##### 









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION








|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934







|  |                                                                                             
|- | --------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934



XO COMMUNICATIONS, INC.


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 54-1983517                          
|(State or other jurisdiction of incorporation or
    organization) |  | (I.R.S. employer identification no.)

11111 Sunset Hills Road


Reston, Virginia 20190


(Address of principal executive offices, including zip
code)


(703) 547-2000


(Registrants telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, par value $0.01 per share


(Title of class)


þ o


þ


þ o




þ o




DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS


|         |  |                                                                                                                     |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                                     |  | Page |   
|         |  |                                                                                                                     |  |      |   
|PART I  
|        
|1.       |  | Business                                                                                                            |  |      | 1  | 
|2.       |  | Properties                                                                                                          |  |      | 30 | 
|3.       |  | Legal Proceedings                                                                                                   |  |      | 31 | 
|4.       |  | Submission of Matters to a Vote of Security Holders                                                                 |  |      | 31 | 
|PART II 
|        
|5.       |  | Market for Registrants Common Equity and Related
    Stockholder Matters and Issuer Purchases of Equity Securities |  |      | 31 | 
|6.       |  | Selected Financial Data                                                                                             |  |      | 32 | 
|7.       |  | Managements Discussion and Analysis of Financial Condition
    and Results of Operations                           |  |      | 33 | 
|7A.      |  | Quantitative and Qualitative Disclosure about Market Risk                                                           |  |      | 45 | 
|8.       |  | Financial Statements and Supplementary Data                                                                         |  |      | 46 | 
|9.       |  | Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure                            |  |      | 46 | 
|9A.      |  | Controls and Procedures                                                                                             |  |      | 46 | 
|PART III
|        
|10.      |  | Directors and Executive Officers of the Registrant                                                                  |  |      | 47 | 
|11.      |  | Executive Compensation                                                                                              |  |      | 48 | 
|12.      |  | Security Ownership of Certain Beneficial Owners and Management                                                      |  |      | 48 | 
|13.      |  | Certain Relationships and Related Transactions                                                                      |  |      | 48 | 
|14.      |  | Principal Accounting Fees and Services                                                                              |  |      | 49 | 
|PART IV 
|        
|15.      |  | Exhibits, Financial Statement Schedules and Reports on
    Form 8-K                                                 |  |      | 49 | 
|         |  | Signatures                                                                                                          |  |      | 50 | 



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##### 



PART I




|        |         
|------- | --------
|Item 1. | Business





Business Overview




2004 Highlights




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Acquisition of Allegiance Telecom, Inc. We acquired the
    telecommunications services assets of Allegiance Telecom, Inc.
    on June 23, 2004. The acquisition of Allegiance
    substantially expanded our local facilities, and significantly
    increased the number of business customers to which we can
    cost-effectively provide service. We completely integrated their
    administrative functions and have achieved all of the originally
    estimated $100 million of annualized selling, operating and
    general synergies. We have made substantial progress in
    achieving the originally estimated $60 million of
    annualized network synergies.
|
| |  | Positive Cash Flow from Operations for 2004. We generated
    positive cash flow from operations (excluding capital
    expenditures) in 2004, marking the third consecutive fiscal year
    that we have achieved that operating milestone.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Raised $200 million of Capital. In August 2004, we
    strengthened our balance sheet by raising an additional
    $200 million in capital to support our ongoing operations
    and to fund potential acquisitions 95% of which came from our
    significant shareholder.                                                                                                                                                                                                                                                                                                                                                                                                   

1



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The U.S. Telecommunications Market








Recent Federal Rulemaking.






Emergence of New Technologies.




| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IP Communications. Voice over Internet Protocol, or VoIP,
    technology enables delivery of voice and data telecommunications
    services over a single Internet Protocol or IP network, rather
    than

2



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##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | through the existing Public Switched Telephone Network or PSTN.
    XOs experience and network architecture allows us to take
    advantage of the development of VoIP services. XOs initial
    VoIP implementation, named XOptions Flex, enables customers to
    utilize dynamic bandwidth allocation to maximize the
    utilization of their bandwidth by allocating it for data
    applications during periods when voice lines are idle. XO also
    anticipates that it will add additional IP-enabled features to
    its existing products.                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Fixed Broadband Wireless. With the exception of building
    locations to which we have constructed our own fiber or network
    connections, we are dependent upon the ILECs for obtaining
    network access to our customers buildings, which access is
    referred to in our industry as last mile
    connectivity. There has been ongoing development of technical
    equipment and data encryption and compression protocols that
    permit the use of high bandwidth wireless connections between
    physical locations that are located within a line of sight
    across relatively short distances, usually under five miles.
    This fixed wireless, point-to-point connectivity may, in limited
    circumstances, allow us to obtain direct network access to our
    customers buildings via wireless connection without the
    requirement of leasing network access from the ILECs.
|
| |  | Mobile Wireless Technologies. Wireless carriers have
    engaged in rapid development of new high bandwidth applications
    to be delivered to their customers via wireless devices,
    commonly referred to as 3G broadband wireless
    networks. Such applications include the delivery of video and
    photos via wireless connection. The ongoing adoption of
    broadband networks and applications could mean that current
    wireless telecommunications carriers will require significantly
    greater wireline bandwidth for transport of their
    customers traffic, presenting an opportunity for
    facilities based carriers such as XO to offer transport and
    termination services to those wireless carriers.                                                                                                                                                                  

Industry Consolidation.


Growth of the Mobile Wireless Market.


Entry of New Telecommunications Competitors.


3



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##### 





Competitive Strategy






Leverage National Network Footprint.




Focus on Business Customers.


Focus on Profitable Revenue.


