercisable for less than 3,333,333
shares of New Common Stock. Accordingly, not less than
40,000,000 and not more than 43,333,333 shares will be offered
in the Rights Offering.
In addition, under the Plan of Reorganization:
•
Holders of pre-petition subordinated notes of
    XO Parent had their securities cancelled, and received a
    cash payment from High River based upon the amount of the
    Investment Termination Payment that High River would have been
    entitled to receive as a holder of the loans under the New
    Credit Agreement and the right to participate in the Rights
    Offering; and
•
Holders of pre-petition class A common stock
    of XO Parent had their securities cancelled, and received
    the right to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and
•
Holders of pre-petition class B common stock
    and holders of all series of pre-petition preferred stock of
    XO Parent had their securities cancelled and received the
    right to participate in the Rights Offering.
Of the 95.0 million shares of New Common
Stock distributed on the Effective Date, more than 80% were
issued to High River. Immediately following this distribution,
High River transferred all interest in its New Common Stock to
Cardiff Holding LLC, a Delaware limited liability company also
controlled by Mr. Icahn ("Cardiff"). Of the
warrants to be distributed under the Plan of Reorganization,
XO estimates Cardiff will receive Series A Warrants to
purchase approximately 3.0 million shares of New Common
Stock, Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C
Warrants to purchase approximately 2.3 million shares of
New Common Stock. High River assigned its approximately 85%
interest in the loans outstanding under the New Credit Agreement
to Chelonian Corp. ("Chelonian"), which subsequently
assigned those loans to Arnos Corp. ("Arnos"). Both
Chelonian and Arnos are controlled by Mr. Icahn.
Accounting
Impact of Chapter 11 Filing
Liabilities subject to compromise reflected in
the accompanying consolidated financial statements and the
XO Parent stand-alone financial statements represent the
liabilities of XO Parent incurred prior to the Petition
Date that are with unrelated parties (other than those that are
payable to a subsidiary in the XO Parent Stand-Alone
Balance Sheet). In accordance with SOP 90-7, liabilities
subject to compromise were recorded at the amount allowed on
pre-petition claims in the Chapter 11 proceedings. Other
obligations that
F-28
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
are not subject to compromise have retained their
historical balance sheet classifications and amounts.
Liabilities subject to compromise consisted of the following as
of December 31, 2002 (dollars in thousands):
Long-term debt
$
5,165,718
Accrued interest and preferred stock dividends
295,820
Pre-petition accounts payable and accrued
    liabilities
33,640
Capital lease obligations
9,211
Total liabilities subject to compromise
5,504,389
Less: long-term liabilities subject to compromise
7,182
Current liabilities subject to compromise
$
5,497,207
At December 31, 2002, there were
approximately $34 million of liabilities subject to
compromise that had not been settled by the Bankruptcy Court.
The Company expects to pay approximately $6 million to
settle these claims which will result in a reorganization
benefit of approximately $28 million.
In order to record its debt instruments at the
amount allowed by the Bankruptcy Court in accordance with
SOP 90-7, as of the Petition Date, XO Parent wrote off
all of its debt issuance costs and discounts related to debt
(collectively the "Deferred Financing Fees") as a
component of reorganization expense. Reorganization expense also
includes professional fees incurred in connection with the
Chapter 11 proceedings, as well as gains or penalties from
the settlement or rejection of liabilities subject to compromise
and the net gains from the Investment Termination Payment.
Reorganization expenses for the year ended December 31,
2002 consisted of the following (dollars in thousands):
Year Ended
December 31,
2002
Net loss from the settlement or rejection of
    liabilities subject to compromise
$
14,916
Net gain from Investment Termination Payment
(16,667
)
Deferred Financing Fees
56,270
Professional fees
36,602
Total reorganization expense, net
$
91,121
Under SOP 90-7, XO Parent was required
to accrue interest expense during the Chapter 11
proceedings only to the extent that such interest was expected
to be paid pursuant to the proceedings. Under the Plan of
Reorganization, there were no cash payments of interest on the
loans outstanding under the Pre-Petition Credit Facility or
XO Parent's unsecured notes. Therefore, XO Parent
ceased accruing interest on the Pre-Petition Credit Facility and
on its unsecured notes as of the Petition Date. The contractual
interest amounts parenthetically disclosed on the accompanying
consolidated statement of operations represent the additional
interest expense that would have been accrued under the relevant
financing agreements had the Company not ceased accruing
interest as described above.
In accordance with SOP 90-7, XO Parent
recorded its preferred stock at the amount allowed by the
Bankruptcy Court. Accordingly, as of the Petition Date,
XO Parent recognized a gain equal to the remaining
$81.5 million unamortized balance of a deferred
modification fee and wrote off all issuance costs and discounts
related to its preferred stock, which resulted in a charge of
$2.8 million. In addition, the Company stopped accruing
preferred stock dividends subsequent to the Petition Date. The
dividend amounts parenthetically disclosed on the accompanying
consolidated statement of operations represent the additional
dividends that would have been accrued under the terms of the
relevant preferred stock had the Company not ceased accruing
such dividends as described above.
F-29
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
XO Parent Stand-Alone Financial
Statements
In accordance with SOP 90-7, stand-alone
financial statements of XO Parent are presented below. Such
financial statements have been prepared using standards
consistent with the Company's consolidated financial
statements without eliminating intercompany transactions and
without consolidating controlled subsidiaries (dollars in
thousands).
XO Communications, Inc.
(XO Parent)
Debtor In Possession
Stand-Alone Balance Sheet
As of December 31, 2002
(Unaudited)
ASSETS
Current assets:
Pledged securities
$
1,100
Other current assets
66,764
Total current assets
67,864
Property and equipment, net
65,654
Fixed wireless licenses, net
67,039
Other intangibles, net
79,711
Investment in and notes receivable from
    subsidiaries, net
8,542,749
Other assets, net
43,638
Total assets
$
8,866,655
LIABILITIES AND STOCKHOLDERS'
    EQUITY
Current liabilities not subject to compromise
$
50,422
Debt and accrued interest payable to subsidiary
    subject to compromise
620,389
Current liabilities subject to compromise
5,497,207
Total current liabilities
6,168,018
Long-term liabilities not subject to compromise
62,633
Long-term liabilities subject to compromise
7,182
Total liabilities
6,237,833
Redeemable preferred stock held by and payable to
    a subsidiary subject to compromise
514,640
Redeemable preferred stock subject to compromise
1,708,316
Stockholders' equity:
Common stock
4,628,139
Deferred compensation
(8,149
)
Accumulated deficit
(4,214,124
)
Total stockholders' equity
405,866
Total liabilities and stockholders' equity
$
8,866,655
F-30
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
XO Communications, Inc.
(XO Parent)
Debtor In Possession
Stand-Alone Statement of Operations
(Unaudited)
Period from the
Petition Date of
June 17, 2002
through
December 31, 2002
Revenue
$
—
Costs and expenses:
Selling, operating, and general (excludes stock
    based compensation)
75,000
Stock-based compensation
12,352
Depreciation and amortization
47,584
Total costs and expenses
134,936
Loss from operations
(134,936
)
Reorganization expense, net
(91,121
)
Interest income on notes receivable from
    subsidiaries
286,202
Interest expense
(3,468
)
Net income
56,677
Recognition of preferred stock modification fee,
    net — reorganization item
78,703
Net income applicable to common shares
$
135,380
XO Communications, Inc.
(XO Parent)
Debtor In Possession
Stand-Alone Statement of Cash Flows
(Unaudited)
Period From the
Petition Date of
June 17, 2002
through
December 31, 2002
OPERATING ACTIVITIES:
Net income
$
56,677
Adjustments for non-cash items:
Depreciation and amortization
47,584
Reorganization expense
91,121
Stock-based compensation
12,352
Interest income on notes receivable from
    subsidiaries
(286,202
)
Interest expense
3,468
Changes in assets and liabilities:
Notes receivable from subsidiaries, net
75,000
Net cash used in operating activities
—
Net increase (decrease) in cash and cash
    equivalents
—
Cash and cash equivalents, beginning of the period
—
Cash and cash equivalents, end of period
$
—
F-31
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
3.
FRESH START ACCOUNTING
The Company will adopt the fresh start accounting
provisions ("fresh start") of SOP 90-7 during the
first quarter of 2003. Under SOP 90-7, the implementation
of fresh start reporting is triggered in part by the emergence
of XO Parent from its Chapter 11 proceedings. Although
the effective date of the Plan of Reorganization was
January 16, 2003, the Company plans to account for the
consummation of the Plan of Reorganization as if it had occurred
on January 1, 2003 and implement fresh start reporting as
of that date. Fresh start requires that the Company adjust the
historical cost of its assets and liabilities to their fair
value. The fair value of the reorganized Company, or the
reorganization value, of approximately $1.4 billion was
determined based on the sum of the reorganized Company's
$500.0 million of debt outstanding under the New Credit
Agreement, $475.0 million of New Common Stock as approved
by the Bankruptcy Court, and the $425.0 million of other
liabilities that were not eliminated or discharged under the
Plan of Reorganization.
