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### UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-K

|    |  |                                                                                     
|--- |  | ------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2000
Commission File No. 0-30900

### XO COMMUNICATIONS, INC.
XO CAPITAL, INC.

|                                               |  |                                                                                            
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------
|A Delaware CorporationA Washington Corporation |  | I.R.S. Employer Identification No. 54-1983517
I.R.S. Employer Identification No. 91-1716062

11111 Sunset Hills Road, Reston, Virginia 20190
Telephone Number (703) 547-2000

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $0.02

Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

The aggregate market value of the Class A and Class B common stock held by
non-affiliates of the Registrants, based upon the closing sale price of the
Class A common stock on March 15, 2001, as reported on the NASDAQ Stock Market,
was approximately $4,252,159,764. Shares of Class A and Class B common stock
held by each executive officer and director and by certain persons who own 5%
or more of the outstanding Class A and Class B common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

As of March 15, 2001, the number of outstanding shares of XO Communications,
Inc.s Class A common stock was 264,338,797 and Class B common stock was
105,414,226. XO Capital, Inc. had outstanding 1,000 shares of common stock, par
value $0.01 per share.

XO Capital, Inc. (XO Capital and together with XO Communications, Inc., the
Registrants) meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:

Portions of the Companys Definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to Vote of Security Holders                                    
|Item 4A. Executive Officers of the Registrant                                                
|Item 5. Market for Registrants' Common Stock and Related Stockholder Matters                 
|Item 6. Selected Financial Data                                                              
|Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|Item 8. Financial Statements and Supplementary Data                                          
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Managementt                     
|Item 13. Certain Relationships and Related Transactions                                      
|Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|Ex.10.3.4 Amendment No.1 to Employment Agreement                                             
|Ex.21 Subsidiaries of the Registrant                                                         
|Ex.23.1 Consent of Arthur Andersen                                                           



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PART I




Item 1. Business

Introduction

XO Communications, Inc., XO or the Company, is a Delaware corporation,
which, through its predecessor entities, was formed in 1994. The Company was
originally organized as NEXTLINK Communications, L.L.C., a Washington limited
liability company. 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 the Companys merger with Concentric Network Corporation, NEXTLINK
Communications, Inc. merged with the Company and the Company, as the surviving
corporation in the merger, changed its name to NEXTLINK Communications, Inc. On
September 25, 2000, the Company began doing business as XO Communications
and, on October 25, 2000, the Company changed its name to XO Communications,
Inc.

XOs principal executive and administrative offices are located at 11111
Sunset Hills Road, Reston, Virginia 20190, and its telephone number is (703)
547-2000.

Overview

Since 1996, we have provided high-quality bundled local and long distance
as well as dedicated voice telecommunications services to the rapidly growing
business market. We expanded our services through our acquisition of
Concentric. By combining our data and voice services, we are able to provide
our customers with a comprehensive array of communications services from a
single source.

Our data services include the following:



| |  |  | Internet access, including:
| | - |  | ---------------------------



| |  |  |  | dedicated Internet access for customers with large, high-speed
Internet access requirements; and                                                  
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | digital subscriber line, or DSL, services, for small
businesses that require high-speed Internet access over existing
copper wire telephone lines;

| |  |  | Private data networking, including:
| | - |  | -----------------------------------

| |  |  |  | Dedicated transmission capacity on our networks,
including 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 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 a metropolitan area at speeds of up to one gigabit per
second; and                                                                         



| |  |  | Hosting services, including:
| | - |  | ----------------------------



| |  |  |  | Hosting and web site traffic management tools, for
Internet-centric businesses, and web hosting, e-commerce, and
streamed media services designed for small and medium-sized
businesses; and
| |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | Server management equipment and customer support to
completely manage a customers servers.                                                                                                 

Our voice services include the following:



| |  |  | Bundled local and long distance, and stand-alone long
distance services, and related services such as conferencing,
domestic and international toll free, voicemail and calling cards;                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Interactive voice response, or IVR, systems that we develop
and operate that enable our customers end-users to order products
and services, receive information, seek assistance, and a host of
other capabilities over the telephone using natural language speech
recognition and web-to-phone capabilities; and

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| |  |  | Shared tenant services, consisting of telecommunications
management services provided to groups of small and medium-sized
businesses located in the same office building.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We also combine many of these services in flat rate service packages.
These packages, tailored to the communications needs of small and medium-sized
businesses, 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.

To serve our customers broad and expanding telecommunications needs, we
have assembled a collection of metropolitan, or metro, and inter-city network
assets, in both the United States and Europe. These networks incorporate
state-of-the-art fiber optic cable and transmission equipment and fixed
wireless spectrum and equipment capable of carrying high volumes of data,
voice, video and Internet traffic.

In the United States we have:



| |  | built 35 metro broadband fiber optic networks
in 21 states
and the District of Columbia, including 26 of the 30 largest
metropolitan areas in the U.S., and we are continuing to build
additional metro fiber networks;                                                                                                                                                     
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | become the nations largest holder of fixed wireless spectrum
by acquiring Federal Communications Commission, or FCC, licenses
covering 95% of the population of the 30 largest U.S. cities, and
have deployed this technology in 27 of our markets as of December
31, 2000; and                                                                                            
| 
| |  | acquired indefeasible rights to use dark fiber and an empty
fiber conduit in a North American inter-city fiber optic network
expected to be completed in 2001 that will traverse over 17,000 miles and connect
more than 60 cities in the United States and Canada, including most
of the major metropolitan markets served by our current and planned
metro fiber networks.

In Europe, we have:



| |  | agreed to acquire indefeasible rights to use numerous dark
fibers or empty conduit in five metropolitan networks in London,
Frankfurt, Brussels, Amsterdam and Paris, and rights to use empty
fiber conduits for future network deployment in Berlin, Dusseldorf,
Hamburg and Munich;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | agreed to acquire indefeasible rights to use dark fibers on a
3,600 mile inter-city network that will connect 21 cities through
five European countries; and                                                                                                                         
| 
| |  | been awarded fixed wireless spectrum licenses in the United
Kingdom including licenses covering the Greater London, Greater
Manchester and Birmingham/West Midlands Regions in the recently
completed U.K. Broadband Fixed Wireless Auction.                                         

In Canada, we have acquired, through a Canadian joint venture, an interest
in six broadband fixed wireless spectrum licenses covering Toronto, Montreal,
Vancouver, Ottawa, Edmonton, Calgary and surrounding areas.

Using these assets, we are creating two fiber optic networks, one in the
U.S. and one in Europe, which will be connected by high speed transatlantic
fiber optic capacity that we have acquired. When completed, each of these
networks will consist 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 will be connected by a network of numerous fiber
optic cables, which we refer to as an inter-city network. We plan to integrate
our network assets with advanced communications technologies to enable us to
provide a comprehensive array of communications services entirely over our
network, 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 will
enable us to provide communication services between customers connected to our
network and among customers with multiple locations entirely over our network.

We own or control
substantially all of our network assets, making us a facilities-based carrier. We have constructed
or acquired our metro fiber networks, consisting of up to 432 strands of fiber
optic cable and, in some cases, additional empty fiber conduits. For our inter-city
networks, we have acquired indefeasible, exclusive rights to use
unlit fiber optic strands, known as dark fiber, and
for many segments empty fiber conduits through which we can deploy additional
fiber optic strands. Unlike lit fiber, dark fiber has not been equipped with
the electronic components necessary for communications transmission, which
enables us to deploy

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our own switching, routing and optical equipment, thereby giving us
greater control over the design of our networks.

Business Strategy

Our goal is to meet our customers communications needs with complete,
integrated, end-to-end voice and data network applications and services. We
plan to deliver these applications and services primarily through networks that
we own or control as a facilities-based carrier.
The key components of our strategy to achieve this goal are to:



| |  | Develop and Enhance Service Offerings and Expand Our Targeted
Customer Base. We plan to add a variety of new services and
enhancements to existing services to take advantage of our robust
networks, which are designed to carry high volumes of all types of
communications traffic. By continuing to introduce services for
large customers, we plan to continue to expand our targeted customer
base, which historically has focused on small and medium-sized
businesses, to include larger national customers that can benefit
from our unique end-to-end broadband capabilities.          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Broaden Our Sales Channels. We continue to complement 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
sales agents, including four national agencies, our telesales
operation, which focuses on DSL and shared web hosting services, and
web marketing of DSL, web hosting, domain name and email services.                                                                                                                                
|
| |  | Create Integrated High-Capacity Networks. We are creating
integrated, end-to-end, facilities-based networks in the United
States and Europe, consisting of metro fiber networks and fixed
wireless connections that will be connected through advanced
inter-city fiber optic networks and transatlantic fiber optic
capacity. These networks use or will use state-of-the art Internet
Protocol, or IP, technologies that enable our networks to carry high
volumes of data, voice, video and Internet traffic as well as other
high-bandwidth services.                                          
|
| |  | Connect Customers Directly to Our Networks. We use a variety
of technologies to connect our customers directly to our networks,
including those that use fiber optic cable and fixed wireless
spectrum. By building our metro fiber networks in central business
districts, we can connect a high percentage of the areas commercial
buildings using these technologies, rather than connections leased
from third parties. We expect that this effort to reduce both our
costs and the amount of time that it takes to connect customers to
our network.                                         
|
| |  | Focused, Data-Centric European Broadband Service Strategy. In
Western Europe, we have launched a focused, data-centric broadband
service strategy targeted at multi-location business customers,
Internet service providers, or ISPs, and other telecommunications
carriers. We intend to provide high bandwidth data services between
major business centers in Western Europe by as early as mid-2001 as
our metro and inter-city fiber networks are deployed. These services
will include global transit, transport, Gigabit Ethernet, VPN,
wavelength, and shared and managed hosting services.

2000 Transactions and Developments

Acquisition of Concentric Network Corporation

In June 2000, we acquired Concentric, a provider of web hosting,
e-commerce, high-speed DSL, and other Internet services. As a combined company,
we are able to offer our customers a complete, single source of communications
services, including a full complement of voice and data products. In connection
with the acquisition, we issued approximately 68 million shares of our Class A
common stock to former Concentric stockholders in exchange for their shares of
Concentric common stock.

Introduction of New and Expanded Service Offerings

In 2000, not only did we acquire a number of data services through the
Concentric acquisition, but we also introduced a number of new data services.

XOptions. In September 2000, we began offering small and medium-sized
business customers in all of our U.S. markets integrated, flat-rate packages
that include local and long distance voice, Internet access and web hosting
services. These packages, marketed as XOptions, include a variety of service
packages designed to simplify the way

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that customers with anywhere from 10 to 100 employees per location satisfy
their communications needs. We believe that we were the first company to offer
bundled local, long distance, Internet Access and web hosting services at a
flat, monthly price in all of our U.S. markets.

Ethernet Services. In November 2000, we began offering a suite of Ethernet
services, including Gigabit Ethernet, or GigE, in selected markets. We expect
to offer these services throughout most of our U.S. markets by mid 2001. Our
Ethernet services are designed to provide high-speed, high-capacity connections
between customers local area networks within a metropolitan area, and to both
simplify their network connections and significantly reduce their costs. These
services offer network connection speeds ranging from 10 to 100 megabits per
second to one gigabit per second.

Wavelength
Services. 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. In December 2000, we began offering dedicated wavelength services over our metro fiber networks, with connections
of up to 2.5 gigabits per second.

Introduction of New Brand

In September 2000, we began doing business as XO Communications. We
changed the companys name to reflect the core business strengths of the
combined NEXTLINK and Concentric brands, and to signify our transformation into
a full-service, integrated broadband communications services provider. In
connection with the name change, our Nasdaq National Market trading symbol
changed to XOXO. We introduced the new XO brand with a fall advertising
campaign that utilized a variety of advertising media, including network and
cable television, national print, direct mail, and local print and radio.

Network Development

We made significant progress
in the development of our domestic networks
in 2000.

North American Inter-City Network. In June 2000, we connected transmission
equipment to the first segment of our inter-city fiber optic network, which
consists of the segment connecting Dallas, Houston, Austin and San Antonio,
Texas and began to transport information, a process known as lighting fiber. In
addition, we have taken delivery of our central ring, which connects, among
other cities, our Dallas, Memphis, Nashville, Chicago, St. Louis and Denver
markets, and much of our southeast ring, which connects, among other cities,
our Texas and central rings to our Atlanta, Miami and Tampa markets. We expect
the construction of the remainder of the fiber backbone in the network to be
substantially completed in segments during 2001.

In addition, in June 2000, as part of our reorganization under which we
acquired Concentric, we acquired from Craig O. McCaw, our principal
stockholder, the 50% interest of the joint venture that held the interests in
our North American inter-city fiber optic network that we did not
already own. We
acquired this interest in exchange for approximately 6.8 million shares of our
Class A common stock and the assumption of $9.9 million in liabilities. As a
result of this acquisition, we now own the entire interest in our
inter-city network.

Metro Networks. In 2000, we launched service in Tampa Bay, Florida,
Portland, Oregon and Austin, Texas. In January 2001, we launched service in San
Antonio, Texas and Baltimore, Maryland, bringing to over 60 the total number of
markets that we serve via our metro fiber networks.

Fixed Wireless Deployment. In 2000, we deployed fixed wireless services in
27 markets to extend the reach of our metro fiber networks to additional
customers and connect these customers directly to our networks using
principally point-to-point equipment and to a lesser extent point-to-multi-point equipment.

In December 2000, we successfully completed field trials in Boston of
broadband point-to-consecutive-point fixed wireless equipment. This technology
allows us to use our fixed wireless spectrum to create redundant network rings,
which will extend the reach of our metro fiber networks with very
high-bandwidth wireless connections. We are beginning to deploy
point-to-consecutive-point equipment in our U.S. metro networks as another
means to meet customer and networking needs.

Launch of European Broadband Service Strategy

In November 2000, we launched a tightly focused, data-centric European
broadband service strategy targeted at multi-location business customers, ISPs
and other telecommunications carriers. We intend to provide facilities-based,
high bandwidth data services including global transit, transport, Gigabit
Ethernet, VPN, wave length services, and shared and managed hosting services in
Western Europe by as early as mid-2001.

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Earlier in the year, we agreed to purchase robust metro fiber facilities
that include a number of empty fiber optic conduits in London, Frankfurt,
Amsterdam and Brussels and dark fibers in Paris. Additionally, we will receive
rights to use empty fiber conduits for future network deployment in Berlin,
Dusseldorf, Hamburg and Munich. We also have agreed to purchase 24 dark fibers
to connect our European metro fiber networks in five countries, and have agreed
to purchase transatlantic capacity to connect our customers in Europe and North
America. Most of the network facilities are expected to be ready for commercial
service in the second half of 2001.

In 2000, we also were awarded three fixed wireless spectrum licenses
covering the Greater London, Greater Manchester and Birmingham/West Midlands
regions of the United Kingdom. As in the U.S., we intend to use these licenses
to extend our metro networks in some areas of the United Kingdom directly to
customers premises by providing last mile broadband services through a fixed
wireless connection. These licenses cover spectrum that is similar to our U.S.
fixed wireless spectrum. As a result, we believe that we will be able to use
wireless network equipment and technology that is similar to that being
deployed in the U.S.

Financing Transactions

In 2000, we secured
approximately $2.2 billion in funding and funding commitments.

Secured Credit Facility. In February 2000, we entered into a $1.0 billion
senior secured credit facility underwritten by a syndicate of banks and other
financial institutions. The credit facility consists of a $387.5 million
tranche A term loan facility, a $225.0 million tranche B term loan facility and
a $387.5 million revolving credit facility.

Investments by Forstmann Little & Co. In January 2000, Forstmann Little
made an initial investment of $850.0 million, and, in July 2000, Forstmann
Little invested an additional $400.0 million, in both cases in
exchange for shares of our preferred stock. These preferred shares are
entitled to receive dividends equivalent to 3.75% of the total investment, and
are convertible into shares of our Class A common stock at a conversion price
of $31.625 per share.

Two-for-One Stock Split

In June 2000, our common stock split two-for-one, which was paid in the
form of a stock dividend.

Post Year-End Transactions and Developments

Offering of 5 3/4% Convertible Subordinated Notes. In January 2001, we
completed the sale of $517.5 million of 5 3/4% convertible subordinated notes due
2009, from which we received net proceeds of approximately $503.3 million. The
notes are convertible at the option of the holders, prior to maturity or the
earlier termination of the conversion rights, into our Class A common stock at
a conversion price of $25.5438 per share, subject to adjustment upon the
occurrence of certain events. In accordance with the terms under which the
notes were issued, we will file a shelf registration statement with the
Securities and Exchange Commission to facilitate resales by the holders of the
notes and shares of Class A common stock issued upon conversion of the notes.

Industry and Market Overview

Prior to 1984, AT&T Corp. dominated both the local exchange and long
distance marketplace by owning the operating entities that provided both local
exchange and long distance services to most of the U.S. population. While the
court-ordered breakup of AT&T established the conditions for competition in the
long distance services market in 1984, the market for local exchange services
has been, until recently, virtually closed to competition and has largely been
dominated by regulated monopolies. To foster competition in the long distance
market, AT&Ts divested local exchange businesses, the Regional Bell Operating
Companies, or RBOCs, were prohibited from providing long distance services to
customers in their home markets.

We believe that a similarly critical event occurred in 1996 with the
passage of the Telecommunications Act of 1996, or the Telecom Act. Before
passage of this law, in most locations throughout the United States, the
incumbent carrier operated a virtual monopoly in the provision of most local
exchange services. However, just as competition slowly emerged in the long
distance business prior to the mandated breakup of AT&T, competitive
opportunities also have slowly emerged over the last 10 years at the local
exchange level.

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. These provisions include:

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| |  | Interconnectionprovides competitors the right to connect to
the incumbent carriers networks at any technically feasible point
and to obtain access to its rights-of-way;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Unbundling of the Local Networkallows competitors to
purchase and utilize components of the incumbent carriers network
selectively;                                     
| 
| |  | Reciprocal Compensationestablishes the framework for pricing
between a competitor and the incumbent carrier for use of each
others networks; and                        
| 
| |  | Number Portabilityallows incumbent carrier customers to
retain their current telephone numbers when they switch to a
competitor.                                         

The Telecom Act and the subsequent rules issued by the FCC governing
competition, as well as pro-competitive policies already developed by state
regulatory commissions, have caused fundamental changes in the structure of the
local exchange markets. These developments created opportunities for new
entrants into the local exchange market to capture a portion of the incumbent
carriers dominant, and historically monopoly controlled, market share of local
services. The development of this switched local service competition, however,
is still in its early stages.

Industry sources estimate that in 1999 the total revenues from local and
long distance telecommunications services were approximately $220 billion, of
which approximately $112 billion were derived from local exchange services and
approximately $108 billion from long distance services. Based on FCC
information, total revenues for local and long distance services grew at a
compounded annual rate of approximately 5.3% between 1992 and 1999.

In addition to traditional local and long distance voice services,
telecommunication services have been growing at an accelerated pace because of
increased data telecommunications, such as Internet usage. As technology
advances, we believe the demand for broadband capacity and additional business
and consumer telecommunications services will increase.

The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990s, combined with deregulation of the
telecommunications industry and advances in telecommunications technology, have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and online computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including email, electronic file
transfers, online computing and electronic financial transactions. These trends
have led businesses increasingly to explore opportunities to provide IP-based
applications and services within their organization, and to customers and
business partners outside the enterprise.

The ubiquitous nature and relatively low cost of the Internet have
resulted in its widespread usage for certain applications, most notably web
access and email. However, usage of the Internet for business applications has
been impeded by the limited security and unreliable performance inherent in the
structure and management of the Internet. In addition, transmission delays make
the Internet less appealing for these emerging applications. Although private
networks are capable of offering lower and more stable transmission delays,
providers of these emerging applications also desire a network that will offer
their customers full access to the Internet. As a result, these businesses and
applications providers require a network that combines the best features of the
Internet, such as openness, ease of access and low cost made possible by the IP
standard, with the advantages of a private network, such as high security,
low/fixed latency and customized features.

Industry analysts expect the market size for both value-added IP data
networking services and Internet access to grow rapidly as businesses and
consumers increase their use of the Internet, intranets and privately managed
IP networks. According to industry analyst Forrester Research, Inc., the
Internet services market will grow from $2.8 billion in 1998 to $56.6 billion
in 2003. Forrester Research predicts that access revenue will comprise nearly
$42.0 billion of the 2003 market and hosting services revenue will comprise the
remainder.

Applications and Services

Historically, our targeted customer base has consisted of primarily small
and medium-sized businesses. In 2000, as our service offerings expanded through
the addition of data service capabilities, including enhancements of those
capabilities resulting from the Concentric acquisition, and the addition of IP
technology to our networks, we expanded our targeted customers to include
larger national customers that can benefit from our broad range of

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services. As our inter-city fiber optic network is completed in 2001 and
lit, we expect to further attract large national customers that can benefit
from our unique end-to-end broadband capabilities.

Data Applications and Services

We began offering data services in 1999. Our June 2000 acquisition of
Concentric significantly accelerated implementation of our data services
strategy, and we have continued to add new data products including Ethernet and
wavelength services throughout 2000. Our data services include the following:



| |                
| | ---------------
| | Internet Access

We have offered Internet access services as an Internet service provider,
or ISP, since December 1999. The Concentric acquisition, however, elevated our
status as an ISP with significant peering arrangements, which significantly
enhanced our ability to market Internet access services.

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 to 155 megabits per
second, and digital subscriber line, or DSL, services that include a wide range
of dedicated access speeds.



| |                        
| | -----------------------
| | Private Data Networking

We provide dedicated transmission capacity on our networks to customers
that desire high-bandwidth links between locations. Historically, we have
offered, and we continue to 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 2.5 gigabits per second, and in the future we hope to
offer 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. We also from time to time may engage in sales of dark fiber.

Our virtual private network, or VPN, services enable customers to deploy
tailored, Internet Protocol-based mission-critical business applications for
secure data
communications among geographically dispersed locations, while also affording
high-speed access to the Internet. VPN also provides 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. In
2001, we began enhancing our VPN services by adding managed firewall services.

In the fourth quarter of 2000, we launched a suite of Ethernet services,
including Gigabit Ethernet, or GigE, in selected markets. By mid-2001, we
expect to launch these services throughout most of our U.S. markets. Our
Ethernet services are designed to provide high-speed, high-capacity connections
between customers local area networks, or LANs, within a metropolitan area,
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 to 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 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 completely manage customers servers for them.

To provide this service, we 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 larger computers (which are known as servers) or from
which they can run important applications on servers that we will maintain.

Our hosting services also include:



| |  | Web Hosting: support for customers websites, including
design, maintenance and telecommunications services;
|- |  | ------------------------------------------------------------------------------------------------------------
| 
| |  | Server Hosting: collocation of customers servers in our
central offices; and                               

7



---



##### Table of Contents





| |  | Application Hosting: running our customers enterprise-wide
applications at our central offices and distributing them as needed
over our network to ensure uniformity, reduce costs and implement
upgrades on a continuous and immediate basis.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Voice Applications and Services



| |                                       
| | --------------------------------------
| | Local and Long Distance Voice Services

We offer a variety of voice applications and services, generally 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 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 implemented
permanent local number portability, which allows customers to retain their
telephone numbers when changing telephone service providers.



| |                       
| | ----------------------
| | Shared Tenant Services

Our voice 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.



| |                           
| | --------------------------
| | Interactive Voice Response

We also develop interactive voice response, or IVR, systems for clients
that enable end users to order products and services, receive information, seek
assistance, and a host of other capabilities over the telephone using natural
language speech recognition and web-to-phone capabilities. 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, for instance, order
entry 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.

Bundled Services

Since the second quarter 2000, we have offered bundled packages of voice and data products. In September 2000, we began offering small and medium-sized businesses in
all of our markets integrated, flat-rate packages that include local and long
distance voice services, Internet access and web hosting services. These
packages, marketed as XOptions, include a variety of service packages designed
to accommodate different sized customers with anywhere from 10 to 100 employees
per location. We believe that we are the first company to bundle local, long
distance, Internet Access and web hosting services. 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 four separate competitive voice and
data providers.

XOs Networks

We have built, and are continuing to build, fiber optic networks with
robust capacity in urban centers in North America and Europe. Our IP-optimized
inter-city networks in North American and Europe will connect these local

8



---



##### Table of Contents



networks to one another. Our fiber optic and fixed wireless customer
connections will complete our goal of becoming an end-to-end, facilities-based
provider of broadband communications services.



North American 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 networks ourselves or
obtain indefeasible rights to use dark fiber so that we can control the design
and technology used to best meet our customers needs.

We are now operating 35 metro
fiber networks serving over 60 cities, having launched
networks in three major metropolitan markets in 2000. We continue to evaluate
opportunities in other markets.

The following table provides information on the markets in which we
operate metro fiber networks in the United States.

|                     |  |                               
|-------------------- |  | ------------------------------
|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                         
|                    
|                    
|                    
|                    
|                     |  | Tampa Bay                     
|                    
|                    
|                    
|                    
|Georgia              |  | Atlanta                       
|                    
|                    
|                    
|                    
|                     |  | Marietta                      
|                    
|                    
|                    
|                    
|Illinois             |  | Chicago                       
|                    
|                    
|                    
|                    
|Maryland             |  | Baltimore                     
|                    
|                    
|                    
|                    
|Massachusetts        |  | Boston                        
|                    
|                    
|                    
|                    
|Michigan             |  | Detroit                       
|                    
|                    
|                    
|                    
|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 build high capacity metro fiber networks using a backbone density
ranging between 72 and 432 strands of fiber optic cable. Fiber optic cables
have the capacity, or bandwidth, to carry tens of thousands 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 connect customers directly to our networks, we design
them to serve both core downtown areas and other metropolitan and suburban
areas where business development supports the capital required for the network
build.

9



---



##### Table of Contents





| |                   
| | ------------------
| | Inter-City Network

We are creating 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,
the vast majority of which currently is being constructed by Level 3
Communications. When complete, we will be able to use this network to offer our
customers integrated, end-to-end telecommunications services over facilities we
control. By owning these high-speed dark fiber facilities rather than leasing
lit fiber capacity from others, we have retained control over decisions on
when, where and how to deploy existing or new generations of optical transmission
equipment. This will allow us to maximize the capacity and enhance the
performance of our network as needed to meet our customers current and future
broadband data and other communications needs, rather than relying on the
owners of leased lines to make those upgrades.

This inter-city network is planned to cover more than 17,000 route miles
and connect 60 cities in the United States and
Canada. The portion being constructed by Level 3 includes:



| |  |  | an exclusive interest in 24 dark fibers in a shared, filled
conduit throughout this network;                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an exclusive interest in one empty conduit, through which we
expect to be able to pull up to 432 fiber optic strands; and   
|
| |  |  | the right to purchase 25% of the dark fibers pulled by Level
3 through the sixth and any additional conduits in the network.

We expect the construction of the fiber backbone of our inter-city network
to be substantially completed in 2001.



| |                                     
| | ------------------------------------
| | Connecting Customers to Our Networks

We intend to reduce our reliance on customer connections leased from the
incumbent carriers by increasing the number of customers connected directly to
our networks. 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. For example, direct
customer connections enhance our ability to:



| |  |  | ensure technological support for high-bandwidth communications;      
| | - |  | ---------------------------------------------------------------------
|
| |  |  | manage and control the quality of services used by our customers; and
|
| |  |  | meet the varying bandwidth needs of our customers.                   

We maximize the number of customers that can be connected directly to our
networks by deploying high capacity metro fiber networks and using a variety of
technologies, including those that use fiber optic cable and fixed wireless
spectrum. By having both fiber and fixed wireless spectrum at our disposal, we
can directly connect customers to our network using the most effective and cost
efficient means. In those instances where it is not cost effective or feasible
to directly connect customers to our networks using fiber or fixed wireless
technology, we can connect them by leasing the incumbent carriers facilities,
and meet their high bandwidth needs by deploying DSL technology where
available.

Fiber Optics. In cases where expected revenues justify the cost, we will
construct a new fiber optic extension from our network to the customers
premises. Whether it is economic 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                          
|
| |  |  | local permit requirements.                                                  

Even if we initially determine that it is not economic 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.

Making a direct fiber optic connection for a customer who is a tenant in
an office building requires installation of in-building cabling through the
buildings risers from the customers office to our fiber in the street. Space
in building risers for fiber optic cables is limited, and in some office
buildings, particularly the premier buildings in the

10



---



##### Table of Contents



largest markets, competition among carriers to gain access to this space
is intense. Moreover, increasingly the owners of these buildings are seeking to
impose fees or other revenue sharing arrangements as a condition of access.

Broadband Wireless Spectrum. In cases where construction of a fiber optic
connection is not practical or economic, we plan to deploy a high-bandwidth
wireless connection between an antenna on the roof of the customers premises
and an antenna attached to our fiber rings. These wireless connections offer
high-quality broadband capacity and, in many cases, cost less and take less
time to install than fiber connections.

By the end of 2000, we had deployed fixed wireless services in 27 markets.
In December 2000, we successfully completed field trials in Boston of broadband
point-to-consecutive-point fixed wireless equipment. We believe that this
technology will allow us to use our fixed wireless spectrum to create redundant
network rings, which will extend the reach of our metro fiber networks with
very high bandwidth. We are beginning to deploy point-to-consecutive-point
equipment in our U.S. metro networks as another means to meet customer and
networking needs.

Through a series of auction bids and acquisitions, we have become the
largest holder of broadband fixed wireless spectrum in North America. We hold
licenses to 1,150 to 1,300 Mega Hertz, or 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. In 2000, we also acquired
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.

11



---



##### Table of Contents



We believe that, for many locations, broadband wireless connections from
customer buildings to our local fiber optic networks will offer a lower cost
solution for providing high-quality broadband services than fiber or copper
connections. The following table provides information on the markets in which
we hold licenses for LMDS and 39 GHz broadband fixed wireless spectrum in the United States.
Unless otherwise noted, the licenses listed below are for LMDS spectrum.

|                     |  |                                 |  |     |       | 
|-------------------- |  | ------------------------------- |  | --- | ----- | 
|State                |  | Market                          |  | MHz
|                     |  |                                 |  |    
|Alabama              |  | Birmingham                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Huntsville                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Arizona              |  | Tucson                          |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|California           |  | Los Angeles                     |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | Sacramento                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | San Diego (1)                   |  |     | 450   | 
|                    
|                    
|                    
|                    
|                     |  | San Francisco (1)               |  |     | 350   | 
|                    
|                    
|                    
|                    
|                     |  | San Luis Obispo                 |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Santa Barbara-Santa Monica      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Colorado             |  | Denver (2)                      |  |     | 400   | 
|                    
|                    
|                    
|                    
|Connecticut          |  | Hartford                        |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | New Haven-Waterbury-Meriden     |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | New London                      |  |     | 150   | 
|                    
|                    
|                    
|                    
|District of Columbia |  | Washington                      |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Florida              |  | Jacksonville                    |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Lakeland-Winterhaven            |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Miami-Ft. Lauderdale            |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Ocala                           |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Tampa-St. Petersburg-Clearwater |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  |                                
|                    
|                    
|                    
|                    
|                     |  | West Palm Beach-Boca Raton      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Georgia              |  | Atlanta                         |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Illinois             |  | Chicago                         |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Indiana              |  | Indianapolis                    |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Iowa                 |  | Des Moines                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Kentucky             |  | Lexington                       |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Louisville                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Maryland             |  | Baltimore                       |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Massachusetts        |  | Boston                          |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | Springfield-Holyoke             |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Worcester-Fitchburg-Leominster  |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Michigan             |  | Detroit                         |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Minnesota            |  | Minneapolis-St. Paul            |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Missouri             |  | Kansas City                     |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | St. Louis                       |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|Nebraska             |  | Omaha                           |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Nevada               |  | Las Vegas (3)                   |  |     | 200   | 
|                    
|                    
|                    
|                    
|New Hampshire        |  | Manchester-Nashua-Concord       |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|New Mexico           |  | Albuquerque                     |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|New York             |  | Albany-Schenectady              |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Buffalo-Niagara Falls           |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | New York City (4)               |  |     | 300   | 
|                    
|                    
|                    
|                    
|                     |  | Rochester                       |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | Syracuse                        |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|North Carolina       |  | Charlotte-Gastonia              |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Hickory-Lenoir-Morganton        |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Raleigh-Durham                  |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Ohio                 |  | Cleveland                       |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Cincinnati                      |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Columbus                        |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Mansfield                       |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Toledo (1)                      |  |     | 350   | 
|                    
|                    
|                    
|                    
|Oklahoma             |  | Lawton-Duncan                   |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Oklahoma City                   |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Tulsa                           |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Oregon               |  | Klamath Falls                   |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Medford-Grants Pass             |  |     | 150   | 
|                    
|                    
|                    
|                    
|                     |  | Portland                        |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Pennsylvania         |  | Philadelphia-Wilmington, DE     |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  |                                
|                    
|                    
|                    
|                    
|                     |  | Pittsburgh                      |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Rhode Island         |  | Providence-Pawtucket            |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|South Carolina       |  | Columbia                        |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Greenville-Spartanburg          |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Tennessee            |  | Chattanooga                     |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Knoxville                       |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Memphis                         |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Nashville                       |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Texas                |  | Austin                          |  |     | 1,300 | 
|                    
|                    
|                    
|                    
|                     |  | Dallas-Ft. Worth                |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | El Paso                         |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | Houston                         |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|                     |  | San Antonio                     |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Virginia             |  | Richmond-Petersburg             |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Washington           |  | Seattle-Tacoma                  |  |     | 1,150 | 
|                    
|                    
|                    
|                    
|Wisconsin            |  | Milwaukee                       |  |     | 1,300 | 



---

|(1) |  | Represents licenses for a combination of LMDS
and 39 GHz spectrum, and
includes 150 MHz of LMDS spectrum and from 100 to 300 MHz of
39 GHz spectrum.                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(2) |  | Represents licenses for a combination of LMDS and 39 GHz spectrum,
and includes 300 MHz of LMDS Spectrum and 100 MHz of 39 GHz spectrum.                                                   
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(3) |  | Represents 200 MHz of 39 GHz spectrum.                                                                                                                                                     
|   
|   
|   
|   
|   
|   
|   
|   
|   
|(4) |  | For the five boroughs comprising New York City, we hold licenses for 300
MHz of spectrum. For the remainder of the New York Basic Trading Area, we
hold licenses for 1,300 MHz of spectrum.