Diverse Service Offerings.


Strategic Acquisitions.


Our Services




4



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##### 







| |                                   
| | ----------------------------------
| | Integrated Voice and Data Services

XOptions and Total Communications.


IP Communications Services.


Managed Services.




| |               
| | --------------
| | Voice Services



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





| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | local standard dial tone, including touch-tone dialing, 911
    access and operator assisted calling;                                          
|
| |  | local multi-trunk dial tone services, including primary rate
    interface, or PRI, with direct inward dialing, and direct
    outward dialing;
|
| |  | long distance services, including 1+, toll free, calling card
    and operator services;                                                       
|
| |  | IP termination services;                                                                                                                       
|
| |  | voice messaging with personalized greetings, send, transfer,
    reply and remote retrieval capabilities;                                      
|
| |  | conferencing services, including voice and web conferencing
    services;                                                                      
|
| |  | directory listings and assistance; and                                                                                                         
|
| |  | hosted interactive voice response services.                                                                                                    



5



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| |              
| | -------------
| | Data Services



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





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









| |                 
| | ----------------
| | Hosting Services







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



6



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Our Network






| |                                          
| | -----------------------------------------
| | Metro Fiber Networks and Local Facilities







7



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##### 





|       |  |                      |  |                                                                                                                                                                        
|------ |  | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  | Metro Fiber          |  |                                                                                                                                                                        
|State  |  | Network Location     |  | Service Market                                                                                                                                                         
|       |  |                      |  |                                                                                                                                                                        
|AZ     |  | Phoenix              |  | Phoenix                                                                                                                                                                
|CA     |  | Los Angeles          |  | Los Angeles                                                                                                                                                            
|CA     |  | Orange County        |  | Anaheim
    Costa Mesa
    Fullerton
    Garden Grove
    Huntington Beach
    Inglewood
    Irving
    Long Beach
    Orange
    Santa Ana                            
|CA     |  | Sacramento           |  | Sacramento                                                                                                                                                             
|CA     |  | San Diego            |  | San Diego                                                                                                                                                              
|CA     |  | San Francisco        |  | San Francisco
    Oakland                                                                                                                                              
|CA     |  | San Francisco (cont) |  | Fremont
    Milpitas
    Mountain View
    Palo Alto
    Santa Clara
    Sunnyvale                                                                                     
|CA     |  | San Jose             |  | San Jose                                                                                                                                                               
|CO     |  | Denver               |  | Denver
    Boulder-Longmont                                                                                                                                            
|DC/VA  |  | Washington DC/ No VA |  | Washington, DC-MD-VA-WV                                                                                                                                                
|FL     |  | Ft Lauderdale        |  | Ft Lauderdale                                                                                                                                                          
|FL     |  | Miami                |  | Miami
    West Palm Beach-Boca Raton                                                                                                                                   
|FL     |  | Orlando              |  | Orlando                                                                                                                                                                
|FL     |  | Tampa                |  | Tampa-St. Petersburg- Clearwater                                                                                                                                       
|GA     |  | Atlanta              |  | Atlanta
    Marietta                                                                                                                                                   
|IL     |  | Chicago              |  | Chicago                                                                                                                                                                
|MA     |  | Boston               |  | Boston, MA-NH
    Brockton
    Lawrence, MA-NH
    Lowell, MA-NH
    Worcester, MA-CT                                                                                  
|MD     |  | Baltimore            |  | Baltimore                                                                                                                                                              
|MI     |  | Detroit              |  | Detroit                                                                                                                                                                
|MN     |  | Minneapolis          |  | Greater Minneapolis/ St. Paul                                                                                                                                          
|MO     |  | St Louis             |  | St Louis                                                                                                                                                               
|NJ     |  | New Jersey           |  | Bergen/ Passaic
    Middlesex-Somerset-Hunterdon
    Newark
    Jersey City
    Monmouth-Ocean
    Trenton                                                             
|NV     |  | Las Vegas            |  | Las Vegas                                                                                                                                                              
|NY     |  | New York             |  | Manhattan
    Nassau-Suffolk                                                                                                                                           
|OH     |  | Cleveland/ Akron     |  | Cleveland-Lorain-Elyria
    Akron
    Canton-Massillon                                                                                                                 
|OH     |  | Columbus             |  | Columbus                                                                                                                                                               
|OR     |  | Portland             |  | Portland-Vancouver, OR-WA                                                                                                                                              
|PA/ DE |  | Central PA           |  | Allentown-Bethlehem-Easton
    Harrisburg-Lebanon-Carlisle
    Lancaster
    Reading
    Scranton-Wilkes-Barre-Hazleton
    York
    Wilmington-Newark, DE-MD
    Dover
|PA     |  | Philadelphia         |  | Philadelphia, PA-NJ                                                                                                                                                    
|TN     |  | Memphis              |  | Memphis, TN-AR-MS                                                                                                                                                      
|TN     |  | Nashville            |  | Nashville                                                                                                                                                              
|TX     |  | Austin               |  | Austin-San Marco                                                                                                                                                       
|TX     |  | Dallas/ Ft Worth     |  | Dallas
    Fort Worth-Arlington                                                                                                                                        
|TX     |  | Houston              |  | Houston                                                                                                                                                                
|TX     |  | San Antonio          |  | San Antonio                                                                                                                                                            
|UT     |  | Salt Lake City       |  | Salt Lake City-Ogden
    Orem/Provo                                                                                                                                    
|WA     |  | Seattle              |  | Seattle-Bellevue-Everett                                                                                                                                               
|WA     |  | Spokane              |  | Spokane
    Lewiston
    Clarkston
    Coeur dAlene                                                                                                                   



| |                  
| | -----------------
| | Intercity Network





8



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9



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| |                   
| | ------------------
| | Broadband Wireless





| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | 150 MHz of LMDS spectrum in 14 other cities;                                                      
|
| |  | 150 MHz of LMDS spectrum in the five boroughs that comprise
    New York City (300 MHz total); and
|
| |  | 400 MHz of LMDS spectrum in Denver.                                                               



www.xo.com





10



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Connecting
Customers to Our Networks




Leasing UNEs.