Fresh start requires that the reorganization
value be allocated to the entity's net assets in conformity
with procedures specified by Accounting Principles Board Opinion
("APB") No. 16, "Business
Combinations," ("APB No. 16") as superseded
by Statement of Financial Accounting Standards
("SFAS") No. 141, "Business
Combinations" ("SFAS No. 141"). The Company
engaged an independent appraiser to assist in the allocation of
the reorganization value to the reorganized Company's
assets and liabilities by determining the fair market value of
its property and equipment, intangible assets and certain
obligations related to its facility leases. The fair value
adjustments impacted current assets, property and equipment,
fixed wireless licenses, intangible assets and accrued
liabilities. A reconciliation of the adjustments to be recorded
in connection with the debt restructuring and the adoption of
fresh start accounting is presented below (in thousands):
Reorganized XO
Pro forma
Predecessor XO
December 31,
December 31,
Debt
Fresh Start
2002
2002
Restructuring
Adjustments(d)
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
314,038
$
—
$
—
$
314,038
Marketable securities
246,945
—
—
246,945
Accounts receivable
116,541
—
—
116,541
Other current assets
83,480
—
(50,826
)
32,654
Total current assets
761,004
—
(50,826
)
710,178
Property and equipment, net
2,780,589
—
(2,278,413
)
502,176
Fixed wireless licenses, net
911,832
—
(852,324
)
59,508
Other intangibles, net
72,782
—
3,389
76,171
Other assets, net
59,289
—
(36,181
)
23,108
Total assets
$
4,585,496
$
—
$
(3,214,355
)
$
1,371,141
F-32
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Reorganized XO
Pro forma
Predecessor XO
December 31,
December 31,
Debt
Fresh Start
2002
2002
Restructuring
Adjustments(d)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
    EQUITY
Current liabilities:
Accounts payable
$
63,729
$
—
$
6,000
$
69,729
Accrued liabilities
265,889
—
(19,841
)
246,048
Accrued interest payable
213
—
—
213
Total current liabilities
329,831
—
(13,841
)
315,990
Current liabilities subject to compromise
5,497,207
(5,461,433
)(a)
(35,774
)
—
Long-term debt
—
500,000
(b)
—
500,000
Other long-term liabilities
75,242
—
4,909
80,151
Long-term liabilities subject to compromise
7,182
—
(7,182
)
—
Total liabilities
5,909,462
(4,961,433
)
(51,888
)
896,141
Predecessor XO Redeemable preferred
    stock — subject to compromise
1,708,316
(1,708,316
)(a)
—
—
Stockholders' (deficit) equity:
Predecessor XO Common stock
4,628,139
—
(4,628,139
)
—
Reorganized XO Common stock and warrants
—
475,000
(c)
—
475,000
Deferred compensation
(8,500
)
—
8,500
—
Accumulated other comprehensive income
2,512
—
(2,512
)
—
Accumulated deficit
(7,654,433
)
6,194,749
1,459,684
—
Total stockholders' (deficit) equity
(3,032,282
)
6,669,749
(3,162,467
)
475,000
Total liabilities and stockholders'
    (deficit) equity
$
4,585,496
$
—
$
(3,214,355
)
$
1,371,141
(a)
To record the discharge of indebtedness,
    including Pre-Petition Credit Facility ($1,000.0 million),
    pre-petition senior and convertible subordinated notes
    ($4,165.7 million), accrued interest ($245.2 million),
    and accrued dividends ($50.6 million) and the elimination
    of pre-petition Redeemable Preferred Stock
    ($1,708.3 million) in accordance with the Plan of
    Reorganization.
(b)
To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.
(c)
To record the issuance of New Common Stock and
    Warrants.
(d)
To adjust the carrying value of assets,
    liabilities and stockholders' equity to fair value, in
    accordance with fresh start accounting.
4.
SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES
Review of Significant Accounting
    Policies
As discussed in note 3, the Company will
adopt fresh start accounting during the first quarter of 2003,
creating, in substance, per SOP 90-7 a new reporting
entity. SOP 90-7 also requires that changes in accounting
principles required in the financial statements of the emerging
entity within twelve months of fresh start reporting should be
adopted at the time fresh start reporting is adopted.
F-33
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Principles of
Consolidation
The Company's consolidated financial
statements include all of the assets, liabilities and results of
operations of subsidiaries in which the Company has a
controlling interest. All inter-company accounts and
transactions among consolidated entities have been eliminated.
Preparation of
Consolidated Financial Statements
The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting period. Management periodically assesses the accuracy
of these estimates and assumptions. Actual results could differ
from those estimates.
Cash and Cash
Equivalents
The Company considers all highly liquid
investments with maturities of three months or less at the time
of purchase to be cash equivalents. Cash equivalents consist
primarily of money market accounts that are available on demand.
The carrying amount of these instruments approximates fair value
due to their short maturities.
Marketable
Securities
Substantially all of the Company's
marketable securities consist of U.S. government agency
issued and other high-grade and highly-liquid securities with
original maturities beyond three months. The Company classifies
investments in debt and equity securities as available-for-sale
and records such investments at fair value. The fair values are
based on quoted market prices. Unrealized gains and losses on
available-for-sale marketable securities are reported as a
separate component of comprehensive income. Realized gains and
losses for available-for-sale securities are recognized in
interest income.
Long-Lived
Assets
Long-lived assets, including property and
equipment, fixed wireless licenses, and intangible assets with
definite useful lives to be held and used, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed pursuant to SFAS
No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," ("SFAS No. 144"). SFAS
No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," ("SFAS No. 121"). In
accordance with implementation requirements, the Company
implemented the provisions of SFAS No. 144 on
January 1, 2002. The criteria for determining impairment
for long-lived assets to be held and used are generally
consistent with SFAS No. 121. Pursuant to SFAS
No. 144, impairment is determined by comparing the carrying
value of these long-lived assets to management's best
estimate of future undiscounted cash flows expected to result
from the use of the assets. The Company believes that no
impairment existed under SFAS No. 144 as of
December 31, 2002. In the event that there are changes in
the planned use of the Company's long-lived assets or its
expected future undiscounted cash flows are reduced
significantly, the Company's assessment of its ability to
recover the carrying value of these assets under SFAS
No. 144 could change. As discussed in note 3, the
Company will apply fresh start accounting during the first
quarter of 2003, which will result in a significant write-down
of the Company's long-lived assets.
F-34
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Property and
Equipment
Property and equipment is stated at historical
cost net of accumulated depreciation. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the
assets beginning in the month telecommunications networks and
acquired bandwidth are substantially complete and available for
use and in the month equipment and furniture are acquired. The
estimated useful lives of property and equipment are determined
based on historical usage with consideration given to
technological changes and trends in the industry that could
impact the network architecture and asset utilization.
Telecommunications networks and bandwidth include the deployment
of fiber optic cable and telecommunications hardware and
software for the expressed purpose of delivering
telecommunications services. Costs of additions and improvements
are capitalized, and repairs and maintenance are charged to
expense as incurred. Direct costs of constructing property and
equipment are capitalized including interest costs related to
construction. As discussed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of property and
equipment.
Equipment held under capital leases is stated at
the lower of the fair value of the asset or the net present
value of the minimum lease payments at the inception of the
lease. For equipment held under capital leases, depreciation is
provided using the straight-line method over the shorter of the
estimated useful lives of the assets owned or the related lease
term.
The estimated useful lives of property and
equipment are as follows:
Telecommunications networks and acquired bandwidth
5-20 years
Furniture, fixtures, equipment, and other
3-5 years
Leasehold improvements
the shorter of the estimated useful lives or the
    terms of the leases
These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because XO operates within an industry in which
new technological changes could render some or all of its
network related equipment obsolete requiring application of a
shorter useful life or, in a worst case, a write off of the
entire value of the asset. Accordingly, in making this
assessment, the Company considers the views of experts within
the Company and outside sources regarding the impact of
technological advances and trend in the industry on the value
and useful lives of its network assets.
Fixed Wireless
Licenses
Fixed wireless licenses consist of direct costs
to acquire fixed wireless licenses. The estimated useful life is
20 years, which represents the original ten year license
term with one ten year renewal. Amortization commences when
commercial service using fixed wireless technology is deployed
in the license's geographic area. Renewal is conditioned
upon the satisfaction of certain utilization requirements
established by the Federal Communications Commission
("FCC"). The Company's current utilization may
not be sufficient to satisfy this FCC condition on certain
licenses which could impact the FCC's decision to renew. As
discussed in note 3, the Company will apply fresh start
accounting during the first quarter of 2003 which will result in
a significant write down of fixed wireless licenses.
Goodwill
Goodwill consisted primarily of goodwill from the
Concentric merger. Effective January 1, 2002, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), in which goodwill
and intangible assets with indefinite lives are no longer
amortized but must be tested for impairment annually or more
frequently if an event indicates that the asset might be
impaired. The Company performed the required transitional
impairment tests of goodwill as of January 1, 2002, and
determined that the goodwill
F-35
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
was totally impaired. Accordingly, in the first
quarter of 2002 the Company recognized a $1,876.6 million
charge as a cumulative effect of accounting change to write off
all of its goodwill.
Other
Intangibles
Other intangibles consist primarily of
intangibles from the Concentric merger. Such costs are amortized
using the straight line method of accounting over a period of up
to five years. As discussed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003
which will result in a net increase to other intangibles.
Other
Assets
Other assets consist primarily of deferred costs
associated with the installation of customer services,
investments in both publicly traded and privately held companies
and pledged securities. The Company defers direct labor costs
related to customer installations, which are amortized ratably
over the estimated customer service period.
The Company has investments in entities in which
XO has no significant influence. These investments are accounted
for under the cost method. The Company regularly reviews its
investment portfolio to determine if any declines in value are
other than temporary. During 2000 and 2001, the slowing economy
had a negative impact on the equity value of companies in the
telecommunications sector. In light of these circumstances and
based on the Company's review of its investment portfolio
in this sector, the Company recorded other than temporary
impairment charges in other income (loss) of $89.0 million
in 2001 and $57.7 million in 2000 with respect to its
public and private equity investments.
As of December 31, 2002 and 2001, the
Company had pledged $1.4 million and $16.6 million,
respectively, in certificates of deposit as collateral for
outstanding letters of credit. The pledged securities are stated
at cost, adjusted for accrued interest. The fair value of the
pledged securities approximates their carrying value.
As disclosed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003
which will result in a reduction of other assets.
Income Taxes
The Company accounts for income taxes in
accordance with the provisions of SFAS No. 109,
"Accounting for Income Taxes," ("SFAS
No. 109") which requires that deferred income taxes be
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax
laws. Valuation allowances are used to reduce deferred tax
assets to the amount considered likely to be realized.
Revenue Recognition
Revenues from telecommunication services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. Service discounts and incentives
related to telecommunication services are recorded as a
reduction of revenue when granted or ratably over a contract
period. Fees billed in connection with customer installations
and other upfront charges are deferred and recognized ratably
over the estimated customer life. Revenue from the sale or lease
of unlit network capacity is recognized upon consummation of the
transaction and the acquirer's acceptance of the capacity
in instances when the Company receives upfront cash payments and
is contractually obligated to transfer title to the specified
capacity at the end of the contract term. If the transaction
does not meet these criteria, revenue is recognized ratably over
the contract term. In 2001, approximately 1.5% of XO's total
F-36
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
revenue was attributed to sales of unlit network
capacity. There were no sales of unlit network capacity during
2002 or 2000.
The Company establishes valuation allowances for
collection of doubtful accounts and other sales credit
adjustments. Valuation allowances for sales credits are
established through a charge to revenue, while valuation
allowances for doubtful accounts are established through a
charge to selling, operating and general expense. The Company
assesses the adequacy of these reserves monthly evaluating
general factors, such as the length of time individual
receivables are past due, historical collection experience, the
economic and competitive environment, and changes in the credit
worthiness of its customers. As considered necessary, the
Company also assesses the ability of specific customers to meet
their financial obligations to XO and establishes specific
valuation allowances based on the amount XO expects to collect
from its customers. The Company believes that the established
valuation allowances were adequate as of December 31, 2002
and 2001. If circumstances relating to specific customers change
or economic conditions worsen such that the Company's past
collection experience and assessment of the economic environment
are no longer relevant, XO estimate of the recoverability of its
trade receivables could be further reduced.