12



---



##### Table of Contents



The following table provides
information on the markets in which our venture holds
licenses for 24 GHz broadband fixed wireless spectrum in the Canada.

|          |  |     |     | 
|--------- |  | --- | --- | 
|Market    |  | MHz
|          |  |    
|Calgary   |  |     | 400 | 
|         
|         
|         
|         
|Edmonton  |  |     | 400 | 
|         
|         
|         
|         
|Montreal  |  |     | 400 | 
|         
|         
|         
|         
|Ottawa    |  |     | 400 | 
|         
|         
|         
|         
|Toronto   |  |     | 400 | 
|         
|         
|         
|         
|Vancouver |  |     | 400 | 

In order to obtain the necessary access to install equipment to operate
fixed broadband licenses that connect our customers to our network, we must
secure roof and other building access rights, including access to conduits and
wiring from the owners of each 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 are also currently deploying 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 locations,
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 other DSL service
providers. We have introduced our own
DSL equipment and services at many of our collocation sites, and plan to
introduce DSL equipment and services at other collocation sites.

European and Trans-Atlantic Networks



| |               
| | --------------
| | Metro Networks

As in North America, the core of each of our metro fiber networks in
Europe will be a ring of fiber optic cable in a citys central business
district that connects to our central offices. In 2000, we agreed to acquire
indefeasible rights to use numerous dark fibers or empty conduits in metro
fiber networks in London, Frankfurt, Brussels, Amsterdam and Paris, and rights
to use empty fiber conduits for future network deployment in Berlin,
Dusseldorf, Hamburg and Munich. Once completed, these network facilities will
contain the routers and other equipment that direct data traffic to their
destinations. These networks are being constructed by Level 3, and we expect
them to be substantially completed in 2001.

In 2000, we also were awarded three 28 GHz fixed wireless spectrum licenses
covering the Greater London, Greater Manchester and Birmingham/West Midlands
regions of the United Kingdom. The following table provides information on the
markets in which we hold licenses for broadband fixed wireless spectrum in the
Europe.

|                                                                                         |  |     |     | 
|---------------------------------------------------------------------------------------- |  | --- | --- | 
|Market                                                                                   |  | MHz
|                                                                                         |  |    
|Greater London UK (Region A)                                                             |  |     | 224 | 
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Cheshire, Greater Manchester and Merseyside (Region B)                                   |  |     | 224
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|Herefordshire, Shropshire, Staffordshire, Warwickshire, West Midlands and Worcestershire
|                                                                                        
|                                                                                        
|                                                                                        
|                                                                                        
|(Region C)                                                                               |  |     | 224 | 

As in the U.S., we intend to use these licenses to extend our metro
networks directly to customers premises by providing last mile broadband
services through a high-bandwidth fixed wireless connection. These licenses
cover spectrum that is similar to our U.S. fixed wireless spectrum. As a
result, we believe that we will be able to use wireless network equipment and
technology that is similar to that being deployed in the U.S.



| |                   
| | ------------------
| | Inter-City Network

In connection with our agreement to purchase European metro networks in
2000, we agreed to acquire indefeasible rights to use dark fibers on a 3,600
mile inter-city network that will connect 21 cities in five European countries.
As in the United States, we are creating a single, end-to-end network by
linking our metro networks to one another through the use of the inter-city
fiber optic backbone network currently being constructed by Level 3. When
complete, we will be able to utilize this network to offer our customers
integrated, end-to-end telecommunications services between the metropolitan
markets we serve and over facilities we control. Also, as in the United States,
by owning dark fibers rather than leasing lit fiber capacity from others, we
have retained control over decisions on where and how to deploy existing or new
generations of optical transmission equipment. This will allow us to maximize
the capacity and enhance the performance of our network as needed to meet our
customers

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current and future broadband data and other communications needs, rather
than relying on the owners of leased lines to make those upgrades.

The inter-city networks consists of the following:



| |  | 24 dark fibers;                                                                                                             
|- |  | ----------------------------------------------------------------------------------------------------------------------------
| 
| |  | 24 dark fibers on a cross-Channel submarine cable between England and
Belgium;                                              
| 
| |  | dark fiber in four EuroTunnel conduits, ranging from 24
fibers in two conduits to up to 96 fibers in two other conduits; and
| 
| |  | rights to purchase additional dark fibers installed in the
network in the future.                                           



| |                                  
| | ---------------------------------
| | Trans-Atlantic Transport Capacity

We have acquired high speed transatlantic fiber optic capacity to connect
our North American and European inter-city networks, between gateways located
in New York and London. Our capacity is a protected wavelength that can
transmit at speeds of up to 2.5 gigabits per second. Our agreements relating to
this capacity provide that, by the fourth quarter of 2002, the transmission
speeds will be increased substantially to ten gigabits per
second.

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 to 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. We
have, therefore, begun to supplement 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 technologies enable us to offer our
customers numerous high-speed data services. Because it is more efficient,
these innovations increase 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.

Fiber Optic Technology

To enhance the capacity of both our metro and inter-city networks, we are
incorporating wavelength division multiplexing technology, which increases the
capacity of an optical fiber by simultaneously operating at more than one
wavelength, thereby allowing the transmission of multiple signals through the
same fiber at different wavelengths. To further enhance our networks capacity,
we also are using the latest in fiber technology. In our inter-city networks,
we are deploying a new generation of fiber that allows for transmission
of more traffic with less dispersion than previous generations, which can enhance
the speed and capacity of the inter-city network.

LMDS and Other Fixed Wireless Technology

The LMDS and 39 GHz licenses that we hold may be used to provide
high-speed data transfer, wireless local telephone service, wireless
transmission of telephone calls in bulk quantity, video broadcasting and
videoconferencing, in any combination. Two LMDS licenses are available in each geographic licensing area, one with 1,150
MHz and the other with 150 MHz of capacity. 39 GHz licenses also are available with up to 300
MHz of capacity. Holders of these licenses may hold multiple licenses for any
single market. As described above, in many of our markets, we hold licenses for
both the 1,150 MHz license and the 150 MHz license, for a total of 1,300 MHz of
LMDS spectrum. In addition, in several markets where we hold the 150 MHz LMDS license, we have acquired one or more
39 GHz licenses to increase our fixed wireless capacity.

In general, because fixed wireless technology transmits information with
narrow beam widths, a greater amount of available MHz of spectrum allows us to
deploy fixed wireless transmission equipment with greater density and increases
our ability to re-use channels, without radio wave interference. This means
that, like cellular telephone systems, fixed wireless sites can be split into
sectors in order to increase the available capacity. The large amount of
capacity in each channel permits the simultaneous use of multiple voice and
data applications. We believe that

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in our smaller markets where we have a license for only 150 MHz of spectrum,
we have sufficient available spectrum to meet our needs.

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 39 GHz spectrum.

A wireless connection typically consists of paired antennas that we
anticipate will be 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. Point-to-multipoint technology allows a single
hub site antenna to be used to form multiple paths with antennas located on
numerous customer buildings. As few as four hub site antennas can provide
telecommunications connections to buildings in all directions that have line of
sight visibility. Because these connections are affected by rain attenuation,
our base stations utilize power control to increase signal
strength where necessary to mitigate the effects of rain. In areas of heavy
rainfall, transmission links are engineered for shorter distances and
greater power to maintain transmission quality. This reduction of path link
distances to maintain transmission quality requires more closely spaced
transceivers and, therefore, tends to increase the cost of service coverage.

To find unobstructed lines of
sight, we generally install our
transceivers and antennas on the rooftops of buildings. Line of sight and
distance limitations generally do not present problems in urban areas, provided
that suitable roof rights can be obtained, due to the existence of unobstructed
structures from which to transmit and the concentration of customers within a
limited area. Line of sight and distance limitations in non-urban areas can
arise due to lack of structures with sufficient height to clear local
obstructions. We may have to construct intermediate links or use other
means to resolve these line of sight and distance issues. These limitations may
render fixed wireless links uneconomic in certain locations.

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.

Switching Technology

There are two widely used switching technologies currently deployed
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.

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. Current implementations of IP technology over
the Internet lack

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the necessary quality of service to support real-time applications like
voice and fax at commercially acceptable quality levels. We fully expect that a
combination of increased bandwidth and improved technology will correct these
deficiencies.

We are in the process of constructing IP points of presence in all of our
major markets using high-capacity IP routers. We have launched points of
presence in eight of our markets, through which we offer Internet-related
services, and plan to launch additional points of presence in 2000. We
currently connect these points of presence with leased backbone facilities. On
completion, our inter-city fiber network will serve as our IP backbone.

We are in the process of deploying 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 also
are beginning to deploy 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 wave 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
currently under way on 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.

Sales and Customer Care

Overview

Our sales effort includes a direct field sales force, a telesales
operation and third party sales agents. Historically, our primary sales efforts
have focused on selling switched local and long distance voice services to
small and medium-sized businesses and professional groups with fewer than 50
business lines. 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
small and medium-sized customers our bundled local and long distance services
or our XOptions packages, which bundle 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 are now marketing and
selling services to other telecommunications carriers and
large commercial users through our national sales team. The expansion of our
data service capabilities, including enhancements of those capabilities
resulting from the Concentric acquisition and the addition of IP technology to
our networks, has enabled our national sales team to expand our targeted
customers to include larger national 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 service.

Direct Sales

We have established highly motivated and experienced direct field and
telesales forces that are designed to establish a direct and personal
relationship with our customers. We seek to recruit salespeople with strong
sales backgrounds, including salespeople from long distance companies,
telecommunications equipment manufacturers, network systems integrators and the
incumbent carriers. Salespeople are given incentives through a commission
structure that generally targets 40% to 50% of a salespersons compensation to
be based on performance. Our compensation structure also provides additional
incentives for the sale of services to customers who are located in buildings
that are connected directly to our networks.

We have expanded our sales
force from approximately 700 salespeople at December 31,
1999 to approximately 1,700 salespeople at December 31, 2000. This increase in headcount
was due primarily to the growth of our business.

Other Sales Channels

We are complementing 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 national distribution arrangements
with four agency firms, whose representatives market a broad range of XO
services. Our alternate distribution channel includes nearly 400 indirect
agents in markets throughout the United States. We also market via our
telesales operation and via the web at www.xo.com.

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Customer Care

We support our sales efforts and customer retention and satisfaction
through our customer care operations. Historically, customers received support
from customer care representatives based in each of our markets. In 2000, we
consolidated customer care operations into four primary centers. Our goal
continues to be to provide customers with a customer care group that has the
ability and resources to respond to and resolve customer problems as they
arise. As the number of markets in which we operate expanded, we felt that
centralizing customer care centers enabled us to provide customers with better
care, including the availability of representatives 24 hours a day, seven days
a week. This structure also takes advantage of economies of scale, which we
believe improves our cost structure significantly. We, however, still provide
locally-based care for our most complex, largest customers.

We have expanded our customer
care organization from approximately 300 employees at
December 31, 1999 to approximately 900 employees at December 31, 2000.

Regulatory Overview

Overview

The Telecom Act, which substantially revised the Communications Act of
1934, 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 and operated the entire
local exchange network. 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 or
local governments from prohibiting any entity from providing telecommunications
service, which had the effect of eliminating prohibitions on entry found in
almost half of the states at the time the Telecom Act was enacted.

The Telecom Act requires incumbent carriers to interconnect their
facilities with those of their competitors, including us. This interconnection
obligation permits our customers to exchange telecommunications traffic with
the customers of other carriers, including the incumbent carrier. This ability
to interconnect with incumbent carriers and the preemption of state and local
prohibitions on entry are essential to our ability to be a full service
provider of telecommunications services.

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.

Federal Regulation

Although the FCC exercises jurisdiction over our communication facilities
and services, we are not currently required to obtain FCC authorization for the
installation, acquisition or operation of our wireline network facilities. We
have obtained FCC authority to provide facilities-based international services.
In addition, we are required to hold and have obtained FCC authorizations for
the operation of our fixed wireless LMDS and 39 GHz 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. The FCC does
require us to file interstate tariffs on an ongoing basis for interstate access
(rates charged among carriers for access to their networks). The FCC has issued
a decision that requires us to
withdraw tariffs for interstate domestic long distance service and
international long distance service. We, however,
still will be 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:



| |  |  | Network interconnection, 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 not directly connected to our networks;

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| |  |  | Reciprocal compensation, which mandates arrangements for local
traffic exchange between incumbent carriers and XO and other
competitors, 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;
and
|
| |  |  | 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.       

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 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 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.



| |                                          
| | -----------------------------------------
| | 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 order addressing the deficiencies in the FCCs original ruling cited by the
Supreme Court. The order is generally viewed as favorable to us and other
competitive carriers because it ensures that incumbent carriers will 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. It states that incumbent carriers must provide access to the
following unbundled network elements:



| |  |  |  | loops, including loops used to provide high-capacity and
advanced telecommunications services, which allow competitors to
access all of the features, functions and capabilities of the
transmission facilities owned by the incumbent carrier between its
central office and the customers location;
| |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  |  | network interface devices, which permit competitors to
connect their facilities with the telephone wiring inside the
customers location;                                                                                                                                                             
|
| |  |  |  | local circuit switching (except for larger business customers
in major urban markets), which allows competitors to access all of
the features, functions and capabilities of the incumbent carriers
switch;                                                                                          
|
| |  |  |  | dedicated and shared transport, which allows competitors to
utilize transmission facilities owned by the incumbent carrier
between customer locations and the incumbent carriers switches or
between the incumbent carriers switch locations;                                                       
|
| |  |  |  | signaling and call-related databases, which competitors use
to correctly route and bill calls; and                                                                                                                                                                                                    
|
| |  |  |  | operations support systems, which permit competitors to
submit orders to the incumbent for unbundled network elements and
for provisioning, repair and maintenance services.                                                                                                                          

In addition, incumbent carriers must provide access to combinations of
elements if they are currently combined in the networks, but the FCC did not
address whether an incumbent carrier must combine network elements that are not
already combined in the network because that issue is pending before the Eighth
Circuit Court of Appeals.

The FCC declined, except in limited circumstances, to require incumbents
to unbundle the facilities used to provide high-speed Internet access and other
data services. In addition, the FCC did not require incumbents to provide
competitive carriers with access to operator and directory assistance services.
These aspects of the order are not expected to have a material adverse effect
on our operations.

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The Supreme Courts decision did not address or resolve the incumbent
carriers challenge to the FCCs forward-looking pricing methodology for
unbundling network elements. The incumbent carriers challenged this methodology
before the Eighth Circuit Court of Appeals which issued a decision vacating the
FCCs decision to use a forward-looking pricing methodology. The Eighth Circuit
decision has been appealed to the Supreme Court. If the incumbent carriers
succeed in defending the Eighth Circuit decision, we may be required to pay
more to purchase network elements, which could increase our cost of doing
business.



| |                                                                   
| | ------------------------------------------------------------------
| | Regulation of the RBOCs 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 two RBOCs the authority to provide long distance
service in a few states. Verizon has such authority in the New York, and SBC
Communications has such authority in Texas, Kansas and Oklahoma. In addition,
several applications by the RBOCs are currently pending before state
commissions and it is expected that these applications plus several new
applications are likely to be filed with the FCC in the near future. We cannot
predict if any of these applications will be approved or when such approval is
likely to occur. Approval 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 Advanced Telecommunications Services.

Rules promulgated under the Telecom Act restrict the RBOCs ability to
provide advanced telecommunications services, such as data and DSL services.
The RBOCs have challenged these restrictions at the FCC, in court appeals and
through federal and state legislative efforts. A regulatory decision,
legislative change or a court ruling striking down the FCCs restrictions on
RBOCs ability to provide advanced services may have the effect of allowing
RBOCs to provide terms, conditions and pricing to their own affiliates that
provide data services that are better than those made available to unaffiliated
competitors.



| |                   
| | ------------------
| | 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 its share of its interstate telecommunications
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. We cannot be sure that legislation or FCC
rulemaking will not increase the size of our subsidy payments or the scope of
the subsidy program.



| |                                  
| | ---------------------------------
| | 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
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
has initiated a proceeding to consider whether the access

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | rates that companies such as us charge to long distance carriers
should be regulated. The FCC is also considering whether competitors
access rates be set through negotiation rather than tariffing and
whether long distance companies can refuse to exchange traffic with
competitors. The method selected and the timing of a FCC decision to
lower access charge levels or a FCC decision requiring that
competitors access rates be set through negotiation rather than
tariffing may reduce access charge revenue that we receive from long
distance carriers. Although a FCC decision lowering access charges may
reduce our access charge revenues, we do not expect that such a
reduction would have a material impact on our total revenues or
financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Local Reciprocal Compensation Charges. Local telephone companies
such as us typically compensate other local carriers for terminating
traffic on their networks. These payments flow in two directions. 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 is currently considering whether it should revamp the local
reciprocal compensation structure to eliminate or reduce the opportunity
for carriers to take advantage of an imbalance of originating and
terminating traffic flows. The method selected and the timing of a FCC
decision to restructure reciprocal compensation could affect the amount
of revenue we receive from other carriers for terminating their traffic.
Because our traffic is relatively in balance across our markets,
however, we do not expect a FCC decision to restructure reciprocal
compensation to have a material impact on our total revenues or
financial position.



| |                                     
| | ------------------------------------
| | Regulation of Business Combinations.

The FCC, along with the Department of Justice and state commissions, has
jurisdiction over business combinations involving telecommunications companies.
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.

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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
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 agreements were 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 have 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.

European Regulation

Three of our European subsidiaries, our United Kingdom subsidiary, our
German subsidiary, and our Netherlands subsidiary, have received approvals to
provide a variety of communications services in those respective countries. We
currently are seeking similar approval in France and Belgium.

Our U.K. subsidiary is qualified for competitive carrier status and,
therefore, is regulated by the United Kingdom Office of Telecommunications,
known as OFTEL, which regulates local, interexchange and international
telecommunications in the United Kingdom. We have secured the right to occupy
the municipal rights of way, subject to the receipt of certain local permitting
approvals. We, however, have no assurance that these permits will be granted on
a timely basis, or that they are on terms and conditions acceptable to us. In
addition, we have been awarded licenses for fixed broadband wireless spectrum
in the United Kingdoms spectrum auction and, therefore, are regulated by the
Radio Communications Agency, which regulates wireless licensees.

Our German subsidiary has authorization to provide data services in
Germany and is regulated by the Regulatory Authority for Telecommunications and
Posts, known as Reg TP, which regulates telecommunications in Germany. We have
secured the right to occupy municipal rights of way to operate our national
transmission network in Germany and for our metropolitan network in the City of
Frankfurt am Main, subject to the receipt of certain local permitting
approvals. We, however, have no assurance that these permits will be granted on
a timely basis, or that they are on terms and conditions acceptable to us.

Our Netherlands subsidiary has authorization to provide data and/or
Internet services in the Netherlands and is regulated by the Independent Post
and Telecommunications Authority, known as OPTA, which regulates
telecommunications in the Netherlands. We have secured the right to occupy the
municipal rights of way, subject to the receipt of certain local permitting
approvals. We, however, have no assurance that these permits will be granted on
a timely basis, or that they are on terms and conditions acceptable to us.

As in the United States, incumbent carriers in Europe must provide
competitive carriers with interconnection, including collocation in their
central offices and access to certain unbundled network elements.
There are,
however, significant differences between the European and the United States
regulatory structures. In many cases, the European regulations are less
favorable for competitive carriers than those applicable in the United States.
For example, most European governments still retain majority ownership or
controlling interest in their incumbent

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telephone companies. Government ownership and regulatory restrictions may
hamper our ability to fully compete against the incumbent telephone companies
in Europe.

Canadian Regulation

Wispra Networks is the licensee of fixed broadband wireless spectrum
licenses that it won in Canadas first spectrum auction and is therefore
subject to regulation by Industry Canada, which regulates wireless licensees.
In addition, Wispra Networks has qualified for competitive local exchange
carrier status and is regulated by the Canadian Radio-television and
Telecommunications Commission, known as CRTC, which regulates local,
interexchange and international telecommunications carriers operating in
Canada. To be eligible to continue to hold wireless licenses and to operate as
a Canadian competitive local exchange carrier, Wispra Networks must be
Canadian-owned and controlled and incorporated under the laws of Canada. Wispra
must also secure permits from the cities in its markets to occupy the municipal
rights of way. Wispra has no assurance that these permits will be granted, or
that if they are granted that they are on terms and conditions favorable to
Wispra.

Like in the United States, incumbent carriers in Canada must provide
competitive carriers with interconnection, including collocation in their
central offices and access to unbundled network elements. There are, however, significant differences between the Canadian and the United States regulatory
structures. In many cases, the Canadian regulations are less favorable for
competitive carriers than those applicable in the United States. In addition,
Canadian regulation requires the ownership and control of Canadian
telecommunications carriers by Canadians and restricts the voting rights and
equity participation of non-Canadian investors like us in ventures like Wispra.
These restrictions hamper not only our ability to fully and effectively
participate in this venture, but may also hamper Wispras ability to attract
investors, raise capital and efficiently operate.

Competition

The regulatory environment in which we operate is changing rapidly. The
passage of the Telecom Act combined with other actions by the FCC and state
regulatory authorities continues to promote competition in the provision of
communications services. In addition, new technologies, such as voice-over-IP,
and regulatory changes, particularly the FCCs approval for two incumbent
carriers to provide long distance services in several states, are blurring the
distinctions between traditional communications markets. Also, the increasing
importance of data services has focused the attention of most communications
companies on this growing sector. As a result, a competitor in any of our
business areas potentially is a competitor in our other business areas.

Incumbent Carriers

In each market we serve, we face, and expect to continue to face,
significant competition from the incumbent carriers, which currently dominate
the local telecommunications markets. We compete with the incumbent carriers in
our markets for local exchange 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 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.

Other Voice Service Competitors

We also face, and expect to continue to face, competition for local
telecommunications services from other competitors and potential competitors.
In addition to the incumbent carriers, competitors and potential competitors
offering or capable of offering switched local and long distance services
include long distance carriers such as AT&T, WorldCom, Inc. and Sprint
Corporation, cable television companies, the largest of which have merged with
AT&T or AOL Time Warner, electric utilities, microwave carriers, wireless
telephone system operators and private networks built by large end users, as
well as other new entrants such as Time Warner Telecom, Level 3, McLeodUSA
Incorporated, Winstar Communications, Inc. and Teligent, Inc.

We also compete with long distance carriers in the provision of long
distance services. Although the long distance market is dominated by three
major competitors, AT&T, WorldCom, and Sprint, hundreds of other companies,
such as Qwest, also compete in the long distance marketplace. In addition, we
will compete with the RBOCs for the provision of long distance service as they
receive FCC authority to offer such service.

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Many of our existing and potential competitors have financial, personnel
and other resources, including name recognition, significantly greater than
ours.

Data Service Competitors

We face competition from at least four groups of companies for Internet
access and other data services, and the following are examples of the key
competitors in these groups:



| |  |  | Telecommunications companies: AT&T, WorldCom, Sprint, Level
3, Qwest, and the other incumbent carriers;                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Online service providers: AOL Time Warner and MSN, the
Microsoft Network;                                                                                                                   
|
| |  |  | Internet service providers: BBN Corporation, a subsidiary of
GTE, EarthLink Network, Inc., MindSpring Enterprises, Inc., PSINet
Inc., Verio Inc., other national and regional providers; and
|
| |  |  | Web hosting providers: AboveNet Communications, Exodus
Communications.                                                                                                                      

Additional groups of competitors include cable companies and DSL
providers, including Covad Communications Group, Inc. and Rhythms
Netconnections, Inc.

Many of these competitors have greater market presence, engineering and
marketing capabilities, and financial, technological and personnel resources
than those available to us.

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 Call Interactive and West Teleservices Corporation, which we believe
focus their sales efforts on large volume interactive voice response service
users.

Our shared tenant services business competes with a number of companies
offering similar services, including Allied Riser Communications Corporation,
OnSite Access and Cypress Communications.

Employees

As of December 31, 2000, we employed approximately 7,400 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.

Risk Factors



| |                                                   
| | --------------------------------------------------
| | Risks Related to Liquidity and Financial Resources

We have a history of increasing net losses and negative cash flow from
operations and we may never be able to satisfy our cash needs from operations.

For each period since inception, we have incurred substantial and
increasing net losses and negative cash flow from operations. For 2000, we
posted a net loss attributable to common stockholders of approximately $1,247.7
million and showed negative cash flows from operations of approximately $559.4
million. Our accumulated deficit was approximately $2,465.2 million at December
31, 2000. We expect that losses and negative cash flow from operations will
continue over the next several years.

Our existing operations do not currently, and are not expected in the near
future to, generate cash flows from which we can make interest payments on our
outstanding notes, make dividend payments on our outstanding preferred stock or
fund continuing operations and planned capital expenditures. We cannot know
when, if ever, net cash generated by our internal business operations will
support our growth and continued operations. If we are unable to generate cash
flow in the future sufficient to cover our fixed charges and are unable to
raise sufficient funds from other sources, we may be required to:



| |  | refinance all or a portion of our debt and redeemable preferred stock; or
| | - | -------------------------------------------------------------------------
|
| |  | sell all or a portion of our assets.                                     

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We have substantial existing debt and preferred stock and we will incur
substantial additional obligations that will increase the risk of a default.

As of December 31, 2000, we had ten outstanding issues of senior notes
totaling $4,021.6 million in principal amount and accreted value,
approximately $38.2 million in miscellaneous debt obligations of our
subsidiaries, and eight series of redeemable preferred stock with an aggregate
liquidation preference of $2,100.1 million. In addition, we have a $1,000.0
million senior secured credit facility, under which $375.0 million was drawn at
December 31, 2000, and an additional $237.5 million was drawn in February 2001.
Based on the existing interest rates for obligations with variable interest
rates and assuming payment of dividends in additional shares of preferred stock
for the three series of our preferred stock that permit this type of dividend
payment, we estimate that $430.0 million would be needed to pay cash interest
and dividend obligations in 2001 under our outstanding debt and preferred
stock, including the interest payable on our convertible subordinate notes
issued on January 12, 2001 and the additional $237.5 million drawn under our
senior secured credit facility in February 2001.

The indentures under which our notes have been issued, and our senior
secured credit facility, permit us to incur substantial additional debt. We
fully expect to draw down the remaining $387.5 million available under our
senior secured credit facility and borrow substantial funds in the next several
years. This additional indebtedness will further increase the risk of a default
unless we can establish an adequate revenue base and generate sufficient cash
flow to repay our indebtedness. We may never establish an adequate revenue base
to produce an operating profit or generate adequate positive cash flow to
provide future capital expenditures and repayment of debt.

We do not have sufficient additional financing commitments to meet our long
term needs and, if we are not successful in raising additional capital, we will
not be able to build and maintain our business, which may adversely affect our
ability to compete.

Building our business will require substantial additional capital
spending. Our capital spending plans have increased substantially over time, as
our strategy has evolved and our planned networks have grown larger and more
robust. We will need to raise additional capital because our anticipated future
capital requirements exceed the $1,861.0 million in cash and marketable
securities we had on hand as of December 31, 2000, the $387.5 million currently
available under our senior secured credit facility (which is our only current
commitment for additional financing) and the net proceeds of approximately
$503.3 million from the convertible subordinated notes sold by us on January
12, 2001.

At different points in recent years, debt and equity financing for
technology companies in general, and competitive communications companies in particular, have not been available on
terms that we would consider acceptable. Specifically, in recent months, conditions in the capital
markets for such companies have deteriorated. Consequently, the capital
markets may be less receptive to debt
and equity offerings by such companies at this time. If, as a result of these existing market conditions or other factors,
 we fail or are unable to raise sufficient capital when needed, we may be required to delay
or abandon some of our planned future expansion or expenditures, which could
have a material adverse effect on our growth and our ability to compete in the
telecommunications services industry and generate profits for stockholders, and
could even result in a payment default on our existing debt.

The covenants in our indentures and senior secured credit facility restrict our
financial and operational flexibility, which could have an adverse affect on
our results of operations and on the value of your investment.

The indentures under which our senior notes have been issued and our
senior secured credit facility contain covenants that restrict, among other
things, our ability to borrow money, grant additional liens on our
assets, make particular types of investments or
other restricted payments, sell assets or merge or consolidate. Our senior
secured credit facility also requires us to maintain specified financial
ratios. If we fail to comply with these covenants or meet these financial
ratios, the holders of our senior notes or the lenders under our senior secured
credit facility could declare a default and demand immediate repayment. Unless
we cure any such default, they could seek a judgment and attempt to seize our
assets to satisfy the debt to them. The security for our senior secured credit
facility consists of all of the assets purchased with the proceeds thereof, the
stock of certain of our direct subsidiaries, all of our assets and, to the
extent of $125.0 million of guaranteed debt, assets of our subsidiaries. A
default under any of these agreements could adversely affect our rights under
other commercial agreements.

In addition, we are required to use the net proceeds from the sale of
certain series of senior notes and senior discount notes, and a portion of the
proceeds drawn under our senior secured credit facility, to fund expenditures
for the construction, improvement and acquisition of new and existing networks
and other assets used in our business and direct and indirect investments in
certain joint ventures to fund similar expenditures. Prior to the application
of all such proceeds, we may invest them in marketable securities.

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Our existing debt obligations and outstanding redeemable preferred stock
also could affect our financial and operational flexibility, as follows:



| |  | they may impair our ability to obtain additional financing in the
future;                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | they will require that a substantial portion of our cash flow from
operations and financing activities be dedicated to
the payment of interest on debt and dividends on preferred stock, which will reduce
the funds available for other purposes;
|
| |  | 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.                                                                                                                                                               



| |                                     
| | ------------------------------------
| | Risks Related to Network Development

If we cannot quickly and efficiently install our network hardware, we will be
unable to generate revenue, which would adversely affect our operating results.

Each of our networks consists of many different pieces of hardware,
including switches, routers, fiber optic cables, electronics and combination
radio transmitter/receivers, known as transceivers, and associated equipment,
which are difficult to install. If we cannot install this hardware quickly, the
time in which customers can be connected to our network and we can begin to
generate revenue from our network will be delayed. You should be aware that the
construction of our North American inter-city fiber optic network is not under
our control, but is under the control of Level 3 Communications. If Level 3
fails to complete its network on time or if it fails to perform as specified,
our strategy of linking our local networks to one another and creating an
end-to-end North American network will be delayed. In addition, you should be
aware that the construction of our European inter-city and metro fiber networks
are also under the control of Level 3, and, if Level 3 fails to complete any of
these networks on time or if it fails to perform as specified, our European
strategy will be delayed.

The failure of our operations support systems to perform as we expect could
impair our ability to retain customers and obtain new customers or result in
increased capital expenditures, which would adversely affect our revenues.

Some of the operations support systems we employ are proprietary. In
addition, we are continuing to integrate the operations support systems
previously employed by Concentric, which we acquired in June 2000, into our
operation support systems. Our operation support systems are expected to be an
important factor in our success. If any of these systems fail or do not perform
as expected, we could suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would adversely
affect our revenues. 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.

If our selection of IP technology is incorrect, implementation of our business
strategy could be delayed, which would adversely affect our growth and
operation results.

We plan to rely on IP technology as the basis for our planned end-to-end
network. Although IP technology is used throughout the Internet, its extension
to support other telecommunications applications, such as voice and video, has
not yet been perfected, and IP technology currently has several deficiencies,
including poor reliability and quality. Integrating this technology into our
network may prove difficult and may be subject to delays. In addition,
improvements to the IP technology may not become available in a timely fashion
or at a reasonable cost, if at all. If the technology choices we make prove to
be incorrect, ineffective or unacceptably costly, our strategy of creating an
end-to-end network could be delayed, which would adversely affect our growth and
operating results.

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 in order to connect our customers to the public telephone network. We
may not be able to renegotiate or maintain interconnection agreements in all of
our markets on favorable terms. 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.