Direct Fiber Connection.




| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | the existing and potential revenue base located in the building
    in question;                                              
|
| |  | the building location relative to our network and our ability to
    access the communications equipment in that building, and

11



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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | local permit requirements, landlord requirements, and
    construction costs.

Direct Fixed Broadband Wireless Connection.


Network Technology




Voice Switching Technology.








12



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Fixed Broadband Wireless Technology.


|        |  |                                            |  |       |    |  |            |  |           |        |  |        |          |  |         |        |   |  |         |  |  |  |  |  |           | 
|------- |  | ------------------------------------------ |  | ----- | -- |  | ---------- |  | --------- | ------ |  | ------ | -------- |  | ------- | ------ | - |  | ------- |  |  |  |  |  | --------- | 
|License |  |                                            |  |       |    |  |            |  |           |        |  | 39 GHz |          |  | License |       
|Number  |  | City                                       |  | State |    |  | Population |  |           | A Band |  |        | B Band   |  |         | Chanls |   |  | Renewal | 
|        |  |                                            |  |       |    |  |            |  |           |        |  |        |          |  |         |        |   |  |         | 
|WPOL286 |  | New York (PMSA of 5 boroughs & 3 counties) |  |       | NY |  |            |  | 8,546,846 |        |  |        | A3       |  |         |        |   |  |         |  |  |  |  |  | 2/01/2006 | 
|WPLM417 |  | Atlanta                                    |  |       | GA |  |            |  | 3,197,171 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM412 |  | Austin                                     |  |       | TX |  |            |  | 899,361   |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM416 |  | Baltimore                                  |  |       | MD |  |            |  | 2,430,563 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM430 |  | Birmingham                                 |  |       | AL |  |            |  | 1,200,336 |        |  |        | A        |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM413 |  | Boston                                     |  |       | MA |  |            |  | 4,133,895 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM418 |  | Chattanooga                                |  |       | TN |  |            |  | 510,860   |        |  |        | A        |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM405 |  | Chicago                                    |  |       | IL |  |            |  | 8,182,076 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM424 |  | Cincinnati                                 |  |       | OH |  |            |  | 1,990,451 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM422 |  | Cleveland-Akron                            |  |       | OH |  |            |  | 2,894,133 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM410 |  | Columbia                                   |  |       | SC |  |            |  | 568,754   |        |  |        | A        |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM438 |  | Columbus                                   |  |       | OH |  |            |  | 1,477,891 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPON926 |  | Denver                                     |  |       | CO |  |            |  | 2,073,952 |        |  |        | A1(part) |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM408 |  | Detroit                                    |  |       | MI |  |            |  | 4,705,164 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM398 |  | Hartford                                   |  |       | CT |  |            |  | 1,123,678 |        |  |        |          |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM411 |  | Hickory-Lenoir-Morganton                   |  |       | NC |  |            |  | 292,409   |        |  |        | A        |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 