In-Process
Research and Development
In conjunction with the Concentric merger, the
Company allocated $36.2 million of the purchase price to
in-process research and development which represented the
estimated fair value of incomplete projects based on
risk-adjusted future cash flows. At the date of the Concentric
merger, the development of these projects had not yet reached
technological feasibility and the technology had no alternative
future uses. Accordingly, the entire $36.2 million of
acquired in-process research and development was expensed as of
the acquisition date.
Net Loss Per Share
Net loss per common share, basic and diluted, is
computed by dividing loss applicable to common shares by the
weighted average number of common shares outstanding for the
period. In periods of net loss, the assumed common share
equivalents for options, warrants and convertible securities are
anti-dilutive. Assuming exercise or conversion of outstanding
stock options, warrants and convertible securities, calculated
under the treasury method, diluted shares would have been
549.8 million for 2002, 512.6 million for 2001 and
398.5 million for 2000.
As discussed in note 2, the Company emerged
from bankruptcy on January 16, 2003 and has a reorganized
equity structure. In particular, implementation of the
Company's Plan of Reorganization resulted in the
cancellation of all of the shares of all classes of the
Company's common and preferred stock that were outstanding
prior to the Petition Date.
Stock-Based Compensation
As allowed by SFAS No. 123, "Accounting
for Stock-Based Compensation," ("SFAS
No. 123") the Company has chosen to account for
compensation cost associated with its employee stock plans in
accordance with the intrinsic value method prescribed by APB
No. 25, "Accounting for Stock Issued to
Employees," ("APB No. 25") adopting the
disclosure-only provisions of SFAS No. 123. See
note 16 for additional information regarding the
Company's stock compensation arrangements.
Had compensation costs been recognized based on
the calculated fair value of stock options at the date of grant,
the pro forma amounts of the Company's net loss applicable
to common shares and net loss per
F-37
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
common share for the years ended
December 31, 2002, 2001 and 2000 would have been as follows
(dollars in thousands, except for per share data):
Year Ended December 31,
2002
2001
2000
Net loss applicable to common shares —
    pro forma
$
(3,351,824
)
$
(1,845,882
)
$
(1,435,253
)
Net loss per common share — pro forma
$
(7.58
)
$
(4.57
)
$
(4.46
)
Comprehensive Loss
Comprehensive loss includes the Company's
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and foreign
currency translation adjustments relating to the Company's
European operations. Comprehensive loss excludes net realized
gains and losses transferred to current period earnings relating
to the sale of available-for-sale investments and other than
temporary impairment charges.
Concentration of Credit Risk
Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of trade receivables. Although the Company's trade
receivables are geographically dispersed and include customers
in many different industries, a portion of the Company's
revenue is generated from services provided to other
telecommunications service providers. Several of these companies
have recently filed for protection under Chapter 11 of the
Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of
December 31, 2002 to cover these risks.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosure about Fair
Value of Financial Instruments" ("SFAS
No. 107"), requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Company's financial instruments classified as current
assets and liabilities approximate their fair value due to their
short maturities as a result of the Company's emergence
from bankruptcy, the holders of the Company's debt and
equity instruments received certain rights and securities as
described further in note 2.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards
Board ("FASB') issued SFAS No. 143,
"Accounting for Asset Retirement Obligations,"
("SFAS No. 143") which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which a legal or contractual removal
obligation is incurred if a reasonable estimate of fair value
can be made. If a reasonable estimate of fair value cannot be
made in the period the asset retirement obligation is incurred,
SFAS No. 143 requires the liability to be recognized when a
reasonable estimate of the fair value can be made. The
provisions of SFAS No. 143 are effective for financial
statements issued for fiscal years beginning after June 15,
2002. As required by SOP 90-7, the Company will implement
SFAS No. 143 during the first quarter of 2003 in
conjunction with the implementation of fresh start accounting.
The accompanying pro forma balance sheet and note 3
includes an estimated asset retirement obligation of
$21.4 million.
In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002", ("SFAS
No. 145") which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entity's statement of operations. SFAS No. 145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an
F-38
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
extraordinary item only when the extinguishment
meets the criteria of both "unusual in nature" and
"infrequent in occurrence" as prescribed under APB
Opinion No. 30, "Reporting the Results of
Operations — Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" ("APB
No. 30"). The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002
with respect to the rescission of SFAS No. 4 and for
transactions occurring after May 15, 2002, with respect to
provisions related to SFAS No. 13. The Company has
recognized extraordinary gains from debt repurchases in 2001 and
has determined that the classification of such gains as
extraordinary items will change under SFAS No. 145 when XO
implements fresh start accounting in accordance with
SOP 90-7.
In June 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal
Activities", ("SFAS No. 146") which requires
that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a
liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements' commitment to an exit plan, which is generally
before an actual liability has been incurred. The Company will
apply the provisions of SFAS No. 146 to any exit or
disposal activities initiated after December 31, 2002.
In December 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure", ("SFAS
No. 148") which amends SFAS No. 123, to provide
alternative methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB Opinion No. 28,
"Interim Financial Reporting," ("APB
No. 28") to require disclosure in the summary of
significant accounting policies of the effects of an
entity's accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS
No. 148 does not amend SFAS No. 123 to require
companies to account for employee stock options using the fair
value method, the disclosure provisions of SFAS No. 148 are
applicable to all companies with stock-based employee
compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or
the intrinsic value method of APB No. 28. The provisions of
SFAS No. 148 are effective for fiscal years beginning after
December 15, 2002 with respect to the amendments of SFAS
No. 123 and effective for financial reports containing
condensed financial statements for interim periods beginning
after December 15, 2002 with respect to the amendments of
APB No. 28. The Company will implement SFAS No. 148
effective January 1, 2003 regarding disclosure requirements
for condensed financial statements for interim periods.
Management is currently evaluating the impact of the fair value
method of accounting for stock-based compensation on the
Company's results of operations and financial position.
5.
CUMULATIVE EFFECT OF ACCOUNTING
    CHANGE
In July 2001, the FASB issued SFAS No. 142,
which revises the accounting for purchased goodwill and
intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets" ("APB No. 17").
Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but must be tested for
impairment annually or more frequently if an event indicates
that the asset might be impaired. This impairment test under
SFAS No. 142 is based on fair values determined by using
market prices, current prices for similar assets and
liabilities, or a discounted cash flow methodology. Intangible
assets with definite useful lives continue to be amortized over
their useful lives.
SFAS No. 142 required that the initial
impairment analysis of goodwill be completed by June 30,
2002. If however, events or changes in circumstances indicate
that goodwill of a reporting unit might be impaired before
June 30, 2002, goodwill was required to be tested for
impairment when this indication of possible impairment arises.
The Company performed the required transitional impairment tests
of goodwill as of January 1, 2002, and determined that the
value of its goodwill was totally impaired. Accordingly, in the
first quarter of 2002, the Company recorded a
$1,876.6 million charge as a cumulative effect of
accounting change
F-39
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
to write-off all of its goodwill. The pro forma
impact on net loss before cumulative effect of accounting change
for the year ended December 31, 2002, 2001, and 2000
compared to the actual results for the same period is as follows
(dollars in thousands, except for per share data):
2002
2001
2000
Net loss before extraordinary item and cumulative
    effect of accounting change
$
(1,510,192
)
$
(2,431,135
)
$
(1,101,299
)
Goodwill amortization
—
595,601
323,109
Adjusted net loss before extraordinary item and
    cumulative effect of accounting change
$
(1,510,192
)
$
(1,835,534
)
$
(778,190
)
Net loss per common share before extraordinary
    item and cumulative effect of accounting change, basic and
    diluted:
Reported net loss before extraordinary item and
    cumulative effect of accounting change
$
(3.42
)
$
(6.02
)
$
(3.42
)
Goodwill amortization
—
1.47
1.00
Adjusted net loss per common share before
    extraordinary item and cumulative effect of accounting change,
    basic and diluted
$
(3.42
)
$
(4.55
)
$
(2.42
)
6.
RESTRUCTURING CHARGES AND ASSET
    WRITE-DOWNS
On August 8, 2002, the Company entered into
a Master Agreement with Level 3 Communications, Inc.
("Level 3"), which amends various agreements
related to XO acquisition of fiber networks in the United States
from Level 3 and the recurring maintenance thereon (the
"Master Agreement"). Beginning on January 1, 2003
and continuing over the remaining term of the initial agreement,
the Company's operating and maintenance fees as well as
fiber relocation charges will be reduced from approximately
$17.0 million annually to a fixed rate of $5.0 million
annually. In exchange for this reduction and certain other
concessions, effective as of February 11, 2003, the closing
date for the transaction, the Company surrendered its
indefeasible right to use an empty conduit and six of the
24 fibers previously acquired from Level 3. Because
the Company had committed to this plan of disposal and believed
at the time that XO entered into the Master Agreement that
consummation of the contemplated transaction was probable, the
Company recorded a $477.3 million non-cash write-down of
these assets during the third quarter of 2002. Pursuant to
applicable accounting principles, the write-down is based on the
book value of the surrendered facilities and does not reflect
the future benefits to be received by the Company under the
Master Agreement.
During the second half of 2001, the Company
implemented a plan to restructure certain of its business
operations. The restructuring plan included reducing the
Company's discretionary spending, capital expenditures and
workforce based on its assessment of current and future market
conditions and the divestiture of its European operations. As a
result of the restructuring plan, the Company recorded
$509.2 million of estimated restructuring charges during
the year ended December 31, 2001. The Company continued to
restructure its operations, reducing its workforce by
approximately 350 additional employees, the majority of which
were employed in network operations, sales and marketing and
information technology, and recorded a $2.9 million
restructuring charge related to involuntary termination
severance liabilities in the second quarter of 2002. These
employees were notified of their termination of employment in
the second quarter of 2002 and the employment of the majority of
the notified employees was terminated by June 30, 2002. As
of December 31, 2002, the remaining restructuring accrual
was $79.0 million, which relates primarily to payments due
to landlords on exited leased facilities. The restructuring
accrual has decreased from $125.8 million as of
December 31, 2001 primarily due to payments associated with
exited leased facilities.
F-40
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
7.
MARKETABLE SECURITIES
Marketable securities consisted of the following
(dollars in thousands):
December 31,
2002
2001
U.S. Government and agency notes and bonds
$
246,945
$
242,048
Corporate notes and bonds
—
266,930
$
246,945
$
508,978
8.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following
components (dollars in thousands):
December 31,
2002
2001
Telecommunications networks and acquired bandwidth
$
2,920,819
$
2,832,878
Furniture, fixtures, equipment, and other
656,994
758,022
3,577,813
3,590,900
Less accumulated depreciation
1,165,216
795,739
2,412,597
2,795,161
Network construction-in-progress
367,992
947,416
$
2,780,589
$
3,742,577
As discussed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of property and
equipment and the associated depreciation expense in future
periods. During 2002, 2001 and 2000, depreciation expense was
$598.5 million, $447.0 million and
$223.8 million, respectively. During 2002, 2001 and 2000,
the Company capitalized interest on construction costs of
$11.1 million, $51.6 million, and $31.0 million,
respectively.