We require continued peering arrangements with other ISPs, particularly
the large, national ISPs, to implement our planned expansion of data services
including Internet access services. Peering arrangements are agreements

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among Internet backbone providers to exchange data traffic. Depending on
the relative size of the carriers involved, these exchanges may be made without
settlement charge. We may not be able to renegotiate or maintain peering
arrangements on favorable terms, which would impair our growth and performance.

Physical space limitations in office buildings and landlord demands for fees or
revenue sharing could limit our ability to connect customers directly to our
networks and increase our costs, which would adversely impact our results.

Connecting a customer who is a tenant in an office building directly 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 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.
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. We have not been required to pay these fees
in the smaller markets we have served in the past, but may be required to do so
to penetrate larger markets, which would reduce our operating margins. In
addition, some major office building owners have equity interests in, or joint
ventures with, companies offering broadband communications services over fiber
optic networks and may have an incentive to encourage their tenants to choose
those companies services over ours or to grant those companies more favorable
terms for installation of in-building cabling.

The availability of equipment that takes advantage of the multipoint
characteristics of our broadband wireless spectrum licenses has been only
recently developed and may continue to cause performance problems or delays.

Our broadband fixed wireless licenses permit us to transmit from a fixed
point to multiple receivers, which may reduce our installation costs, as
compared with traditional point-to-point links. Since this is a
newly-authorized service, vendors are only beginning to offer multipoint
equipment, and we encountered performance problems with it in its initial
deployment. These performance problems may not be satisfactorily resolved,
which could delay our plans to extend our services to customers through
wireless connections.

Fixed wireless direct connections require us to obtain access to rooftops
from building owners and to satisfy local construction and zoning rules for
antennas and transmitters. The need to obtain these authorizations could be an
additional source of cost and delay.

Our inability to accurately predict the total cost of our broadband wireless
first mile deployment could have an adverse impact on our results.

Although we have selected vendors from which we may purchase broadband
wireless equipment, because our fixed wireless deployment strategy contemplates
utilizing a number of equipment vendors, we do not know precisely how much the
equipment we will need will cost. Installation costs are expected to vary
greatly, depending on the particular characteristics of the locations to be
served. After initial installation, we expect to incur additional costs to
reconfigure, redeploy and upgrade our wireless direct connections as
technologies improve.

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:



| |  | a potential customer faces switching costs if it decides 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.

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.

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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 the entry into new
markets. We could also be less prepared for technological or marketing
problems, which could reduce our ability to serve our customers and lower the
quality of our services.

We believe that a critical component for our success will be the
attraction and retention of qualified professional and technical personnel. In
addition, we must also develop and retain a large and sophisticated sales
force, particularly in connection with our plan to target larger national
customers. We have experienced intense competition for qualified personnel in
our business with the 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, consequently, our operating cash flow.



| |                                              
| | ---------------------------------------------
| | Risks Related to Competition and Our Industry

We face competition in local markets from other carriers, putting downward
pressure on prices, which could impair our 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. This competition places downward pressure on
prices for local telephone service and data services, which can adversely
affect our operating results. In addition, we expect competition from other
companies, such as cable television companies, electric utilities, 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.

We face competition in long distance markets, putting downward pressure on
prices, which could impair our results.

We also face intense competition from long distance carriers in the
provision of long distance services. This competition has substantially reduced
prices for long distance services in recent years. Although the long distance
market is dominated by three major competitors, AT&T, WorldCom and Sprint,
hundreds of other companies, such as Qwest, also compete in the long distance
marketplace. The incumbent carriers also are beginning to compete in the long
distance market. If we are not able to effectively compete with these industry
participants, our operating results could be adversely affected.

We face competition in creating a national broadband network, putting downward
pressure on prices, which could impair our results.

Several of our competitors, such as AT&T, WorldCom, Qwest, Level 3, and
Williams, are creating broadband networks that would compete directly with the
network we are building. In addition, other competitors have the ability to do
so as well. If we are not able to successfully compete with these service
providers, our operating results could be adversely affected.

We face competition for data services, putting downward pressure on prices,
which could adversely affect our results.

Competitors for data services consist of online service providers,
Internet service providers and web hosting providers. New competitors continue
to enter this market and include large computer hardware, software, media and
other technology and telecommunications companies, including the incumbent
carriers. Many communications companies and online services providers are
currently offering or have announced plans to offer Internet or online services
or to expand their network services. This competition puts downward pressure on
prices. If we are unable to successfully compete with these data service
providers, our operating results could be adversely affected.

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Technological advances and regulatory changes are eroding traditional barriers
between formerly distinct telecommunications markets, which could increase the
competition we face and impair our growth.

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 and growth.

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 develop and expand their communications and network infrastructures more
quickly, 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 marketing and sale of their
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,
changes in customer needs, emerging competition and frequent new 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;                                                
| | - | -------------------------------------------------------------------------------------
|
| |  | 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.

We may be required to pay patent licensing fees, which will divert funds which
could be used for other purposes and could adversely impact our results.

From time to time, we receive claims by third parties to the effect that
technology or processes used by us in our business are covered by those third
parties alleged patent rights and related requests to consider licensing
certain patents held by those third parties. Should we be required to pay
license fees in the future, such payments, if substantial, could have a
material adverse effect on our results of operations.

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, as well as from various national and local agencies in
Europe and Canada. This regulation imposes substantial compliance costs on us.
It

28



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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. In addition, we will be required to obtain
authorizations from various governmental agencies in the countries in which we
plan to expand our existing European operations and Canada. If we do not
receive authorization for markets or services to be launched in the future, our
ability to offer services in our target markets could be adversely affected.

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 to implement 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 business in the affected metropolitan area.

Credit risks associated with Internet-related customers and service providers
may adversely affect us.

Many of our customers are in various Internet-related businesses,
including ISPs, some of which have been adversely
affected by recent business trends in that sector. To the extent the credit
quality of these customers deteriorates or these customers seek bankruptcy
protection, our ability to collect our receivables, and ultimately our
operating results, may be adversely affected.

We provide a significant portion of our DSL service through wholesale
arrangements with other DSL service providers, many of which have been
adversely affected by recent trends in that sector. One such provider,
Northpoint Communications Group, Inc., has filed for bankruptcy protection. To
the extent that Northpoint or other 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 provide service on our own DSL equipment or
wholesale service from another DSL service provider is not available. 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 Growth and Development of Data Services

If we are unable to manage our growth, the continued rapid growth of our
network, services and subscribers could be slowed, which would adversely impact
our results.

We have rapidly expanded and developed our network and service offerings
and increased the number of our subscribers, and expect to continue to do so.
This has placed and will continue to place significant demands on our
management, technical staff, operational and financial systems and procedures
and controls. We may not be able to manage our anticipated growth effectively,
which would harm our business, results of operations and financial condition.
Further expansion and development of our network, service offerings and
subscriber base will depend on a number of factors, including:



| |  |  | technological developments, including improvements in IP technology;                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to hire, train and retain qualified personnel in a competitive labor market;                                                   
|
| |  |  | availability of rights-of-way, building access and antenna sites;                                                                          
|
| |  |  | development of customer billing, order processing and network
management systems that are capable of serving our growing customer
base; and
|
| |  |  | cooperation of the incumbent local telephone companies.                                                                                    

29



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If we are not able to succeed in the data services market, the value of your
investment could be adversely impacted.

Our ability to succeed in the data services market depends to a large
extent on our ability to build a tailored, value-added network services
business. Our ability to do so is subject to the following risks:



| |  |  | the data services markets are relatively new, and current and
future competitors are likely to introduce competing services or
products, which may result in market saturation;                                                                                                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | critical issues concerning commercial use of tailored, value-added
services and Internet services, including security, reliability, ease
and cost of access, and quality of service, remain unresolved and may
impact the growth of such services;                              
|
| |  |  | the market for data services may fail to grow or grow more slowly
than anticipated;                                                                                                                                                                                             
|
| |  |  | our inability to obtain sufficient quantities of sole- or
limited-source components required to provide data services or to
develop alternative sources, if required, could result in delays and
increased costs in expanding, and overburdening of, our network
infrastructure;
|
| |  |  | suppliers may not provide us with products or components that
comply with Internet standards or that properly inter-operate with
other products or components used in our network infrastructure;                                                                               
|
| |  |  | the failure of any link in the delivery chain, including the
networks with which we may establish public or private peering
arrangements or private transit could impact our ability to serve
customers;                                                                        
|
| |  |  | the market for tailored value-added network services is extremely
competitive, and we expect that competition will intensify in the
future;                                                                                                                                     
|
| |  |  | we could experience interruptions in service due to interruption in
electricity and other utility services, a natural disaster, such as an
earthquake, or other unanticipated problems; and                                                                                     
|
| |  |  | we could have liability for information disseminated through our
network.                                                                                                                                                                                                       

We face risks that could have a material adverse effect on our planned
international expansion.

Through the Concentric
acquisition, we have acquired entities operating in the
United Kingdom and The Netherlands, and have entered into agreements to acquire
metro and inter-city networks in Europe and in connection with our planned
expansion into other European countries. We also have an interest in a joint
venture located in Canada. We may in the future expand into other international
markets, either through acquisition of businesses or assets, organic
development, or a combination thereof. The following risks are inherent in
doing business on an international level:



| |  |  | unexpected changes in regulatory requirements or tax consequences;                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | export restrictions;                                                                                             
|
| |  |  | tariffs and other trade barriers;                                                                                
|
| |  |  | difficulties in staffing and managing foreign operations;                                                        
|
| |  |  | problems in collecting accounts receivable;                                                                      
|
| |  |  | fluctuations in currency exchange rates; and                                                                     
|
| |  |  | seasonal reductions in business activity during the summer months
in Europe and certain other parts of the world.

One or more of these factors may have a material adverse effect on our
future international operations.



| |            
| | -----------
| | Other Risks

Craig O. McCaw, who controls XO, may have interests which are adverse to your
interests and he may act in a manner that adversely impacts the value of your
investment.

Craig O. McCaw, primarily through his majority ownership and control of
Eagle River Investments, L.L.C., currently controls more than 50% of our total
voting power, and holds proxies that are likely to continue to assure that Mr.
McCaw will hold a majority of that voting power. Because Mr. McCaw has the
ability to control our direction and future operations and has interests in
other companies that may compete with us, he may make decisions which are
adverse to your interests and the interests of our other security holders.

30



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##### Table of Contents



Mr. McCaw effectively controls a decision whether a change of control of
XO will occur. Moreover, Delaware corporate law could make it more difficult
for a third party to acquire control of us, even if a change of control could
be beneficial to you.



| |                           
| | --------------------------
| | Forward-Looking Statements

Our forward-looking statements are subject to a variety of factors that could
cause actual results to differ significantly from current beliefs.

Some statements and information contained in this report are not
historical facts, but are forward-looking statements, as 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:



| |  |  | product and service development, 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;                                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | market development, including the number and location of markets we
expect to serve;                                                                                                                                                                                                                                
|
| |  |  | network development, including those with respect to IP network and
facilities development and deployment, switches using soft-switch
technology, broadband fixed wireless technology, testing and
installation, high speed technologies such as DSL, and matters relevant
to our metro and inter-city networks; and
|
| |  |  | liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures and anticipated levels of
indebtedness.                                                                                                                                                              

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 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;
|
| |  |  | access to sufficient debt or equity capital to meet our operating
and financing needs;                                                                   
|
| |  |  | the quality and price of similar or comparable communications
services offered or to be offered by our competitors; and                                  
|
| |  |  | future telecommunications-related legislation or regulatory
actions.                                                                                     

XO Capital, Inc.

XO Capital, Inc. is a Washington corporation and a wholly-owned subsidiary
of XO Communications, Inc. XO Capital was formed for the sole purpose of
obtaining financing from external sources when XO Communications, through a
predecessor entity, was a limited liability company. It is a joint obligor with
XO Communications on the 12 1/2% Senior Notes due 2006. XO Capital has had no
operations to date.




Item 2. 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.

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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 2001 to 2008.
Most have renewal options.

In the first quarter of 2000, we relocated our headquarters to Reston,
Virginia, where we are currently leasing 212,000 square feet of space, which
will serve as our permanent headquarters. We still maintain some operations in
the 45,000 square feet in Bellevue, Washington, leased for our former
headquarters. Additional office space and equipment rooms will be leased as our
operations and networks are expanded and as new networks are constructed.




Item 3. Legal Proceedings

XO is not currently a party to any legal proceedings, other than
regulatory and other proceedings that are in the normal course of business.




Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.

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##### Table of Contents






Item 4A. Executive Officers of the Registrant

The following table sets forth the names, ages and positions of XOs
executive officers. Their respective backgrounds are described following the
table.

|                   |  |     |    |       |  |                                                           
|------------------ |  | --- | -- | ----- |  | ----------------------------------------------------------
|Name               |  | Age |    | Title
|                   |  |     |    |      
|Daniel F. Akerson  |  |     | 52 |       |  | Chairman, Chief Executive Officer                         
|                  
|                  
|                  
|                  
|Nathaniel A. Davis |  |     | 47 |       |  | President and Chief Operating Officer                     
|                  
|                  
|                  
|                  
|Henry R. Nothhaft  |  |     | 57 |       |  | Vice Chairman                                             
|                  
|                  
|                  
|                  
|Nancy B. Gofus     |  |     | 47 |       |  | Executive Vice President, Marketing and Customer Care     
|                  
|                  
|                  
|                  
|Michael Ruley      |  |     | 41 |       |  | Executive Vice
President, Market Sales Operations         
|                  
|                  
|                  
|                  
|Gary D. Begeman    |  |     | 42 |       |  | Senior Vice President, General Counsel and Secretary      
|                  
|                  
|                  
|                  
|Doug L. Carter     |  |     | 50 |       |  | Senior Vice President, Chief Technology Officer           
|                  
|                  
|                  
|                  
|Wayne M. Rehberger |  |     | 42 |       |  | Senior Vice President, Chief Financial Officer            
|                  
|                  
|                  
|                  
|Charles W. Sackley |  |     | 47 |       |  | Senior Vice President, National Accounts Sales & Marketing
|                  
|                  
|                  
|                  
|R. Gerard Salemme  |  |     | 47 |       |  | Senior Vice President, Regulatory and Legislative Affairs 
|                  
|                  
|                  
|                  
|Scott G. Macleod   |  |     | 38 |       |  | Vice President, Chief Corporate Development Officer       

Daniel F. Akerson. Mr. Akerson has served as our Chairman of the Board of
Directors and Chief Executive Officer since joining XO in September 1999. From
March 1996 to February 2001, he was the Chairman of the Board of Directors of
Nextel Communications, Inc. From March 1996 to July 1999, he was Chief
Executive Officer of Nextel. From 1993 to March 1996, Mr. Akerson served as a
general partner of Forstmann Little & Co., a private investment firm. While
serving as a general partner of Forstmann Little, Mr. Akerson also held the
positions of Chairman of the Board and Chief Executive Officer of General
Instrument Corporation, a technology company acquired by Forstmann Little. From
1983 to 1993, Mr. Akerson held various senior management positions with MCI
Communications Corporation, including president and chief operating officer. In
addition, Mr. Akerson currently serves as a director of the American Express
Company, AOL Time Warner, and Nextel Communications, Inc. and serves as
Chairman of the Board of Directors of Nextel International, Inc., a
substantially wholly owned subsidiary of Nextel.

Nathaniel A. Davis. Mr. Davis has served as our President and Chief
Operating Officer since joining XO in January 2000. In February 2000, he was
elected to serve on our Board of Directors. From October 1998 to January 2000,
Mr. Davis served as Vice President of Technical Services for Nextel. From
November 1996 to September 1998, Mr. Davis was Chief Financial Officer of U.S.
Operations at MCI. From January 1994 to October 1996, he was Chief Operating
Officer of MCImetro, a subsidiary of MCI. From July 1992 to December 1993, Mr.
Davis was Senior Vice President of Access Services for MCI. Mr. Davis currently
serves as a director of Mutual of America Capital Management Corporation and XM
Satellite Radio, Inc.

Henry R. Nothhaft. Mr. Nothhaft has served as our Vice Chairman and as
a member of our Board since the closing of our merger with Concentric in June
2000. From May 1995 to June 2000, he was President and Chief Executive Officer
of Concentric. From August 1995 to June 2000, he served on the Board of
Directors of Concentric and from January 1998 to June 2000, he served as the
Chairman of Concentric.

Nancy B. Gofus. Ms. Gofus has served as our Executive Vice President,
Marketing and Customer Care since September 2000 and was Senior Vice President
and Chief Marketing Officer from January 2000 until September 2000. From March
1999 to December 1999, she was the Chief Operating Officer of Concert
Management Services, Inc., which previously was a wholly-owned subsidiary of
British Telecom and is a global provider of managed telecommunications
services. From March 1995 to March 1998, Ms. Gofus was Concerts Senior Vice
President of Marketing.

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##### Table of Contents



Michael S.
Ruley. Mr. Ruley has been Executive Vice President, Market
Sales Operations since March 2001. From June 1999 to March 2001, he was our President, West Region. From April 1998 to June 1999, he was the President of our Southwest
Region. From June 1996 to April 1998, Mr. Ruley held various positions at TCG,
including Regional Vice President of the Pacific Bell Territory and Vice
President and General Manager of both the San Francisco and Colorado markets.
From March 1993 to June 1996, Mr. Ruley was the Director of New Business
Development for BPI Communications, a Colorado based telecommunications and
technology company.

Gary D. Begeman. Mr. Begeman has served as our Senior Vice President,
General Counsel and Secretary since November 1999. From May 1997 to November
1999, he was Deputy General Counsel of Nextel, and from August 1999 to November
1999, he also was a Vice President of Nextel. From January 1992 to May 1997,
Mr. Begeman was a partner of the law firm Jones, Day, Reavis & Pogue,
specializing in corporate and securities law and mergers and acquisitions.

Doug L. Carter. Mr. Carter has served as our Senior Vice President, Chief
Technology Officer since May 1999. From July 1998 to May 1999, he was our
Senior Vice President, Technology. From February 1998 to November 1998, Mr.
Carter also was the Vice President, Technology of Teledesic. From June 1996 to
January 1998, he was Senior Vice President, Network Operations of AT&T Wireless
Services, and, from June 1995 to May 1996, he was AT&T Wireless Vice
President, Network Operations. From January 1987 to May 1995, Mr. Carter was
Director, Technology of McCaw Cellular.

Wayne M. Rehberger. Mr. Rehberger has served as our Senior Vice President,
Chief Financial Officer since December 2000. 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 August 2000 to October 2000, Mr. Rehberger was our Senior Vice President
of Finance. 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.

Charles W. Sackley. Mr. Sackley has served as our Senior Vice President,
National Accounts Sales and Marketing since February 2000. From May 1999 to
February 2000, he was Senior Vice President, Sales and Marketing for Wireless
Facilities, Inc. and, from February 1998 to May 1999, he was Wireless
Facilities Vice President, Sales and Business Development. From May 1997 to
January 1998, Mr. Sackley was Executive Director of Marketing  Americas for
Broadband Networks, Inc. From 1995 to 1997, he was Senior Director 
Intelligent Network Operations of the Cellular Infrastructure Group of Motorola
Inc. and, from 1993 to 1995, he was the Cellular Infrastructure Groups
Director  Switching and Intelligent Network Operations.

R. Gerard Salemme. Mr. Salemme has served as our Senior Vice President,
Regulatory and Legislative Affairs since January 2000. From March 1998 to
January 2000, he served as our Senior Vice President, External Affairs and
Industry Relations. From July 1997 to March 1998, he was our Vice President,
External Affairs and Industry Relations. From December 1994 to July 1997, Mr.
Salemme was Vice President, Government Affairs at AT&T Corp. From 1991 to 1994,
Mr. Salemme was Senior Vice President, External Affairs at McCaw Cellular.

Scott G. Macleod. Mr. Macleod has been our Vice President, Chief Corporate
Development Officer since May, 1999. From January 1992 to May 1999, he was an
investment banker with Merrill Lynch & Co., in its telecommunications group.
While Mr. Macleod was with Merrill Lynch, he was a Vice President from 1993 to
1995, a director in 1996, and a managing director from 1997 to May 1999.

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##### Table of Contents



PART II




Item 5. Market for Registrants Common Stock and Related Stockholder Matters

Market Information

Our Class A common stock is traded on the NASDAQ National Market under the
symbol XOXO. Prior to September 26, 2000, our Class A common stock traded on
the NASDAQ National Market under the symbol NXLK. The following table shows,
for the periods indicated, the high and low bid prices for our Class A common
stock as reported by the NASDAQ National Market. The prices below have been
adjusted for the two-for-one stock split effected June 16, 2000, and a
two-for-one stock split effected August 27, 1999.

|               |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|               |  | 2000 |       | 1999
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|               |  |      |       |      |  |      |       |    
|First Quarter  |  | $    | 66.25 |      |  | $    | 32.75 |     |  | $ | 15.72 |  |  | $ | 6.50  | 
|              
|              
|              
|              
|Second Quarter |  | $    | 63.91 |      |  | $    | 25.13 |     |  | $ | 21.69 |  |  | $ | 13.32 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 46.00 |      |  | $    | 22.88 |     |  | $ | 28.44 |  |  | $ | 19.00 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 36.25 |      |  | $    | 11.50 |     |  | $ | 45.66 |  |  | $ | 24.91 | 

There is no public trading market for our Class B common stock or XO
Capitals common equity. XO Capital is a wholly owned subsidiary of ours,
formed for the sole purpose of obtaining financing from external sources.

As of March 15, 2001, the approximate number of stockholders of record of
our Class A common stock was 2,256 and of our Class B
common stock was 8.
XO is the sole holder of record of XO Capitals common stock.

Use of Proceeds

The initial public offering, or IPO, of our Class A common stock closed in
October 1997, pursuant to a registration statement on Form S-1 filed with the
Securities and Exchange Commission that become effective on September 26, 1997.
The net proceeds we received from the offering totaled approximately $226.8
million. As of December 31, 2000, proceeds from the IPO remain available for
future network build out and working capital requirements. We have raised
additional funding from debt and additional equity offerings in 1999, 2000 and
2001. The proceeds from these recent offerings have been applied first in
funding the expansion of our network and other working capital requirements.

Dividends

Neither we nor XO Capital have declared a cash dividend on any of our
respective common stock. Covenants in our credit facility and the indentures
pursuant to which our and XO Capitals senior notes have been issued restrict
our ability to pay cash dividends on our capital stock.

Sales of Unregistered Securities

In January 2001, XO completed the issuance and sale in a private placement
of $517.5 million 5.75% convertible subordinated notes due 2009. The notes,
which were sold at 100% of their principal amount, are convertible into XO
common stock at a conversion price of $25.5438 per share. Salomon Smith Barney,
Inc. and Goldman, Sachs, and Co. acted as initial purchasers and received
approximately $14.2 million in fees in connection with the sale of the notes.
The offer and sale of the notes were exempt from registration requirements of
the Securities Act of 1933 as amended, because each initial purchaser offered
and sold the notes in the United States only to qualified institutional buyers
in reliance on Rule 144A under the Securities Act and outside the United States
only to non-US persons in offshore transactions in reliance on Regulation S
under the Securities Act.

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##### Table of Contents






Item 6. Selected Financial Data

|                                                     |  |          |            |      |  |                                       |            |      |  |      |            |   |  |   |           |   |  |   |          |  
|---------------------------------------------------- |  | -------- | ---------- | ---- |  | ------------------------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | --------- | - |  | - | -------- | -
|                                                     |  |          |            |      |  | Year Ended December 31,              
|                                                     |  |          |            |      | 
|                                                     |  | 2000 (a) |            | 1999 |  | 1998                                  |            | 1997 |  | 1996
|                                                     |  |          |            |      |  |                                       |            |      |  |     
|                                                     |  |          |            |      |  | (In Thousands, Except per Share Data)
|Statement of Operations Data:                       
|                                                    
|                                                    
|                                                    
|                                                    
|Revenue                                              |  | $        | 723,826    |      |  | $                                     | 274,324    |      |  | $    | 139,667    |   |  | $ | 57,579    |   |  | $ | 25,686   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Loss from operations                                 |  |          | (1,011,652 | )    |  |                                       | (366,530   | )    |  |      | (206,184   | ) |  |   | (102,621  | ) |  |   | (51,015  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss                                             |  |          | (1,101,299 | )    |  |                                       | (558,692   | )    |  |      | (278,340   | ) |  |   | (129,004  | ) |  |   | (71,101  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss applicable to common shares                 |  |          | (1,247,655 | )    |  |                                       | (627,881   | )    |  |      | (337,113   | ) |  |   | (168,324  | ) |  |   | (71,101  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net loss per share (b)                               |  |          | (3.87      | )    |  |                                       | (2.51      | )    |  |      | (1.57      | ) |  |   | (0.98     | ) |  |   | (0.46    | )
|                                                    
|                                                    
|                                                    
|                                                    
|Statement of Cash Flow Data:                        
|                                                    
|                                                    
|                                                    
|                                                    
|Net cash used in operating activities                |  | $        | (559,414   | )    |  | $                                     | (349,192   | )    |  | $    | (174,484   | ) |  | $ | (97,320   | ) |  | $ | (40,563  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net cash used in investing activities                |  |          | (1,464,495 | )    |  |                                       | (1,050,344 | )    |  |      | (1,276,747 | ) |  |   | (470,195  | ) |  |   | (227,012 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Net cash provided by financing
activities            |  |          | 1,648,663  |      |  |                                       | 1,948,503  |      |  |      | 1,381,653  |   |  |   | 879,782   |   |  |   | 343,032  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Other Data:                                         
|                                                    
|                                                    
|                                                    
|                                                    
|EBITDA, as adjusted (c)                              |  | $        | (309,444   | )    |  | $                                     | (214,248   | )    |  | $    | (140,937   | ) |  | $ | (72,184   | ) |  | $ | (30,761  | )
|                                                    
|                                                    
|                                                    
|                                                    
|Balance Sheet Data:                                 
|                                                    
|                                                    
|                                                    
|                                                    
|Cash, cash equivalents and
marketable   securities   |  | $        | 1,860,963  |      |  | $                                     | 1,881,764  |      |  | $    | 1,478,062  |   |  | $ | 742,357   |   |  | $ | 124,520  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Property and equipment, net                          |  |          | 2,794,105  |      |  |                                       | 1,180,021  |      |  |      | 594,408    |   |  |   | 253,653   |   |  |   | 97,784   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Investment in fixed wireless
licenses, net           |  |          | 997,333    |      |  |                                       | 926,389    |      |  |      | 67,352     |   |  |   |          |   |  |   |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|Total assets                                         |  |          | 9,085,375  |      |  |                                       | 4,597,108  |      |  |      | 2,483,106  |   |  |   | 1,219,978 |   |  |   | 390,683  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Long-term debt                                       |  |          | 4,396,596  |      |  |                                       | 3,733,342  |      |  |      | 2,013,192  |   |  |   | 750,000   |   |  |   | 350,000  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Redeemable preferred stock, net of
   issuance costs |  |          | 2,097,016  |      |  |                                       | 612,352    |      |  |      | 556,168    |   |  |   | 313,319   |   |  |   |         |  
|                                                    
|                                                    
|                                                    
|                                                    
|Total shareholders equity (deficit)                 |  |          | 1,838,401  |      |  |                                       | (13,122    | )    |  |      | (246,463   | ) |  |   | 71,285    |   |  |   | (18,654  | )



---

|(a) |  | The selected financial data in 2000 includes
the accounts and activities of Concentric Network Corporation for the period
commencing June 16, 2000, the date that Concentric merged into XO, through
December 31, 2000.                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | The net loss per share data above has been adjusted for the stock splits
effected in 2000 and in prior periods.                                                                                                                                                                                                                                                                                                                      
|   
|(c) |  | EBITDA represents operating loss adjusted for stock based compensation,
depreciation, amortization and in-process research and development
write-offs for the periods noted and has also been adjusted to exclude the
restructuring charge recorded in 1999. EBITDA is not a generally accepted
accounting principle measure but rather a measure employed by management
to view operating results adjusted for major non-cash items.




Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations

Forward-looking and Cautionary Statements

Some of the statements contained in this filing discuss future
expectations and business strategies or include other forward-looking
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. We undertake no obligation to publicly update or revise any
forward-looking statements.

Results of Operations

Operating results for any period are not necessarily indicative of results
for any future period. On June 16, 2000, we completed the acquisition of
Concentric. The Concentric acquisition was accounted for as a purchase;
accordingly the operating results of Concentric are included from the date of
acquisition.

36



---



##### Table of Contents



Operating Data

The table below provides a summary of the key operating metrics used by
management to assess the Companys operational performance. As we are
transitioning to a more data-centric business model, we have refined our
operating metrics to better track and assess performance of our business and
assets. Some of the metrics currently being presented are not available (n/a)
for 1998 and in those instances we have provided previously disclosed metrics
within the applicable results of operations discussion.

|                                                                  |  |                    |         |              |  |  |  |      |  |              |         |      |  |          |       |   |  |  |         |  |  |  |       |  
|----------------------------------------------------------------- |  | ------------------ | ------- | ------------ |  |  |  | ---- |  | ------------ | ------- | ---- |  | -------- | ----- | - |  |  | ------- |  |  |  | ----- | -
|                                                                  |  | As of December 31, |         |              |  |  |  |      |  |             
|                                                                  |  |                    |         | Year to Year |  |  |  |      |  | Year to Year
|                                                                  |  | 2000               |         |              |  |  |  | 1999 |  | % Change     |         | 1998 |  | % Change
|                                                                  |  |                    |         |              |  |  |  |      |  |              |         |      |  |         
|Operating data (a):                                              
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Route miles (b)                                                   |  |                    | 13,493  |              |  |  |  |      |  |              | 4,285   |      |  |          | 214.9 | % |  |  | 2,477   |  |  |  | 73.0  | %
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Fiber miles (c)                                                   |  |                    | 748,604 |              |  |  |  |      |  |              | 378,200 |      |  |          | 97.9  | % |  |  | 195,531 |  |  |  | 93.4  | %
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|On-net buildings connected (d)                                    |  |                    | 1,947   |              |  |  |  |      |  |              | 1,320   |      |  |          | 47.5  | % |  |  | 801     |  |  |  | 64.8  | %
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Off-net buildings connected (e)                                   |  |                    | 51,345  |              |  |  |  |      |  |              | 28,656  |      |  |          | 79.2  | % |  |  | 13,443  |  |  |  | 113.2 | %
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Voice grade equivalents (in thousands) (f)                        |  |                    | 11,211  |              |  |  |  |      |  |              | 2,437   |      |  |          | 360.0 | % |  |  | n/a     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Customers (g)                                                     |  |                    | 87,755  |              |  |  |  |      |  |              | 46,947  |      |  |          | 86.9  | % |  |  | n/a     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Average monthly revenue per customer
      (fourth quarter)   (h) |  | $                  | 916     |              |  |  |  |      |  | $            | 655     |      |  |          | 39.8  | % |  |  | n/a     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Voice switches operational                                        |  |                    | 34      |              |  |  |  |      |  |              | 32      |      |  |          | 6.3   | % |  |  | 21      |  |  |  | 52.4  | %
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|ATM switches operational                                          |  |                    | 49      |              |  |  |  |      |  |              |        |      |  |          |       |   |  |  |        | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Managed servers (i)                                               |  |                    | 3,015   |              |  |  |  |      |  |              |        |      |  |          |       |   |  |  |        | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Hosted shared websites (j)                                        |  |                    | 218,598 |              |  |  |  |      |  |              |        |      |  |          |       |   |  |  |        | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Data centers operational                                          |  |                    | 8       |              |  |  |  |      |  |              |        |      |  |          |       |   |  |  |        | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Employees                                                         |  |                    | 7,400   |              |  |  |  |      |  |              | 3,500   |      |  |          | 111.4 | % |  |  | 2,299   |  |  |  | 52.2  | %

The Company defines certain business metrics used above as follows:



---

|(a) |  | Operating data  Except as noted below, the operating data for all
periods presented include the statistics of the Las Vegas network, which
we manage and in which we have a 40% membership interest.                                                                                                                        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Route miles  Route miles refers to the number of operational miles of
the telecommunications path in which leased or Company-owned fiber optic
cables are installed. These include metro and intercity miles.                                                                                                               
|   
|(c) |  | Fiber miles  Fiber miles refers to the number of operational route miles
installed along a telecommunications path, multiplied by our estimate of
the number of fibers along that path. These include metro and inter-city
miles.                                                                                           
|   
|(d) |  | On-net buildings connected  On-net buildings connected represents
buildings physically connected to our networks, excluding those connected
by unbundled incumbent local exchange carrier facilities.                                                                                                                       
|   
|(e) |  | Off-net buildings connected  Off-net buildings connected represents
buildings connected to our networks through leased or unbundled incumbent
carriers facilities.                                                                                                                                                          
|   
|(f) |  | Voice grade equivalents  Voice grade equivalents is a revenue-generating
digital broadband equivalent of 64 kilobits per second line, known as DS-0 level, the standard
capacity of a voice grade line, and measures the network utilization of
both our voice and data services.                                           
|   
|(g) |  | Customers  Customers represent the number of revenue-generating invoices
within our billing systems. This statistic excludes Europe, Las Vegas, as
well as consumer dial up and shared hosting accounts.                                                                                                                    
|   
|(h) |  | Revenue per customer  Revenue per customer represents average revenue
per customer per month. These figures relate to the fourth quarter of each
period presented. This calculation excludes both the associated revenue
and customer counts for Europe, Las Vegas, as well as consumer dial up and
shared hosting accounts.
|   
|(i) |  | Managed servers  Managed servers represent the number of Company or
customer owned servers that are dedicated to hosting a single customers
websites which reside in our data centers.                                                                                                                                     
|   
|(j) |  | Hosted shared websites  Hosted share websites represents the number of
websites that are hosted for multiple customers on shared servers.                                                                                                                                                                                   

37



---



##### Table of Contents



Year Ended December 31, 2000 Compared to Year Ended December 31, 1999



| |        
| | -------
| | Revenue

Revenue in 2000 increased 163.9% to $723.8
million from $274.3 million in 1999. This increase
was, in large part, the result of an increase in our overall number
of customers resulting from the acquisition of Concentric, continued penetration into existing
markets, and expansion into the Tampa Bay, Florida, Austin, Texas, and
Portland, Oregon markets. In the year 2000, our customer base grew 86.9% from
46,947 customers in 1999 to 87,755 in 2000. Also
contributing to the revenue growth was a 39.8% increase in average monthly
revenue per customer from $655 per customer in the fourth quarter of 1999 to
$916 per customer for the quarter ended December 31, 2000. We anticipate the trend
of increasing revenue per customer to continue in future periods as we continue
targeting larger business customers and adding higher-end services to our
product mix. Servicing these larger enterprises and consequently achieving
growth in revenue per customer is dependent on our ability to provide high
bandwidth products and services over our network. Network traffic, as measured
by voice grade equivalents, or VGEs, increased 360% from
2.4 million in 1999 to 11.2 million in 2000. A VGE is a
revenue-generating digital broadband equivalent of 64 kilobits per second, the standard
capacity of a voice grade line, and measures the network utilization of both
our voice and data services.