13



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|        |  |                                               |  |       |       |  |            |  |            |        |  |        |        |  |         |        |   |  |         |  |  |  |  |  |           | 
|------- |  | --------------------------------------------- |  | ----- | ----- |  | ---------- |  | ---------- | ------ |  | ------ | ------ |  | ------- | ------ | - |  | ------- |  |  |  |  |  | --------- | 
|License |  |                                               |  |       |       |  |            |  |            |        |  | 39 GHz |        |  | License |       
|Number  |  | City                                          |  | State |       |  | Population |  |            | A Band |  |        | B Band |  |         | Chanls |   |  | Renewal | 
|        |  |                                               |  |       |       |  |            |  |            |        |  |        |        |  |         |        |   |  |         | 
|WPLM431 |  | Huntsville                                    |  |       | AL    |  |            |  | 439,832    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM435 |  | Indianapolis                                  |  |       | IN    |  |            |  | 1,321,911  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM436 |  | Kansas City                                   |  |       | MO    |  |            |  | 1,839,569  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM434 |  | Klamath Falls                                 |  |       | OR    |  |            |  | 74,566     |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM420 |  | Lakeland-Winterhaven                          |  |       | FL    |  |            |  | 405,382    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM429 |  | Lexington                                     |  |       | KY    |  |            |  | 816,101    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM401 |  | Los Angeles*                                  |  |       | CA    |  |            |  | 14,549,810 |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM428 |  | Louisville                                    |  |       | KY    |  |            |  | 1,352,955  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM423 |  | Mansfield                                     |  |       | OH    |  |            |  | 221,514    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM433 |  | Medford-Grants Pass                           |  |       | OR    |  |            |  | 209,038    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPOH970 |  | Milwaukee                                     |  |       | WI    |  |            |  | 1,751,525  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM419 |  | Minneapolis-St. Paul                          |  |       | MN    |  |            |  | 2,840,561  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPOH945 |  | New Haven-Waterbury- Meriden                  |  |       | CT    |  |            |  | 978,311    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM400 |  | New London- Norwich                           |  |       | CT    |  |            |  | 357,482    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM397 |  | New York (whole BTA)                          |  |       | NY    |  |            |  | 18,050,615 |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM421 |  | Ocala                                         |  |       | FL    |  |            |  | 194,833    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM432 |  | Portland                                      |  |       | OR    |  |            |  | 1,690,930  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPOH956 |  | Providence-Pawtucket, New Bedford- Fall River |  |       | RI,MA |  |            |  | 1,509,789  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM437 |  | Rochester                                     |  |       | NY    |  |            |  | 1,118,963  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM407 |  | Sacramento                                    |  |       | CA    |  |            |  | 1,656,581  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM402 |  | San Diego                                     |  |       | CA    |  |            |  | 2,498,016  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM406 |  | San Francisco- Oakland- San Jose              |  |       | CA    |  |            |  | 6,420,984  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM404 |  | San Luis Obispo                               |  |       | CA    |  |            |  | 217,162    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM403 |  | Santa Barbara- Santa Maria                    |  |       | CA    |  |            |  | 369,608    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM427 |  | Seattle-Tacoma                                |  |       | WA    |  |            |  | 2,708,949  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM425 |  | St. Louis                                     |  |       | MO    |  |            |  | 2,742,114  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM409 |  | Toledo                                        |  |       | OH    |  |            |  | 782,184    |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPLM415 |  | Washington                                    |  |       | DC    |  |            |  | 4,118,628  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 6/17/2008 | 
|WPOH677 |  | Albuquerque                                   |  |       | NM    |  |            |  | 688,612    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH679 |  | El Paso                                       |  |       | TX    |  |            |  | 649,860    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH676 |  | Tucson                                        |  |       | AZ    |  |            |  | 666,880    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH683 |  | Lawton-Duncan                                 |  |       | OK    |  |            |  | 177,830    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH682 |  | Oklahoma City                                 |  |       | OK    |  |            |  | 1,305,472  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH684 |  | Omaha                                         |  |       | NE    |  |            |  | 905,991    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH676 |  | Tulsa                                         |  |       | OK    |  |            |  | 836,559    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 9/1/2008  | 
|WPOH944 |  | Albany-Schenectady                            |  |       | NY    |  |            |  | 1,028,615  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH963 |  | Atlanta                                       |  |       | GA    |  |            |  | 3,197,171  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH954 |  | Austin                                        |  |       | TX    |  |            |  | 899,361    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH962 |  | Baltimore                                     |  |       | MD    |  |            |  | 2,430,563  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH955 |  | Boston                                        |  |       | MA    |  |            |  | 4,133,895  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH955 |  | Buffalo-Niagara Falls                         |  |       | NY    |  |            |  | 1,231,795  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH950 |  | Charlotte-Gastonia                            |  |       | NC    |  |            |  | 1,671,037  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH948 |  | Chicago                                       |  |       | IL    |  |            |  | 8,182,076  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH953 |  | Dallas                                        |  |       | TX    |  |            |  | 4,329,924  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH975 |  | Des Moines                                    |  |       | IA    |  |            |  | 728,830    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH949 |  | Detroit                                       |  |       | MI    |  |            |  | 4,705,164  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH952 |  | Greenville-Spartanburg                        |  |       | NC    |  |            |  | 788,212    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH943 |  | Hartford                                      |  |       | CT    |  |            |  | 1,123,678  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH966 |  | Houston                                       |  |       | TX    |  |            |  | 4,054,253  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH974 |  | Indianapolis                                  |  |       | IN    |  |            |  | 1,321,911  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH979 |  | Jacksonville                                  |  |       | FL    |  |            |  | 1,114,847  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH981 |  | Knoxville                                     |  |       | TN    |  |            |  | 948,055    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH947 |  | Los Angeles                                   |  |       | CA    |  |            |  | 14,549,810 |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH959 |  | Manchester-Nashua- Concord                    |  |       | NH    |  |            |  | 540,704    |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH973 |  | Memphis                                       |  |       | TN    |  |            |  | 1,396,390  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH967 |  | Miami-Ft. Lauderdale                          |  |       | FL    |  |            |  | 3,270,606  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 
|WPLM426 |  | Milwaukee                                     |  |       | WI    |  |            |  | 1,751,525  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH964 |  | Minneapolis- St. Paul                         |  |       | MN    |  |            |  | 2,840,561  |        |  |        |        |  |         |        | B |  |         |  |  |  |  |  | 10/6/2008 | 
|WPOH980 |  | Nashville                                     |  |       | TN    |  |            |  | 1,429,309  |        |  |        | A      |  |         |        |   |  |         |  |  |  |  |  | 10/6/2008 | 