As of December 31, 2002, the Company owned a
North American inter-city network with a carrying value of
$260.5 million. The inter-city network requires the
purchase and installation of optical networking equipment in
order for the fiber to be "lit" and operationally
ready for its intended use. The Company has postponed lighting
this network and in the interim has purchased Level 3 wavelength
capacity to provide inter-city transport. As a result, the
inter-city network has not been placed into service, is not
being depreciated and is included in network
construction-in-progress as of December 31, 2002.
F-41
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
9.
OTHER INTANGIBLES
Intangible assets with definite useful lives
consisted of the following (dollars in thousands):
December 31, 2002
December 31, 2001
Gross
Gross
Carrying
Accumulated
Net Book
Carrying
Accumulated
Net Book
Amount
Amortization
Value
Amount
Amortization
Value
Acquired technology
$
130,515
$
(84,336
)
$
46,179
$
141,541
$
(56,027
)
$
85,514
Customer lists
123,745
(105,635
)
18,110
124,873
(80,845
)
44,028
Other
35,413
(26,920
)
8,493
48,731
(24,869
)
23,862
Total intangible assets
$
289,673
$
(216,891
)
$
72,782
$
315,145
$
(161,741
)
$
153,404
Fixed wireless licenses
$
997,942
$
(86,110
)
$
911,832
$
997,942
$
(50,397
)
$
947,545
As discussed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of other
intangibles and the associated amortization expense.
Amortization expense for the years ended December 31, 2002,
2001 and 2000 was $101.3 million, $715.7 million and
$393.9 million, respectively. Fixed wireless licenses are
amortized when commercial service using the wireless technology
is deployed in the license's geographic area. At
December 31, 2002, $635.3 million of the fixed
wireless licenses are being amortized.
10.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following
components (dollars in thousands):
December 31,
2002
2001
Accrued compensation
$
58,551
$
73,807
Accrued telecommunications costs
52,803
40,955
Accrued construction
1,123
27,552
Other accrued liabilities
153,412
198,780
$
265,889
$
341,094
11.
LONG-TERM DEBT
As of December 31, 2002, the carrying value
of the Company's long-term debt was $5.2 billion
including $3.7 billion in pre-petition senior notes,
$0.5 billion in pre-petition convertible subordinated
notes, and $1.0 billion outstanding under the Pre-Petition
Credit Facility, all of which are classified as current
liabilities subject to compromise. The Company ceased making all
scheduled interest payments due under the terms of its senior
unsecured notes effective December 1, 2001, and its
subordinated unsecured notes in February 2002. Consequently, as
of December 31, 2001, the Company was in default on certain
unsecured notes and had triggered cross-default provisions under
the Pre-Petition Credit Facility and the indentures under which
all other senior notes were issued, so the entire
$5.2 billion of pre-petition debt was classified as current.
As discussed further in note 2, upon the
Company's consummation of the Plan of Reorganization, all
of XO Parent's pre-petition senior notes and
pre-petition general unsecured claims were cancelled in exchange
for (i) 4,750,000 shares of New Common Stock,
(ii) warrants to purchase shares up to an additional
23,750,000 shares of New Common Stock (iii) rights to
purchase shares of New Common Stock in the Rights Offering and
(iv) a portion of the cash consideration received by
XO Parent from the Investment Termination Payment. Any
holders of pre-petition subordinated notes of XO Parent had
their securities cancelled, and
F-42
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
received a cash payment from High River based
upon the amount of the Investment Termination Payment that High
River would have been entitled to receive as holder of the loans
under the New Credit Agreement and the right to participate in
the Rights Offering. The pre-petition senior notes had interest
rates ranging from 9.0% to 12.75% and the interest rate on the
pre-petition convertible subordinated notes was 5.75%.
The Pre-Petition Credit Facility bore interest at
the Company's option, at an alternative base rate, as
defined, or at the reserve-adjusted London Interbank Offered
Rate ("LIBOR"), plus in each case, applicable margins.
As discussed further in note 2, upon the Company's
consummation of the Plan of Reorganization, the
$1.0 billion of loans under the Pre-Petition Credit
Facility were converted into 90.25 million shares of New
Common Stock and the $500.0 million of outstanding
principal amount of loans under the New Credit Agreement. The
maturity date of the outstanding principal under the New Credit
Agreement is July 15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on
October 15, 2007. The security for the New Credit Agreement
consists of the all assets of XO Parent, including stock of
its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement
limits additional indebtedness, liens, dividend payments and
certain investments and transactions, and contains certain
covenants with respect to minimum cash balance and EBITDA
(earnings before interest, taxes, depreciation and amortization)
requirements and maximum capital expenditures.
The Company is not required to pay interest
accrued on the principal amount under the New Credit Agreement
until it meets certain financial ratios. The Company can elect
to begin paying interest in cash prior to the required date.
Loans under the New Credit Agreement bear interest, at the
Company's option, at an alternate base rate, as defined, or
LIBOR, plus in each case, applicable margins. Once the Company
begins to pay accrued interest in cash, the applicable margins
are reduced. Under certain circumstances, the New Credit
Agreement permits the Company to obtain a senior secured
facility of up to $200.0 million, subject to reduction in
an amount equal to any proceeds received from the exercise of
rights in the Rights Offering.
During the second half of 2001, in a series of
transactions, a subsidiary of the Company paid
$201.9 million to repurchase $557.1 million of the
outstanding principal of certain series of the pre-petition
senior notes at a substantial discount to their respective face
values. As a result of these transactions, during the year ended
December 31, 2001, the Company recognized an extraordinary
gain of $345.0 million, net of unamortized financing costs.
12.
REDEEMABLE PREFERRED STOCK
As of December 31, 2002 and 2001, the
carrying values of the Company's pre-petition preferred
stock were $1.7 billion and $1.8 billion,
respectively. As discussed in note 2, as a result of the
Company's emergence from bankruptcy and consummation of the
Plan of Reorganization, the Company's pre-petition
redeemable preferred stock has been cancelled and discharged and
the holders of such securities will receive no distribution
under the Plan of Reorganization.
In conjunction with the implementation of the
transactions that ultimately led to the reorganization of the
Company's capital structure pursuant to the Plan of
Reorganization, the Company ceased making all scheduled dividend
payments effective December 31, 2001 and stopped accruing
preferred stock dividends subsequent to the Petition Date. In
accordance with SOP 90-7, during the Chapter 11
proceedings, the Company was required to record its preferred
stock at the amount allowed by the Bankruptcy Court.
Accordingly, during the second half of 2002, the Company
recognized a gain equal to the remaining unamortized balance of
a deferred modification fee and wrote off all issuance costs and
discounts related to its preferred stock which resulted in a net
gain of $78.7 million.
During the second half of 2001, in a series of
transactions, a subsidiary of the Company paid
$88.4 million to repurchase $301.6 million in
liquidation preference of its 14% pre-petition Series A
senior exchangeable redeemable preferred stock and
$171.0 million in liquidation preference of its
pre-petition 13 1/2% Series E
F-43
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
senior redeemable exchangeable preferred stock at
a substantial discount to their respective carrying amounts. As
a result of these transactions, the Company recognized a gain of
$376.9 million, net of unamortized financing costs.
13.
STOCKHOLDERS' EQUITY
In December 2001, the Company voluntarily
delisted its pre-petition Class A common stock from the Nasdaq
National Market and began trading on the Nasdaq Over-the-Counter
Bulletin Board ("OTCBB") on December 17, 2001
under the symbol "XOXO." The Company's
pre-petition Class A common stock stopped trading on the
OTCBB as of the Effective Date and the New Common Stock began
trading on the OTCBB under the symbol "XOCM" shortly
thereafter. As discussed in note 2, pursuant to the Plan of
Reorganization, all interests in the Company's pre-petition
Class A and Class B common stock were terminated as of
the Effective Date.
On June 7, 2001, an investment fund
affiliated with Forstmann Little invested $250.0 million of
cash in the Company to provide additional funding for general
corporate purposes. In exchange for the investment, the Company
issued 50.0 million shares of its pre-petition Class A
common stock to the Forstmann Little fund and amended the terms
of outstanding pre-petition convertible preferred stock held by
various funds affiliated with Forstmann Little to reduce the
share conversion price from $31.625 to $17.00 per share. The
value of the pre-petition Class A common stock issued at
the date the investment closed was $157.5 million. The
remaining $92.5 million, attributed to the pre-petition
convertible preferred stock amendment, was recorded as a credit
to the preferred stock balance and was being amortized against
the accretion of the preferred stock redemption obligation. As
discussed in note 12, during the second half of 2002, the
Company recognized a gain equal to the remaining unamortized
balance of this deferred modification fee.
In June 2000, the Company effected two-for-one
stock splits of the issued and outstanding shares of
pre-petition Class A and Class B common stock, in the
form of stock dividends. The accompanying consolidated financial
statements and the related notes herein have been adjusted
retroactively to reflect the two-for-one stock splits.
14.     INCOME
TAXES
Components of deferred tax assets and liabilities
were as follows (dollars in thousands):
December 31,
2002
2001
Deferred tax assets:
Provisions not currently deductible
$
123,280
$
41,954
Property, equipment and other long-term assets
    (net)
367,208
348,582
Net operating loss and capital loss carryforwards
1,863,336
1,313,477
Total deferred tax assets
2,353,824
1,704,013
Valuation allowance
(2,028,331
)
(1,390,017
)
Net deferred tax assets
325,493
313,996
Deferred tax liabilities:
Property, equipment and other long-term assets
    (net)
(101,402
)
(72,108
)
Other identifiable intangibles
(222,537
)
(238,465
)
Other
(1,554
)
(3,423
)
Total deferred tax liabilities
(325,493
)
(313,996
)
Net deferred taxes
$
—
$
—
F-44
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The net change in valuation allowance for the
year ended December 31, 2002 was an increase of
$638.3 million. The net change in the valuation allowance
for years ended December 31, 2001 and 2000 was an increase
of $591.2 million and $521.2 million, respectively.
As of December 31, 2002, the Company has
capital loss carryforwards of approximately $0.5 billion
and net operating loss carryforwards of approximately
$4.0 billion. As discussed in notes 2 and 3, upon
consummation of the Plan of Reorganization during the first
quarter of 2003, the Company will recognize a substantial amount
of cancellation of indebtedness income. Accordingly, a
substantial portion of the Company's $4.5 billion of
capital and net operating loss carryforwards are expected to be
eliminated. Other tax attributes, including property bases,
could also be reduced. Any surviving capital or net operating
loss carryforwards will be subject to limitations imposed under
the ownership change rules in the U.S. Internal Revenue
Code.