Revenue was derived from provision of the following services (in
thousands):

|               |  |        |         |                    |  |        |      |                    |  |                      |         |  |  |  |      |   |  |  |       |  
|-------------- |  | ------ | ------- | ------------------ |  | ------ | ---- | ------------------ |  | -------------------- | ------- |  |  |  | ---- | - |  |  | ----- | -
|               |  | 2000   | 1999   
|               |  |        |         |                    |  |       
|               |  | Amount |         | % of Total Revenue |  | Amount |      | % of Total Revenue |  | Year to Year% Change |        
|               |  |        |         |                    |  |        |      |                    |  |                      |        
|Data services  |  | $      | 331,892 |                    |  |        | 45.9 | %                  |  | $                    | 54,032  |  |  |  | 19.7 | % |  |  | 514.3 | %
|              
|              
|              
|              
|Voice services |  |        | 386,796 |                    |  |        | 53.4 | %                  |  |                      | 219,391 |  |  |  | 80.0 | % |  |  | 76.3  | %
|              
|              
|              
|              
|Other services |  |        | 5,138   |                    |  |        | 0.7  | %                  |  |                      | 901     |  |  |  | 0.3  | % |  |  | 470.3 | %
|               |  |        |         |                    |  |        |      |                    |  |                      |         | 
|Total revenue  |  | $      | 723,826 |                    |  |        |      |                    |  | $                    | 274,324 |  |  |  |      |   |  |  | 163.9 | %
|               |  |        |         |                    |  |        |      |                    |  |                      |         | 

Data services includes revenue from Internet access, network access, and
applications hosting services.



| |                                  
| | ---------------------------------
| | Internet access services include:



| |  |  | services marketed to enterprise customers, such as dedicated
Internet access facilities and DSL services, and
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | residential and small business dial-up access services across the United States and in
Canada.               



| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Network access services include primarily dedicated access and virtual
private network, or VPN, services that enable customers to deploy tailored,
Internet Protocol, or IP, based business applications for internal
enterprise, business-to-business and business-to-customer data
communications on the private network while also affording high-speed access
to the Internet.



| |                                       
| | --------------------------------------
| | Applications hosting services include:



| |  |  | sophisticated high-end hosting and Web site traffic
management solutions for Internet-centric businesses, and
| | - |  | -------------------------------------------------------------------------------------------------------------
|
| |  |  | web hosting, e-commerce and streamed media services designed
for small-to-medium sized businesses.           

Data services revenue
increased 514.3% to $331.9 million in 2000, from
$54.0 million in
1999. A primary contributor to this growth was our migration from a
voice-centric to a more data-centric business, facilitated in large part by our
acquisition of Concentric and the integration of its data products with our
pre-existing services. In 2000, data revenue
increased to 45.9% of total revenue from 19.7% of total revenue in the
preceding year. We expect data services revenue to continue to grow as a
percentage of total revenue in future periods due to our full integration of
Concentric, the increased focus of our marketing efforts on targeting larger
enterprise customers who tend to have a higher demand for sophisticated
high-capacity data services, and an overall increased emphasis on the sale of
data products, which generally yield higher margins than our voice products.

38



---



##### Table of Contents



Voice services revenue includes revenue from bundled local and long
distance voice services, prepaid call processing, and other voice
communications based services, including shared tenant services, interactive
voice response, or IVR, and stand-alone long distance services. Voice services
revenue increased 76.3% to $386.8 million in 2000
from approximately $219.4 million in 1999. We
expect voice services revenue to continue to increase over future periods as a
result of anticipated growth in revenue from continued penetration of existing
markets, but to decrease as a percentage of total revenue as we expect growth
in data services revenue to be higher than growth in voice services.

Other services revenue was $5.1 million in 2000 compared to $0.9 million
in the prior year. Other services revenue consists of bundled data and voice
service offerings and other services such as fire-wall security provided to our
existing IP customers. The increase in other services revenue is attributable
to the addition of these bundled services to our product portfolio introduced
in the second quarter of 2000, as well as the impact of the Concentric
acquisition. We anticipate that revenue from bundled services will increase in future
periods both in absolute amounts and as a percentage of our total revenue.



| |                   
| | ------------------
| | Costs and expenses

The table below provides expenses by classification and as a percentage of
revenue (in thousands):

|                    |                                     |   |           |         |                    |  |        |      |                    |   |                      |         |  |  |  |      |   |  |       |        |  
|------------------- | ----------------------------------- | - | --------- | ------- | ------------------ |  | ------ | ---- | ------------------ | - | -------------------- | ------- |  |  |  | ---- | - |  | ----- | ------ | -
|                    |                                     |   | 2000      |         | 1999              
|                    |                                     |   |           |         |                    |  |       
|                    |                                     |   | Amount    |         | % of Total Revenue |  | Amount |      | % of Total Revenue |   | Year to Year% Change
|                    |                                     |   |           |         |                    |  |        |      |                    |   |                     
|Costs and expenses:
|                   
|                   
|                   
|                   
|                    | Operating                           |   | $         | 476,021 |                    |  |        | 65.8 | %                  |   | $                    | 221,664 |  |  |  | 80.8 | % |  |       | 114.7  | %
|                   
|                   
|                   
|                   
|                    | SG&A                                |   |           | 557,249 |                    |  |        | 77.0 | %                  |   |                      | 266,908 |  |  |  | 97.3 | % |  |       | 108.8  | %
|                   
|                   
|                   
|                   
|                    | Restructuring                       |   |           |        |                    |  |        |     |                    |   |                      | 30,935  |  |  |  | 11.3 | % |  |       |       |  
|                   
|                   
|                   
|                   
|                    | Stock-based compensation            |   |           | 48,328  |                    |  |        | 6.7  | %                  |   |                      | 12,872  |  |  |  | 4.7  | % |  |       | 275.5  | %
|                   
|                   
|                   
|                   
|                    | Depreciation                        |   |           | 223,780 |                    |  |        | 30.9 | %                  |   |                      | 93,097  |  |  |  | 33.9 | % |  |       | 140.4  | %
|                   
|                   
|                   
|                   
|                    | Amortization                        |   |           | 393,934 |                    |  |        | 54.4 | %                  |   |                      | 15,378  |  |  |  | 5.6  | % |  |       | 2461.7 | %
|                   
|                   
|                   
|                   
|                    | In-process research and
development |   |           | 36,166  |                    |  |        | 5.0  | %                  |   |                      |        |  |  |  |     |   |  |       |       |  
|                    |                                     |   |           |         |                    |  |        |      |                    |   |                      |        
|Total               |                                     | $ | 1,735,478 |         |                    |  |        |      |                    | $ | 640,854              |         |  |  |  |      |   |  | 170.8 | %     
|                    |                                     |   |           |         |                    |  |        |      |                    |   |                      |        



| |          
| | ---------
| | Operating

Operating expenses increased
$254.3 million to $476.0 million in 2000
compared to $221.7 million in 1999. Operating expenses include
telecommunications costs paid to third party providers for access and transport
services. Operating expenses also includes network operations and engineering
costs for network-related and enhanced communications services.
Telecommunications costs accounted for 67% of the increase in operating
expenses, resulting primarily from the increased volumes in our switched local
and long distance communication services and rapid expansion of our data
services. Network operations and engineering costs accounted for the remaining
increase in operating expense. The increase in network operations and
engineering costs was primarily driven by increased headcount and related costs
necessitated by the expansion of our network and service offerings. Operating
expense as a percentage of revenue decreased from 80.8% in 1999 to
65.8% in 2000. We expect our operating expenses, including our
telecommunications costs of service, to continue to increase in future periods
in connection with our growth and expansion plans. We further expect operating expenses
to decrease as a percentage of revenue as our revenue grows and we continue to
migrate from leased transport capacity to a facilities-based network for our
inter-city transport and certain metro network requirements and increase the
number of our customers connected directly to our network.



| |                                    
| | -----------------------------------
| | Selling, general and administrative

Selling, general and administrative, or SG&A, expenses increased $290.3
million to $557.2 million in 2000 compared to $266.9 million in 1999. SG&A
expenses relate to sales and marketing, information systems, and general
corporate office functions. A majority of the increase is attributable to
increased sales, customer support, and
administrative headcount and related costs associated with the expansion of our
business. Marketing costs also increased $40.9 million due to
costs associated with our national advertising and marketing campaigns to
support our new product offerings and launch of the XO brand name. SG&A expense
decreased as a percentage of revenue from 97.3% in 1999 to 77.0% in 2000 due
primarily to our ability to support higher revenue growth with lower incremental costs.

39



---



##### Table of Contents



We expect to see a continued reduction of SG&A as a percentage of revenue due to
the anticipated growth in our revenue, cost savings resulting from the
centralization of key functions, and integration of Concentrics operations as
well as our ongoing efforts to control these costs. We expect SG&A expenses to
grow in absolute amounts due to the continued expansion of our
business.



| |              
| | -------------
| | Restructuring

In the fourth quarter of 1999, we recorded a $30.9 million non-recurring
restructuring charge for costs associated with relocating our Bellevue,
Washington headquarters to Northern Virginia. Approximately $28.0 million of
the charge resulted from non-cash stock option compensation charges that arose
from accelerated vesting on certain employee options associated with their
severance.



| |                         
| | ------------------------
| | Stock-based compensation

Stock-based compensation expense increased $35.5 million in 2000 versus
1999 and also increased as a percentage of revenue to 6.7% in 2000 from 4.7% in
1999. The year over year increase resulted from an increase in compensation
expense arising from stock option grants to new executive management as well as
restricted stock granted to key employees of Concentric in connection with the
merger. Compensation expense is recognized over the vesting periods of
compensatory stock options 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 of the option. Compensation expense associated
with restricted stock is based on the fair market value of the stock at the
time of vesting. With respect to the restricted stock granted to key Concentric
employees in connection with the merger, a portion of the restricted stock
issued was fully vested as of the date of the grant, with the remainder vesting
in connection with year 2000 and 2001 performance criteria.



| |             
| | ------------
| | Depreciation

Depreciation expense increased $130.7 million in 2000, which was primarily
attributable to the increase in network and technology assets placed into
service during the year and assets placed into service in 1999 that were
subject to a full year of depreciation in 2000. In 2000, we had capital
expenditures of $1,380.6 million versus $611.5 million in the prior year. Our
net property and equipment, which also reflects assets acquired from
Concentric, increased $1,614.1 million to $2,794.1 million
in 2000 versus $1,180.0 million in 1999. As we expand our networks
and install related equipment and other network technology, depreciation
expense is expected to continue to increase.



| |             
| | ------------
| | Amortization

Amortization expense was $393.9 million in 2000 versus $15.4 million in
1999. Substantially all of the increase is attributable to the amortization of
goodwill and other intangibles associated with the Concentric acquisition,
which are being amortized over a period of up to five years.



| |                                    
| | -----------------------------------
| | In-process research and development

As a result of the Concentric merger, we incurred a $36.2 million one-time
charge 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 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. As such, the entire $36.2 million of in-process
research and development acquired was expensed as of the acquisition date.



| |                
| | ---------------
| | Interest income

Interest income totaled
$180.9 million in 2000 compared to interest income of
$91.0 million in 1999. The increase in interest income corresponds to the increase in our
average cash and investment balances.



| |                 
| | ----------------
| | Interest expense

Interest expense totaled
$434.1 million in 2000 compared to interest expense of $283.1 million in 1999. The increase in interest expense was primarily due to an increase in
our average outstanding indebtedness over the respective periods resulting from
a $375.0 million draw on our senior secured credit facility in the first
quarter of 2000, debt assumed in connection with the Concentric acquisition and senior notes issued in June and November 1999 being outstanding
for a full year.

40



---



##### Table of Contents



We expect interest expense to increase in 2001 due to the
issuance in January 2001 of $517.5 million of 5 3/4% convertible subordinated
notes and a $237.5 million additional borrowing under our credit facility in
February 2001.



| |                                
| | -------------------------------
| | Loss from continuing operations

Loss from continuing operations totaled $1,101.3 million in 2000, compared to $558.7 million in
1999, due to the foregoing factors. Additionally, the net loss in
2000 includes a $226.5 million net gain on the sale
of an equity investment and a $57.7 million impairment charge on investments,
including three investments acquired in the Concentric merger that were recorded at
fair market value at the merger date.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998



| |        
| | -------
| | Revenue

Revenue in 1999 increased 96.4% to $274.3
million from $139.7 million in 1998. This increase
was driven by growth in our customer base resulting from continued penetration
in existing markets, the expansion into new markets, and build out of our
network. During 1999, access lines in service grew 145.7% to 428,035 in 1999 from 174,182 in 1998.

Revenue was derived from provision of the following services (in
thousands):

|               |  |        |         |                    |  |        |      |                    |  |              |         |  |  |  |      |   |  |  |       |  
|-------------- |  | ------ | ------- | ------------------ |  | ------ | ---- | ------------------ |  | ------------ | ------- |  |  |  | ---- | - |  |  | ----- | -
|               |  | 1999   |         | 1998              
|               |  |        |         |                   
|               |  | Amount |         | % of Total Revenue |  | Amount |      | % of Total Revenue |  | Year to Year
|               |  |        |         |                    |  |        |      |                    |  |             
|Data services  |  | $      | 54,032  |                    |  |        | 19.7 | %                  |  | $            | 13,054  |  |  |  | 9.3  | % |  |  | 314.0 | %
|              
|              
|              
|              
|Voice services |  |        | 219,391 |                    |  |        | 80.0 | %                  |  |              | 126,613 |  |  |  | 90.7 | % |  |  | 73.3  | %
|              
|              
|              
|              
|Other services |  |        | 901     |                    |  |        | 0.3  | %                  |  |              |        |  |  |  |     |   |  |  |      |  
|               |  |        |         |                    |  |        |      |                    |  |              |         | 
|Total revenue  |  | $      | 274,324 |                    |  |        |      |                    |  | $            | 139,667 |  |  |  |      |   |  |  | 96.4  | %
|               |  |        |         |                    |  |        |      |                    |  |              |         | 

Data services revenue
increased 314.0% to $54.0 million in 1999, from approximately $13.1 million in 1998. Our 1999 and 1998 data services revenue consists of network access
services including dedicated access that enable customers to deploy tailored,
Internet Protocol, or IP, based business applications for internal enterprise,
business-to-business and business-to-customer data communications while also
affording high-speed access to the Internet. In 1999, data revenue increased to 19.7% of total revenue as compared to 9.3% of
total revenue in the preceding period. The increase resulted primarily from
growing dedicated network access sales, mostly to larger business customers.

Voice services revenue
increased 73.3% to $219.4 million in 1999 from $126.6 million in 1998. Voice services revenue includes revenue from bundled local and long
distance, prepaid call processing, and other voice services. Voice services
revenue increased $92.8 million from 1998 to 1999 which is attributable to
increased call volume from bundled local and long distance services arising
from expansion in existing markets, and the addition of new markets. In 1999,
we launched 12 new markets for a total of 49 markets across the United States.

Voice services revenue also includes other services such as shared tenant
services, interactive voice response, or IVR, and stand-alone long distance
services. Shared tenant services, including telecommunications management
services is provided to groups of small and medium-sized businesses located in
the same office building. IVR is a platform that allows a consumer to dial into
a computer-based system using a toll-free number and a touch-tone phone and
access a variety of information by following a customized menu. Combined
revenue from IVR, shared tenant and stand alone long distance has decreased
from 45.1% percent of total revenue in 1998 to 20.9% of revenue in 1999 due to
our focus on selling bundled local and long distance services and increased
data services revenue.

41



---



##### Table of Contents



The table below provides expenses by classification and as a percentage of
revenue (amounts in thousands):

|                    |                          |   |                                                   |         |         |  |            |      |   |   |         |         |         |  |          |  |            |  |              |       |   |  |      |       |  
|------------------- | ------------------------ | - | ------------------------------------------------- | ------- | ------- |  | ---------- | ---- | - | - | ------- | ------- | ------- |  | -------- |  | ---------- |  | ------------ | ----- | - |  | ---- | ----- | -
|                    |                          |   | Expense Classification as a Percentage of Revenue
|                    |                          |   | (dollars in thousands)                           
|                    |                          |   |                                                  
|                    |                          |   | 1999                                              |         | 1998   
|                    |                          |   |                                                   |         |        
|                    |                          |   |                                                   |         |         |  | % of Total |      |   |   |         |         |         |  |          |  | % of Total |  | Year to Year
|                    |                          |   | Amount                                            |         | Revenue |  | Amount     |      |   |   |         |         | Revenue |  | % Change
|                    |                          |   |                                                   |         |         |  |            |      |   |   |         |         |         |  |         
|Costs and expenses:
|                   
|                   
|                   
|                   
|                    | Operating                |   | $                                                 | 221,664 |         |  |            | 80.8 | % |   | $       | 123,675 |         |  |          |  |            |  |              | 88.5  | % |  |      | 79.2  | %
|                   
|                   
|                   
|                   
|                    | SG&A                     |   |                                                   | 266,908 |         |  |            | 97.3 | % |   |         | 156,929 |         |  |          |  |            |  |              | 112.4 | % |  |      | 70.1  | %
|                   
|                   
|                   
|                   
|                    | Restructuring            |   |                                                   | 30,935  |         |  |            | 11.3 | % |   |         |        |         |  |          |  |            |  |              |      |   |  |      |      |  
|                   
|                   
|                   
|                   
|                    | Stock-based compensation |   |                                                   | 12,872  |         |  |            | 4.7  | % |   |         | 4,993   |         |  |          |  |            |  |              | 3.6   | % |  |      | 157.8 | %
|                   
|                   
|                   
|                   
|                    | Depreciation             |   |                                                   | 93,097  |         |  |            | 33.9 | % |   |         | 45,638  |         |  |          |  |            |  |              | 32.7  | % |  |      | 104.0 | %
|                   
|                   
|                   
|                   
|                    | Amortization             |   |                                                   | 15,378  |         |  |            | 5.6  | % |   |         | 14,616  |         |  |          |  |            |  |              | 10.5  | % |  |      | 5.2   | %
|                    |                          |   |                                                   |         |         |  |            |      |   |   |         |        
|Total               |                          | $ | 640,854                                           |         |         |  |            |      |   | $ | 345,851 |         |         |  |          |  |            |  |              |       |   |  | 85.3 | %    
|                    |                          |   |                                                   |         |         |  |            |      |   |   |         |        



| |          
| | ---------
| | Operating

Operating expenses increased
79.2% in 1999 to $221.7 million versus $123.7
million in 1998. The increase was attributable to increased
network costs related to provisioning higher volumes of local, long distance
and enhanced communications services, an increase in employees and an increase
in other related costs primarily to expand our switched local and long distance
service businesses in existing and planned markets.



| |                                    
| | -----------------------------------
| | Selling, general and administrative

Selling, general and
administrative, or SG&A, expenses increased 70.1% in
1999 to $266.9 million from $156.9 million in 1998. Consistent with the cost
drivers of our operating expenses, the increase in SG&A expense was primarily
due to increases in employees and other costs associated with the expansion of
our switched local and long distance service businesses in existing and planned
markets.



| |              
| | -------------
| | Restructuring

In the fourth quarter of 1999, we recorded a $30.9 million non-recurring
restructuring charge for costs associated with relocating our Bellevue,
Washington headquarters to Northern Virginia.



| |                         
| | ------------------------
| | Stock-based compensation

Stock-based compensation expense increased to $12.9 million from $5.0
million in 1998 due primarily to compensatory stock options issued to new
executive management during 1999. Compensation expense is recognized over the
vesting periods of the options based on the excess of the fair value of the
stock options at the date of grant over the exercise price.



| |             
| | ------------
| | Depreciation

Depreciation expense increased 104% in 1999 to $93.1 million from $45.6
million in 1998. The increase was primarily due to placement in service of
additional telecommunications network assets, including switches, fiber optic
cable, and network electronics and related equipment.



| |             
| | ------------
| | Amortization

Amortization expense was $15.4 million in 1999 which was consistent with
amortization expense of $14.6 million recorded in 1998.



| |                
| | ---------------
| | Interest income

Interest income increased 25.7% in 1999 to $91.0 million from $72.4 million
in 1998. The increase corresponded to the increase in our average cash and
investment balances.



| |                 
| | ----------------
| | Interest expense

In 1999, interest expense
increased 95.8% to $283.1 million from $144.6
million in 1998. The increase was due to an increase in our average outstanding
indebtedness.

42



---



##### Table of Contents



Other Operating Data

EBITDA represents operating loss adjusted for stock based compensation,
depreciation, amortization and in-process research and development write-offs
and has also been adjusted to exclude the non-recurring restructuring charge
recorded in 1999. The table below summarizes EBITDA, both in amount and as a
percentage of revenue (dollars in thousands):

|       |  |                         |          |         |  |            |       |    |  |   |          |         |  |        |  |            |  |  |       |    |  |            |          |   |  |  |        |   
|------ |  | ----------------------- | -------- | ------- |  | ---------- | ----- | -- |  | - | -------- | ------- |  | ------ |  | ---------- |  |  | ----- | -- |  | ---------- | -------- | - |  |  | ------ | --
|       |  | Year Ended December 31,
|       |  |                        
|       |  | 2000                    |          | 1999    |  | 1998      
|       |  |                         |          |         |  |           
|       |  |                         |          |         |  | % of Total |       |    |  |   |          |         |  |        |  | % of Total |  |  |       |    |  | % of Total
|       |  | Amount                  |          | Revenue |  | Amount     |       |    |  |   |          | Revenue |  | Amount |  | Revenue   
|       |  |                         |          |         |  |            |       |    |  |   |          |         |  |        |  |           
|EBITDA |  | $                       | (309,444 | )       |  |            | (42.8 | %) |  | $ | (214,248 | )       |  |        |  |            |  |  | (78.1 | %) |  | $          | (140,937 | ) |  |  | (100.9 | %)

EBITDA is not a generally accepted accounting principle measure but rather
a measure employed by management to view operating results adjusted for major
non-cash items. EBITDA has been consistently improving as a percentage of
revenue due to revenue growth and the decrease in operating and SG&A expenses as a
percentage of revenue as indicated above. In absolute dollars, our EBITDA loss
has increased due to business expansion costs as discussed above.

Liquidity and Capital Resources

Our business is capital-intensive and, as such, has required and will
continue to require substantial capital investment. We build high capacity
networks with broad market coverage, a strategy that initially increases our
level of capital expenditures and operating losses and requires us to make a
substantial portion of our capital investments before we realize any revenue
from them. These capital expenditures, together with the associated early
operating expenses, will continue to result in negative cash flow unless and
until we are able to establish an adequate customer base. We believe, however,
that over the long term this strategy will enhance our financial performance by
increasing the traffic flow over our networks.

Capital Uses

During 2000, cash used in operating activities was $559.4 million,
compared to $349.2 million in the prior year. The increase in cash used
was due to increased operating losses and the timing of expenditures and customer
receipts.

During 2000, cash used in investing activities was $1,464.5 million,
compared to $1,050.3 million used in the prior year. Our investment in property
and equipment increased $769.1 million from $611.5 million for 1999 to $1,380.6
million for 2000 and our investment in marketable securities increased $396.2
million in 2000 compared to the prior year. This increase was offset partially
by a decrease in investments in fixed wireless licenses year-over-year from
$508.9 million invested in 1999 to $49.5 million for 2000, as well as the
receipt of $245.1 million from the sale of an equity investment and $46.9
million of net cash acquired in the Concentric merger. Our 1999 fixed wireless
license investment activity reflects our acquisitions of WNP Communications and
remaining interest in NEXTBAND.

We expect that our business will continue to require substantial amounts
of cash expenditures to fund operations and capital expenditures in 2001 and
beyond relating to our existing and planned network development and operations.
These funds are expected to relate to:



| |  |  | the purchase and installation of switches, routers, servers and
other data-related equipment and related electronics in existing
networks, for expansion of existing networks and in networks to be
constructed or acquired in new markets;           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the purchase and installation of fiber optic cable and electronics
to expand existing networks and develop new networks, including the
connection of new buildings;                                                                                   
|
| |  |  | the development of our comprehensive information technology
platform;                                                                                                                                                                                 
|
| |  |  | the purchase and installation of equipment associated with the
deployment of fixed wireless services using our fixed wireless
spectrum;                                                                                                               
|
| |  |  | funding of the commitments to build and expand our North American
metro and inter-city networks, our European inter-city and metro fiber
networks, and our transatlantic capacity, and related expenses we
expect to incur in building these networks;

43



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##### Table of Contents





| |  |  | the purchase and installation of equipment associated with
deployment of digital subscriber line, or DSL, and other data services;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the funding of operating losses and working capital; and                                                                          
|
| |  |  | possible expenditures associated with market
expansions and potential acquisitions of businesses or assets.                       

Capital Resources



| |                          
| | -------------------------
| | 2000 Financing Activities

In January 2000, we issued 584,375 shares of Series C cumulative
convertible participating preferred stock and 265,625 shares of Series D
convertible participating preferred stock to several investment funds
controlled by Forstmann Little & Co. in exchange for $850.0 million in cash.
The Series C and Series D stock are convertible into shares of our Class A
common stock at a conversion rate of $31.625 per share, and provide for a 3.75%
annual dividend that is payable quarterly. Each share of Series C and Series D
stock has a liquidation preference of $1,000 per share plus accrued and unpaid
dividends. The holders may convert the preferred stock into Class A common
stock at any time.

In February 2000, we entered into a $1.0 billion senior secured credit
facility with various lenders, and certain of our subsidiaries, as guarantors.
The security for the facility consists of all of the assets purchased with the
proceeds thereof, the stock of certain of our subsidiaries, all of our assets
and, to the extent of $125.0 million of guaranteed debt, all assets of certain
of our subsidiaries. A portion of the facility is available to provide working
capital and for other general corporate purposes with the remainder available
to provide financing for the construction, acquisition or improvement of
telecommunication assets. The facility consists of a $387.5 million multi-draw
term loan A, a $225.0 million term loan B, and a $387.5 million revolving
credit facility. In addition, the facility may be increased by up to an
additional $1.0 billion under certain circumstances. At closing, we borrowed
$150.0 million of the term loan A and the entire $225.0 million of the term
loan B, all of which remained outstanding at December 31, 2000.

The revolving credit facility and the term loan A mature on December 31,
2006, and the term loan B matures on June 30, 2007. The maturity date for each
of the facilities may be accelerated to October 31, 2005 unless we have
refinanced our $350.0 million 12 1/2% Senior Notes by April 15, 2005. Amounts
drawn under the revolving credit facility and the term loans are expected to
bear interest, at our option, at the alternate base rate or reserve-adjusted
London Interbank Offered Rate, or LIBOR, plus applicable margins. Initially, the
applicable margins for the term loan A and the revolving credit facility are
175 basis points over the alternate base rate and 275 basis points over LIBOR.
After June 30, 2003, the applicable margins for the term loan A and the
revolving credit facility range from 62 1/2 to 150 basis points over the alternate
base rate and from 162 1/2 to 250 basis points over LIBOR, based on the ratio of
our consolidated total debt to annualized consolidated EBITDA, as defined in
the agreements relating to the credit facility. The applicable margin for the
term loan B is fixed at 225 basis points over the alternate base rate and 325
basis points over LIBOR. At December 31, 2000, the rate of interest applicable to the term loan A and the credit facility
was 9.31% and 9.81% for the term loan B.

In July 2000, we issued 268,750 shares of Series G cumulative convertible
participating preferred stock and 131,250 shares of Series H convertible
participating preferred stock to several investment funds controlled by
Forstmann Little & Co. in exchange for $400.0 million in cash. The Series G and Series
H stock are convertible into shares of our Class A common stock at a conversion
rate of $31.625 per share, and provide for a 3.75% annual dividend that is
payable quarterly. Each share of Series G and Series H stock has a liquidation
preference of $1,000 per share plus accrued and unpaid dividends. The holders
may convert the preferred stock into Class A common stock at any time.

Our operating flexibility with respect to certain business matters is, and
will continue to be, limited by covenants associated with our outstanding
indebtedness and certain series of our preferred stock. Among other things,
these covenants limit our ability to incur additional indebtedness, create
liens upon assets, apply the proceeds from the disposition of assets, make
dividend payments and other distributions on capital stock and redeem capital
stock.

We are required to use the proceeds from the sale of certain series of our
senior notes solely to fund expenditures for the construction, improvement and
acquisition of new and existing networks and services and direct and indirect
investments in certain joint ventures, by covenants in the indentures under
which these and other of our notes were issued. We expect to fund other costs
associated with our business with the proceeds of other offerings.

44



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##### Table of Contents



These covenants may adversely affect our ability to finance our future
operations or capital needs or to engage in other business activities that may
be in our interest.



| |                          
| | -------------------------
| | 2001 Financing Activities

In January 2001, we completed the issuance and sale of 5.75% convertible
subordinated notes for proceeds of $503.3 million net of underwriting fees of
$14.2 million. Interest on the notes is payable semi-annually beginning in July
2001. The notes will be unsecured obligations and will be subordinate to all
other senior indebtedness. The notes are convertible by the holders at anytime
prior to maturity into Class A common stock at a conversion rate of 39.1484
shares per $1,000 principal amount of notes. The conversion rate is equivalent
to a conversion price of approximately $25.5438 per share. We may terminate
such conversion rights on or after January 18, 2003 if the current market price
of our Class A common stock equals or exceeds 150%, on or prior to January 18,
2004, or 135% thereafter, of the $25.5438 implied conversion price for 20
days in a 30 consecutive day trading period. The notes are not redeemable prior
to maturity on January 15, 2009.

In February 2001, we drew down the remaining $237.5 million of the term
loan A under our senior secured credit facility, as required under the terms of
that facility.



| |                     
| | --------------------
| | Liquidity Assessment

We believe that we have sufficient funds available to finance our
operations into the first half of 2002. At December 31, 2000, giving effect to
our convertible note offering in January 2001, our available funding sources
totaled $2,989.3 million including our December 31, 2000 balance
of cash and marketable securities of $1,861.0 million, the net proceeds from
our January 2001 convertible note offering of $503.3 million, as well as $625.0
million of available borrowings under the senior secured credit facility. We
estimate that our capital expenditures in the year 2001 will be between
$1,900 million and $2,100 million and that our cash commitments for interest
expense and preferred dividends in the year 2001 will be approximately $430
million based on our existing capital structure and currently applicable
interest rates. The remainder is available to fund other operating expenses
through 2001 and capital requirements and operations into the first half of
2002. We will need and plan to raise additional funds to meet our liquidity
needs for subsequent years. We currently plan to do so when market conditions permit
us to raise capital on acceptable terms. Beyond 2001,
our funding requirements with respect to capital expenditures is expected to be
more success-based and therefore driven by our assessment of the relevant
business opportunities and funding availability.




Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We have existing obligations relating to our redeemable preferred stock,
senior notes, and bank credit facilities outstanding. These financial instruments expose us to interest rate risk. We do not have
significant cash flow exposure to changing interest rates on the majority of
our long term debt and redeemable preferred stock because the interest and
dividend rates of those securities are fixed. However, the estimated fair
values of the fixed-rate debt and redeemable preferred stock are subject to
market risk. As disclosed in Notes 9 and 10 of our consolidated financial
statements, which are included as part of this report, we had $4,021.6 million in fixed rate debt, $375.0 million in
variable rate debt and $2,097.0 million in fixed rate redeemable preferred
stock as of December 31, 2000. The significant terms of our instruments are
fully disclosed in notes 9 and 10 to the consolidated financial statements. We
are not currently engaged in the use of off-balance sheet derivative financial
instruments, including interest rate swap and collar agreements, to hedge or
partially hedge interest rate exposure arising from changes in interest rates.