14



---



##### 



|        |  |                                               |  |       |       |  |            |  |           |        |  |        |        |  |         |        |   |  |         |  |   |  |  |  |            | 
|------- |  | --------------------------------------------- |  | ----- | ----- |  | ---------- |  | --------- | ------ |  | ------ | ------ |  | ------- | ------ | - |  | ------- |  | - |  |  |  | ---------- | 
|License |  |                                               |  |       |       |  |            |  |           |        |  | 39 GHz |        |  | License |       
|Number  |  | City                                          |  | State |       |  | Population |  |           | A Band |  |        | B Band |  |         | Chanls |   |  | Renewal | 
|        |  |                                               |  |       |       |  |            |  |           |        |  |        |        |  |         |        |   |  |         | 
|WPLM399 |  | New Haven-Waterbury- Meriden                  |  |       | CT    |  |            |  | 978,311   |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH942 |  | New York (unencumbered by PMSA)               |  |       | NY    |  |            |  | 9,503,769 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH960 |  | Philadelphia, Wilmington (DE), Trenton (NJ)   |  |       | PA    |  |            |  | 5,899,345 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH971 |  | Pittsburgh                                    |  |       | PA    |  |            |  | 2,507,839 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPLM414 |  | Providence-Pawtucket, New Bedford- Fall River |  |       | RI,MA |  |            |  | 1,509,789 |        |  |        |        |  |         |        | B |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH951 |  | Raleigh-Durham                                |  |       | NC    |  |            |  | 1,089,423 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH972 |  | Richmond-Petersburg                           |  |       | VA    |  |            |  | 1,090,869 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH978 |  | Rochester                                     |  |       | NY    |  |            |  | 1,118,963 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH976 |  | San Antonio                                   |  |       | TX    |  |            |  | 1,530,954 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH958 |  | Springfield-Holyoke                           |  |       | MA    |  |            |  | 672,970   |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH969 |  | St. Louis                                     |  |       | MO    |  |            |  | 2,742,114 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH946 |  | Syracuse                                      |  |       | NY    |  |            |  | 791,140   |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH965 |  | Tampa-St. Petersburg- Clearwater              |  |       | FL    |  |            |  | 2,249,405 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH961 |  | Washington                                    |  |       | DC    |  |            |  | 4,118,628 |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH968 |  | West Palm Beach- Boca Raton                   |  |       | FL    |  |            |  | 893,145   |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPOH957 |  | Worcester-Fitchburg- Leominster               |  |       | MA    |  |            |  | 709,705   |        |  |        | A      |  |         |        |   |  |         |  |   |  |  |  | 10/6/2008  | 
|WPQT938 |  | Denver-Boulder- Greeley                       |  |       | CO    |  |            |  | 2,073,952 |        |  |        |        |  |         |        |   |  |         |  | B |  |  |  | 10/18/2010 | 
|WPQT942 |  | Las Vegas                                     |  |       | NV    |  |            |  | 857,856   |        |  |        |        |  |         |        |   |  |         |  | E |  |  |  | 10/18/2010 | 
|WPQT946 |  | Las Vegas                                     |  |       | NV    |  |            |  | 857,856   |        |  |        |        |  |         |        |   |  |         |  | G |  |  |  | 10/18/2010 | 
|WPQT939 |  | San Diego                                     |  |       | CA    |  |            |  | 2,498,016 |        |  |        |        |  |         |        |   |  |         |  | B |  |  |  | 10/18/2010 | 
|WPQT944 |  | San Diego                                     |  |       | CA    |  |            |  | 2,498,016 |        |  |        |        |  |         |        |   |  |         |  | F |  |  |  | 10/18/2010 | 
|WPQT947 |  | San Diego                                     |  |       | CA    |  |            |  | 2,498,016 |        |  |        |        |  |         |        |   |  |         |  | N |  |  |  | 10/18/2010 | 
|WPQT940 |  | San Francisco                                 |  |       | CA    |  |            |  | 6,420,984 |        |  |        |        |  |         |        |   |  |         |  | D |  |  |  | 10/18/2010 | 
|WPQT945 |  | San Francisco                                 |  |       | CA    |  |            |  | 6,420,984 |        |  |        |        |  |         |        |   |  |         |  | F |  |  |  | 10/18/2010 | 
|WPQT941 |  | Toledo                                        |  |       | OH    |  |            |  | 782,184   |        |  |        |        |  |         |        |   |  |         |  | E |  |  |  | 10/18/2010 | 
|WPQT943 |  | Toledo                                        |  |       | OH    |  |            |  | 782,184   |        |  |        |        |  |         |        |   |  |         |  | F |  |  |  | 10/18/2010 | 

|         |  |                                                                                                                                                                 
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Legend   |  |                                                                                                                                                                 
|         |  |                                                                                                                                                                 
|A        |  | 27,500 to 28,350 MHz, 29,100 to 29,250 GHz, 31,075 to 31,225 GHz
    = 1,150 MHz                                                                                
|A1       |  | 27,500 to 28,350 MHz = 850 MHz                                                                                                                                  
|A3       |  | 31,075 to 31,225 GHz = 150 MHz                                                                                                                                  
|B        |  | 31,000 to 31,075 MHz, 31.225 to 31,300 MHz = 150 MHz                                                                                                            
|39 GHz B |  | 38,650 to 38,700 MHz, 39,350 to 39,400 = 100 MHz                                                                                                                
|39 GHz E |  | 38,800 to 38,850 MHz, 39,500 to 39,550 = 100 MHz                                                                                                                
|39 GHz G |  | 38,900 to 38,950 MHz, 39,600 to 39,650 = 100 MHz                                                                                                                
|39 GHz F |  | 38,850 to 38,900 MHz, 39,550 to 39,600 = 100 MHz                                                                                                                
|39 GHz N |  | 39,250 to 39,300 MHz, 39,950 to 40,000 = 100 MHz                                                                                                                
|39 GHz D |  | 38,750 to 38,800 MHz, 39,450 to 39,500 = 100 MHz                                                                                                                
|         |  | The higher the frequency, the higher the attenuation (loss). For
    the same amount of transmission power, a lower frequency signal
    will propagate farther.







15



---



##### 





Employees




Sales
Overview




Direct Sales.




Indirect Sales Representatives.


Network
Services




16



---



##### 



Customer
Care




Competition




Incumbent Carriers.


Competitive Local Exchange Carriers.


Long Distance Companies.


Data and Internet Services Companies.


VoIP Carriers.


Cable-Based Service Providers.