The Company will join with the affiliated group
of corporations controlled by Mr. Icahn in filing a
consolidated federal income tax return. As such, the Company
entered into a Tax Allocation Agreement with Starfire Holding
Corporation ("Starfire"), the Parent entity of the
affiliated group of corporations controlled by Mr. Icahn.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes XO, and XO will make payments
to Starfire in an amount equal to the tax liability, if any,
that it would have if it were to file as a consolidated group
separate and apart from Starfire.
A reconciliation of the Company's effective
income tax rate and the U.S. federal and state tax rate is
as follows:
2002
2001
Statutory U.S. federal rate
35.0
%
35.0
%
State income taxes, net of federal benefit
6.0
%
6.0
%
Valuation allowance for deferred tax assets
(18.3
)%
(29.4
)%
Other identifiable intangibles
(22.7
)%
(11.6
)%
Effective income tax rate
—
%
—
%
15.     COMPREHENSIVE
LOSS
Comprehensive loss includes the Company's
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and foreign
currency translation adjustments from the Company's former
European operations, which were sold in February 2002. The
following table reflects the Company's calculation of
comprehensive loss for the years ended December 31, 2002,
2001 and 2000 (dollars in thousands):
Year Ended December 31,
2002
2001
2000
Net loss applicable to common shares
$
(3,350,362
)
$
(1,838,917
)
$
(1,247,655
)
Other comprehensive (gains) loss:
Net unrealized holding (gains) losses and foreign
    currency translation adjustments
—
22,556
38,870
Less: Net realized (gains) losses and foreign
    currency translation adjustments transferred to current period
    earnings
(7,894
)
4,891
(206,545
)
Comprehensive loss
$
(3,358,256
)
$
(1,811,470
)
$
(1,415,330
)
F-45
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
16.     STOCK
COMPENSATION ARRANGEMENTS
The Company had an Employee Stock Purchase Plan,
(the "Purchase Plan"), under which 12.0 million
shares of Class A common stock were authorized for
issuance. The Purchase Plan was suspended in 2001 in connection
with the commencement of XO Parent's balance sheet
reorganization, and then was subsequently cancelled. As
discussed in note 2, pursuant to the Plan of
Reorganization, all interests in the Company's pre-petition
Class A common stock were terminated as of the Effective
Date. Prior to the suspension of the Purchase Plan, eligible
employees could purchase the Company's pre-petition
Class A common shares at 85% of the lower of the average
market value of the Class A common stock on the first and
the last trading day of each calendar quarter. Employees who
owned 5% or more of the voting rights of the Company's
outstanding common shares could not participate in the Purchase
Plan. During the years ended December 31, 2001 and 2000,
employees purchased 6.3 million and 0.4 million shares
of pre-petition Class A common stock, respectively, under
the Purchase Plan.
Prior to the Effective Date, the Company also
maintained the XO Communications, Inc. Stock Option Plan
(the "Stock Option Plan") and certain other equity
compensation plans that had been assumed in connection with the
acquisition of Concentric Network (collectively, the "Old
Stock Option Plans") to provide a performance incentive for
certain officers, employees and individuals or companies who
provide services to the Company. The Old Stock Option Plans
provided for the granting of qualified and non-qualified stock
options. The options became exercisable over vesting periods of
up to four years and expired no later than 10 years after
the date of grant.
The Company had authorized 113.0 million
shares of pre-petition Class A common stock for issuance
under the Old Stock Option Plans. In May 2001, the Company
offered its employees the opportunity to exchange certain
options outstanding under the Old Stock Option Plans for new
options equal to 85% of the number of shares tendered. The
Company granted the new options on January 17, 2002, the
first business day that was six months and one day following the
closing of this exchange offer. The exercise price of the new
options was the last reported sale price of the pre-petition
Class A common stock on the date of that grant, which was
$0.14 per share. The new options were 30% vested on the date of
grant and the remaining 70% vest monthly in equal installments
over the following 36-month period until fully vested. As of
December 31, 2002, 44.0 million shares were available
for issuance under the Old Stock Option Plans. However, as
discussed in note 2 under the Plan of Reorganization, all
interests in the Company's pre-petition Class A common
stock including any options or awards granted under the Old
Stock Option Plans, were terminated and cancelled as of the
Effective Date, and holders of such options under such plans
were entitled to no distribution pursuant to the Plan of
Reorganization.
The Company recorded approximately
$28.9 million, $37.2 million, and $48.3 million
of stock-based compensation expense related to the Old Stock
Option Plan for the years ended December 31, 2002, 2001,
and 2000, respectively.
F-46
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
The following two tables summarize information
regarding options under the Company's Old Stock Option Plan
for the last three years:
Weighted
Number of
Average
Shares
Exercise Price
Outstanding at December 31, 1999
55,203,534
$
9.86
Assumed in acquisition
13,086,985
$
20.51
Granted
36,850,732
$
35.17
Canceled
(12,590,334
)
$
19.52
Exercised
(11,310,416
)
$
6.63
Outstanding at December 31, 2000
81,240,501
$
22.77
Granted
5,909,809
$
7.72
Canceled
(49,163,452
)
$
28.32
Exercised
(3,677,562
)
$
5.36
Outstanding at December 31, 2001
34,309,296
$
13.91
Granted
24,978,119
$
0.14
Canceled
(15,053,582
)
$
9.97
Exercised
(35,860
)
$
0.01
Outstanding at December 31, 2002
44,197,973
$
7.37
Exercisable, at December 31, 2000
16,369,892
$
11.30
Exercisable, at December 31, 2001
18,902,125
$
12.38
Exercisable, at December 31, 2002
30,350,882
$
8.00
Options Outstanding
Options Exercisable
Weighted
Options
Average
Weighted
Options
Weighted
Outstanding
Remaining
Average
Exercisable
Average
at December 31,
Contractual
Exercise
at December 31,
Exercise
Range of Exercise Prices
2002
Life
Price
2002
Price
$0.01 - $0.16
22,929,528
8.6
$
0.12
13,097,978
$
0.11
$0.25 - $6.25
5,892,586
6.1
$
4.26
4,818,112
$
4.68
$6.28 - $14.06
8,416,102
6.5
$
9.61
7,521,309
$
9.39
$14.25 - $66.00
6,959,757
6.9
$
31.16
4,913,483
$
30.16
44,197,973
7.6
$
7.37
30,350,882
$
8.00
The Company uses the Black-Scholes option-pricing
model to determine the pro forma effect of using the intrinsic
value method rather than the fair value method of accounting for
employee stock options. The model uses certain information, such
as the interest rate on a risk-free security maturing generally
at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of time an
option will be outstanding until it is exercised or it expires,
to calculate the weighted average fair value per share of
F-47
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
stock options granted. This information and the
assumptions used for 2002, 2001, and 2000 are summarized below:
2002
2001
2000
Expected volatility
125.0
%
125.0
%
77.2
%
Risk free interest rate
4.0
%
4.3
%
6.2
%
Dividend yield
0.0
%
0.0
%
0.0
%
Expected life (range in years)
4.0
4.0
4.0
Weighted average fair value per share at grant
    date
$
0.11
$
5.10
$
19.14
In connection with the confirmation of the
Company's Plan of Reorganization, the Bankruptcy Court
approved the adoption of the XO Communications, Inc. 2002
Stock Incentive Plan (the "2002 Stock Incentive
Plan"), as of the Effective Date. Under the 2002 Stock
Incentive Plan, the Company is authorized to issue, in the
aggregate, stock awards of up to 17.6 million of shares of
New Common Stock, in the form of options to purchase stock or
restricted stock. Non-qualified options to purchase
11.5 million shares of the New Common Stock have been
granted and are outstanding as of March 1, 2003, each at a
purchase price of $5.00 per share. Of these options, 25% are
vested and the remainder vest over three years.
The 2002 Stock Incentive Plan is administered by
the Compensation Committee of the Company's Board of
Directors, which has the discretionary authority to determine
all matters relating to awards of stock options and restricted
stock, including the selection of eligible participants, the
number of shares of common stock to be subject to each option or
restricted stock award, the exercise price of each option,
vesting, and all other terms and conditions of awards.
Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i) ten
years after the date of grant, (ii) twelve months after
termination of employment with XO due to death or complete and
permanent disability, (iii) immediately upon termination of
employment by XO for cause, or (iv) three months after
termination of employment by the employee or by XO for other
than cause.
17.     SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA
Supplemental disclosure of the Company's
cash flow information is as follows (dollars in thousands):
Year Ended December 31,
2002
2001
2000
Non-cash financing and investing activities were
    as follows:
Class A common stock, warrants and options
    issued in acquisitions and under lease arrangements
$
—
$
29,055
$
3,002,309
Redeemable preferred stock dividends, paid in
    shares of redeemable preferred stock
—
86,237
76,671
Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock
—
6,524
17,090
Assumption of preferred stock and liabilities in
    acquisitions
—
8,816
614,027
Conversion of 6 1/2% redeemable cumulative
    preferred stock to Class A common stock
35
17,700
93,860
Other obligations assumed
—
—
11,119
Cash paid for interest
$
11,681
$
313,178
$
331,892
As discussed in note 2, the Company ceased
paying dividends and interest on its redeemable preferred stock
and its senior unsecured notes during 2001 and its subordinated
unsecured notes in February 2002.
F-48
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Employee Savings
and Retirement Plan
At December 31, 2002, the Company had a
defined contribution plan, generally covering all full time
employees in the United States. The Company provides a company
match to all eligible employees based on certain plan provisions
and the discretion of the Board of Directors. Beginning
November 30, 2001, the Company's pre-petition
Class A common stock was no longer available as an
investment option due to the Company's pending
reorganization. Effective April 1, 2002, the Company
changed its employer matching contribution from a 100% matching
contribution up to 5% of the participant's compensation to
a 50% matching contribution up to 5% of the participant's
compensation. Company contributions were $7.0 million,
$12.5 million and $8.3 million during 2002, 2001 and
2000, respectively.
18.
OPERATING SEGMENTS
Reportable Segments
The Company operates its business as one
communications segment. The Company's communications
segment includes all of its products and services including
data, voice, integrated voice and data, and other services.
These services have similar network operations and technology
requirements and are sold through similar sales channels to a
similar targeted customer base. Therefore, the Company manages
these services as a single segment that is divided into profit
centers that are focused on geographic areas, or markets, within
the United States, or that are focused on customers with a
presence across geographical markets.