As disclosed in Note 4 of the consolidated financial statements, we also
maintain an investment portfolio consisting of U.S. government and other
securities with an average maturity of less than one year. These securities are
classified as available for sale. If interest rates were to increase or
decrease immediately, it could have a material, short-term impact on the fair
value of these financial instruments. However, changes in interest rates would
not likely have a material impact on interest earned on our investment
portfolio. We currently mitigate our interest rate exposure on these
investments by maintaining shorter maturity periods, and cycling the maturity
dates for each investment over different periods throughout the year.

Presented below is an analysis of our financial instruments, as of
December 31, 2000, that are sensitive to changes in interest rates. The table
demonstrates the change in fair value of the instruments calculated for an
instantaneous parallel shift in interest rates, plus or minus 50 basis points,
or BPS, 100 BPS, and 150 BPS. With respect to our fixed rate debt, the
sensitivity table below illustrates fair values or the amount of debt we
would be able to obtain should interest rates fall or rise in the range
indicated assuming similar terms and similar assessment of risk by our lenders.
Fair values are determined using market rates on comparable instruments at
December 31,

45



---



##### Table of Contents



2000. Also included in the table below is an illustration of the cash flow
risk arising from changes in interest rates on our senior secured credit
facility.

|                       |  |                                                                    |       |                       |  |                                                                    |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|---------------------- |  | ------------------------------------------------------------------ | ----- | --------------------- |  | ------------------------------------------------------------------ | ----- | ---------- |  | ------ | ----- | ------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|Interest Rate Risk     |  | Valuation of Securities Given an Interest Rate Decrease of X Basis |       | No Change in Interest |  | Valuation of Securities Given an Interest Rate Decrease of X Basis |      
|(in millions)          |  | Points                                                             |       | Rates                 |  | Points                                                            
|                       |  |                                                                    |       |                       |  |                                                                    |      
|                       |  | (150 BPS)                                                          |       | (100 BPS)             |  | (50 BPS)                                                           |       | Fair Value |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                       |  |                                                                    |       |                       |  |                                                                    |       |            |  |        |       |         |  |        
|Financial Assets:     
|                      
|                      
|                      
|                      
|3 months - 1 year      |  |                                                                    | 859   |                       |  |                                                                    | 858   |            |  |        | 857   |         |  |         | 855   |  |  |   | 854   |  |  |   | 853   |  |  |   | 852  
|                      
|                      
|                      
|                      
|Over 1 year            |  |                                                                    | 516   |                       |  |                                                                    | 515   |            |  |        | 514   |         |  |         | 513   |  |  |   | 512   |  |  |   | 510   |  |  |   | 508   | 
|                       |  |                                                                    |       |                       |  |                                                                    |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Marketable securities  |  | $                                                                  | 1,375 |                       |  | $                                                                  | 1,373 |            |  | $      | 1,371 |         |  | $       | 1,368 |  |  | $ | 1,366 |  |  | $ | 1,363 |  |  | $ | 1,360 | 
|                      
|                      
|                      
|                      
|Financial Liabilities:
|                      
|                      
|                      
|                      
|Due within 5-7 years   |  |                                                                    | 810   |                       |  |                                                                    | 793   |            |  |        | 777   |         |  |         | 762   |  |  |   | 746   |  |  |   | 732   |  |  |   | 717   | 
|                      
|                      
|                      
|                      
|Due in 7-10 years      |  |                                                                    | 2,500 |                       |  |                                                                    | 2,434 |            |  |        | 2,370 |         |  |         | 2,308 |  |  |   | 2,249 |  |  |   | 2,191 |  |  |   | 2,136 | 
|                       |  |                                                                    |       |                       |  |                                                                    |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Fixed rate debt        |  | $                                                                  | 3,310 |                       |  | $                                                                  | 3,227 |            |  | $      | 3,147 |         |  | $       | 3,070 |  |  | $ | 2,995 |  |  | $ | 2,923 |  |  | $ | 2,853 | 

|                |  |                                             |        |                       |  |                                             |        |            |  |        |        |         |  |         |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|--------------- |  | ------------------------------------------- | ------ | --------------------- |  | ------------------------------------------- | ------ | ---------- |  | ------ | ------ | ------- |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|Cash Flow Risk  |  | Annual Interest Expense Given               |        | No Change in Interest |  | Annual Interest Expense Given               |       
|(in thousands)  |  | an Interest Rate decrease of X Basis Points |        | Rates                 |  | an Interest Rate decrease of X Basis Points |       
|                |  |                                             |        |                       |  |                                             |       
|                |  | (150 BPS)                                   |        | (100 BPS)             |  | (50 BPS)                                    |        | Fair Value |  | 50 BPS |        | 100 BPS |  | 150 BPS
|                |  |                                             |        |                       |  |                                             |        |            |  |        |        |         |  |        
|Credit Facility |  | $                                           | 30,412 |                       |  | $                                           | 32,287 |            |  | $      | 34,162 |         |  | $       | 36,037 |  |  | $ | 37,912 |  |  | $ | 39,787 |  |  | $ | 41,662 | 



The sensitivity analysis provides 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 sensitivity analysis.




Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements are filed under this Item, beginning
on page F-1 of this Report, and XO Capitals consolidated balance sheet is
filed under this Item, beginning on Page F-26 of this Report.




Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

PART III




Item 10. Directors and Executive Officers of the Registrant

The information required herein regarding directors is incorporated herein
by reference from the definitive Proxy Statement for XOs 2001 Annual Meeting,
which is scheduled to be filed on or before May 1, 2001, under the caption
Election of Directors. The information required herein regarding executive
officers required is set forth in Part I hereof under the heading Executive
Officers of the Registrant, which information is incorporated herein by
reference. The information required by this item regarding compliance with
Section 16(a) of the Securities and Exchange Act of 1934 by XOs directors and
executive officers, and holders of ten percent of a registered class of XOs
equity securities is incorporated herein by reference from the definitive Proxy
Statement for XOs 2001 Annual Meeting which is scheduled to be filed on or
before May 1, 2001, under the caption Other Information-Section 16(a)
Beneficial Ownership Reporting Compliance.




Item 11. Executive Compensation

The information required by this item regarding compensation of executive
officers and directors is incorporated herein by reference from the definitive
Proxy Statement for XOs 2001 Annual Meeting, which is scheduled to be filed on
or before May 1, 2001, under the captions Director Compensation and
Executive Compensation.

46



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##### Table of Contents






Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this item is incorporated herein by reference
from the definitive Proxy Statement for XOs 2001 Annual Meeting, which is
scheduled to be filed on or before May 1, 2001, under the caption XO Common
Stock Ownership.




Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference
from the definitive Proxy Statement for XOs 2001 Annual Meeting, which is
scheduled to be filed on or before May 1, 2001, under the caption Executive Compensation  Certain
Relationships and Related Transactions.

PART IV




Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. and 2. Financial Statements and Schedules:

|                                                                                                              |  |  |      | 
|------------------------------------------------------------------------------------------------------------- |  |  | ---- | 
|XO Communications, Inc.                                                                                      
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Report of Independent Public Accountants                                                                      |  |  | F-1  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                                  |  |  | F-2  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998                    |  |  | F-3  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Consolidated Statement of Shareholders Equity (Deficit) for the
Years Ended December 31, 2000, 1999 and 1998 |  |  | F-4  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998                    |  |  | F-6  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Notes to Consolidated Financial Statements                                                                    |  |  | F-7  | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|XO Capital, Inc.                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Report of Independent Public Accountants                                                                      |  |  | F-25 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                                  |  |  | F-26 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Note to Consolidated Balance Sheets                                                                           |  |  | F-26 | 

(3) List of Exhibits  Refer to Exhibit Index, which is incorporated
herein by reference.

(b) Reports on Form 8-K:



| |     
| | ----
| | None

47



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                    |  |                                   
|------------------- |  | ----------------------------------
|                    |  | XO Communications, Inc.           
|                   
|                   
|Date: April 2, 2001 |  | By: /s/ Daniel F. Akerson         
|                    |  | Daniel F. Akerson                 
|                    |  | Chief Executive Officer           
|                    |  | Chairman of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 2, 2001 by the following persons on
behalf of the Registrant and in the capacities indicated:

|                                          |  |                                                                                                              
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------
|Name                                      |  | Title                                                                                                        
|                                         
|/s/ Daniel F. Akerson
Daniel F. Akerson   |  | Chief Executive Officer (Principal Executive Officer)
Chairman of the Board of Directors                     
|                                         
|/s/ Wayne M. Rehberger
Wayne M. Rehberger |  | Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
|                                         
|/s/ Joseph L. Cole
Joseph L. Cole         |  | Director                                                                                                     
|                                         
|/s/ Nathaniel A. Davis
Nathaniel A. Davis |  | Director                                                                                                     
|                                         
|/s/ Sandra J. Horbach
Sandra J. Horbach   |  | Director                                                                                                     
|                                         
|/s/ Nicholas Kauser
Nicolas Kauser        |  | Director                                                                                                     
|                                         
|/s/ Craig O. McCaw
Craig O. McCaw         |  | Director                                                                                                     
|                                         
|Sharon L. Nelson                          |  | Director                                                                                                     
|                                         
|Henry R. Nothhaft                         |  | Director                                                                                                     
|                                         
|/s/ Jeffrey S. Raikes
Jeffrey S. Raikes   |  | Director                                                                                                     

48



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|                                          |  |         
|----------------------------------------- |  | --------
|                                         
|/s/ Peter C. Waal
Peter C. Waal           |  | Director
|                                         
|/s/ Dennis M. Weibling
Dennis M. Weibling |  | Director

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                    |  |                          
|------------------- |  | -------------------------
|                    |  | XO Capital, Inc.         
|                   
|                   
|Date: April 2, 2001 |  | By: /s/ Daniel F. Akerson
|                    |  | Daniel F. Akerson        
|                    |  | Chief Executive Officer  

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 2, 2001 by the following persons on
behalf of the Registrant and in the capacities indicated:

|                                             |  |                                                                                                                           
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Name
/s/ Daniel F. Akerson
Daniel F. Akerson |  | TitleChief Executive Officer (Principal Executive Officer)                                                                
|                                            
|/s/ Wayne M. Rehberger
Wayne M. Rehberger    |  | Senior Vice President, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer) and Director
|                                            
|/s/ Nathaniel A. Davis
Nathaniel A. Davis    |  | Director                                                                                                                  
|                                            
|/s/ Gary D. Begeman
Gary D. Begeman          |  | Director                                                                                                                  

49



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EXHIBIT INDEX

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1.1 |  | Amended and Restated Certificate of Incorporation of XO Communications,
Inc. (f/k/a NM Acquisition Corp.) (Incorporated herein by reference to
exhibit 3.1.1 filed with the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 of XO Communications, Inc. (f/k/a
NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
Capital, Inc.))                                                                                                                                                      
|     
|3.1.2 |  | Certificate of Amendment of Certificate of Incorporation of XO
Communications, Inc. (f/k/a NM Acquisition Corp.) (Incorporated herein by
reference to exhibit 3.1.2 filed with the Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000 of XO Communications, Inc.
(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
Capital, Inc.))                                                                                                                                               
|     
|3.1.3 |  | Certificate of Amendment of Certificate of Incorporation of XO
Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) (Incorporated
herein by reference to exhibit 3.1.3 filed with the Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000 of XO
Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO Capital,
Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                      
|     
|3.1.4 |  | Certificate of Amendment of Certificate of Incorporation of XO
Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) (Incorporated
herein by reference to exhibit 3.1.4 filed with the Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2000 of XO
Communications, Inc. and XO Capital, Inc.)                                                                                                                                                                                                      
|     
|3.2.1 |  | Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 14% Series A Senior
Exchangeable Redeemable Preferred Shares and Qualifications, Limitations
and Restrictions Thereof (Incorporated herein by reference to exhibit
3.1.4 filed with the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                  
|     
|3.2.2 |  | Certificate of Designation of Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of 6 1/2% Series B
Cumulative Convertible Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (Incorporated herein by reference to exhibit 3.1.5
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                            
|     
|3.2.3 |  | Certificate of Designation of Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of Series C Cumulative
Convertible Participating Preferred Stock and Qualifications, Limitations
and Restrictions Thereof (Incorporated herein by reference to exhibit
3.1.6 filed with the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                     
|     
|3.2.4 |  | Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of Series D Convertible
Participating Preferred Stock and Qualifications, Limitations and
Restrictions Thereof (Incorporated herein by reference to exhibit 3.1.7
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                            
|     
|3.2.5 |  | Certificate of Designation of Voting Power, Designation Preferences and
Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 13 1/2% Series E Senior
Redeemable Exchangeable Preferred Stock Due 2010 (Incorporated herein by
reference to exhibit 3.1.8 filed with the Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2000 of XO Communications, Inc.
(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
Capital, Inc.))
|     
|3.2.6 |  | Certificate of Designation of Voting Power, Designation Preferences and
Relative, Participating, Optional and Other Special Rights and
Qualifications, Limitations and Restrictions of 7% Series F Convertible
Redeemable Preferred Stock Due 2010 (Incorporated herein by reference to
exhibit 3.1.9 filed with the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 of XO Communications, Inc. (f/k/a
NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
Capital, Inc.))             
|     
|3.2.7 |  | Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of Series G Cumulative
Convertible Participating Preferred Stock and Qualifications,                                                                                                                                                                                                                                                                                                                         

50



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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|      |  | Limitation and Restrictions Thereof (Incorporated herein by reference to
exhibit 3.1.10 filed with the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2000 of XO Communications, Inc. (f/k/a
NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
Capital, Inc.))                                                                                                                                                                                               
|     
|3.2.8 |  | Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and Other Special Rights of Series H Convertible
Participating Preferred Stock and Qualifications, Limitation and
Restrictions Thereof (Incorporated herein by reference to exhibit 3.1.11
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
|     
|3.3   |  | Restated By-laws of XO Communications, Inc. (f/k/a NM Acquisition Corp.)
(Incorporated herein by reference to exhibit 3.2 filed with the Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000 of XO
Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO Capital,
Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                             
|     
|3.4   |  | Articles of Incorporation of XO Capital, Inc. (Incorporated herein by
reference to exhibit 3.3 filed with the Registration Statement on Form S-4
of XO Communications, L.L.C. (the predecessor of XO Communications, Inc.)
and XO Capital, Inc. (Commission File No. 333-4603))                                                                                                                                                                                                                       
|     
|3.5   |  | By-laws of XO Capital, Inc. (Incorporated herein by reference to exhibit
3.4 filed with the Registration Statement on Form S-4 of XO
Communications, L.L.C. (the predecessor of XO Communications, Inc.) and XO
Capital, Inc. (Commission File No. 333-4603))                                                                                                                                                                                                                                         
|     
|4.1.1 |  | Form of stock certificate of 14% Senior Exchangeable Redeemable
Preferred Shares (Incorporated herein by reference to exhibit 4.4 filed
with the Annual Report on Form 10-KSB for the year ended December 31, 1996
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                       
|     
|4.1.2 |  | Form of stock certificate of Class A common stock (Incorporated herein
by reference to exhibit 4.4 filed with the Registration Statement on Form
S-1 of NEXTLINK Communications, Inc. (Commission File No. 333-32001))                                                                                                                                                                                                                                                                                
|     
|4.1.3 |  | Form of stock certificate of 6 1/2% Cumulative Convertible Preferred
Stock (Incorporated herein by reference to exhibit 4.1.3 filed with the
Annual Report on Form 10-K for the year ended December 31, 1999 of
NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                             
|     
|4.1.4 |  | Form of stock certificate of Series C Cumulative Convertible
Participating Preferred Stock (Incorporated herein by reference to exhibit
4.1.4 filed with the Annual Report on Form 10-K for the year ended
December 31, 1999 of NEXTLINK Communications, Inc. and NEXTLINK Capital,
Inc.)                                                                                                                                                                                                             
|     
|4.1.5 |  | Form of stock certificate of Series D Convertible Participating
Preferred Stock (Incorporated herein by reference to exhibit 4.1.5 filed
with the Annual Report on Form 10-K for the year ended December 31, 1999
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                        
|     
|4.1.6 |  | Form of stock certificate of 13 1/2% Series E Senior Redeemable
Exchangeable Preferred Stock Due 2010 (Incorporated herein by reference to
exhibit 4.3 filed with the Registration Statement on Form S-4 of
Concentric Network Corporation (Commission File No. 333-58641))                                                                                                                                                                                                                           
|     
|4.1.7 |  | Form of stock certificate of 7% Series F Convertible Redeemable
Preferred Stock Due 2010 (Incorporated herein by reference to exhibit
4.1.7 filed with the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                           
|     
|4.1.8 |  | Form of stock certificate of Series G Cumulative Convertible
Participating Preferred Stock (Incorporated herein by reference to exhibit
4.1.8 filed with the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                         
|     
|4.1.9 |  | Form of stock certificate of Series H Convertible Participating
Preferred Stock (Incorporated herein by reference to exhibit 4.1.9 filed
with the Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                    

51



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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|4.2.1 |  | Indenture, dated as of April 25, 1996, by and among NEXTLINK
Communications, Inc. (predecessor to XO Communications, Inc.), NEXTLINK
Capital, Inc. and United States Trust Company of New York, as Trustee,
relating to 12 1/2% Senior Notes due April 15, 2006, including form of
global note (Incorporated herein by reference to exhibit 4.1 filed with
the Registration Statement on Form S-4 of NEXTLINK Communications, L.L.C.
and NEXTLINK Capital, Inc. (Commission File No. 333-4603))                                                                                                                                               
|     
|4.2.2 |  | First Supplemental Indenture, dated as of January 31, 1997, by and among
NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc.),
NEXTLINK Communications, L.L.C. (predecessor to XO Communications, Inc.),
NEXTLINK Capital, Inc. and United States Trust Company of New York, as
Trustee (Incorporated herein by reference to exhibit 4.6 filed with the
Annual Report on Form 10-KSB for the year ended December 31, 1996 of
NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                      
|     
|4.2.3 |  | Second Supplemental Indenture, dated June 3, 1998, amending Indenture
dated April 25, 1996, by and among NEXTLINK Communications, Inc.
(predecessor to XO Communications, Inc.), NEXTLINK Capital, Inc. and
United States Trust Company of New York, as Trustee (Incorporated herein
by reference to exhibit 4.10 filed with the Registration Statement on Form
S-4 of NEXTLINK Communications, Inc. (Commission File No. 333-53975))                                                                                                                                                                                                         
|     
|4.2.4 |  | Third Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated April 25, 1996, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., NEXTLINK Capital,
Inc., XO Communications, Inc., f/k/a NM Acquisition Corp. and successor by
merger to the Issuer, and United States Trust Company of New York, as
Trustee (Incorporated herein by reference to exhibit 4.2.4 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
|     
|4.3.1 |  | Indenture dated September 25, 1997 between United States Trust Company,
as Trustee and NEXTLINK Communications, Inc. (predecessor to XO
Communications, Inc.), relating to the 9 5/8% Senior Notes due 2007
(Incorporated herein by reference to exhibit 4.7 filed with the
Registration Statement on Form S-3 of NEXTLINK Communications, Inc.
(Commission File No. 333-77577))                                                                                                                                                                                                                                                              
|     
|4.3.2 |  | First Supplemental Indenture, dated June 3, 1998, amending Indenture
dated September 25, 1997, by and between NEXTLINK Communications, Inc.
(predecessor to XO Communications, Inc.) and United States Trust Company
of New York, as Trustee (Incorporated herein by reference to exhibit 4.11
filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-53975))                                                                                                                                                                                                                            
|     
|4.3.3 |  | Second Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated September 25, 1997, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and United States Trust Company of New York, as Trustee
(Incorporated herein by reference to exhibit 4.3.3 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                   
|     
|4.4.1 |  | Indenture, dated March 3, 1998, between United States Trust Company, as
Trustee and NEXTLINK Communications, Inc. (predecessor to XO
Communications, Inc.), relating to the 9% Senior Notes due 2008
(Incorporated herein by reference to exhibit 4.7 filed with the Annual
Report on Form 10-KSB for the year ended December 31, 1997 of NEXTLINK
Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                           
|     
|4.4.2 |  | First Supplemental Indenture, dated June 3, 1998, amending Indenture
dated March 3, 1998, by and between NEXTLINK Communications, Inc.
(predecessor to XO Communications, Inc.) and United States Trust Company
of New York, as Trustee (Incorporated herein by reference to exhibit 4.12
filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-53975))                                                                                                                                                                                                                                 
|     
|4.4.3 |  | Second Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of March 3, 1999, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and United States Trust Company of New York, as Trustee
(Incorporated herein by reference to exhibit 4.4.3 filed with                                                                                                                                                                                                                       

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|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|      |  | the Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and
XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                                                                                                                                                                                           
|     
|4.5.1 |  | Indenture, dated April 1, 1998, between United States Trust Company, as
Trustee and NEXTLINK Communications, Inc. (predecessor to XO
Communications, Inc.), relating to the 9.45% Senior Discount Notes due
2008 (Incorporated herein by reference to exhibit 4.9 filed with the
quarterly report on Form 10-Q for the quarterly period ended June 30, 1998
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                       
|     
|4.5.2 |  | First Supplemental Indenture, dated June 3, 1998, amending Indenture
dated April 1, 1998, by and between NEXTLINK Communications, Inc.
(predecessor to XO Communications, Inc.) and United States Trust Company
of New York, as Trustee (Incorporated herein by reference to exhibit 4.13
filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-53975))                                                                                                                                                                                                                  
|     
|4.5.3 |  | Second Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of April 1, 1998, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and United States Trust Company of New York, as Trustee
(Incorporated herein by reference to exhibit 4.5.3 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))   
|     
|4.6.1 |  | Indenture, dated November 12, 1998, by and among NEXTLINK
Communications, Inc. (predecessor to XO Communications, Inc.) and United
States Trust Company of New York, as trustee relating to the 10 3/4%
Senior Notes due 2008 (Incorporated herein by reference to exhibit 4.1
filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-71749))                                                                                                                                                                                                                             
|     
|4.6.2 |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of November 12, 1998, by and among NEXTLINK
Communications, Inc., as Issuer and predecessor to NM Acquisition Corp.,
XO Communications, Inc., f/k/a NM Acquisition Corp. and successor by
merger to the Issuer, and United States Trust Company of New York, as
Trustee (Incorporated herein by reference to exhibit 4.6.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
|     
|4.7.1 |  | Indenture, dated June 1, 1999, by and among NEXTLINK Communications,
Inc. (predecessor to XO Communications, Inc.) and United States Trust
Company of New York, as Trustee, relating to the 10 3/4% Senior Notes due
2009 (Incorporated herein by reference to exhibit 4.16 filed with the
quarterly report on Form 10-Q for the quarterly period ended September 30,
1999 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                        
|     
|4.7.2 |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of June 1, 1999, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and United States Trust Company of New York, as Trustee
(Incorporated herein by reference to exhibit 4.7.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))     
|     
|4.8.1 |  | Indenture, dated June 1, 1999, by and among NEXTLINK Communications Inc.
(predecessor to XO Communications, Inc.) and United States Trust Company
of Texas, as Trustee, related to the 12 1/4% Senior Discount Notes due
2009 (Incorporated herein by reference to exhibit 4.17 filed with the
quarterly report on Form 10-Q for the quarterly period ended September 30,
1999 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                    
|     
|4.8.2 |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of June 1, 1999, by and among NEXTLINK Communications,
Inc., as Issuer and predecessor to NM Acquisition Corp., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and United States Trust Company of Texas, as Trustee
(Incorporated herein by reference to exhibit 4.8.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))        

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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|4.9.1  |  | Indenture, dated November 17, 1999, by and among NEXTLINK
Communications, Inc. (predecessor to XO Communications, Inc.) and United
States Trust Company of New York, as Trustee, relating to the 10 1/2%
Senior Notes due 2009 (Incorporated herein by reference to exhibit 4.1(i)
filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-30388))                                                                                                                                                                                                                                              
|      
|4.9.2  |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of November 17, 1999, by and among NEXTLINK
Communications, Inc., as Issuer and predecessor to NM Acquisition Corp.,
XO Communications, Inc., f/k/a NM Acquisition Corp. and successor by
merger to the Issuer, and United States Trust Company of New York, as
Trustee (Incorporated herein by reference to exhibit 4.9.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                     
|      
|4.10.1 |  | Indenture, dated November 17, 1999, by and among NEXTLINK
Communications, Inc. (predecessor to XO Communications, Inc.) and United
States Trust Company of Texas, as Trustee, relating to the 12 1/8% Senior
Discount Notes due 2009 (Incorporated herein by reference to exhibit
4.1(ii) filed with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. (Commission File No. 333-30388))                                                                                                                                                                                                                                       
|      
|4.10.2 |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated as of November 17, 1999, by and among NEXTLINK
Communications, Inc., as Issuer and predecessor to NM Acquisition Corp.,
XO Communications, Inc., f/k/a NM Acquisition Corp. and successor by
merger to the Issuer, and United States Trust Company of Texas, as Trustee
(Incorporated herein by reference to exhibit 4.10.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                       
|      
|4.11.1 |  | Indenture, dated as of December 18, 1997, between Concentric Network
Corporation (predecessor to XO Communications, Inc.), as Issuer, and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
(Incorporated herein by reference to exhibit 4.2 filed with the
Registration Statement on Form S-4 of Concentric Network Corporation
(Commission File No. 333-45055))                                                                                                                                                                                                                                                            
|      
|4.11.2 |  | First Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated December 18, 1997, by and among Concentric Network
Corporation (predecessor to XO Communications, Inc.), as Issuer, and Chase
Manhattan Bank and Trust Company, National Association, as Trustee
(Incorporated herein by reference to exhibit 4.11.2 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                              
|      
|4.11.3 |  | Second Supplemental Indenture, dated as of June 15, 2000, amending
Indenture dated December 18, 1997, by and among Concentric Network
Corporation, as Issuer and predecessor to XO Communications, Inc., XO
Communications, Inc., f/k/a NM Acquisition Corp. and successor by merger
to the Issuer, and Chase Manhattan Bank and Trust Company, National
Association, as Trustee (Incorporated herein by reference to exhibit
4.11.3 filed with the Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
|      
|4.12   |  | Indenture, dated as of January 12, 2001, by and among XO Communications,
Inc., as Issuer and U.S. Trust Company, National Association, as Trustee
 (Incorporated herein by reference to exhibit 4.12 filed with Amendment No. 1 on Form
S-3 to Registration Statement on Form S-4 of XO Communications Inc. (Commission File No. 333-34974)).                                                                                                                                                                                                                                                                                                       
|      
|4.13.1 |  | Warrant Agreement, dated as of December 18, 1997, between Concentric
Network Corporation (predecessor to XO Communications, Inc.) and Chase
Manhattan Bank and Trust Company, National Association, as warrant agent
(Incorporated herein by reference to exhibit 10.45 filed with the
Registration Statement on Form S-4 of Concentric Network Corporation
(Commission File No. 333-45055))                                                                                                                                                                                                                                                        

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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|4.13.2 |  | Warrant Registration Rights Agreement, dated as of December 18, 1997,
between Concentric Network Corporation (predecessor to XO Communications,
Inc.) and the Initial Purchasers. (Incorporated herein by reference to
exhibit 10.46 filed with the Registration Statement on Form S-4 of
Concentric Network Corporation (Commission File No. 333-45055))                                                                         
|      
|4.13.3 |  | Common Stock Purchase Warrant, dated June 29, 1999, issued to Microsoft
Corporation by Concentric Network Corporation (predecessor to XO
Communications, Inc.) (Incorporated herein by reference to exhibit 4.12.5
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
|      
|10.1.1 |  | Stock Option Plan of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) (Incorporated herein by reference to exhibit 10.1.1
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                            
|      
|10.1.2 |  | Employee Stock Purchase Plan of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) (Incorporated herein by reference to exhibit 10.1.2
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                 
|      
|10.1.3 |  | Change of Control Retention Bonus and Severance Pay Plan of XO
Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) (Incorporated
herein by reference to exhibit 10.3 filed with the Annual Report on Form
10-K for the year ended December 31, 1999 of NEXTLINK Communications, Inc.
and NEXTLINK Capital, Inc.)                                                                                                           
|      
|10.1.4 |  | 1995 Stock Incentive Plan for Employees and Consultants of Concentric
Network Corporation (predecessor to XO Communications, Inc.) (Incorporated
herein by reference to exhibit 10.4 filed with the Registration Statement
on Form S-1 of Concentric Network Corporation (Commission File No.
333-27241))                                                                                                                         
|      
|10.1.5 |  | Amended and Restated 1996 Stock Plan of Concentric Network Corporation
(predecessor to XO Communications, Inc.) (Incorporated herein by reference
to exhibit 10.5 filed with the Registration Statement on Form S-1 of
Concentric Network Corporation (Commission File No. 333-27241))                                                                                                                                            
|      
|10.1.6 |  | 1997 Stock Plan of Concentric Network Corporation (predecessor to XO
Communications, Inc.) (Incorporated herein by reference to exhibit 10.6
filed with the Registration Statement on Form S-1 of Concentric Network
Corporation (Commission File No. 333-27241))                                                                                                                                                                 
|      
|10.1.7 |  | 1999 Non-Statutory Stock Option Plan of Concentric Network Corporation
(predecessor to XO Communications, Inc.) (Incorporated herein by reference
to exhibit 10.50 filed with the Annual Report on Form 10-KA for the year
ended December 31, 1998 of Concentric Network Corporation)                                                                                                                                             
|      
|10.2.1 |  | Registration Rights Agreement, dated as of January 15, 1997, between
NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc. and
the signatories listed therein (Incorporated herein by reference to
exhibit 10.4 filed with the Annual Report on Form 10-KSB for the year
ended December 31, 1996 of NEXTLINK Communications, Inc. and NEXTLINK
Capital, Inc.)                                                     
|      
|10.2.2 |  | Registration Rights Agreement, dated as of November 4, 1997, between
NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc.) and
Wendy P. McCaw (Incorporated herein by reference to exhibit 10.5 filed
with the Annual Report on Form 10-K for the year ended December 31, 1999
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                      
|      
|10.2.3 |  | Registration Right Agreement, dated as of June 30, 1999, between
NEXTLINK Communications, Inc. and Craig O. McCaw (Incorporated herein by
reference to exhibit 10.6 filed with the Annual Report on Form 10-K for
the year ended December 31, 1999 of NEXTLINK Communications, Inc. and
NEXTLINK Capital, Inc.)                                                                                                                   

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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      
|10.2.4 |  | Amended and Restated Registration Rights Agreement dated as of July 6,
2000, between XO Communications, Inc. (f/k/a NEXTLINK Communications,
Inc.) and the purchasers listed on the signature pages thereto, relating
to Class A common stock issuable upon conversion of Series C, Series D,
Series G and Series H convertible preferred stock (Incorporated herein by
reference to exhibit 10.2.4 filed with the Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2000 of XO Communications,
Inc. and XO Capital, Inc.)                                                                                                                                    
|      
|10.2.5 |  | Registration Right Agreement, dated as of June 16, 2000, between XO
Communications, Inc. (f/k/a NM Acquisition Corp.) and Craig O. McCaw
(Incorporated herein by reference to exhibit 99.4 filed with the Current
Report on Form 8-K filed on June 22, 2000 of NEXTLINK Communications,
Inc.)                                                                                                                                                                                                                                                                                                                                                                                          
|      
|10.2.6 |  | Registration Rights Agreement, dated as of January 12, 2001, by and
among XO Communications, Inc., Salomon Smith Barney Inc. and Goldman,
Sachs & Co., relating to Class A Common Stock issuable upon conversion of
5 3/4% Convertible Subordinated Notes due 2009 (Incorporated herein by reference to exhibit
10.2.7 filed with Amendment No. 1 a Form S-3 to Registration Statement on Form S-4 of XO Communications, Inc.
(Commission file No. 333-34974)).                                                                                                                                                                                                                        
|      
|10.3.1 |  | Employment Agreement, effective September 21, 1999, by and between
Daniel Akerson and NEXTLINK Communications, Inc. (predecessor to XO
Communications, Inc.) (Incorporated herein by reference to exhibit 10.11
filed with the quarterly report on Form 10-Q for the quarterly period
ended September 30, 1999 of NEXTLINK Communications, Inc. and NEXTLINK
Capital, Inc.)                                                                                                                                                                                                                                                                                                            
|      
|10.3.2 |  | Employment Agreement, dated as of January 3, 2000, by and between
Nathaniel A. Davis and NEXTLINK 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.)                                                                                                                                                                                                                                                                                                                                                                  
|      
|10.3.3 |  | Employment Agreement, dated as of June 16, 2000, by and between Henry R.
Nothhaft and XO Communications, Inc. (f/k/a NM Acquisition Corp.)
(Incorporated herein by reference to exhibit 10.3.4 filed with the
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000
of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.) and XO
Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                                         
|      
|10.3.4 |  | Amendment No. 1 to Employment Agreement, dated as of February 16,
2001, between Henry R. Nothhaft and XO Communications, Inc. (filed herewith)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      
|10.4.1 |  | Cost sharing and IRU Agreement, dated July 18, 1998, between Level 3
Communications, LLC and 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 |  | Guaranty Agreement, dated July 18, 1998, between NEXTLINK
Communications, Inc. (predecessor to XO Communications, Inc.) and Level 3
Communications, LLC. (Incorporated herein by reference to exhibit 10.7
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.)                                                                                                                                                                                                                                                                                                                 
|      
|10.4.3 |  | Amendment of Guaranty Agreement, dated as of June 16, 2000, between XO
Communications, Inc. (f/k/a NM Acquisition Corp.) and Level 3
Communications, L.L.C. (Incorporated herein by reference to exhibit 10.5.3
filed with the Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                        
|      
|10.5.1 |  | Credit and Guaranty Agreement, dated as of February 3, 2000, among
NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc.),
certain subsidiaries of NEXTLINK Communications, Inc., as guarantors,
various lenders, Goldman Sachs Credit Partners L.P., as syndication agent,
Toronto Dominion (Texas), Inc., as administrative agent, Barclays Bank
PLC, and The Chase Manhattan Bank, as co-documentation agents and Goldman
Sachs Credit Partners L.P., and TD Securities (USA) Inc., as joint lead
arrangers (Incorporated herein by reference to exhibit 10.1 filed with the
current report on Form 8-K filed on February 16, 2000 of NEXTLINK
Communications, Inc.)
|      
|21     |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|      
|23.1   |  | Consent of Arthur Andersen                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |  | 
| |  | 
| |  | 

57



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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of

XO Communications, Inc.:

We have audited the accompanying consolidated balance sheets of XO
Communications, Inc. (a Delaware corporation, formerly NEXTLINK Communications,
Inc.) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial position
of XO Communications, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.