17



---



##### 





| |                
| | ---------------
| | Company History











Regulatory Overview




| |         
| | --------
| | Overview







18



---



##### 









| |                   
| | ------------------
| | Federal Regulation





| |                                  
| | ---------------------------------
| | Implementation of the Telecom Act



| |                                              
| | ---------------------------------------------
| | The Telecom Acts Local Competition Framework





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Access to UNEs. ILECs are required to lease to
    CLECs various elements in their network that are used
    individually or in combination with each other to provide local
    telephone service. As discussed in more detail below, the FCC
    determines which facilities must be made available by the ILECs
    as UNEs. The ILECs must make UNEs available at rates that are
    based on their forward-looking economic costs, a pricing regime
    known as TELRIC, short for Total Element Long Run
    Incremental Cost. For XO, the most critical UNEs are local loops
    and transport, which enable us to connect our customers to our
    network.
|
| |  | Construction of New Facilities. CLECs may also
    enter the local service market by building entirely new
    facilities. The ILECs are required to allow CLECS to
    interconnect their facilities with the ILECs facilities in
    order to reach all customers.                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Resale. ILECs are required to permit CLECs to
    purchase their services for resale to the public at a wholesale
    rate that is less than the rate charged by the ILECs to their
    retail customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                            

19



---



##### 









| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | interconnection with the networks of incumbents and other
    carriers, which permits our customers to exchange traffic with
    customers connected to other networks;                                                                                                
|
| |  | requirements that the ILECs make available access to their
    facilities for our local loops and transport needs, thereby
    enabling us to serve customers not directly connected to our
    networks;                                                              
|
| |  | compensation obligations, which mandate reciprocal payment
    arrangements for local traffic exchange between us and both
    incumbent and other competitive carriers and compensation for
    terminating local traffic originating on other carriers
    networks;
|
| |  | requirements concerning local number portability, which allows
    customers to change local carriers without changing telephone
    numbers, thereby removing a significant barrier for a potential
    customer to switch to our local voice services;               
|
| |  | access to assignment of telephone numbers, which enables us to
    provide telephone numbers to new customers on the same basis as
    incumbent carriers; and                                                                                                         
|
| |  | collocation rights allowing us to place telecommunications
    equipment in ILEC central offices, which enables us to have
    direct access to local loops and other network elements.                                                                                





| |                                         
| | ----------------------------------------
| | Unbundling of Incumbent Network Elements



United States
Telecom Association v. FCC


20



---



##### 







| |          
| | ---------
| | UNE Loops

DS0 loops.


DS1 loops.


DS3 loops.








| |              
| | -------------
| | UNE Transport

DS1 transport.


DS3 transport.


Dark fiber transport.






| |                                                                             
| | ----------------------------------------------------------------------------
| | Transitional availability where elements are no longer
    available as UNEs



21



---



##### 









| |                               
| | ------------------------------
| | Additional Federal Regulations



VoIP.


AT&T Declaratory Ruling Re: VoIP.


Level 3 Forbearance Petition.


22



---



##### 





ILEC Provision of Broadband Telecommunications Services and
Information Services.


Intercarrier Compensation Reform.


Cost-based TELRIC Pricing.




| |                           
| | --------------------------
| | State and Local Regulation

California PUC Proceeding.




23



---



##### 









Risk Factors




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

The covenants in our Credit Agreement restrict our financial
and operational flexibility, which could have an adverse affect
on our results of operations.






24



---



##### 







| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | they may impair our ability to obtain additional financing in
    the future;                      
|
| |  | they may limit our flexibility in planning for or reacting to
    changes in market conditions; and
|
| |  | they may cause us to be more vulnerable in the event of a
    downturn in our business.            

We may not prevail in our $50 million claim against the
Allegiance Telecom Liquidating Trust, and we may not be
successful in defending ourselves from the Allegiance Telecom
Liquidating Trusts $100 million counterclaim against
us.




We incurred a net loss in 2004 and, in the near term, may not
generate funds from operations sufficient to meet all of our
cash requirements.




We may not realize the network synergies that we estimate in
connection with the acquisition of the Allegiance assets.








| |                                
| | -------------------------------
| | Risks Related to Our Operations

The failure of our operations support systems, including the
systems for sales tracking, order entry and provisioning, and
billing, to perform as we expect could impair our ability to
retain customers and obtain


25



---



##### 



new customers, or provision their services, or result in
increased capital expenditures, which would adversely affect our
revenues or capital resources.






Our rights to the use of the unlit capacity that make up our
network may be affected by the financial health of our fiber
providers.




We may not be able to continue to connect our network to the
ILECs network or maintain Internet peering arrangements on
favorable terms, which would impair our growth and
performance.






26



---



##### 





We may not be able to successfully extend the termination
date of our LMDS licenses for New York City and the surrounding
vicinity.




We depend on a limited number of third party service
providers for the performance of selected business operations,
and if any such third party service providers were to experience
significant interruptions in their business operations, or were
to otherwise cease to provide such services, our operations
could be materially and adversely affected.




We may be unable to adequately protect our intellectual
property or rights to licenses for use of third-party
intellectual property, and may be subject to claims that we
infringe the intellectual property of others, which could
substantially harm our business.




27



---



##### 



We experience turnover among our experienced and trained
employee base, which could result in our inability to continue
performing certain functions and completing certain initiatives
in accordance with our existing budgets and operating plans.




Several customers account for a significant portion of our
revenue, and some our customer agreements may not continue due
to bankruptcies, acquisitions, nonrenewal, or other factors.




Risks
Related to Competition and Our Industry


Technological advances and regulatory changes are eroding
traditional barriers between formerly distinct
telecommunications markets, which could increase the competition
we face and put downward pressure on prices, which could impair
our results.




The telecommunications industry is highly competitive, and
has experienced the consolidation of many existing competitors
and the introduction of significant new competitors.




28



---



##### 





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.




Attempts to limit the basic competitive framework of the
Telecom Act could interfere with the successful implementation
of our business plan.






| |                                  
| | ---------------------------------
| | Risks Related to Our Common Stock

An entity owned and controlled by Mr. Carl C. Icahn is
our majority stockholder.