Products and Services
The Company classifies its products and services
revenues offered by its communications services segment into
voice services, data services, integrated voice and data
services, and other services (dollars in thousands):
Year Ended December 31,
2002
2001
2000
Voice services
$
658,453
$
606,848
$
386,796
Data services
472,247
596,664
331,892
Integrated voice and data services
128,048
52,018
2,693
Other services
1,105
3,037
2,445
Total revenue
$
1,259,853
$
1,258,567
$
723,826
19.
SELECTED QUARTERLY DATA (Unaudited)
Quarterly financial information is summarized in
the table below (dollars in thousands, except for share data):
Quarter Ended 2002
March 31,
June 30,
September 30,
December 31,
Revenue
$
333,405
$
325,480
$
301,526
$
299,442
Cost of service
140,367
134,346
126,215
121,996
Loss from operations(a)(b)
(182,663
)
(176,771
)
(673,001
)
(176,463
)
Net loss before extraordinary item and cumulative
    effect of accounting change
(299,028
)
(346,133
)
(695,209
)
(169,822
)
Net loss(c)
(2,175,654
)
(346,133
)
(695,209
)
(169,822
)
Net loss applicable to common shares(d)
(2,198,480
)
(286,851
)
(695,209
)
(169,822
)
Net loss per common share (basic and diluted)(e)
(4.97
)
(0.65
)
(1.57
)
(0.39
)
F-49
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Quarter Ended 2001
March 31,
June 30,
September 30,
December 31,
Revenue
$
277,307
$
306,779
$
331,478
$
343,003
Cost of service
114,894
122,942
138,100
151,762
Loss from operations(a)
(358,248
)
(362,418
)
(547,285
)
(681,940
)
Net loss before extraordinary item
(443,511
)
(461,116
)
(734,655
)
(791,853
)
Net loss(c)
(443,511
)
(461,116
)
(398,917
)
(782,581
)
Net loss applicable to common shares(d)
(482,552
)
(500,722
)
(50,752
)
(804,891
)
Net loss per common share (basic and
diluted)(e)
(1.31
)
(1.32
)
(0.12
)
(1.84
)
(a)
In the third quarter of 2002, loss from
    operations includes a non-cash asset write down totaling
    $477.3 million resulting from an agreement with
    Level 3 to amend various agreements relating to the
    Company's Level 3 inter-city fiber network facilities.
    In the second quarter of 2001, loss from operations includes
    restructuring charges totaling $509.2 million associated
    with plans to restructure certain aspects of the Company's
    business operations.
(b)
Loss from operations in the quarters ended
    March 31, June 30, and September 30, 2002,
    respectively, reflects the reclassification of reorganization
    expense, net to below loss from operations.
(c)
In the first quarter of 2002, net loss includes a
    $1,876.6 million impairment charge to write-off all of
    XO's goodwill as a cumulative effect of accounting change,
    pursuant to SFAS No. 142. In the third quarter of 2001, net
    loss includes an extraordinary gain of $345.0 million
    resulting from the repurchase of certain of XO's senior
    notes and a write-down of $87.0 million for an other than
    temporary decline in the value of certain investments.
(d)
In the second quarter of 2002, net loss
    applicable to common shares includes a net gain of
    $78.7 million as XO's preferred stock was deemed
    subject to compromise under SOP 90-7 as of the Petition
    Date, requiring the Company to recognize the remaining
    $81.5 million unamortized balance of its deferred
    modification fee and write-off certain issuance costs and
    discounts.
(e)
The net loss per share data has been calculated
    based on the shares outstanding of the Company's
    pre-petition class A and class B common stock prior to
    the consummation of its Plan of Reorganization. On the Effective
    Date of the Company's Plan of Reorganization, all interests
    in XO's pre-petition class A and class B common
    stock were terminated and all outstanding shares were cancelled.
    See note 2 for further discussion. The net loss per share
    data has been adjusted for the stock splits effected in 2000 and
    in prior periods.
20.
RELATED PARTY TRANSACTIONS
In February 2003, Dixon Properties, LLC
("Dixon"), which is controlled by Mr. Icahn,
acquired ownership of the building in which XO headquarters
is located in a transaction that was approved by the Bankruptcy
Court. XO currently leases approximately 170,000 square
feet of space in that building. In connection with the purchase
of the building by Dixon, it assumed the existing lease
agreement. Pursuant to the assumed lease agreement, XO is
obligated to pay $20.4 million in the aggregate to Dixon
through the expiration of the initial term of the lease, which
is November 30, 2007.
XO Parent has entered into a Tax Allocation
Agreement, dated January 16, 2003, between XO Parent
and Starfire, a company controlled by Mr. Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
XO Parent's Chapter 11 proceedings, establishes
the methodology for the calculation and payment of income taxes
in connection with the consolidation of the Company with
Starfire for income tax purposes. Generally, the Tax Allocation
Agreement provides that Starfire will pay all consolidated
federal income taxes on behalf of the consolidated group that
includes the Company, and the Company will make payments to
Starfire in an amount equal to the tax liability, if any, that
it would have if it were to file as a consolidated group
separate and apart from Starfire.
F-50
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Arnos, which is owned and controlled by
Mr. Icahn, holds approximately 85% of the $500 million
in loans outstanding under the New Credit Agreement. Under the
New Credit Agreement, no cash interest payments are required to
be made by the Company until it achieves specified financial
targets.
In July 2001, the Company executed a multi-year
agreement with Nextel Communications, Inc. ("Nextel")
pursuant to which XO will provide Nextel telecommunications
services. Individuals who served as members of the
Company's board of directors prior to the Effective Date of
the Company's Plan of Reorganization also serve on the
board of directors of Nextel. One of these members,
Craig O. McCaw, along with his affiliates, held a
controlling voting interest in the Company prior to the
Effective Date of the Plan of Reorganization and holds certain
management rights related to his investment in Nextel. Prior to
entering into the agreement with Nextel, the Company
participated in a competitive proposal process initiated by
Nextel, which included numerous national telecommunications
providers. Therefore, in management's opinion, the
agreement with Nextel was consummated in the normal course of
operations with prices and terms equivalent to those available
to, and transacted with, unrelated parties.
Prior to the Effective Date of the Company's
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little & Co. had a significant equity
interest in the Company and had designated certain individuals
to serve as members of the Company's board of directors.
Such investment funds and other entities affiliated with
Forstmann Little & Co. also hold a significant equity
interest in McLeodUSA ("McLeod"). McLeod provides
interconnection and facilities based telecommunications services
to the Company, and the Company provides, on a limited basis,
telecommunications service to McLeod. In addition, during 2001,
XO acquired certain unlit metro network capacity from
McLeod to support infrastructure requirements in a specific
XO market.
The following table summarizes the Company's
transactions with Nextel and McLeod (dollars in thousands):
Revenue Recognized
Payments Made
from Services
for Services
Provided for the
Received for the
Year Ended
Year Ended
December 31,
December 31,
2002
2001
2002
2001
McLeod
$
373
$
7,112
$
1,953
$
8,410
Nextel
$
66,852
$
27,599
$
2,745
$
6,206
The following amounts are outstanding as a result
of the Company's transactions (dollars in thousands):
Accounts
Accounts
Payable as
Receivable as of
of December
December 31,
31,
2002
2001
2002
2001
McLeod
$
16
$
57
$
20
$
—
Nextel
$
11,219
$
9,732
$
—
$
10
21.     COMMITMENTS
AND CONTINGENCIES
Operating Commitments
The Company is leasing premises under various
noncancelable operating leases for administrative space,
building access, and other leases, which, in addition to rental
payments, require payments for insurance, maintenance, property
taxes and other executory costs related to the leases. The lease
agreements have various expiration dates and renewal options
through 2021. The Company also has various noncancelable
long-term contractual obligations associated with maintenance
and service agreements.
F-51
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
Future minimum lease commitments required under
noncancelable operating leases and contractual obligations are
as follows (dollars in thousands):
Operating
Other Long-Term
Lease
Contractual
Year Ending December 31,
Obligations
Obligations
2003
$
62,733
$
74,126
2004
59,045
57,612
2005
55,600
17,574
2006
51,458
14,577
2007
47,334
11,780
Thereafter
232,550
107,277
Total minimum commitments
$
508,720
$
282,946
Rent expense for cancelable and noncancelable
leases totaled approximately $76.4 million,
$100.1 million, and $54.6 million for the years ended
December 31, 2002, 2001, and 2000, respectively.
Capital
Leases
Network assets under capital leases totaled
approximately $16.3 million and $27.2 million as of
December 31, 2002 and 2001, respectively, and are included
in telecommunications networks in property and equipment.
Depreciation on leased assets of $2.0 million for the year
ended December 31, 2002 is included in depreciation
expense. Future minimum lease payments under capital lease
obligations as of December 31, 2002 are as follows (dollars
in thousands):
Year Ending December 31,
2003
$
10,031
2004
2,809
2005
2,668
2006
2,416
2007
1,733
Thereafter
277
Total minimum capital lease payments
19,934
Less: imputed interest
4,123
Less: current portion of capital lease obligations
8,629
Long-term portion of capital lease obligation
$
7,182
As of December 31, 2002 both the current
portion and long-term portions of the capital lease obligation
are classified as subject to compromise, in accordance with
SOP 90-7.
Legal
Proceedings
The Company is not currently a party to any legal
proceedings, other than regulatory and other proceedings that
are in the normal course of business.
Prepaid Calling
Card Tax Matter
On July 26, 2002, the Company was advised by
the staff of the Securities and Exchange Commission that it was
conducting an informal inquiry primarily relating to obligations
with respect to, and XO's accrual of liabilities for,
specified federal excise and state sales tax and similar tax
obligations arising in connection with
F-52
Table of Contents
XO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS — (Continued)
prepaid calling card services and relating to
certain other matters. Sales from prepaid calling card services
that are potentially subject to these taxes accounted for
approximately $56 million of total revenues for 1999, when
the Company began providing these services, through
June 30, 2002. The Company believes that its accounting for
these potential obligations is appropriate and that its accruals
of liabilities relating to these obligations are adequate.
Unfunded
Affiliate Pension Obligation
As discussed in note 2, affiliates of
Mr. Icahn hold over 80% of the outstanding New Common Stock
of XO Parent. Applicable pension and tax laws make each
member of a plan sponsor's "controlled group"
(generally defined as entities in which there is at least an 80%
common ownership interest) jointly and severally liable for
certain pension plan obligations of the plan sponsor. These
pension obligations include ongoing contributions to fund the
plan, as well as liability for any unfunded liabilities that may
exist at the time the plan is terminated. In addition, the
failure to pay these pension obligations when due may result in
the creation of liens in favor of the pension plan or the
Pension Benefit Guaranty Corporation, (the "PBGC")
against the assets of each member of the plan sponsor's
controlled group.