/s/ ARTHUR ANDERSEN LLP



Vienna, Virginia

February 5, 2001

F-1



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##### Table of Contents



XO Communications, Inc.

Consolidated Balance Sheets
(Dollars in thousands, except share amounts)

|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |            |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | --------- | ------------ | --------- | ---- | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           | December 31,
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |             
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           | 2000         |           | 1999
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |     
|ASSETS                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Current assets:                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                    |                           | $         | 493,004      |           |      | $         | 868,463    |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Marketable securities                                                                                                                                                                                                                                                                                                                                                                        |                           |           | 1,367,959    |           |      |           | 1,013,301  |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accounts receivable, net of allowance for
doubtful accounts of $20,999 and $7,215,
respectively                                                                                                                                                                                                                                                                                              |                           |           | 181,309      |           |      |           | 80,746     |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Other current assets                                                                                                                                                                                                                                                                                                                                                                         |                           |           | 71,536       |           |      |           | 8,935      |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Pledged securities                                                                                                                                                                                                                                                                                                                                                                           |                           |           | 17,415       |           |      |           | 40,759     |          
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              | Total current assets      |           |              | 2,131,223 |      |           |            | 2,012,204 | 
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Property and equipment, net                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 2,794,105 |              |           |      | 1,180,021 |           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Investments in fixed wireless licenses, net                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 997,333   |              |           |      | 926,389   |           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Goodwill and other intangibles, net                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 2,914,876 |              |           |      | 91,428    |           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Other assets                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 247,838   |              |           |      | 387,066   |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              | Total assets              |           | $            | 9,085,375 |      |           | $          | 4,597,108 | 
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                                                                             
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Current liabilities:                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accounts payable                                                                                                                                                                                                                                                                                                                                                                             |                           | $         | 357,451      |           |      | $         | 81,841     |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                          |                           |           | 279,534      |           |      |           | 119,795    |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                                     |                           |           | 46,018       |           |      |           | 45,578     |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Current portion of capital lease obligations                                                                                                                                                                                                                                                                                                                                                 |                           |           | 24,820       |           |      |           | 2,003      |          
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              | Total current liabilities |           |              | 707,823   |      |           |            | 249,217   | 
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Long-term debt                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 4,396,596 |              |           |      | 3,733,342 |           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Other long-term liabilities                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 45,539    |              |           |      | 15,319    |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              | Total liabilities         |           |              | 5,149,958 |      |           |            | 3,997,878 | 
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Redeemable preferred stock, par value $0.01 per
share, 25,000,000 shares authorized: 13,189,227 and
12,324,796 shares issued and outstanding on
December 31, 2000 and December 31,
1999, respectively; aggregate liquidation preference of
$2,100,093 and $625,952 on December 31, 2000 and
December 31, 1999, respectively |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 2,097,016 |              |           |      | 612,352   |           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|Stockholders equity (deficit):                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Common Stock, par value $0.02 per share, stated
at amounts paid in; Class A, 1,000,000,000
shares authorized, 262,010,715 and 150,457,264 shares issued and outstanding on December 31,
2000 and December 31, 1999, respectively; Class
B, 120,000,000 shares authorized, 105,414,226
and 117,485,100 shares issued and outstanding on
December 31, 2000 and December 31, 1999, respectively |                           |           | 4,392,646    |           |      |           | 1,139,232  |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Deferred compensation                                                                                                                                                                                                                                                                                                                                                                        |                           |           | (72,050      | )         |      |           | (85,489    | )        
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                |                           |           | (17,041      | )         |      |           | 150,634    |          
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                            | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                          |                           |           | (2,465,154   | )         |      |           | (1,217,499 | )        
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|Total stockholders equity (deficit)                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                              |                           | 1,838,401 |              |           |      | (13,122   | )         
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           
|Total liabilities and stockholders equity (deficit)                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                              | $                         | 9,085,375 |              |           | $    | 4,597,108 |           
|                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                              |                           |           |              |           |      |           |           

See accompanying notes to consolidated financial statements.

F-2



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##### Table of Contents



XO Communications, Inc.

Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)

|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |         |         | 
|------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ----------- | ----------------------- | --------- | ---- | ----------- | ------- | ------- | - | ----------- | ------- | ------- | 
|                                                                                     |                                                                                                                                                      |                          |             | Year Ended December 31,
|                                                                                     |                                                                                                                                                      |                          |             |                        
|                                                                                     |                                                                                                                                                      |                          |             | 2000                    |           | 1999 |             | 1998   
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |        
|Revenue                                                                              |                                                                                                                                                      | $                        | 723,826     |                         |           | $    | 274,324     |         |         | $ | 139,667     |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Costs and expenses:                                                                 
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Operating (excluding stock-based
compensation of $3,015
    and $835 in 2000 and
1999, respectively)                                                 |                          |             | 476,021                 |           |      |             | 221,664 |         |   |             | 123,675 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Selling, general and administrative
(excluding stock-based
    compensation of
$45,313, $12,037 and $4,993 in 2000,
    1999
and 1998, respectively) |                          |             | 557,249                 |           |      |             | 266,908 |         |   |             | 156,929 |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Restructuring (including $28,016 in non-cash
stock
    compensation)                                                                                 |                          |             |                        |           |      |             | 30,935  |         |   |             |        |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Stock-based compensation                                                                                                                             |                          |             | 48,328                  |           |      |             | 12,872  |         |   |             | 4,993   |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Depreciation                                                                                                                                         |                          |             | 223,780                 |           |      |             | 93,097  |         |   |             | 45,638  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | Amortization                                                                                                                                         |                          |             | 393,934                 |           |      |             | 15,378  |         |   |             | 14,616  |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                     | In-process research and development                                                                                                                  |                          |             | 36,166                  |           |      |             |        |         |   |             |        |        
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|                                                                                     |                                                                                                                                                      | Total costs and expenses |             |                         | 1,735,478 |      |             |         | 640,854 |   |             |         | 345,851 | 
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Loss from operations                                                                 |                                                                                                                                                      |                          | (1,011,652  | )                       |           |      | (366,530    | )       |         |   | (206,184    | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest income                                                                      |                                                                                                                                                      |                          | 180,905     |                         |           |      | 90,961      |         |         |   | 72,409      |        
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Interest expense                                                                     |                                                                                                                                                      |                          | (434,122    | )                       |           |      | (283,123    | )       |         |   | (144,565    | )      
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Other income, net                                                                    |                                                                                                                                                      |                          | 163,570     |                         |           |      |            |         |         |   |            |        
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Net loss                                                                             |                                                                                                                                                      | $                        | (1,101,299  | )                       |           | $    | (558,692    | )       |         | $ | (278,340    | )      
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Preferred stock dividends and accretion of
preferred stock
    redemption obligation |                                                                                                                                                      |                          | (146,356    | )                       |           |      | (69,189     | )       |         |   | (58,773     | )      
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Net loss applicable to common shares                                                 |                                                                                                                                                      | $                        | (1,247,655  | )                       |           | $    | (627,881    | )       |         | $ | (337,113    | )      
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Net loss per share (basic and diluted)                                               |                                                                                                                                                      | $                        | (3.87       | )                       |           | $    | (2.51       | )       |         | $ | (1.57       | )      
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        
|Shares used in computation of net loss per share                                     |                                                                                                                                                      |                          | 322,089,883 |                         |           |      | 250,264,918 |         |         |   | 215,416,528 |        
|                                                                                     |                                                                                                                                                      |                          |             |                         |           |      |             |         |         |   |             |        

See accompanying notes to consolidated financial statements.

F-3



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##### Table of Contents



XO Communications, Inc.

Consolidated Statements of Stockholders Equity (Deficit)
(Dollars in thousands)

|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |         |                                             |   |         |         |   |   |            |          |  
|----------------------------- | ---------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------- |  | ----------- | ----------- | -------------------- | - | ------------------ | ------- | ------------------------------------------- | - | ------- | ------- | - | - | ---------- | -------- | -
|                              |                                                                                                            |  | Common Stock
|                              |                                                                                                            |  |             
|                              |                                                                                                            |  | Shares      
|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |        
|                              |                                                                                                            |  | Class A      |            | Class B |  | Amount      |             | DeferredCompensation |   | AccumulatedDeficit |         | Accumulated
OtherComprehensiveIncome (Loss) |   | Total  
|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |         |                                             |   |        
|Balance at December 31,  1997 |                                                                                                            |  | 76,671,596   |            |         |  | 134,986,292 |             |                      | $ | 330,561            |         |                                             | $ | (6,771  | )       |   | $ | (252,505   | )        |  
|                             
|                             
|                             
|                             
|                              | Issuance of compensatory   stock options                                                                   |  |              |           |         |  |             |            |                      |   |                    | 9,592   |                                             |   |         | (9,592  | ) |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Compensation attributable   to stock options vesting                                                       |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         | 4,993   |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  through employee
  benefit plans                                                 |  |              | 3,377,140  |         |  |             |            |                      |   |                    | 3,695   |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  for purchase of
minority
  interest                                              |  |              |           |         |  |             | 757,248     |                      |   |                    | 5,727   |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Conversion of Class B   common stock
into   Class A  common
stock                                          |  |              | 16,631,732 |         |  |             | (16,631,732 | )                    |   |                    |        |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Termination of common  stock redemption  obligation                                                        |  |              |           |         |  |             | 2,079,800   |                      |   |                    | 4,950   |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                                                                   |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            | (278,340 | )
|                             
|                             
|                             
|                             
|                              | Cumulative redeemable  preferred stock
dividends  and accretion of preferred stock redemption obligation   |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            | (58,773  | )
|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |         |                                             |   |         |         |   |   |            |          |  
|Balance at December 31,  1998 |                                                                                                            |  | 96,680,468   |            |         |  | 121,191,608 |             |                      |   | 354,525            |         |                                             |   | (11,370 | )       |   |   | (589,618   | )        |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  in public offering                                                               |  |              | 16,928,200 |         |  |             |            |                      |   |                    | 310,533 |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  in acquisition                                                                   |  |              | 22,863,324 |         |  |             |            |                      |   |                    | 350,438 |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of compensatory  stock options                                                                    |  |              |           |         |  |             |            |                      |   |                    | 86,991  |                                             |   |         | (86,991 | ) |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Compensation attributable  to stock options vesting                                                        |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         | 12,872  |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  through employee
benefit  plans                                                  |  |              | 9,193,416  |         |  |             |            |                      |   |                    | 36,468  |                                             |   |        |         |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Conversion of Class B  common stock
  into Class A common
stock                                            |  |              | 4,782,120  |         |  |             | (4,782,120  | )                    |   |                    |        |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  for purchase of
minority  interest                                               |  |              |           |         |  |             | 1,075,612   |                      |   |                    | 210     |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Issuance of common stock  under leasing arrangement                                                        |  |              | 9,736      |         |  |             |            |                      |   |                    | 67      |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              | Net loss                                                                                                   |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            | (558,692 | )
|                             
|                             
|                             
|                             
|                              | Cumulative redeemable  preferred stock
dividends  and accretion of preferred  stock redemption  obligation |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            | (69,189  | )
|                             
|                             
|                             
|                             
|                              | Other comprehensive  income-net
unrealized  holding
gains                                                  |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            |         |  
|                             
|                             
|                             
|                             
|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |         |                                             |   |         |         |   |   |            |          |  
|                              | Total comprehensive  income                                                                                |  |              |           |         |  |             |            |                      |   |                    |        |                                             |   |         |        |   |   |            |         |  
|                              |                                                                                                            |  |              |            |         |  |             |             |                      |   |                    |         |                                             |   |         |         |   |   |            |          |  
|                             
|                             
|                             
|                             
|Balance at December 31,  1999 |                                                                                                            |  | 150,457,264  |            |         |  | 117,485,100 |             |                      | $ | 1,139,232          |         |                                             | $ | (85,489 | )       |   | $ | (1,217,499 | )        |  

F-4



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##### Table of Contents



XO Communications, Inc.

Consolidated Statements of Stockholders Equity (Deficit)  continued
(Dollars in thousands)

|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           |               |   |         |         |       |   |            |            |   |   |         |          |   |   |           |            |  
|---------------------------- | ------------------------------------------------------------------------------------------------------ |  | ------------ | ---------- | ------- |  | ----------- | ----------- | ------------ | - | ----------- | --------- | ------------- | - | ------- | ------- | ----- | - | ---------- | ---------- | - | - | ------- | -------- | - | - | --------- | ---------- | -
|                             |                                                                                                        |  | Common Stock
|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           | Accumulated  
|                             |                                                                                                        |  | Shares       |            |         |  |             |             |              |   |             |           |               |   |         |         | Other
|                             |                                                                                                        |  |              |            |         |  |             |             | Deferred     |   | Accumulated |           | Comprehensive
|                             |                                                                                                        |  | Class A      |            | Class B |  | Amount      |             | Compensation |   | Deficit     |           | Income (Loss) |   | Total  
|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           |               |   |        
|                             | Issuance
of common stock options and warrants in acquisitions                                          |  |              | 77,536,299 |         |  |             |            |              |   | $           | 3,002,309 |               |   | $       |        |       |   | $          |           |   |   | $       |         |   |   | $         | 3,002,309  |  
|                            
|                            
|                            
|                            
|                             | Issuance of compensatory stock options                                                                 |  |              |           |         |  |             |            |              |   |             | 22,704    |               |   |         | (22,704 | )     |   |            |           |   |   |         |         |   |   |           |          
|                            
|                            
|                            
|                            
|                             | 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    
|                            
|                            
|                            
|                            
|                             | Issuance of restricted stock to employees                                                              |  |              | 200,440    |         |  |             |            |              |   |             | 7,937     |               |   |         |        |       |   |            |           |   |   |         |         |   |   |           | 7,937     
|                            
|                            
|                            
|                            
|                             | Net loss                                                                                               |  |              |           |         |  |             |            |              |   |             |          |               |   |         |        |       |   |            | (1,101,299 | ) |   |         |         |   |   |           | (1,101,299 | )
|                            
|                            
|                            
|                            
|                             | Cumulative redeemable preferred stock dividends and
accretion of preferred stock redemption obligation |  |              |           |         |  |             |            |              |   |             |          |               |   |         |        |       |   |            | (146,356   | ) |   |         |         |   |   |           | (146,356   | )
|                            
|                            
|                            
|                            
|                             | Other comprehensive income  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 income                                                                             |  |              |           |         |  |             |            |              |   |             |          |               |   |         |        |       |   |            |           |   |   |         |         |   |   |           | (1,415,330 | )
|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           |               |   |         |         |       |   |            |            |   |   |         |          |   |   |           |            |  
|                            
|                            
|                            
|                            
|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           |               |   |         |         |       |   |            |           
|                            
|                            
|                            
|                            
|Balance at December 31, 2000 |                                                                                                        |  | 262,010,715  |            |         |  | 105,414,226 |             |              | $ | 4,392,646   |           |               | $ | (72,050 | )       |       | $ | (2,465,154 | )          |   | $ | (17,041 | )        |   | $ | 1,838,401 |           
|                             |                                                                                                        |  |              |            |         |  |             |             |              |   |             |           |               |   |         |         |       |   |            |            |   |   |         |          |   |   |           |           

See accompanying notes to consolidated financial statements.

F-5



---



##### Table of Contents



XO Communications, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)

|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |         |  
|----------------------------------------------------------------------------- | ------------------------------------- | - | ----------------------- | -------- | ---- | - | ---------- | ------- | - | - | ---------- | ------- | -
|                                                                              |                                       |   | Year Ended December 31,
|                                                                              |                                       |   |                        
|                                                                              |                                       |   | 2000                    |          | 1999 |   | 1998      
|                                                                              |                                       |   |                         |          |      |   |           
|OPERATING ACTIVITIES:                                                        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net loss                                                                      |                                       | $ | (1,101,299              | )        |      | $ | (558,692   | )       |   | $ | (278,340   | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Adjustments to reconcile net loss to net cash used in operating
  activities:
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Restructuring charge                  |   |                         |         |      |   |            | 28,016  |   |   |            |        |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Stock-based compensation              |   |                         | 48,328   |      |   |            | 12,872  |   |   |            | 4,993   |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Equity in loss of affiliates          |   |                         | 6,417    |      |   |            | 4,386   |   |   |            | 3,677   |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Net gains on investments              |   |                         | (168,846 | )    |   |            |        |   |   |            |        |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Depreciation and amortization         |   |                         | 617,714  |      |   |            | 108,475 |   |   |            | 60,254  |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accretion of interest on senior notes |   |                         | 119,293  |      |   |            | 68,731  |   |   |            | 28,869  |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | In-process research and development   |   |                         | 36,166   |      |   |            |        |   |   |            |        |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Changes in assets and liabilities, net of effects from acquisitions:         
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accounts receivable                   |   |                         | (68,761  | )    |   |            | (44,631 | ) |   |            | (13,160 | )
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Other assets                          |   |                         | (42,167  | )    |   |            | 4,344   |   |   |            | (21,175 | )
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accounts payable                      |   |                         | (11,620  | )    |   |            | (6,924  | ) |   |            | 5,742   |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|                                                                              | Accrued liabilities                   |   |                         | 5,361    |      |   |            | 34,231  |   |   |            | 34,656  |  
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|Net cash used in operating activities                                         |                                       |   | (559,414                | )        |      |   | (349,192   | )       |   |   | (174,484   | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|INVESTING ACTIVITIES:                                                        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Purchase of property and equipment                                            |                                       |   | (1,380,629              | )        |      |   | (611,511   | )       |   |   | (268,255   | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Investment in fixed wireless licenses                                         |                                       |   | (49,502                 | )        |      |   | (508,888   | )       |   |   | (67,354    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net cash acquired in acquisition                                              |                                       |   | 46,940                  |          |      |   |           |         |   |   |           |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Assets acquired in network lease                                              |                                       |   |                        |          |      |   |           |         |   |   | (92,000    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Investments in unconsolidated entities                                        |                                       |   | (71,489                 | )        |      |   | (18,239    | )       |   |   | (80,836    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Purchase of pledged securities                                                |                                       |   |                        |          |      |   | (40,759    | )       |   |   |           |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Maturity of pledged securities                                                |                                       |   | 33,386                  |          |      |   | 21,135     |         |   |   | 36,981     |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Purchase of marketable securities                                             |                                       |   | (19,381,106             | )        |      |   | (9,095,139 | )       |   |   | (4,699,018 | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Sale of marketable securities                                                 |                                       |   | 19,092,793              |          |      |   | 9,203,057  |         |   |   | 3,893,735  |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Proceeds from sale of equity investment                                       |                                       |   | 245,112                 |          |      |   |           |         |   |   |           |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|Net cash used in investing activities                                         |                                       |   | (1,464,495              | )        |      |   | (1,050,344 | )       |   |   | (1,276,747 | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|FINANCING ACTIVITIES:                                                        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net proceeds from issuance of redeemable preferred stock                      |                                       |   | 1,248,901               |          |      |   |           |         |   |   | 193,824    |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Repayment of note payable and other obligations                               |                                       |   | (6,809                  | )        |      |   | (2,954     | )       |   |   | (11,417    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Dividends paid on convertible preferred stock                                 |                                       |   | (49,984                 | )        |      |   | (13,000    | )       |   |   | (9,750     | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net proceeds from sale of common stock                                        |                                       |   |                        |          |      |   | 310,533    |         |   |   |           |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Proceeds from sale of senior notes                                            |                                       |   |                        |          |      |   | 1,651,419  |         |   |   | 1,234,323  |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Proceeds from issuance of common stock issued under employee
benefit plans    |                                       |   | 98,655                  |          |      |   | 36,468     |         |   |   | 3,695      |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Costs incurred in connection with debt financing                              |                                       |   | (17,100                 | )        |      |   | (33,963    | )       |   |   | (29,022    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Proceeds from draws on credit facility                                        |                                       |   | 375,000                 |          |      |   |           |         |   |   |           |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|Net cash provided by financing activities                                     |                                       |   | 1,648,663               |          |      |   | 1,948,503  |         |   |   | 1,381,653  |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|Effect of exchange rate changes on cash                                       |                                       |   | (213                    | )        |      |   |           |         |   |   |           |        
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Net increase (decrease) in cash and cash equivalents                          |                                       |   | (375,459                | )        |      |   | 548,967    |         |   |   | (69,578    | )      
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Cash and cash equivalents, beginning of year                                  |                                       |   | 868,463                 |          |      |   | 319,496    |         |   |   | 389,074    |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|Cash and cash equivalents, end of year                                        |                                       | $ | 493,004                 |          |      | $ | 868,463    |         |   | $ | 319,496    |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        
|SUPPLEMENTAL DATA:                                                           
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Cash paid for interest                                                        |                                       | $ | 331,892                 |          |      | $ | 202,431    |         |   | $ | 100,551    |        
|                                                                              |                                       |   |                         |          |      |   |            |         |   |   |            |        

See accompanying notes to consolidated financial statements.

F-6



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##### Table of Contents



XO Communications, Inc.

Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Overview

XO Communications Inc., a Delaware corporation, provides broadband
communication services, offering local and long distance voice communication
services and a wide array of data services. Data services offered include
dedicated Internet access and digital subscriber line (DSL) services, network
access services including dedicated access and virtual private networks, or
VPNs, and application hosting services such as web hosting e-commerce and
streamed media services designed for small and medium-sized businesses, as well
as sophisticated high-end hosting and website traffic management solutions for
Internet-centric businesses.

Organization

The consolidated financial statements include the accounts and activities
of XO Communications, Inc. (formerly NEXTLINK Communications, Inc.), and its
wholly owned subsidiaries (collectively referred to as the Company or XO).
The consolidated financial statements also include the results of Concentric
Network Corporation (Concentric) for the period from June 16, 2000, the date
at which Concentric merged with XO, through December 31, 2000. The Company,
through predecessor entities, was formed in September 1994. The Company is
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
by Mr. McCaw or over which he has voting control.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 significant inter-company accounts and transactions
have been eliminated.

Use of Estimates

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. 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 commercial paper and money market accounts
that are available on demand. The carrying amount of these instruments
approximates fair value due to their short maturities.

Marketable Securities

Investments in marketable securities are classified as available-for-sale
and are reported at fair value in accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in
Debt and Equity Securities. The fair values are based on quoted market prices.
Unrealized gains and losses on marketable securities are reported as a separate
component of comprehensive income, if significant. The Companys marketable
securities consist of U.S. government and other securities with original
maturities beyond three months.

F-7



---



##### Table of Contents



Pledged Securities

As of December 31, 2000, the Company had pledged $17.4 million in
marketable securities as collateral for outstanding letters of credit.

As of December 31, 1999, the Company had pledged $40.0 million in
marketable securities as collateral against certain hedge options. The Company
had entered into a hedge transaction during 1999 to reduce its risk of
significant market declines on certain highly volatile equity securities. The
hedge was closed out in early 2000.

The pledged securities are stated at cost, adjusted for premium
amortization and accrued interest. The fair value of the pledged securities
approximates the carrying value.

Long-lived Assets

Long-lived assets, including
goodwill and identifiable intangible assets to be held and
used, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount should be addressed. Impairment is measured
by comparing the carrying value to the estimated undiscounted future cash flows
expected to result from the use of the assets and their eventual dispositions.
The Company considers expected cash flows and estimated future operating
results, trends, and other available information in assessing whether the
carrying value of the assets is impaired. The Company believes that no such
impairment existed as of December 31, 2000 and 1999.

The Companys estimates of anticipated net revenues, the remaining
estimated lives of tangible and intangible assets, or both, could be reduced
significantly in the future due to changes in technology, regulation, available
financing, or intense competition. As a result, the carrying amount of
long-lived assets could be reduced materially in the future.

Property and Equipment

Property and equipment is stated at historical cost net of accumulated
depreciation and amortization. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets. Direct costs of
construction are capitalized, including $31.0 million, $9.9 million, and $4.3
million of interest costs related to construction for the years ended December
31, 2000, 1999, and 1998, respectively. Costs of additions and improvements are
capitalized and repairs and maintenance are charged to expense as incurred.

The estimated useful lives of property and equipment are as follows:

|                                      |  |                                                                    
|------------------------------------- |  | -------------------------------------------------------------------
|Telecommunications networks           |  | 5-20 years                                                         
|                                     
|                                     
|                                     
|                                     
|Office equipment, furniture and other |  | 3-5 years                                                          
|                                     
|                                     
|                                     
|                                     
|Leasehold improvements                |  | the lesser of the estimated useful
lives or the terms of the leases

Investments in Fixed Wireless Licenses

Investments in fixed wireless licenses consist of direct costs to acquire
fixed wireless license rights. Such costs are amortized using the straight-line
method over 20 years commencing when the license is placed into use, or when
commercial service using fixed wireless technology is deployed in the licenses
geographic area.

Goodwill and Other Intangibles

Goodwill and other intangibles consist primarily of goodwill acquired in
the Concentric merger. Other intangible assets also includes costs allocated in
acquisitions.
Such costs are amortized using the straight-line method over the estimated
useful lives of the assets as follows:

|                                           |  |           
|------------------------------------------ |  | ----------
|Computer technology                        |  | 4-5 years 
|                                          
|                                          
|                                          
|                                          
|Tradenames                                 |  | 4-5 years 
|                                          
|                                          
|                                          
|                                          
|Acquired work force                        |  | 4-5 years 
|                                          
|                                          
|                                          
|                                          
|Customer bases                             |  | 4-5 years 
|                                          
|                                          
|                                          
|                                          
|Software and related intellectual property |  | 4-5 years 
|                                          
|                                          
|                                          
|                                          
|Goodwill                                   |  | 5-20 years

F-8



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##### Table of Contents



Other Assets

Other assets includes investments in entities in which the Company has
less than a majority interest but can exercise significant influence. The
Company uses the equity method to account for such investments. Under the
equity method, investments are originally recorded at cost, and adjusted to
recognize the Companys share of net earnings or losses of the affiliates as
they occur, rather than as dividends or other distributions as received,
limited to the extent of the Companys investment in, advances to and
guarantees for the investees. Investments in publicly traded equity securities
for which the Company exercises no control or significant influence, are marked
to market in accordance with SFAS No. 115. Investments in
non-public entities in which the
Company has no significant influence are accounted for under the cost method
and are also included in other assets. The Company periodically reviews all
investment balances for non-temporary impairments.

Other assets also includes costs incurred in connection with securing the
Companys debt facilities, including underwriting and advisory fees and other
such costs, which are deferred and amortized over the term of the financing
using the effective interest method.

Income Taxes

The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes, 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.

Revenue Recognition

Revenue from communication service contracts is recognized in the period
that services are provided. Amounts for services billed in advance of the
service period and cash received in advance of revenues earned are recorded as
unearned revenues and recognized as revenue over the expected service period.
Service discounts and incentives 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 service period.

Operating Costs

Operating expenses consist of telecommunications costs paid to third party
providers for access and transport services. Operating expenses also include
network operations and engineering costs for network-related and enhanced
communications services. Operating costs are expensed as incurred. Customer
installation and acquisition costs are deferred and expensed ratably over the
estimated service period.

Net Loss Per Share

SFAS No. 128, Earnings Per Share, requires dual presentation of basic
and diluted earnings per share on the face of the consolidated statements of
operations. Basic earnings per share excludes dilution and is computed by
dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock thereby increasing the
weighted average number of common shares outstanding.

The following common share equivalents were excluded from the computation
of diluted loss per share (in thousands):

|                                                              |  |              |        |      |  |      |        |  |  |  |       | 
|------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ |  |  |  | ----- | 
|                                                              |  | December 31,
|                                                              |  |             
|                                                              |  | 2000         |        | 1999 |  | 1998
|                                                              |  |              |        |      |  |     
|Employee stock options (calculated under the
treasury method) |  |              | 24,232 |      |  |      | 20,955 |  |  |  | 2,605 | 
|                                                             
|                                                             
|                                                             
|                                                             
|Warrants                                                      |  |              | 1,248  |      |  |      |       |  |  |  |      | 
|                                                             
|                                                             
|                                                             
|                                                             
|Preferred share common stock equivalents                      |  |              | 50,966 |      |  |      | 9,160  |  |  |  | 4,580 | 

F-9



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##### Table of Contents



The inclusion of the common share equivalents would have had an
anti-dilutive effect on the loss per share calculation. Accordingly, the
weighted average number of common shares outstanding for basic and dilutive
loss per share calculations are equal for all periods presented.

Stock-Based Compensation

As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company has chosen to account for compensation cost associated with
its employee stock plans in accordance with Accounting Principles Bulletin (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, adopting the
disclosure-only provisions of SFAS No. 123.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Companys trade receivables are geographically dispersed and include customers
in many different industries. Management believes that any risk of loss is
significantly reduced due to the diversity of its customers and geographic
sales areas. The Company continually evaluates the creditworthiness of its
customers, however, it generally does not require collateral. The Companys
allowance for doubtful accounts is based on historical trends, current market
conditions and other relevant factors.

Reclassifications

Certain reclassifications have been made to prior period amounts in order
to conform to the current year presentation.

Fair Value of Financial Instruments

SFAS No. 101, Disclosure about Fair Value of
Financial Instruments, requires disclosure of fair value
information about financial instruments, for which it is practicable
to estimate the value. In cases where quoted market prices are not available, fair values are
based on estimates of future cash flows. The carrying amounts for current
assets and liabilities approximate their fair value due to their short
maturities. The fair value of long term debt is based on quoted market rates or
the cash flows from such financial instruments discounted at the Companys
estimated current interest rate to enter into similar financial instruments.
The fair value assumptions are based upon subjective estimates of market
conditions and perceived risks of the instruments.

New Accounting Pronouncements

In the fourth quarter of 2000, the Company implemented Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101) as
required by the Securities and Exchange Commission. SAB 101 requires that
recognition of certain nonrefundable up-front fees be deferred and recognized
over the term of the expected service period. SAB 101 also permits the deferral
of certain incremental direct costs including customer acquisition,
origination, and set-up costs. Accordingly the Company expenses customer
installation and certain acquisition costs ratably over the expected service
period. The Companys implementation of SAB 101 did not materially affect the
Companys results of operations or financial position.

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the consolidated balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. The Company believes
the adoption of SFAS No. 133 will not have a material effect on the Companys
financial position or results of operations.

3. ACQUISITIONS

On June 16, 2000, the Company merged with Concentric Network Corporation,
a provider of high-speed DSL, web hosting, e-commerce, and other Internet and
data transmission services. In the merger (the Concentric merger), the
Company issued shares of its Class A common stock, warrants, options and
assumed liabilities of Concentric. The aggregate value of this consideration
was approximately $3.6 billion.