Future sales or issuances of our common stock could adversely
affect its price and/or our ability to raise capital.










29



---



##### 







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







| |   |                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our services, including the development and deployment of data
    products and services based on IP, Ethernet and other
    technologies and strategies to expand our targeted customer base
    and broaden our sales channels;                                        
|
| |  | the operation of our network, including with respect to the
    development of IP protocols;                                                                                                                                                                             
|
| |  | liquidity and financial resources, including anticipated capital
    expenditures, funding of capital expenditures and anticipated
    levels of indebtedness; and                                                                                                       
|
| |  | trends related to and expectations regarding the results of
    operations in future periods, including but not limited to those
    statements set forth in Item 7, Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations below.





| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions in the geographic areas that we are
    targeting for communications services;                                                       
|
| |  | the ability to achieve and maintain market penetration and
    average per customer revenue levels sufficient to provide
    financial viability to our business;
|
| |  | the quality and price of similar or comparable communications
    services offered or to be offered by our current or future
    competitors; and                
|
| |  | future telecommunications-related legislation or regulatory
    actions.                                                                                         



|        |           
|------- | ----------
|Item 2. | Properties





30



---



##### 











|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings









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



Part II




|        |                                                                                                                    
|------- | -------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and Related
    Stockholder Matters and Issuer Purchases of Equity Securities



|               |  |      |      |  |      |   |      |      |  |   |      |  |  |   |      | 
|-------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|               |  | 2004 |      |  | 2003 |  
|               |  |      |      |  |      |  
|               |  | High |      |  | Low  |   |      | High |  |   | Low  | 
|               |  |      |      |  |      |   |      |      |  |   |      | 
|First Quarter  |  | $    | 7.90 |  |      | $ | 4.98 |      |  | $ | 4.00 |  |  | $ | 0.35 | 
|Second Quarter |  | $    | 5.70 |  |      | $ | 3.33 |      |  | $ | 7.80 |  |  | $ | 3.90 | 
|Third Quarter  |  | $    | 4.00 |  |      | $ | 3.16 |      |  | $ | 8.33 |  |  | $ | 5.60 | 
|Fourth Quarter |  | $    | 3.62 |  |      | $ | 2.67 |      |  | $ | 5.80 |  |  | $ | 4.97 | 

31



---



##### 







|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                           |  |                         |           |   |      |                         |           |   |      |  |   |            |   |  |      |            |   |  |   |            |  
|---------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | ----------------------- | --------- | - | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                           |  | Reorganized XO(f)       |           |   |      | Predecessor XO(f)       |          
|                                                           |  |                         |           |   |      |                         |          
|                                                           |  | Year Ended December 31, |           |   |      | Year Ended December 31, |          
|                                                           |  |                         |           |   |      |                         |          
|                                                           |  | 2004(a)                 |           |   | 2003 |                         |           |   | 2002 |  |   | 2001       |   |  | 2000 |           
|                                                           |  |                         |           |   |      |                         |           |   |      |  |   |            |   |  |      |           
|Statement of Operations Data:                              |  |                         |           |   |      |                         |           |   |      |  |   |            |   |  |      |            |   |  |   |            |  
|Revenue                                                    |  | $                       | 1,300,420 |   |      | $                       | 1,110,483 |   |      |  | $ | 1,259,853  |   |  | $    | 1,258,567  |   |  | $ | 723,826    |  
|Loss from operations (b)                                   |  |                         | (370,292  | ) |      |                         | (111,858  | ) |      |  |   | (1,208,898 | ) |  |      | (1,949,891 | ) |  |   | (1,011,652 | )
|Net loss (c)                                               |  |                         | (405,543  | ) |      |                         | (102,554  | ) |      |  |   | (3,386,818 | ) |  |      | (2,086,125 | ) |  |   | (1,101,299 | )
|Net loss applicable to common shares (c)(d)                |  |                         | (410,453  | ) |      |                         | (102,554  | ) |      |  |   | (3,350,362 | ) |  |      | (1,838,917 | ) |  |   | (1,247,655 | )
|Net loss per common share, basic and diluted               |  |                         | (2.57     | ) |      |                         | (1.07     | ) |      |  |   | (7.58      | ) |  |      | (4.55      | ) |  |   | (3.87      | )
|Statement of Cash Flow Data:                               |  |                         |           |   |      |                         |           |   |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net cash (used in) provided by operating activities        |  | $                       | 150       |   |      | $                       | 6,301     |   |      |  | $ | 17,602     |   |  | $    | (560,877   | ) |  | $ | (559,414   | )
|Net cash (used in) provided by investing activities        |  |                         | (444,837  | ) |      |                         | 153,036   |   |      |  |   | 57,582     |   |  |      | (708,598   | ) |  |   | (1,464,495 | )
|Net cash (used in) provided by financing activities        |  |                         | 200,116   |   |      |                         | 5,185     |   |      |  |   | (6,079     | ) |  |      | (1,019,647 | ) |  |   | 1,648,663  |  
|Balance Sheet Data:                                        |  |                         |           |   |      |                         |           |   |      |  |   |            |   |  |      |            |   |  |   |            |  
|Cash, cash equivalents and marketable securities           |  | $                       | 251,289   |   |      | $                       | 520,612   |   |      |  | $ | 560,983    |   |  | $    | 755,167    |   |  | $ | 1,860,963  |  
|Property and equipment, net                                |  |                         | 820,536   |   |      |                         | 485,984   |   |      |  |   | 2,780,589  |   |  |      | 3,742,577  |   |  |   | 2,794,105  |  
|Broadband wireless licenses and other intangibles, net (c) |  |                         | 139,866   |   |      |                         | 109,515   |   |      |  |   | 984,614    |   |  |      | 2,977,575  |   |  |   | 3,912,209  |  
|Total assets (c)                                           |  |                         | 1,459,385 |   |      |                         | 1,265,165 |   |      |  |   | 4,585,496  |   |  |      | 7,930,465  |   |  |   | 9,085,375  |  
|Total long-term debt and accrued interest payable (e)      |  |                         | 366,247   |   |      |                         | 536,791   |   |      |  |   | 5,165,718  |   |  |      | 5,109,503  |   |  |   | 4,396,596  |  
|Redeemable preferred stock, net of issuance costs          |  |                         | 204,353   |   |      |                         |          |   |      |  |   | 1,708,316  |   |  |      | 1,781,990  |   |  |   | 2,097,016  |  
|Total stockholders equity (deficit) (e)                   |  |                         | 485,552   |   |      |                         | 380,425   |   |      |  |   | (3,032,282 | ) |  |      | 297,416    |   |  |   | 1,838,401  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The selected consolidated financial data includes the accounts
    and activities of the businesses we acquired from Allegiance
    Telecom, Inc. from June 23, 2004, the acquisition date
    through December 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(b) | In 2004, loss from operations included a $212.5 million
    non-cash impairment charge of goodwill. In 2002, loss from
    operations included non-cash charges totaling
    $477.3 million in connection with the amendment to the
    terms of fiber acquisition and maintenance arrangements with
    Level 3 Communications, and the return of previously
    acquired intercity fiber in connection therewith. In 2001, loss
    from operations included restructuring charges totaling
    $509.2 million associated with the restructuring of certain
    aspects of our business operations. Loss from operations in 1999
    included restructuring charges totaling $30.9 million
    associated with relocating our Bellevue, Washington headquarters
    to Reston, Virginia.
|   
|(c) | In 2004, net loss included a $212.5 million non-cash
    impairment charge of goodwill. In 2003, net loss included a
    $33.5 million gain on investment sales. In 2002, net loss
    and total assets reflects a $1,876.6 million impairment
    charge to write-off all of our goodwill as a cumulative effect
    of accounting change, pursuant to SFAS No. 142. In 2001,
    net loss included a gain of $345.0 million resulting from
    the repurchase of certain of our senior notes. In 2000, net loss
    included a $225.1 million net gain from the sale of an
    equity investment.                                                                                                                                                                                       
|   
|(d) | The comparability of net loss applicable to common shares is
    impacted by the transactions discussed in c. above. In
    2001, net loss applicable to common shares includes a gain of
    $376.9 million resulting from the repurchase of certain of
    our preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