As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahn's affiliates,
XO Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr. Icahn has
a direct or indirect ownership interest of at least 80%, which
includes ACF Industries Inc. ("ACF"), which is the
sponsor of certain pension plans. As most recently determined by
the ACF plans' actuaries, pension plans maintained by ACF
are underfunded in the aggregate by approximately
$14 million on an ongoing actuarial basis and by
approximately $102 million if those plans were terminated.
As a member of the same controlled group, XO Parent and
each of its subsidiaries would be liable for any failure of ACF
to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of the ACF pension plans.
The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other "reportable events,"
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.
22.     SUBSEQUENT
EVENT
Effectiveness
of Bankruptcy Plan
The Plan of Reorganization that was confirmed by
order of the Bankruptcy Court on November 15, 2002 became
effective January 16, 2003, and is discussed in more detail
in note 2.
F-53
Table of Contents
XO COMMUNICATIONS, INC.
SCHEDULE II — CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS
For The Years Ended December 31, 2002,
2001 and 2000
Additions
Beginning
Charged to
Ending
Balance
Expense
Reductions
Balance
(In thousands)
Allowance for doubtful accounts
2000
$
7,215
$
21,999
$
(8,215
)
$
20,999
2001
$
20,999
$
45,757
$
(34,264
)
$
32,492
2002
$
32,492
$
53,631
$
(49,093
)
$
37,030
Restructuring accrual
2000
$
30,935
$
—
$
(30,935
)
$
—
2001(a)
$
—
$
509,202
$
(383,429
)
$
125,773
2002(b)
$
125,773
$
480,168
$
(526,951
)
$
78,990
(a)
Only $16.6 million of the reduction in the
    2001 restructuring accrual was for cash payments. The balance
    was associated with the write down for the excess of carrying
    value of assets to be sold or abandoned and was applied to those
    assets.
(b)
Only $49.7 million of the reduction in 2002
    restructuring accrual was for cash payments. The balance was
    associated with the non-cash asset write down resulting from an
    agreement with Level 3 to amend various agreements relating
    to XO's Level 3 inter-city fiber network facilities.
F-54
Table of Contents
XO Communications, Inc.
Rights Offering
43,333,333 Shares of Common Stock, $0.01 par
value
Exercise Price $5.00 per share
PROSPECTUS
Dated
[                    ],
2003
Table of Contents
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
Item 13.
Other Expenses of Issuance and
    Distribution
Securities and Exchange Commission Registration
    Fee
$
17,528.33
Printing Expenses
$
300,000.00
Accounting Fees and Expenses
$
[        ]
Legal Fees and Expenses
$
185,000.00
Rights Agent's, Information Agent's and
    Registrar's Fees and Expenses
$
50,000.00
Miscellaneous Expenses
$
—
Total
$
Item 14.
Indemnification of Directors and
    Officers.
XO Communications, Inc., or XO Parent,
is a Delaware corporation. In its Certificate of Incorporation,
XO Parent has adopted the provisions of
Section 102(b)(7) of the Delaware General Corporation Law
(the "Delaware Law"), which enables a corporation in
its original certificate of incorporation or an amendment
thereto to eliminate or limit the personal liability of a
director for monetary damages for breach of the director's
fiduciary duty, except (i) for any breach of the
director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation
of law, (iii) pursuant to Section 174 of the Delaware
Law (providing for liability of directors for unlawful payment
of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director will
personally receive a benefit in money, property or services to
which the director is not legally entitled.
XO Parent also has adopted indemnification
provisions pursuant to Section 145 of the Delaware Law,
which provides that a corporation may indemnify any person who
is or was a party to any actual or threatened legal action,
whether criminal, civil, administrative or investigative, by
reason of the fact that the person is or was an officer,
director or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer or agent
of another corporation, partnership or other enterprise, against
expenses (including attorney's fees), judgments, fines and
settlement payments reasonably and actually incurred by him or
her in connection with such proceeding, if he or she acted in
good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe was unlawful, except that, with
respect to any legal action by or in the right of the
corporation itself, an officer, director or agent of the
corporation is entitled to indemnification only for expenses
(including attorney's fees) reasonably and actually
incurred, and is not entitled to indemnification in respect of
any claim, issue or matter as to which he or she is found liable
to the corporation, unless the court determines otherwise.
XO Management Services, Inc., a subsidiary
of XO Parent entered into indemnification agreements with
certain the then-existing directors and officers of
XO Parent as of July 14, 2002 to indemnify them for
claims against them arising from their employment by
XO Parent, and for payment of related costs and expenses.
Although XO Parent originally planned to provide customary
"tail" insurance coverage to supplement these
indemnification provisions, after reviewing the costs of
insurance in the marketplace, XO Parent and its senior
secured lenders determined that comparable benefits could be
provided at sharply reduced costs by placing $25 million of
XO Parent's cash on hand into escrow as security for
XO Parent's existing indemnification obligations, in
lieu of purchasing third party coverage. The Escrow Agreement,
dated January 15, 2003, by and among
XO Communications, Inc., XO Management Services, Inc.
and U.S. Bank Trust National Association, as escrow agent,
implements this decision, and provides a mechanism for review
and payment of appropriate claims. The Escrow Agreement does not
change any of existing indemnification rights referred to above,
but merely provides funds to secure their payment.
II-1
Table of Contents
Insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors,
officers or persons controlling the registrant pursuant to the
foregoing provisions, the registrant has been informed that in
the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is therefore
unenforceable.
Item
15.
Recent Sales of Unregistered
Securities
The following securities were issued by us within
the past year pursuant to the Plan of Reorganization without
registration under the Securities Act:
(a) approximately 95 million shares of
New Common Stock to our pre-petition senior secured creditors in
exchange for their claims;
(b) 7-year warrants to purchase
approximately:
(i) 9.5 million shares of New Common
    Stock at $6.25 per share;
(ii) 7.1 million shares of New Common
    Stock at $7.50 per share; and
(iii) 7.1 million shares of New Common
    Stock at $10.00 per share.
(c) Subscription Rights with basic
subscription privileges and oversubscription privileges in this
Rights Offering to holders of our pre-petition senior notes and
general unsecured creditors in exchange for their claims.
Each of the transactions above is exempt from
registration under the Securities Act pursuant to
Section 1145 of the Chapter 11 of the United States
Code or, in the case of certain affiliates of XO Parent,
Section 4(2) of the Securities Act.
Under the Plan of Reorganization we also issued
Subscription Rights with oversubscription privileges in the
Rights Offering to holders of our pre-petition subordinated
notes, pre-petition preferred stock and pre-petition common
stock. These Subscription Rights were issued for no
consideration and therefore are exempt from registration under
the Securities Act under the no sale doctrine.
Item 16.
Exhibits and Financial
Statement Schedules
2.1
Third Amended Plan of Reorganization of
    XO Communications, Inc., dated July 22, 2002
    (Incorporated herein by reference to exhibit 2.1 filed with
    the Current Report on Form 8-K/ A of
    XO Communications, Inc., filed on November 26, 2002)
2.2
Plan Supplement, dated October 23, 3003, to
    the Third Amended Plan of Reorganization of
    XO Communications, Inc., dated July 22, 2002
    (Incorporated herein by reference to exhibit 2.2 filed with
    the Current Report on Form 8-K/ A of
    XO Communications, Inc., filed on November 26, 2002)
2.3
Order Confirming Third Amended Plan of
    Reorganization, dated November 15, 2002 (Incorporated
    herein by reference to exhibit 99.1 filed with the Current
    Report on Form 8-K/ A of XO Communications, Inc.,
    filed on November 26, 2002)
3.1
Amended and Restated Certificate of Incorporation
    of XO Communications, Inc. (Incorporated herein by
    reference to exhibit 3.1 filed with the Registration
    Statement on Form 8-A of XO Communications, Inc.,
    filed on February 7, 2003, pursuant to the Securities
    Exchange Act)
3.2
Amended and Restated By-laws of
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 3.2 filed with the Registration Statement on
    Form 8-A of XO Communications, Inc., filed on
    February 7, 2003, pursuant to the Securities Exchange Act)
4.1
Form of stock certificate of New Common Stock
    (Incorporated herein by reference to exhibit 4.1 filed with
    the Annual Report on Form 10-K for the year ended
    December 31, 2002 of XO Communications, Inc.)
4.2.1
Series A Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.1 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
II-2
Table of Contents
4.2.2
Series B Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.2 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
4.2.3
Series C Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.3 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
5.1†
Opinion of Willkie Farr & Gallagher
5.2†
Tax Opinion of Willkie Farr & Gallagher
10.1.1
XO Communications, Inc. 2002 Stock Incentive
    Plan (Incorporated herein by reference to exhibit 10.1.1
    filed with the Annual Report for the year ended
    December 31, 2002 on Form 10-K of
    XO Communications, Inc.)
10.1.2
XO Communications, Inc. Retention Bonus and
    Incentive Plan (Incorporated herein by reference to
    exhibit 10.2.1 filed with the Annual Report on
    Form 10-K for the year ended December 31, 2002 of
    XO Communications, Inc.)
10.2.1
Registration Rights Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and
    High River Limited Partnership and Meadow Walk Limited
    Partnership (Incorporated herein by reference to
    exhibit 10.4 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003)
10.2.2
Tax Allocation Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit 10.5 filed with the Current Report on
    Form 8-K of XO Communications, Inc., filed on
    January 30, 2003)
10.3.1
Employment Term Sheet between
    XO Communications, Inc. and Carl J. Grivner (Incorporated
    herein by reference to exhibit 10.1 filed with the
    Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 2003 of XO Communications, Inc.)
10.3.2
Change of Control Agreement, dated April 25,
    2003, by and between XO Communications, Inc. and Carl J.
    Grivner (Incorporated herein by reference to exhibit 10.2
    filed with the Quarterly Report on Form 10-Q for the
    quarterly period ended March 31, 2003 of
    XO Communications, Inc.)
10.3.3
Employment Agreement, dated as of January 3,
    2000, by and between Nathaniel A. Davis and NEXTLINK
    Communications, Inc. (predecessor to XO Communications,
    Inc.) (Incorporated herein by reference to exhibit 10.11
    filed with the Annual Report on Form 10-K for the year
    ended December 31, 1999 of NEXTLINK Communications, Inc.
    and NEXTLINK Capital, Inc.)
10.3.4
Letter agreement, dated December 17, 2002,
    by and among Communications Consultants, Inc.,
    XO Communications, Inc., Eagle River Investments, L.L.C.
    and R. Gerard Salemme (Incorporated herein by reference to
    exhibit 10.3.2 filed with the Annual Report of
    Form 10-K for the year ended December 31, 2002 of
    XO Communications, Inc.)
10.3.5
Employment Agreement, dated as of
    January 13, 2000, by and between Michael S. Ruley and
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 10.3.3 filed with the Annual Report on
    Form 10-K for the year ended December 31, 2001 of
    XO Communications, Inc.)