F-10



---



##### Table of Contents



The Concentric merger was accounted for using the purchase method of
accounting. The consideration and purchase price allocation, which are still
subject to adjustments, were as follows (dollars in thousands):

|                                          |  |   |           | 
|----------------------------------------- |  | - | --------- | 
|Stock issued                              |  | $ | 2,542,356 | 
|                                         
|                                         
|                                         
|                                         
|Liabilities, warrants and options assumed |  |   | 1,038,650 | 
|                                          |  |   |           | 
|Consideration                             |  | $ | 3,581,006 | 
|                                          |  |   |           | 
|                                         
|In-process research and development       |  | $ | 36,166    | 
|                                         
|                                         
|                                         
|                                         
|Fair value of intangible assets acquired  |  |   | 246,234   | 
|                                         
|                                         
|                                         
|                                         
|Fair value of tangible assets             |  |   | 364,923   | 
|                                         
|                                         
|                                         
|                                         
|Goodwill                                  |  |   | 2,933,683 | 
|                                          |  |   |           | 
|                                         
|                                         
|                                         
|                                         
|Aggregate purchase price                  |  | $ | 3,581,006 | 
|                                          |  |   |           | 

As a result of the Concentric merger, each issued and outstanding share of
Concentric common stock was converted into 1.2868 shares of the Companys Class
A common stock resulting in approximately 68.0 million shares of the Companys
Class A common stock being issued to Concentric common stockholders. The
Company assumed all obligations under Concentrics $150.0 million of 12 3/4%
Senior Notes due 2007 outstanding at the time of the merger. The 12 3/4% senior
notes rank pari passu with the Companys other outstanding senior notes.
Additionally, outstanding shares of Concentrics redeemable preferred stock
were converted into 195,079 shares of the Companys 13 1/2% Series E senior
redeemable exchangeable preferred stock due 2010, and 53,296 shares of the
Companys 7% Series F convertible redeemable preferred stock due 2010.

In connection with the Concentric merger, outstanding warrants to purchase
Concentric common stock were converted into warrants to acquire shares of the
Companys Class A common stock based on the 1.2868 exchange ratio applicable to
the Concentric common stock. Also, the Company assumed certain Concentric
employee stock option and other benefit plans. As a result of the Concentric
merger, holders of Concentric options and warrants outstanding at the time of
the merger received the right to acquire approximately 17.6 million shares of
the Companys Class A common stock in the aggregate.

The results of operations of Concentric have been included in the
accompanying consolidated statements of operations of the Company from the date
of acquisition. The accompanying consolidated financial statements also reflect
the allocation of the purchase price as of December 31, 2000. Following the
merger, the Company began to realign and integrate Concentrics operations
which included involuntary termination of employees and other consolidation
actions. The costs of actions identified and implemented through December 31,
2000, the aggregate of which were not material, have been included in
the determination of the aggregate purchase consideration. The Company will
continue to implement its integration and realignment plans which
may result in further adjustments to the allocation of the purchase price.

Goodwill resulting from the Concentric transaction of $2.9 billion is
amortized on a straight-line basis over five years. Other acquired intangible
assets totaling $246.2 million, include developed technology, customer lists,
work force and trade names are amortized on a straight-line basis over four
years.

Based on the appraisal by professional consultants retained by the Company
to assist with the assessment and allocation of the $3.6 billion
purchase price, approximately $36.2 million was allocated to in-process
research and development. This allocation represents the estimated fair value
based on risk-adjusted future cash flows related to the incomplete projects. 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. As such, the entire $36.2 million of in-process research and
development acquired was expensed as of the acquisition date.

The pro forma operating results of the Company for the year ended December
31, 2000 and 1999 have been prepared assuming the merger occurred on January 1,
1999 (dollars in thousands, except per share amounts):

|                                               |  |                         |            |      |  |   |            |  
|---------------------------------------------- |  | ----------------------- | ---------- | ---- |  | - | ---------- | -
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2000                    |            | 1999
|                                               |  |                         |            |     
|Pro forma revenue                              |  | $                       | 830,208    |      |  | $ | 421,384    |  
|                                              
|                                              
|                                              
|                                              
|Pro forma net loss applicable to common shares |  | $                       | (1,591,244 | )    |  | $ | (1,387,960 | )
|                                              
|                                              
|                                              
|                                              
|Pro forma loss per share                       |  | $                       | (4.50      | )    |  | $ | (4.36      | )

F-11



---



##### Table of Contents



The pro forma results do not purport to represent what the Companys
results of operations would have actually been had the merger occurred on the
date indicated and are not indicative of future results.

On June 16, 2000, the Company acquired from Craig O. McCaw, our principal
stockholder, the 50% interest in the joint venture INTERNEXT, L.L.C., that held
the interests in our North American inter-city fiber optic network that we did
not own. We acquired this interest in exchange for approximately 6.8 million
shares of the Companys Class A common stock and the assumption of $9.9 million
in liabilities. The transaction was accounted for as a reorganization of
entities under common control and was recorded by the Company at Craig O.
McCaws historical cost. As a result of this acquisition, the Company now owns
the entire interest in the 16,000 mile, 50 city national broadband network that
is currently under construction. The Company initially invested in INTERNEXT,
L.L.C. in July 1998.

In April 1999, the
Company acquired WNP Communications, Inc. (WNP), for a
total of $698.2 million. Of this amount, $157.7 million was paid to the FCC in
license fees, including interest. The remainder of the purchase price,
consisting of $190.1 million in cash and 11,431,662 shares of Class A common
stock, was paid to the stockholders of WNP. In this transaction, the Company
acquired 39 A block local multi-point distribution services (LMDS) wireless
licenses and one B block LMDS wireless license. At the time of the acquisition,
WNP was a holding company for the fixed wireless licenses and did not have any
operations.

In June 1999, the Company
acquired from Nextel Communications Inc.
(Nextel) its 50% interest in NEXTBAND, a joint venture formed between the
Company and Nextel in January 1998, for $137.7 million in cash. NEXTBAND owns
LMDS licenses in 42 markets throughout the U.S. The purchase price was
determined based on a formula derived in conjunction with the acquisition of
WNP.

4. MARKETABLE SECURITIES

As of December 31, 2000 and 1999, the Companys marketable securities were
recorded at fair value. All of the marketable securities contractually mature
within one year. The Companys marketable securities consisted of the following
(in thousands):

|                                           |  |              |           |      |  |   |           | 
|------------------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | 
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2000         |           | 1999
|                                           |  |              |           |     
|U.S. Government and agency notes and bonds |  | $            | 909,324   |      |  | $ | 552,394   | 
|                                          
|                                          
|                                          
|                                          
|Foreign government notes and bonds         |  |              |          |      |  |   | 21,195    | 
|                                          
|                                          
|                                          
|                                          
|Corporate notes and bonds                  |  |              | 458,635   |      |  |   | 439,712   | 
|                                           |  |              |           |      |  |   |           | 
|                                           |  | $            | 1,367,959 |      |  | $ | 1,013,301 | 
|                                           |  |              |           |      |  |   |           | 

5. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following components (in
thousands):

|                                          |  |              |           |      |  |   |           | 
|----------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                          |  | December 31,
|                                          |  |             
|                                          |  | 2000         |           | 1999
|                                          |  |              |           |     
|Telecommunications networks               |  | $            | 1,736,920 |      |  | $ | 781,899   | 
|                                         
|                                         
|                                         
|                                         
|Furniture, fixtures, equipment, and other |  |              | 589,739   |      |  |   | 216,456   | 
|                                          |  |              |           |      |  |   |           | 
|                                          |  |              | 2,326,659 |      |  |   | 998,355   | 
|                                         
|                                         
|                                         
|                                         
|Less accumulated depreciation             |  |              | 396,991   |      |  |   | 174,134   | 
|                                          |  |              |           |      |  |   |           | 
|                                          |  |              | 1,929,668 |      |  |   | 824,221   | 
|                                         
|                                         
|                                         
|                                         
|Network construction-in-progress          |  |              | 864,437   |      |  |   | 355,800   | 
|                                          |  |              |           |      |  |   |           | 
|                                          |  | $            | 2,794,105 |      |  | $ | 1,180,021 | 
|                                          |  |              |           |      |  |   |           | 

F-12



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##### Table of Contents



6. GOODWILL AND OTHER INTANGIBLES

Goodwill and other intangibles consisted of the following components (in
thousands):

|                              |  |              |           |      |  |   |         | 
|----------------------------- |  | ------------ | --------- | ---- |  | - | ------- | 
|                              |  | December 31,
|                              |  |             
|                              |  | 2000         |           | 1999
|                              |  |              |           |     
|Goodwill                      |  | $            | 3,001,633 |      |  | $ | 62,599  | 
|                             
|                             
|                             
|                             
|Other intangibles             |  |              | 336,399   |      |  |   | 73,192  | 
|                              |  |              |           |      |  |   |         | 
|                              |  |              | 3,338,032 |      |  |   | 135,791 | 
|                             
|                             
|                             
|                             
|Less accumulated amortization |  |              | 423,156   |      |  |   | 44,363  | 
|                              |  |              |           |      |  |   |         | 
|                              |  | $            | 2,914,876 |      |  | $ | 91,428  | 
|                              |  |              |           |      |  |   |         | 

7. OTHER ASSETS

Other assets consisted of the following components (in thousands):

|                                       |  |              |         |      |  |   |         | 
|-------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                       |  | December 31,
|                                       |  |             
|                                       |  | 2000         |         | 1999
|                                       |  |              |         |     
|Investments in unconsolidated entities |  | $            | 112,040 |      |  | $ | 239,221 | 
|                                      
|                                      
|                                      
|                                      
|Financing costs                        |  |              | 79,346  |      |  |   | 72,528  | 
|                                      
|                                      
|                                      
|                                      
|Assets acquired in network lease       |  |              | 28,919  |      |  |   | 66,800  | 
|                                      
|                                      
|                                      
|                                      
|Other non-current assets               |  |              | 27,533  |      |  |   | 8,517   | 
|                                       |  |              |         |      |  |   |         | 
|                                       |  | $            | 247,838 |      |  | $ | 387,066 | 
|                                       |  |              |         |      |  |   |         | 

8. ACCRUED LIABILITIES

Accrued liabilities consisted of the following components (in thousands):

|                                 |  |              |         |      |  |   |         | 
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2000         |         | 1999
|                                 |  |              |         |     
|Accrued compensation             |  | $            | 57,686  |      |  | $ | 27,516  | 
|                                
|                                
|                                
|                                
|Accrued telecommunications costs |  |              | 44,788  |      |  |   | 20,921  | 
|                                
|                                
|                                
|                                
|Accrued construction             |  |              | 62,406  |      |  |   | 24,369  | 
|                                
|                                
|                                
|                                
|Accrued restructuring costs      |  |              |        |      |  |   | 30,935  | 
|                                
|                                
|                                
|                                
|Other accrued liabilities        |  |              | 114,654 |      |  |   | 16,054  | 
|                                 |  |              |         |      |  |   |         | 
|                                 |  | $            | 279,534 |      |  | $ | 119,795 | 
|                                 |  |              |         |      |  |   |         | 

9. LONG-TERM DEBT

Long-term debt consisted of the following components (in thousands):

|                                                     |                      |   |                 |           |          |   |              |           |          |   |         |           |  |   |         |           | 
|---------------------------------------------------- | -------------------- | - | --------------- | --------- | -------- | - | ------------ | --------- | -------- | - | ------- | --------- |  | - | ------- | --------- | 
|                                                     |                      |   |                 |           |          |   | December 31,
|                                                     |                      |   |                 |           |          |   |             
|                                                     |                      |   |                 |           |          |   | 2000         |           | 1999    
|                                                     |                      |   |                 |           |          |   |              |           |         
|                                                     |                      |   | Face Value at   |           | Carrying |   | Estimated    |           | Carrying
|                                                     |                      |   | Stated Maturity |           | Value    |   | Fair Value   |           | Value   
|                                                     |                      |   |                 |           |          |   |              |           |         
|Senior Notes, 10 1/2%, due December 1, 2009          |                      | $ | 400,000         |           |          | $ | 400,000      |           |          | $ | 311,638 |           |  | $ | 400,000 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Discount Notes, 12 1/8%, due December 1,
2009 |                      |   | 455,000         |           |          |   | 285,971      |           |          |   | 196,737 |           |  |   | 255,230 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 10 3/4%, due June 1, 2009              |                      |   | 675,000         |           |          |   | 675,000      |           |          |   | 537,943 |           |  |   | 675,000 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Discount Notes, 12 1/4%, due June 1, 2009     |                      |   | 588,900         |           |          |   | 392,417      |           |          |   | 278,863 |           |  |   | 348,425 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 10 3/4%, due November 15, 2008         |                      |   | 500,000         |           |          |   | 500,000      |           |          |   | 401,458 |           |  |   | 500,000 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Discount Notes, 9.45%, due April 15, 2008     |                      |   | 637,000         |           |          |   | 514,784      |           |          |   | 334,511 |           |  |   | 470,420 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 9%, due March 15, 2008                 |                      |   | 335,000         |           |          |   | 334,513      |           |          |   | 247,293 |           |  |   | 334,267 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 12 3/4%, due December 15, 2007         |                      |   | 149,400         |           |          |   | 168,911      |           |          |   | 134,451 |           |  |   |        |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 9 5/8%, due October 1, 2007            |                      |   | 400,000         |           |          |   | 400,000      |           |          |   | 310,010 |           |  |   | 400,000 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Notes, 12 1/2%, due April 15, 2006            |                      |   | 350,000         |           |          |   | 350,000      |           |          |   | 317,117 |           |  |   | 350,000 |          
|                                                     |                      |   |                 |           |          |   |              |           |          |   |         |           |  |   |         |          
|                                                     | Total Senior Notes   |   |                 | 4,490,300 |          |   | $            | 4,021,596 |          |   | $       | 3,070,021 |  |   | $       | 3,733,342 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Senior Secured Credit Facility                       |                      |   | 375,000         |           |          |   | 375,000      |           |          |   | 375,000 |           |  |   |        |          
|                                                     |                      |   |                 |           |          |   |              |           |          |   |         |           |  |   |         |          
|                                                     | Total long-term debt |   | $               | 4,865,300 |          |   | $            | 4,396,596 |          |   | $       | 3,445,021 |  |   | $       | 3,733,342 | 
|                                                     |                      |   |                 |           |          |   |              |           |          |   |         |           |  |   |         |          

The fair values are determined using market rates on comparable
instruments at December 31, 2000.

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##### Table of Contents



Senior Secured Credit Facility

In February 2000, the Company and certain of its subsidiaries, as
guarantors, entered into a $1.0 billion senior secured credit facility (the
Facility) with various lenders. The Facility is comprised of a $387.5 million
senior secured multi-draw term loan A, a $225.0 million senior secured term
loan B, and a $387.5 million revolving credit facility. At closing, the Company
borrowed $150.0 million of the term loan A and the entire $225.0 million of the
term loan B. As of December 31, 2000, no additional borrowings had been drawn
under the Facility.

The security for the Facility consists of all of the assets purchased with
the proceeds of the Facility, the stock of certain of the Companys direct
subsidiaries, all assets of the Company and, to the extent of $125.0 million of
guaranteed debt, all assets of certain of the Companys subsidiaries.

Amounts drawn under the facility bear interest, at the option of the
Company, at an alternate base rate or reserve-adjusted LIBOR plus, in each
case, applicable margins. Initially, the applicable margins for the term loan A
and the revolving credit facility are 175 basis points over the alternate base
rate and 275 basis points over LIBOR. After June 30, 2003, the applicable
margins for the term loan A and the revolving credit facility range from 62 1/2 to
150 basis points over the alternate base rate and from 162 1/2 to 250 basis points
over LIBOR, based on the ratio of the Companys consolidated total debt to
annualized consolidated EBITDA, as defined in the agreements relating to the
Facility. The applicable margin for the term loan B is fixed at 225 basis
points over the alternate base rate and 325 basis points over LIBOR. Specific
rates are determined by actual borrowings under each facility. Interest on the
term loans and the revolving credit facility is payable on the earlier of the
last day of each interest period, or each successive date three months after
the first day of such interest period. At December 31, 2000, the rate of
interest applicable to term loan A and the revolving credit facility was 9.31% and 9.81% for the term loan B.

The term loan A and the revolving credit facility mature on December 31,
2006, and the term loan B matures on June 30, 2007. In each case, the maturity
dates are subject to acceleration to October 31, 2005 if the Company has not
refinanced its 12 1/2% Senior Notes due 2006 by April 15, 2005. The term loans A
and B and the revolving credit facility provide for automatic and permanent
quarterly reductions of the amount available for borrowing under those
facilities, beginning on March 31, 2004. The term loan B contains nominal
amortization provisions beginning March 31, 2004 until maturity.

The Facility contains certain covenants, which, among other things, limit
additional indebtedness, certain investments and other transactions, and
dividend payments.

Senior Notes

As a result of the Concentric merger, the Company assumed all obligations
of Concentrics 12 3/4% Senior Notes due December 15, 2007. The 12 3/4% Senior Notes
original principal amount was $150.0 million with interest payments due
semi-annually. The terms of the 12 3/4% Senior Notes required that, in connection
with the Concentric merger, the Company offer to redeem the notes at the option
of the holders in whole or in part, at a price equal to 101% of the principal
amount of the notes. The Company redeemed approximately $630,000 of the
original principal amount as part of this offer. The 12 3/4% Senior Notes are
redeemable at the option of the Company, in whole or in part, beginning
December 15, 2002, at established redemption prices that decline to 100% of the
stated principal amount thereof by December 15, 2005.

On November 17, 1999, the Company completed the sale of $400.0 million of
10 1/2% Senior Notes and $455.0 million in principal amount at stated maturity of
12 1/8% Senior Discount Notes, both due December 1, 2009. The Company received
proceeds, net of discounts, commissions, advisory fees and expenses totaling
approximately $639.6 million. Interest payments on the 10 1/2% Notes are due
semi-annually. The 12 1/8% Notes were issued at a discount from their principal
amount to generate aggregate gross proceeds of approximately $251.4 million.
The 12 1/8% Notes accrete at a rate of 12 1/8% compounded semi-annually, to an
aggregate principal amount of $455.0 million by December 1, 2004. No cash
interest will accrue on the 12 1/8% Notes until December 1, 2004. Interest will
become payable in cash semi-annually beginning June 1, 2005. The Company has
the option to redeem the 10 1/2% Notes and the 12 1/8% Notes, in whole or in part,
beginning December 1, 2004 at established redemption prices that decline to
100% of the stated principal amount thereof by December 1, 2007.

F-14



---



##### Table of Contents



On June 1, 1999, the Company completed the sale of $675.0 million of 10 3/4%
Senior Notes and $588.9 million in principal amount at stated maturity of 12 1/4%
Senior Discount Notes, both due June 1, 2009. The Company received proceeds,
net of discounts, underwriting commissions, advisory fees and expenses,
totaling approximately $979.5 million. Interest payments on the 10 3/4% Notes due
2009 are due semi-annually. The 12 1/4% Notes were issued at a discount from their
principal amount to generate aggregate gross proceeds of $325.0 million. The
12 1/4% Notes accrete at a rate of 12 1/4% compounded semi-annually, to an aggregate
principal amount of approximately $588.9 million by June 1, 2004. No cash
interest will accrue on the 12 1/4% Notes until June 1, 2004. Interest will become
payable in cash semi-annually beginning December 1, 2004. The Company has the
option to redeem the 10 3/4% Notes due 2009 and the 12 1/4% Notes, in whole or in
part, beginning June 1, 2004 at established redemption prices that decline to
100% of the stated principal amount thereof by June 1, 2007.

On November 12, 1998, the Company completed the sale of $500.0 million of
10 3/4% Senior Notes due November 15, 2008. The Company received proceeds from the
sale, net of commissions, advisory fees and expenses, totaling approximately
$488.5 million. Interest payments on the notes are due semi-annually. The 10 3/4%
Notes due 2008 are redeemable at the option of the Company, in whole or in
part, beginning November 15, 2003 at established redemption prices, that
decline to 100% of the stated principal amount thereof by November 12, 2006.

On April 1, 1998, the Company completed the sale of $637.0 million in
principal amount at stated maturity of 9.45% Senior Discount Notes due April
15, 2008. The 9.45% Notes were issued at a discount from their principal amount
to generate aggregate gross proceeds of approximately $400.0 million. The
Company received proceeds, net of discounts, commissions, advisory fees and
expenses, totaling approximately $390.9 million. The 9.45% Notes accrete at a
rate of 9.45% compounded semi-annually, to an aggregate principal amount of
approximately $637.0 million by April 15, 2003. No cash interest will accrue on
the 9.45% Notes until April 15, 2003. Interest will become payable in cash
semi-annually beginning on October 15, 2003. The 9.45% Notes are redeemable at
the option of the Company, in whole or in part, beginning April 15, 2003 at
established redemption prices, that decline to 100% of the stated principal
amount thereof by April 1, 2006.

On March 3, 1998, the Company completed the sale of $335.0 million of 9%
Senior Notes due March 15, 2008. The Company received proceeds from the sale,
net of discounts, commissions, advisory fees and expenses, of approximately
$326.5 million. Interest payments on the 9% Senior Notes are due semi-annually.
The 9% Senior Notes are redeemable at the option of the Company, in whole or in
part, beginning March 15, 2003 at established redemption prices that decline to
100% of the stated principal amount thereof by March 3, 2006.

On October 1, 1997, the Company completed the sale of $400.0 million in
principal amount of 9 5/8% Senior Notes due October 1, 2007. The Company received
proceeds from the sale, net of underwriting commissions, advisory fees and
expenses, totaling approximately $388.5 million. Interest payments on the 9 5/8%
Notes are due semi-annually. The 9 5/8% Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after October 1, 2002 at
established redemption prices, that decline to 100% of the stated principal
amount thereof by October 1, 2005.

On April 25, 1996, the Company completed the sale of $350.0 million in
principal amount of 12 1/2% Senior Notes due April 15, 2006. The Company received
proceeds from the sale, net of commissions, advisory fees and expenses
totaling approximately $340.2 million. Interest payments on the 12 1/2% Senior
Notes are due semi-annually. The 12 1/2% Senior Notes are redeemable at the option
of the Company, in whole or in part, at any time on or after April 15, 2001 at
established redemption prices that decline to 100% of the stated principal
amount thereof by April 15, 2004.

These senior notes all rank pari passu with all other senior notes of the
Company. The indentures pursuant to which all of the Companys senior notes and
senior discount notes have been issued contain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
additional indebtedness, issue stock in subsidiaries, pay dividends or make
other distributions, repurchase equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create certain liens, enter into
certain transactions with affiliates, sell assets of the Company and its
subsidiaries, and enter into certain mergers and consolidations. In addition,
the Company is required to use the net proceeds from the sale of certain senior
notes and senior discount notes to fund expenditures for the construction,
improvement and acquisition of new and existing networks and services and
direct and indirect investments in certain joint ventures to fund similar
expenditures. Prior to the application of all such proceeds, the Company may
invest them in marketable securities. Our senior secured credit
facility also requires us to maintain specified financial ratios. If
we fail to comply with these covenants or meet these financial
ratios, the holders of our senior notes or the lenders under our
senior secured credit facility could declare a default and demand
repayment. Default on any one of these agreements could be deemed a
default on all such agreements.

F-15



---



##### Table of Contents



In the event of a change in control of the Company as defined in the
indentures, holders of the Notes will have the right to require the Company to
purchase their Notes, in whole or in part, at a price equal to 101% of the
stated principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase. The Notes are senior unsecured obligations of
the Company, and are subordinated to all current and future indebtedness of the
Companys subsidiaries, including trade payables.

10. REDEEMABLE PREFERRED STOCK

Shares of issued and outstanding preferred stock, redeemable in amounts
equal to their respective aggregate liquidation preferences, are summarized in
the table below (dollars in thousands):

|                                                                |  |   |              |  |              |  |                             |  |                       |  |            |  |  |   |           |  |  |   |         |  | 
|--------------------------------------------------------------- |  | - | ------------ |  | ------------ |  | --------------------------- |  | --------------------- |  | ---------- |  |  | - | --------- |  |  | - | ------- |  | 
|                                                                |  |   |              |  |              |  | Shares Issued & Outstanding |  | Aggregate Liquidation
|                                                                |  |   |              |  |              |  | as of                       |  | Preferences as of    
|                                                                |  |   | Carrying     |  |              |  |                            
|                                                                |  |   | Value as of  |  | December 31, |  | December 31,               
|                                                                |  |   | December 31, |  |              |  |                            
|                                                                |  |   | 2000         |  | 2000         |  | 1999                        |  | 2000                  |  | 1999      
|                                                                |  |   |              |  |              |  |                             |  |                       |  |           
|14% Series A Senior
Exchangeable
Redeemable
Preferred Shares    |  | $ | 481,375      |  |              |  | 9,552,785                   |  |                       |  | 8,324,796  |  |  | $ | 477,639   |  |  | $ | 425,952 | 
|                                                               
|                                                               
|                                                               
|                                                               
|6 1/2% Series B
Cumulative
Convertible
Preferred Stock          |  |   | 101,381      |  |              |  | 2,122,795                   |  |                       |  | 4,000,000  |  |  |   | 106,140   |  |  |   | 200,000 | 
|                                                               
|                                                               
|                                                               
|                                                               
|Series C Cumulative
Convertible
Participating
Preferred Stock   |  |   | 583,779      |  |              |  | 584,375                     |  |                       |  |           |  |  |   | 584,375   |  |  |   |        | 
|                                                               
|                                                               
|                                                               
|                                                               
|Series D
Convertible
Participating
Preferred Stock              |  |   | 265,354      |  |              |  | 265,625                     |  |                       |  |           |  |  |   | 265,625   |  |  |   |        | 
|                                                               
|                                                               
|                                                               
|                                                               
|13 1/2% Series E
Senior Redeemable
Exchangeable
Preferred Stock |  |   | 206,220      |  |              |  | 208,469                     |  |                       |  |           |  |  |   | 210,815   |  |  |   |        | 
|                                                               
|                                                               
|                                                               
|                                                               
|7% Series F
Convertible
Redeemable
Preferred Stock              |  |   | 59,045       |  |              |  | 55,178                      |  |                       |  |           |  |  |   | 55,499    |  |  |   |        | 
|                                                               
|                                                               
|                                                               
|                                                               
|Series G Cumulative
Convertible
Participating
Preferred Stock   |  |   | 268,657      |  |              |  | 268,750                     |  |                       |  |           |  |  |   | 268,750   |  |  |   |        | 
|                                                               
|                                                               
|                                                               
|                                                               
|Series H
Convertible
Participating
Preferred Stock              |  |   | 131,205      |  |              |  | 131,250                     |  |                       |  |           |  |  |   | 131,250   |  |  |   |        | 
|                                                                |  |   |              |  |              |  |                             |  |                       |  |            |  |  |   |           |  |  |   |         |  | 
|Total                                                           |  | $ | 2,097,016    |  |              |  | 13,189,227                  |  |                       |  | 12,324,796 |  |  | $ | 2,100,093 |  |  | $ | 625,952 | 
|                                                                |  |   |              |  |              |  |                             |  |                       |  |            |  |  |   |           |  |  |   |         |  | 

In July 2000, the Company issued 268,750 shares of Series G cumulative
convertible participating preferred stock and 131,250 shares of Series H
convertible participating preferred stock to several investment funds
controlled by Forstmann Little & Co. in exchange for $400.0 million. The Series
G and Series H stock are convertible into shares of the Companys Class A
common stock at a conversion rate of $31.625 per share, and provide for a 3.75%
annual dividend that is payable quarterly. Each share of Series G and Series H
preferred stock has a liquidation preference of $1,000 per share plus accrued
and unpaid dividends. The holders may convert the preferred stock into Class A
common stock at any time after January 20, 2001. Holders of the preferred stock
will also have the option of requiring redemption of the preferred stock during
the 180-day period commencing on July 6, 2010. The Company may redeem the
preferred stock at any time after the later of July 6, 2005 and the date when
the Company has redeemed its 12 1/2% Senior Notes due 2006 in full. As of December
31, 2000, the Company believes that the fair value of the Series G and Series H preferred stock
was between $225.3 million, based on the market price of the Companys Class A
common stock into which the preferred stock converts on that date, and the $400.0 million
liquidation preference. Terms, including conversion features, vary based on
market conditions at the time the security is issued. Accordingly, management
believes that this value may not reflect the proceeds the Company would obtain
if it issued convertible preferred stock today.

As a result of the Concentric merger, certain outstanding shares of
Concentrics preferred stock were converted into 53,296 shares of the Companys
7% Series F convertible redeemable preferred stock due 2010. Each share of
Series F preferred stock has a liquidation preference of $1,000 per share.
Dividends on the Series F preferred stock accrue at the rate of 7% per annum of
the liquidation preference thereof and are payable quarterly in arrears.

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Dividends are payable in cash, except that on each dividend payment date
dividends may be paid, at the Companys option, by the issuance of additional
Series F preferred stock having an aggregate liquidation preference equal to
the amount of such dividends. For the year ended December 31, 2000, the Company
issued a total of 1,882 shares of Series F preferred stock as payment of the
quarterly dividends. The Series F preferred stock is redeemable at the option of the Company, in whole or in part, at any time on or after June
1, 2003 at redemption rates commencing with 105.125% declining to 100% on June
1, 2010. The Series F preferred stock is subject to mandatory redemption at its
liquidation preference, plus accumulated and unpaid dividends on September 1,
2010. The holders of the Series F preferred stock have the right to convert at
any time shares of the Series F preferred stock into shares of common stock at
the conversion price of $31.0258. As of December 31, 2000, the company believes that the fair
value of the Companys Series F preferred stock was between $31.7 million, based
on the market price of the Companys Class A common stock into which the
preferred stock converts on that date, and the liquidation preference of $55.5 million.
Terms, including conversion features, vary based on market conditions at the
time the security is issued. Accordingly, management believes that this value
may not reflect the proceeds the Company would obtain if it issued convertible
preferred stock today.

As a result of the Concentric merger, certain outstanding shares of
Concentrics preferred stock were converted into 195,079 shares of the
Companys 13 1/2% Series E senior redeemable exchangeable preferred stock due
2010. Each share of Series E preferred stock has a liquidation preference of
$1,000 per share. Dividends on the Series E preferred stock accrue at a rate of
13 1/2% per annum of the liquidation preference thereof and are payable quarterly
in arrears commencing on September 1, 1998. Dividends are payable in cash,
except that on each dividend payment date occurring on or prior to June 1,
2003, dividends may be paid, at the Companys option, by the issuance of
additional shares of the Series E preferred stock having an aggregate
liquidation preference equal to the amount of such dividends. For the year
ended December 31, 2000, the Company issued a total of 13,390 shares of the
Series E preferred stock as payment of the quarterly dividends. Holders of
Series E preferred stock have no voting rights. The Series E preferred stock is
redeemable at the option of the Company, in whole or in part, at any time on or
after June 1, 2003, at redemption rates (expressed as a percentage of the
liquidation preference) commencing with 106.75% on June 1, 2003 and declining
to 100% on June 1, 2008, plus accumulated and unpaid dividends to the date of
redemption. In addition, prior to June 1, 2001, the Company may, at its option,
redeem up to a maximum of 35% of the initially issued Series E preferred stock
from the net proceeds of one or more public equity offerings or the sale of
common stock to a strategic investor. The Series E preferred stock is subject
to mandatory redemption at its liquidation preference, plus accumulated and
unpaid dividends on June 1, 2010.

On any scheduled dividend payment date, the Company may, at its option,
exchange in whole but not in part the then outstanding Series E preferred stock
for 13 1/2% Senior Subordinated Debentures due 2010 with a principal amount equal
to the aggregate liquidation preference of the Preferred Stock. If the Exchange
Debentures were issued, they would mature on June 1, 2010. Interest on the
Exchange Debentures would be payable semi-annually in arrears. Interest payable
on or prior to June 1, 2003 may be paid in the form of additional Exchange
Debentures valued at the principal amount thereof.

In January 2000, the Company issued 584,375 shares of Series C cumulative
convertible participating preferred stock and 265,625 shares of Series D
convertible participating preferred stock to several investment funds
controlled by Forstmann Little & Co. in exchange for $850.0 million in cash.
The Series C and Series D stock are convertible into shares of the Companys
Class A common stock at a conversion rate of $31.625 per share, and provide for
a 3.75% annual dividend that is payable quarterly. Each share of Series C and
Series D stock has a liquidation preference of $1,000 per share plus accrued
and unpaid dividends. The holders may convert the preferred stock into Class A
common stock at any time after January 20, 2001. Holders of the Series C and
Series D shares may require the Company to redeem those shares during the
180-day period commencing January 20, 2010. The Company may redeem the Series C
and Series D shares at any time after the later of January 20, 2005 and the
date when the Company has redeemed its 12 1/2% Senior Notes due 2006 in full. As
of December 31, 2000, the fair value of the Companys Series C and D
preferred stock was between $478.8 million, based on the market price of the
Companys Class A common stock into which the preferred stock converts on that date, and the
liquidation preference of $850.0 million. Terms, including conversion features,
vary based on market conditions at the time the security is issued.
Accordingly, management believes that this value may not reflect the proceeds
the Company would obtain if it issued convertible preferred stock today.