10.4.1
Cost Sharing and IRU Agreement, dated
    July 18, 1998, between Level 3 Communications, LLC and
    XO Intercity Holdings No. 2, LLC (f/k/a INTERNEXT LLC)
    (Incorporated herein by reference to exhibit 10.8 filed
    with the quarterly report on Form 10-Q for the quarterly
    period ended September 30, 1998 of NEXTLINK Communications,
    Inc. and NEXTLINK Capital, Inc.)
10.4.2
Master Agreement, dated August 8, 2002,
    between Level 3 Communications, Inc. and
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 10.4.1 filed with the Annual Report on
    Form 10-K of XO Communications, Inc., filed on
    March 21, 2003)
10.5
Amended and Restated Credit and Guaranty
    Agreement, dated as of January 16, 2003, among
    XO Communications, Inc., certain subsidiaries of
    XO Communications, Inc., the Lenders party thereto from
    time to time, and Mizuho Corporate Bank, as Administrative Agent
    (Incorporated herein by reference to exhibit 10.5 filed
    with the Annual Report on Form 10-K of
    XO Communications, Inc., filed on March 21, 2003)
10.6*
Form of Rights Certificate
II-3
Table of Contents
16
Letter from Arthur Andersen LLP to the Securities
    and Exchange Commission, dated May 15, 2002 (Incorporated
    herein by reference to exhibit 16 filed with the Current
    Report on Form 8-K of XO Communications Inc. filed on
    May 16, 2002)
21
Subsidiaries of the Registrant (Incorporated
    herein by reference to exhibit 21 filed with the Annual
    Report on Form 10-K for the year ended December 31,
    2002 of XO Communications, Inc.)
23.1*
Consent of Ernst & Young LLP,
    independent auditors
23.2*
Notice Regarding Lack of Consent of Arthur
    Andersen
24.1*
Power of Attorney (See p. II-  of
    this Registration Statement)
99.1*
Form of Letter of Instructions from Nominee
    Holders to Beneficial Owners
*
Filed herewith.
†
To be filed by amendment.
Item 17.
Undertakings.
(a) Insofar as indemnification for
liabilities arising under the Securities Act of 1933 or the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the
indemnification provisions described herein, or otherwise, the
Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
(b)     The undersigned
registrant hereby undertakes to supplement the prospectus, after
the expiration of the subscription period of the Rights
Offering, to set forth the results of the Rights Offering and
the terms of any subsequent reoffering thereof. If any public
offering by an underwriter is to be made on terms differing from
those set forth on the cover page of this prospectus, a
post-effective amendment will be filed to set forth the terms of
such offering.
II-4
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities
Act, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Reston and State of Virginia, on the
22nd day of July, 2003.
XO COMMUNICATIONS, INC.
By:
/s/  WAYNE M. REHBERGER
Name: Wayne M. Rehberger
Title:
Executive Vice President,
Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of
XO Communications, Inc., hereby severally and individually
constitute and appoint Wayne M. Rehberger, Noelle N.
Beams, Kathy Isaac and Lee Wiener, and each of them, as true and
lawful attorneys-in-fact for the undersigned, in any and all
capacities, with full power of substitution, to sign any and all
amendments to this Registration Statement (including
post-effective amendments), and to file the same with exhibits
thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said
attorneys-in-fact, and each of them, full power and authority to
do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact,
or either of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities
Act, this Registration Statement has been signed below on the
22nd day of July, 2003 by the following persons on behalf of the
Registrant and in the capacities indicated:
Name
Title
/s/ CARL J. GRIVNER
Carl J. Grivner
Chief Executive Officer, President and
    Director
(Principal Executive Officer)
/s/ WAYNE M. REHBERGER
Wayne M. Rehberger
Executive Vice President, Chief Financial
    Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ CARL C. ICAHN
Carl C. Icahn
Chairman of the Board of Directors
/s/ ANDREW R. COHEN
Andrew R. Cohen
Director
II-5
Table of Contents
Name
Title
/s/ ADAM DELL
Adam Dell
Director
/s/ VINCENT J. INTRIERI
Vincent J. Intrieri
Director
/s/ KEITH MEISTER
Keith Meister
Director
II-6
Table of Contents
EXHIBIT INDEX
2.1
Third Amended Plan of Reorganization of
    XO Communications, Inc., dated July 22, 2002
    (Incorporated herein by reference to exhibit 2.1 filed with
    the Current Report on Form 8-K/ A of
    XO Communications, Inc., filed on November 26, 2002)
2.2
Plan Supplement, dated October 23, 3003, to
    the Third Amended Plan of Reorganization of
    XO Communications, Inc., dated July 22, 2002
    (Incorporated herein by reference to exhibit 2.2 filed with
    the Current Report on Form 8-K/ A of
    XO Communications, Inc., filed on November 26, 2002)
2.3
Order Confirming Third Amended Plan of
    Reorganization, dated November 15, 2002 (Incorporated
    herein by reference to exhibit 99.1 filed with the Current
    Report on Form 8-K/ A of XO Communications, Inc.,
    filed on November 26, 2002)
3.1
Amended and Restated Certificate of Incorporation
    of XO Communications, Inc. (Incorporated herein by
    reference to exhibit 3.1 filed with the Registration
    Statement on Form 8-A of XO Communications, Inc.,
    filed on February 7, 2003, pursuant to the Securities
    Exchange Act)
3.2
Amended and Restated By-laws of
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 3.2 filed with the Registration Statement on
    Form 8-A of XO Communications, Inc., filed on
    February 7, 2003, pursuant to the Securities Exchange Act)
4.1
Form of stock certificate of New Common Stock
    (Incorporated herein by reference to exhibit 4.1 filed with
    the Annual Report on Form 10-K for the year ended
    December 31, 2002 of XO Communications, Inc.)
4.2.1
Series A Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.1 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
4.2.2
Series B Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.2 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
4.2.3
Series C Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications,
    Inc. and American Stock Transfer & Trust Company
    (Incorporated herein by reference to exhibit 10.3 filed
    with the Current Report on Form 8-K of
    XO Communications, Inc., filed on January 30, 2003)
5.1†
Opinion of Willkie Farr & Gallagher
5.2†
Tax Opinion of Willkie Farr & Gallagher
10.1.1
XO Communications, Inc. 2002 Stock Incentive
    Plan (Incorporated herein by reference to exhibit 10.1.1
    filed with the Annual Report on Form 10-K for the year
    ended December 31, 2002 of XO Communications, Inc.)
10.1.2
XO Communications, Inc. Retention Bonus and
    Incentive Plan (Incorporated herein by reference to
    exhibit 10.2.1 filed with the Annual Report on
    Form 10-K for the year ended December 31, 2002 of
    XO Communications, Inc.)
10.2.1
Registration Rights Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and
    High River Limited Partnership and Meadow Walk Limited
    Partnership (Incorporated herein by reference to
    exhibit 10.4 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003)
10.2.2
Tax Allocation Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit 10.5 filed with the Current Report on
    Form 8-K of XO Communications, Inc., filed on
    January 30, 2003)
10.3.1
Employment Term Sheet between
    XO Communications, Inc. and Carl J. Grivner (Incorporated
    herein by reference to exhibit 10.1 filed with the
    Quarterly Report on Form 10-Q for the quarterly period
    ended March 31, 2003 of XO Communications, Inc.)
10.3.2
Change of Control Agreement, dated April 25,
    2003, by and between XO Communications, Inc. and Carl J.
    Grivner (Incorporated herein by reference to exhibit 10.2
    filed with the Quarterly Report on Form 10-Q for the
    quarterly period ended March 31, 2003 of
    XO Communications, Inc.)
Table of Contents
10.3.3
Employment Agreement, dated as of January 3,
    2000, by and between Nathaniel A. Davis and NEXTLINK
    Communications, Inc. (predecessor to XO Communications,
    Inc.) (Incorporated herein by reference to exhibit 10.11
    filed with the Annual Report on Form 10-K for the year
    ended December 31, 1999 of NEXTLINK Communications, Inc.
    and NEXTLINK Capital, Inc.)
10.3.4
Letter agreement, dated December 17, 2002,
    by and among Communications Consultants, Inc.,
    XO Communications, Inc., Eagle River Investments, L.L.C.
    and R. Gerard Salemme (Incorporated herein by reference to
    exhibit 10.3.2 filed with the Annual Report of
    Form 10-K for the year ended December 31, 2002 of
    XO Communications, Inc.)
10.3.5
Employment Agreement, dated as of
    January 13, 2000, by and between Michael S. Ruley and
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 10.3.3 filed with the Annual Report on
    Form 10-K for the year ended December 31, 2001 of
    XO Communications, Inc.)
10.4.1
Cost Sharing and IRU Agreement, dated
    July 18, 1998, between Level 3 Communications, LLC and
    XO Intercity Holdings No. 2, LLC (f/k/a INTERNEXT LLC)
    (Incorporated herein by reference to exhibit 10.8 filed
    with the quarterly report on Form 10-Q for the quarterly
    period ended September 30, 1998 of NEXTLINK Communications,
    Inc. and NEXTLINK Capital, Inc.)
10.4.2
Master Agreement, dated August 8, 2002,
    between Level 3 Communications, Inc. and
    XO Communications, Inc. (Incorporated herein by reference
    to exhibit 10.4.1 filed with the Annual Report on
    Form 10-K of XO Communications, Inc., filed on
    March 21, 2003)
10.5
Amended and Restated Credit and Guaranty
    Agreement, dated as of January 16, 2003, among
    XO Communications, Inc., certain subsidiaries of
    XO Communications, Inc., the Lenders party thereto from
    time to time, and Mizuho Corporate Bank, as Administrative Agent
    (Incorporated herein by reference to exhibit 10.5 filed
    with the Annual Report on Form 10-K of
    XO Communications, Inc., filed on March 21, 2003)
10.6*
Form of Rights Certificate
16
Letter from Arthur Andersen LLP to the Securities
    and Exchange Commission, dated May 15, 2002 (Incorporated
    herein by reference to exhibit 16 filed with the Current
    Report on Form 8-K of XO Communications Inc. filed on
    May 16, 2002)
21
Subsidiaries of the Registrant (Incorporated
    herein by reference to exhibit 21 filed with the Annual
    Report on Form 10-K for the year ended December 31,
    2002 of XO Communications, Inc.)
23.1*
Consent of Ernst & Young LLP,
    independent auditors
23.2*
Notice Regarding Lack of Consent of Arthur
    Andersen
24.1*
Power of Attorney (See p. II-  of
    this Registration Statement)
99.1*
Form of Letter of Instructions from Nominee
    Holders to Beneficial Owners
*
Filed herewith.
†
To be filed by amendment.