On March 31, 1998, the Company completed the sale of 4,000,000 shares of
6 1/2% Series B cumulative preferred stock with a liquidation preference of $50
per share. The sale generated gross proceeds to the Company of $200.0 million,
and proceeds net of commissions, advisory fees and expenses of approximately
$193.8 million. Each share of Series B preferred stock is convertible, at the
option of the holder, into 4.58 shares of the Companys Class A common stock
(subject to adjustments in certain circumstances). The Company may cause such
conversion rights to expire after April 15, 2001 and through April 15, 2006, if
the closing price of the Class A common stock exceeds 120% of an implied
conversion price (as defined) for 20 days in a 30 consecutive day trading
period. Dividends on

F-17



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##### Table of Contents



the Series B Preferred Stock accrue from March 31, 1998 and are payable in
cash quarterly, at an annual rate of 6 1/2% of the liquidation preference thereof.
The Company is required to redeem all of the Series B Preferred Stock
outstanding on March 31, 2010 at a redemption price equal to 100% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption. The Company may redeem the Series B shares any time after
April 16, 2006 at a redemption price equal to 100% of the liquidation
preference. In May 2000, certain holders of the Series B preferred stock
converted their shares into approximately 8.1 million shares of the Companys
Class A common stock, based on the then current conversion rate of 4.58 shares
of Class A common stock for each share of Series B preferred stock converted,
in consideration for a cash payment by the Company of approximately $4.7
million, which has been reported as a preferred stock dividend in the second
quarter of 2000. As of December 31, 2000, the Company believes
that the fair value of the
Companys Series B preferred stock is approximately $173.2 million based on the
market price of the Companys Class A common stock into which the preferred
stock converts. Terms, including conversion features, vary based on market
conditions at the time the security is issued. Accordingly, management believes
that this value may not reflect the proceeds the Company would obtain if it
issued convertible preferred stock today.

On January 31, 1997, the Company completed the sale of 5.7 million units
consisting of 14% Series A senior exchangeable redeemable preferred shares with
a liquidation preference of $50 per share. The sale generated gross proceeds to
the Company of $285.0 million, and proceeds net of commissions, advisory fees
and expenses of approximately $274.0 million. Dividends on the Series A
preferred stock accrue from January 31, 1997 and are payable quarterly, at an
annual rate of 14% of the liquidation preference thereof. Dividends may be
paid, at the Companys option, on any dividend payment date occurring on or
prior to February 1, 2002, either in cash or by issuing additional shares of
Series A preferred stock with an aggregate liquidation preference equal to the
amount of such dividends. For the year ended December 31, 2000, the Company
issued a total of 1,227,989 shares of Series A preferred stock as payment of
the quarterly dividends. The Company is required to redeem all of the Series A
preferred stock outstanding on February 1, 2009 at a redemption price equal to
100% of the liquidation preference thereof, plus accumulated and unpaid
dividends to the date of redemption.

Subject to certain conditions, the Series A preferred stock is
exchangeable in whole, but not in part, at the option of the Company, on any
dividend payment date, for the 14% senior subordinated notes (Senior
Subordinated Notes) due February 1, 2009 of the Company. All terms and
conditions (other than interest, ranking and maturity) of the Senior
Subordinated Notes would be substantially the same as those of the Companys
outstanding 12 1/2% Senior Notes.

The terms of the Series E preferred stock and the Series A preferred stock
limit the ability of the Company to incur additional indebtedness and issue
additional preferred stock. In the event of a change of control, as defined by
the terms of the Series A preferred stock, holders of the Series E preferred
stock and Series A preferred stock will have the right to require the Company
to purchase their shares, in whole or in part, at a price equal to 101% of the
liquidation preference thereof, plus accumulated and unpaid dividends, if any,
thereon at the date of purchase.

The Companys authorized capital stock also includes 7,045,000 shares of
preferred stock, net of shares designated as redeemable preferred stock set
forth above, as to which the rights and terms have not yet been designated. The
Company may issue shares of preferred stock in one or more series upon
authorization by its Board of Directors. Under the Companys Certificate of
Incorporation, the Board of Directors has the authority to fix the rights and
terms, conversion rights, voting rights, redemption rights and terms,
liquidation preferences and any other rights, preferences, privileges and
restrictions applicable to each series of preferred stock.

11. INCOME TAXES

Components of deferred tax assets and liabilities were as follows (in
thousands):

|                          |                                                      |  |              |           |      |  |          |         | 
|------------------------- | ---------------------------------------------------- |  | ------------ | --------- | ---- |  | -------- | ------- | 
|                          |                                                      |  | December 31,
|                          |                                                      |  |             
|                          |                                                      |  | 2000         |           | 1999
|                          |                                                      |  |              |           |     
|Deferred tax assets:     
|                         
|                         
|                         
|                         
|                          | Provisions not currently deductible                  |  | $            | 32,513    |      |  | $        | 3,482   | 
|                         
|                         
|                         
|                         
|                          | Property, equipment and other long term assets (net) |  |              | 83,772    |      |  |          | 86,351  | 
|                         
|                         
|                         
|                         
|                          | Net operating loss carryforwards                     |  |              | 1,028,655 |      |  |          | 372,920 | 
|                          |                                                      |  |              |           |      |  |          |        
|Total deferred tax assets |                                                      |  | 1,144,940    |           |      |  | 462,753  |        
|                         
|                         
|                         
|                         
|Valuation allowance       |                                                      |  | (798,853     | )         |      |  | (277,690 | )      
|                          |                                                      |  |              |           |      |  |          |        
|Net deferred tax assets   |                                                      |  | 346,087      |           |      |  | 185,063  |        
|                         
|                         
|                         
|                         

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##### Table of Contents



|                               |                                                      |   |          |          |   |   |          |          |  
|------------------------------ | ---------------------------------------------------- | - | -------- | -------- | - | - | -------- | -------- | -
|Deferred tax liabilities:     
|                              
|                              
|                              
|                              
|                               | Property, equipment and other long term assets (net) |   |          | (80,459  | ) |   |          | (12,535  | )
|                              
|                              
|                              
|                              
|                               | Purchase acquisitions                                |   |          | (264,014 | ) |   |          | (171,050 | )
|                              
|                              
|                              
|                              
|                               | Other                                                |   |          | (1,614   | ) |   |          | (1,478   | )
|                               |                                                      |   |          |          |   |   |          |         
|Total deferred tax liabilities |                                                      |   | (346,087 | )        |   |   | (185,063 | )       
|                               |                                                      |   |          |          |   |   |          |         
|Net deferred taxes             |                                                      | $ |         |          |   | $ |         |         
|                               |                                                      |   |          |          |   |   |          |         

The net change in valuation allowance for the year ended December 31,
2000 was an increase of $521.2 million, of which $76.2 million related to the
merger with Concentric. The net change in the valuation allowance for
years ended December 31, 1999 and 1998 was an increase of $128.7 million and
$114.9 million, respectively.

As of December 31, 2000, the Company has net operating loss carryforwards
of approximately $2,501.1 million portions of which will begin to materially
expire beginning in 2012 through 2020. A portion of the net operating loss
carryforwards is attributable to tax deductions related to the exercise of
stock options. In computing its income tax expense, the Company recognizes the tax
benefits of stock option deductions after utilization
of the net operating losses from operations (operating losses determined
without deductions for exercised stock options) to reduce income tax expense.
Net operating loss carryforwards related to stock option deductions are
credited to stockholders equity when realized.

A reconciliation of the Companys effective income tax rate and the U.S.
federal and state tax rate is as follows:

|                                            |  |      |       |      |  |  |       |   
|------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | --
|                                            |  | 2000 |       | 1999
|                                            |  |      |       |     
|Statutory rate                              |  |      | 35.0  | %    |  |  | 35.0  | % 
|                                           
|                                           
|                                           
|                                           
|State income taxes, net of federal benefit  |  |      | 6.0   | %    |  |  | 6.0   | % 
|                                           
|                                           
|                                           
|                                           
|Valuation allowance for deferred tax assets |  |      | (27.7 | %)   |  |  | (14.9 | %)
|                                           
|                                           
|                                           
|                                           
|Purchase acquisitions                       |  |      | (13.3 | %)   |  |  | (26.1 | %)
|                                            |  |      |       |      |  |  |       |   
|                                            |  |      |      | %    |  |  |      | % 
|                                            |  |      |       |      |  |  |       |   

12. STOCKHOLDERS EQUITY (DEFICIT)

Since January 31, 1997, the Company has had two classes of common stock
outstanding, Class A common stock and Class B common stock. The Companys Class
A common stock and Class B common stock are identical in dividend and
liquidation rights, and vote together as a single class on all matters, except
as otherwise required by applicable law, with the Class A shareholders entitled
to cast one vote per share, and the Class B shareholders entitled to cast 10
votes per share.

In June 2000 and August 1999, the Company effected two-for-one stock
splits of the issued and outstanding shares of 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.

In June 1999, the Company completed the sale of 30,400,000 shares of Class
A common stock at $19.00 per share, 16,928,200 of which were offered by the
Company and 13,471,800 of which were offered by certain shareholders that
previously owned interests in WNP. Gross proceeds from the offering by the
Company totaled $321.6 million, and proceeds to the Company, net of
underwriting discounts, advisory fees and expenses, totaled approximately
$310.5 million.

13. OTHER INCOME

Other income for the year ended December 31, 2000 relates to realized
gains and losses on our available-for-sale investments. The realized gains in
the period relate primarily to a $226.5 million gain on the sale of an equity
investment, net of other costs associated therewith. This gain was offset by a
$57.7 million write-down for a non-temporary decline in the value of certain
investments, three investments of which were acquired from Concentric and
recorded at fair market value at the merger date.

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##### Table of Contents



14. COMPREHENSIVE INCOME

Comprehensive income includes the Companys net loss, as well as changes
in equity from other sources. The following table reflects the Companys
calculation of comprehensive income for the years ended December 31, 2000, 1999
and 1998 (amounts in thousands):

|                                                         |                                                                                                          |   |                         |          |      |   |          |         |  |   |          |   | 
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | - | ----------------------- | -------- | ---- | - | -------- | ------- |  | - | -------- | - | 
|                                                         |                                                                                                          |   | Year Ended December 31,
|                                                         |                                                                                                          |   |                        
|                                                         |                                                                                                          |   | 2000                    |          | 1999 |   | 1998    
|                                                         |                                                                                                          |   |                         |          |      |   |         
|Net loss applicable to common stockholders               |                                                                                                          | $ | (1,247,655              | )        |      | $ | (627,881 | )       |  | $ | (337,113 | )
|                                                        
|                                                        
|                                                        
|                                                        
|Other comprehensive income (loss):                      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Unrealized holding gains (losses)
and foreign currency translation
adjustments arising during the
period |   |                         | 38,870   |      |   |          | 150,634 |  |   |          |  | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Less: Net realized gains
transferred to current period
earnings                                          |   |                         | (206,545 | )    |   |          |        |  |   |          |  | 
|                                                         |                                                                                                          |   |                         |          |      |   |          |         |  |   |          |  
|Comprehensive net loss applicable to
common stockholders |                                                                                                          | $ | (1,415,330              | )        |      | $ | (477,247 | )       |  | $ | (337,113 | )
|                                                         |                                                                                                          |   |                         |          |      |   |          |         |  |   |          |  

The Companys changes in other comprehensive (loss) income, includes
unrealized gains and losses on available-for-sale investments and foreign
currency translation adjustments relating to the Companys foreign operations.
Realized net gains transferred to current period earnings in the year ended
December 31, 2000, relate to entirely realized gains and losses on
available-for-sale investments. The gain on the sale of the equity instrument
and the investment write-down are included in other income.

15. STOCK COMPENSATION ARRANGEMENTS

Effective July 1, 1998, the Company adopted the Employee Stock Purchase
Plan, (the Purchase Plan), under which 12.0 million shares of Class A common
stock were authorized for issuance and 11.1 million shares were available for
issuance at December 31, 2000. Eligible employees may purchase Class A common
shares of the Company 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 own 5% or more of the voting rights of the Companys
outstanding common shares may not participate in the Purchase Plan. Employees
purchased 420,153 and 249,432 shares of Class A Common Stock under the Purchase
Plan during the years ended December 31, 2000 and 1999, respectively.

The Company also maintains the XO Communications, Inc. Stock Option Plan
(the Plan) to provide a performance incentive for certain officers, employees
and individuals or companies who provide services to the Company. The Plan
provides for the granting of qualified and non-qualified stock options. The
options become exercisable over vesting periods of up to four years and expire
no later than 10 years after the date of grant. The Company has authorized 103
million shares of Class A common stock for issuance under the Plan. As of
December 31, 2000, 9.6 million shares were available for issuance.

The exercise price of qualified stock options granted under the Plan may
not be less than the fair market value of the common shares on the date of
grant. The exercise price of non-qualified stock options granted under the Plan
may be greater or less than the fair market value of the common stock on the
date of grant, as determined at the discretion of the Board of Directors or the
Compensation Committee of the Board. Stock options granted at prices below fair
market value at the date of grant are considered compensatory, and compensation
expense is deferred and recognized ratably over the option vesting period based
on the excess of the fair market value of the stock at the date of grant over
the exercise price of the option.

The Company recorded approximately $48.3 million, $12.9 million, and $5.0
million of stock-based compensation expense related to the Plan for the years
ended December 31, 2000, 1999, and 1998, respectively. Additionally, $28.0
million of the Companys 1999 restructuring charge associated with the
relocation of the Companys headquarters from Bellevue, Washington to Northern
Virginia arose due to accelerated vesting of employee options in conjunction
with severance arrangements for approximately 125 employees.

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation costs been recognized based on the fair value at the date of
grant for options awarded under the Plan and the Equity Option

F-20



---



##### Table of Contents



Plan, the pro forma amounts of the Companys net loss and net loss per
share for the years ended December 31, 2000, 1999 and 1998 would have been as
follows (in thousands, except per share amounts):

|                                                   |  |      |            |      |  |      |          |   |  |   |          |  
|-------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                   |  | 2000 |            | 1999 |  | 1998
|                                                   |  |      |            |      |  |     
|Net loss applicable to common shares  as
reported |  | $    | (1,247,655 | )    |  | $    | (627,881 | ) |  | $ | (337,113 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Net loss applicable to common shares  pro forma   |  | $    | (1,435,253 | )    |  | $    | (679,046 | ) |  | $ | (353,466 | )
|                                                  
|                                                  
|                                                  
|                                                  
|Net loss per share  as reported                   |  | $    | (3.87      | )    |  | $    | (2.51    | ) |  | $ | (1.57    | )
|                                                  
|                                                  
|                                                  
|                                                  
|Net loss per share  pro forma                     |  | $    | (4.46      | )    |  | $    | (2.71    | ) |  | $ | (1.64    | )

The fair value of each option grant was estimated using the Black-Scholes
option-pricing model assuming no dividend yield and the following weighted
average assumptions:

|                               |  |      |      |      |  |      |      |   |  |  |         |  
|------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ------- | -
|                               |  | 2000 |      | 1999 |  | 1998
|                               |  |      |      |      |  |     
|Expected volatility            |  |      | 77.2 | %    |  |      | 70.3 | % |  |  | 70.0    | %
|                              
|                              
|                              
|                              
|Risk free interest rate        |  |      | 6.16 | %    |  |      | 5.32 | % |  |  | 5.04    | %
|                              
|                              
|                              
|                              
|Expected life (range in years) |  |      | 4.0  |      |  |      | 4.0  |   |  |  | 2.04.0 |  

The weighted average fair value of options granted during 2000, 1999 and
1998 was $19.14, $12.14, and $7.86, respectively.

Information with respect to the Plan is as follows:

|                                         |                        |  |                |             |              |   |                  |              |  |   |       |       | 
|---------------------------------------- | ---------------------- |  | -------------- | ----------- | ------------ | - | ---------------- | ------------ |  | - | ----- | ----- | 
|                                         |                        |  | Shares Subject |             | Option Price |   | Weighted Average
|                                         |                        |  | to Option      |             | Range        |   | Exercise Price  
|                                         |                        |  |                |             |              |   |                 
|Options outstanding at December 31, 1997 |                        |  | 14,782,104     |             |              | $ | 0.00  6.63      |              |  | $ | 1.62  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted                |  |                | 30,857,720  |              |   | $                | 1.99  10.13 |  |   | $     | 6.96  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled               |  |                | (3,187,220  | )            |   | $                | 0.00  9.47  |  |   | $     | 4.06  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised              |  |                | (3,187,420  | )            |   | $                | 0.00  8.04  |  |   | $     | 0.75  | 
|                                         |                        |  |                |            
|Options outstanding at December 31, 1998 |                        |  | 39,265,184     |             |              | $ | 0.00  10.13     |              |  | $ | 5.69  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted                |  |                | 26,521,992  |              |   | $                | 0.00  45.69 |  |   | $     | 15.63 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled               |  |                | (4,297,136  | )            |   | $                | 0.25  30.69 |  |   | $     | 8.06  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised              |  |                | (6,286,506  | )            |   | $                | 0.00  28.03 |  |   | $     | 4.70  | 
|                                         |                        |  |                |            
|Options outstanding at December 31, 1999 |                        |  | 55,203,534     |             |              | $ | 0.00  45.69     |              |  | $ | 9.86  |      
|                                        
|                                        
|                                        
|                                        
|                                         | Assumed in acquisition |  |                | 13,086,985  |              |   | $                | 0.00  66.00 |  |   | $     | 20.51 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Granted                |  |                | 36,850,732  |              |   | $                | 0.00  66.00 |  |   | $     | 35.17 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Canceled               |  |                | (12,590,334 | )            |   | $                | 0.01  64.88 |  |   | $     | 19.52 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised              |  |                | (11,310,416 | )            |   | $                | 0.01  41.53 |  |   | $     | 6.63  | 
|                                         |                        |  |                |            
|Options outstanding at December 31, 2000 |                        |  | 81,240,501     |             |              | $ | 0.00  66.00     |              |  | $ | 22.77 |      
|                                         |                        |  |                |            

|                         |  |             |            |             |  |                     |     |                     |  |          |       |  |  |          |            |  |  |   |       | 
|------------------------ |  | ----------- | ---------- | ----------- |  | ------------------- | --- | ------------------- |  | -------- | ----- |  |  | -------- | ---------- |  |  | - | ----- | 
|                         |  |             |            |             |  | Options Outstanding |     | Options Exercisable
|                         |  |             |            |             |  |                     |     |                    
|                         |  |             |            |             |  | Weighted           
|                         |  |             |            |             |  | Average             |     | Weighted            |  |          |       |  |  | Weighted
|                         |  |             |            |             |  | Remaining           |     | Average             |  |          |       |  |  | Average 
|                         |  | Options     |            | Contractual |  | Exercise            |     | Options             |  | Exercise
|Range of Exercise Prices |  | Outstanding |            | Life        |  | Price               |     | Exercisable         |  | Price   
|                         |  |             |            |             |  |                     |     |                     |  |         
|$ 0.01  $12.31          |  |             | 26,884,441 |             |  |                     | 7.4 |                     |  | $        | 5.87  |  |  |          | 11,353,388 |  |  | $ | 5.78  | 
|                        
|                        
|                        
|                        
|$12.32  $27.81          |  |             | 24,104,396 |             |  |                     | 9.0 |                     |  |          | 17.48 |  |  |          | 3,811,762  |  |  |   | 20.24 | 
|                        
|                        
|                        
|                        
|$27.82  $41.81          |  |             | 18,571,896 |             |  |                     | 9.3 |                     |  |          | 35.28 |  |  |          | 1,108,418  |  |  |   | 34.32 | 
|                        
|                        
|                        
|                        
|$41.82  $66.00          |  |             | 11,679,768 |             |  |                     | 9.2 |                     |  |          | 51.83 |  |  |          | 96,324     |  |  |   | 44.65 | 
|                         |  |             |            |             |  |                     |     |                     |  |          |       |  |  |          |            |  |  |   |       | 
|                         |  |             | 81,240,501 |             |  |                     | 8.6 |                     |  |          | 22.77 |  |  |          | 16,369,892 |  |  |   | 11.30 | 
|                         |  |             |            |             |  |                     |     |                     |  |          |       |  |  |          |            |  |  |   |       | 

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##### Table of Contents



16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Supplemental disclosure of the Companys cash flow information is as
follows (in thousands):

|                                                            |                                                                                                                                              |  |                         |  |  |  |      |           |      |  |      |         |  |  |   |        | 
|----------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- |  |  |  | ---- | --------- | ---- |  | ---- | ------- |  |  | - | ------ | 
|                                                            |                                                                                                                                              |  | Year Ended December 31,
|                                                            |                                                                                                                                              |  |                        
|                                                            |                                                                                                                                              |  |                         |  |  |  | 2000 |           | 1999 |  | 1998
|                                                            |                                                                                                                                              |  |                         |  |  |  |      |           |      |  |     
|Noncash financing and investing activities were as follows:
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Class A
common stock warrants and options issued in acquisitions and under
lease arrangements                                                |  |                         |  |  |  | $    | 3,002,309 |      |  | $    | 350,438 |  |  | $ |       | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Redeemable preferred stock dividends, paid in
redeemable preferred shares                                                                    |  |                         |  |  |  |      | 76,671    |      |  |      | 53,504  |  |  |   | 46,632 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Accrued redeemable preferred stock dividends, payable
in redeemable preferred shares, and accretion of
preferred stock redemption obligation |  |                         |  |  |  |      | 17,090    |      |  |      | 2,680   |  |  |   | 2,391  | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Assumption of preferred stock and liabilities in
acquisitions                                                                                |  |                         |  |  |  |      | 614,027   |      |  |      |        |  |  |   |       | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Issuance of Class B common stock for purchase of
minority interest                                                                           |  |                         |  |  |  |      |          |      |  |      | 269     |  |  |   | 5,727  | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Conversion of 6 1/2% redeemable cumulative preferred stock
to Class A common stock                                                           |  |                         |  |  |  |      | 93,860    |      |  |      |        |  |  |   |       | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Other obligations assumed                                                                                                                    |  |                         |  |  |  |      | 11,119    |      |  |      |        |  |  |   | 10,139 | 

17. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company is leasing premises under various operating leases for
administrative space, building access rights of way, 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 2019.

Future minimum lease commitments required under operating leases that have
an initial or remaining noncancelable lease term in excess of one year at
December 31, 2000 were as follows (in thousands):

|                                |  |   |         | 
|------------------------------- |  | - | ------- | 
|                                |  |  
|Year Ending December 31,        |  |   |         | 
|2001                            |  | $ | 54,819  | 
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|2002                            |  |   | 59,869  | 
|                               
|                               
|                               
|                               
|2003                            |  |   | 59,477  | 
|                               
|                               
|                               
|                               
|2004                            |  |   | 58,932  | 
|                               
|                               
|                               
|                               
|2005                            |  |   | 55,948  | 
|                               
|                               
|                               
|                               
|Thereafter                      |  |   | 412,901 | 
|                                |  |   |         | 
|Total minimum lease commitments |  | $ | 701,946 | 
|                                |  |   |         | 

Rent expense totaled approximately $54.6 million, $28.0 million, and $13.3
million for the years ended December 31, 2000, 1999, and 1998, respectively.

Capital Leases

Network assets capitalized under capital leases totaled approximately $44.9
million and $15.7 million in property and equipment as of December 31, 2000 and 1999, respectively, and
are included in telecommunications networks. Depreciation of leased assets is
included in depreciation expense. Future minimum lease payments under capital
lease obligations at December 31, 2000 are as follows (in thousands):

|                         |                              |   |        |        | 
|------------------------ | ---------------------------- | - | ------ | ------ | 
|                         |                              |   |       
|Year Ending December 31, |                              |   |        |       
|                        
|                        
|                        
|                        
|2001                     |                              | $ | 27,987 |       
|                        
|                        
|                        
|                        
|2002                     |                              |   | 14,621 |       
|                        
|                        
|                        
|                        
|2003                     |                              |   | 7,523  |       
|                        
|                        
|                        
|                        
|2004                     |                              |   | 2,266  |       
|                        
|                        
|                        
|                        
|2005                     |                              |   | 2,125  |       
|                        
|                        
|                        
|                        
|Thereafter               |                              |   | 3,893  |       
|                         |                              |   |        |       
|                         | Total minimum lease payments |   |        | 58,415 | 
|                        
|                        
|                        
|                        
|Less: imputed interest   |                              |   | 10,603 |       
|                         |                              |   |        |       
|Total                    |                              | $ | 47,812 |       
|                         |                              |   |        |       

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##### Table of Contents



Network Capacity

The Company entered into an agreement with Level 3 Communications, Inc.
(Level 3), which is constructing a fiber optic network in the United States
and Canada. The Company will pay approximately $700.0 million in exchange for
these assets, the majority of which will be payable as segments of the network
are completed and accepted, substantially all of which is expected to be
completed in 2001 with the remainder to be completed in 2002. As of December 31, 2000, the Company had accepted network segments
with a cost of $197.1 million, of which $131.4 million has been paid. As
network segments are accepted by the Company, the corresponding asset has been
recorded in property and equipment and depreciated over the estimated useful
life.

In 2000, the Company entered into an agreement with Level 3 for the
construction of a European network. The Company will pay $163.5 million for
this network, the majority of which will be payable as segments of the network
are completed and accepted. As of December 31, 2000, the Company had accepted
and paid $73.4 million to Level 3. The network is expected to be completed in
2001.

Employee Savings and Retirement Plan

The Company maintains a contributory 401(k) plan that covers substantially
all employees. The Company contributes up to 5% of each eligible employees
pre-tax annual compensation for those employees who contribute at least 5% or
more of their pre-tax annual compensation to the plan.

Legal Proceedings

The Company is subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. While the outcome of these matters
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.

18. OPERATING SEGMENTS

Reportable Segments

Following the Concentric merger, the Company instituted an integration
plan such that the Company operates its business as one communications segment.
The Companys communications segment includes all of the Companys products and
services including data, voice 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 and
Europe, or that are focused on customers with a presence across geographical
markets.

Products and Services

The Company groups its products and services offered by its communications
services segment into data services, voice services, and other services. The
revenues generated by the Companys products and services were as follows (in
thousands):

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##### Table of Contents



|               |  |                         |         |      |  |      |         |  |  |   |         | 
|-------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|               |  | Year Ended December 31,
|               |  |                        
|               |  | 2000                    |         | 1999 |  | 1998
|               |  |                         |         |      |  |     
|Data services  |  | $                       | 331,892 |      |  | $    | 54,032  |  |  | $ | 13,054  | 
|              
|              
|              
|              
|Voice services |  |                         | 386,796 |      |  |      | 219,391 |  |  |   | 126,613 | 
|              
|              
|              
|              
|Other services |  |                         | 5,138   |      |  |      | 901     |  |  |   |        | 
|               |  |                         |         |      |  |      |         |  |  |   |         | 
|Total revenue  |  | $                       | 723,826 |      |  | $    | 274,324 |  |  | $ | 139,667 | 
|               |  |                         |         |      |  |      |         |  |  |   |         | 

19. SELECTED QUARTERLY DATA (Unaudited)

Quarterly financial information is summarized in the table below (amounts
in thousands, except per share amounts):

|                                               |  |                         |          |         |  |         |          |         |  |   |          |   |  |   |          |  
|---------------------------------------------- |  | ----------------------- | -------- | ------- |  | ------- | -------- | ------- |  | - | -------- | - |  | - | -------- | -
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2000                   
|                                               |  |                        
|                                               |  | First                   |          | Second  |  | Third   |          | Fourth 
|                                               |  | Quarter                 |          | Quarter |  | Quarter |          | Quarter
|                                               |  |                         |          |         |  |         |          |        
|Revenue                                        |  | $                       | 105,849  |         |  | $       | 140,649  |         |  | $ | 224,255  |   |  | $ | 253,073  |  
|                                              
|                                              
|                                              
|                                              
|Loss from operations                           |  |                         | (118,122 | )       |  |         | (198,445 | )       |  |   | (336,694 | ) |  |   | (358,391 | )
|                                              
|                                              
|                                              
|                                              
|Net income (loss)                              |  |                         | 43,244   |         |  |         | (258,798 | )       |  |   | (394,182 | ) |  |   | (491,563 | )
|                                              
|                                              
|                                              
|                                              
|Net earning (loss) applicable to
common shares |  |                         | 9,809    |         |  |         | (290,562 | )       |  |   | (436,488 | ) |  |   | (530,414 | )
|                                              
|                                              
|                                              
|                                              
|Net earnings (loss) per share  basic          |  |                         | 0.04     |         |  |         | (0.95    | )       |  |   | (1.20    | ) |  |   | (1.29    | )
|                                              
|                                              
|                                              
|                                              
|Net earnings (loss) per share  diluted        |  |                         | 0.03     |         |  |         | (0.95    | )       |  |   | (1.20    | ) |  |   | (1.29    | )

|                                       |  |                         |          |         |  |         |          |         |  |   |          |   |  |   |          |  
|-------------------------------------- |  | ----------------------- | -------- | ------- |  | ------- | -------- | ------- |  | - | -------- | - |  | - | -------- | -
|                                       |  | Year Ended December 31,
|                                       |  |                        
|                                       |  | 1999                   
|                                       |  |                        
|                                       |  | First                   |          | Second  |  | Third   |          | Fourth 
|                                       |  | Quarter                 |          | Quarter |  | Quarter |          | Quarter
|                                       |  |                         |          |         |  |         |          |        
|Revenue                                |  | $                       | 48,586   |         |  | $       | 60,657   |         |  | $ | 75,059   |   |  | $ | 90,022   |  
|                                      
|                                      
|                                      
|                                      
|Loss from operations                   |  |                         | (71,359  | )       |  |         | (80,224  | )       |  |   | (86,582  | ) |  |   | (128,365 | )
|                                      
|                                      
|                                      
|                                      
|Net loss                               |  |                         | (102,286 | )       |  |         | (122,765 | )       |  |   | (141,573 | ) |  |   | (192,068 | )
|                                      
|                                      
|                                      
|                                      
|Net loss applicable to common shares   |  |                         | (118,886 | )       |  |         | (139,819 | )       |  |   | (159,098 | ) |  |   | (210,078 | )
|                                      
|                                      
|                                      
|                                      
|Net loss per share (basic and diluted) |  |                         | (0.54    | )       |  |         | (0.56    | )       |  |   | (0.63    | ) |  |   | (0.78    | )

Since there are changes in the weighted average number of shares
outstanding each quarter, the sum of net loss per share by quarter may not
equal the total net loss per share for the applicable year.

20. SUBSEQUENT EVENTS

Convertible Notes Offering

In January 2001, the Company completed the issuance and sale of $517.5 million
of 5 3/4% convertible subordinated notes due 2009 for net proceeds of $503.3
million, net of underwriting fees of $14.2 million. Interest on the notes is
payable on January 15 and July 15 of each year, beginning on July 15, 2001. The
notes are unsecured obligations of the Company and are subordinated in right of
payment to all other senior indebtedness. The notes are convertible at the
option of the holders anytime prior to maturity into Class A common stock at a
conversion price of $25.5438 per share subject to adjustment upon the
occurrence of certain events. The Company may terminate such conversion rights
on or after January 18, 2003 if the current market price of our Class A common
stock equals or exceeds 150%, on or prior to January 18, 2004, or 135%
thereafter, of the $25.5438 implied conversion price for 20 days in a 30
consecutive day trading period. The notes are not redeemable prior to their
maturity date of January 15, 2009.

Credit Facility

In February 2001, the Company drew down the remaining $237.5 million of
the term loan A under our senior secured credit facility, as required under the
terms of that facility.

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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To XO Capital, Inc.:

We have audited the accompanying balance sheets of XO Capital, Inc. (a
Washington Corporation) as of December 31, 2000 and 1999. These balance sheets
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these balance sheets 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 consolidated balance
sheets are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
balance sheets. 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 balance sheets referred to above present fairly, in
all material respects, the financial position of XO Capital, Inc. as of
December 31, 2000 and 1999, in conformity with accounting principles generally
accepted in the United States.

__________________

/s/ ARTHUR ANDERSEN LLP

Vienna, Virginia

February 5, 2001

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##### Table of Contents





Balance Sheets

|                     |                                                                             |  |              |     |      |  |   |     | 
|-------------------- | --------------------------------------------------------------------------- |  | ------------ | --- | ---- |  | - | --- | 
|                     |                                                                             |  | December 31,
|                     |                                                                             |  |             
|                     |                                                                             |  | 2000         |     | 1999
|                     |                                                                             |  |              |     |     
|Assets              
|                    
|                    
|                    
|                    
|                     | Cash                                                                        |  |              |    |      |  | $ | 100 | 
|                    
|                    
|                    
|                    
|                     | Receivable from XO Communications Inc.                                      |  | $            | 100 |      |  |   |    | 
|                     |                                                                             |  |              |     |      |  |   |    
|                    
|                    
|                    
|                    
|                     | Total assets                                                                |  | $            | 100 |      |  | $ | 100 | 
|                     |                                                                             |  |              |     |      |  |   |    
|Shareholders Equity
|                    
|                    
|                    
|                    
|                     | Common stock, no par value, 1,000 shares authorized,
issued and outstanding |  | $            | 100 |      |  | $ | 100 | 
|                     |                                                                             |  |              |     |      |  |   |    

XO Capital, Inc.

Note to Balance Sheets

December 31, 2000 and 1999

1. Description

XO Capital, Inc. (XO Capital) is a Washington corporation and a wholly
owned subsidiary of XO Communications, Inc. (XO). XO Capital was formed for the
sole purpose of obtaining financing from external sources and is a joint
obligor on the 12 1/2% Senior Notes due April 15, 2006 of XO. XO Capital was
initially funded with a $100 contribution from XO and has had no operations to
date. XO Capitals sole source and repayment for the 12 1/2% Senior Notes will be
from the operations of XO. Therefore, these balance sheets should be read in
conjunction with the consolidated financial statements of XO.

F-26