32



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##### 





|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(e) | In January 2004, we completed a rights offering. An aggregate of
    39.7 million shares were issued in the offering, yielding
    net proceeds of $197.6 million. These proceeds were used to
    pay down our long-term debt and accrued interest payable.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | The reorganized selected consolidated financial data as of and
    for the years ended December 31, 2004 and 2003 reflects the
    impact of adopting fresh start as of January 1, 2003, and
    is not comparable to that of predecessor XO. The predecessor
    selected consolidated financial data below as of and for the
    years ended December 31, 2002, 2001, and 2000 does not
    include the effects of the fresh start accounting provisions of
    SOP 90-7. Fresh start required that XO adjust the
    historical cost of its assets and liabilities to their fair
    values as determined by the reorganization value of the Company.



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

Executive Overview of Our Business


State
of the Telecommunications Industry






| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Reduced new customer demand and/or reductions in existing
    customer services,              
|
| |  | High number of bankruptcies in the telecommunications industry
    and the economy in general,
|
| |  | Continued competitive pressures, including price cutting in some
    product lines,           
|
| |  | Mandated FCC carrier access rate reductions.                                                  





Business
Overview




33



---



##### 



Key
Performance Indicators






| |   |                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Growth  This KPI tracks a combination of
    sales trends, pricing strategy and operational effectiveness.                                                                                                                                                                                                                         
|
| |  | Operating expenses as a percentage of revenue  This
    KPI tracks our efficiencies in providing services and our
    profitability.                                                                                                                                                                                                       
|
| |  | Customer attrition or churn  This KPI tracks the
    financial impact of customer attrition, or churn, in comparison
    to new sales. Management reviews this KPI to judge the
    effectiveness of operational measures intended to promote
    customer retention and satisfaction with our services, and the
    net impact on revenue.

System
Conversions






| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | XO has completed a number of systems initiatives that improved
    our sales operations and customer service, including:



| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | A customer and prospect management system to facilitate the
    handling of customer and prospect leads;           
|
| |  | A network pricing tool to facilitate production of price quotes
    for the sales team;                            
|
| |  | A project integration tool to allow cross selling of XO products
    by Allegiance sales personnel and the reverse;
|
| |  | A vendor and customer referral tool for lead generation; and                                                       
|
| |  | An ordering system for the selling of the first XO VoIP product,
    XOptions Flex.                                



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In order to improve productivity through the automation of
    business processes, we focused on improving the order
    installation process by implementing systems initiatives
    including:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | An electronic bonding system for trouble ticketing and order
    management between XO and several ILECs;                                      
|
| |  | A new ordering platform to enable standardized selling processes;                                                                              
|
| |  | An order flow through from our order entry system to our
    provisioning and billing systems for XOs four key products;                      
|
| |  | An Automated Switch Translation system, which automated the
    interface between the provisioning systems and the network
    elements; and   
|
| |  | A new Workforce Management system with full integration between
    the Workforce Management system and provisioning and trouble
    ticketing.



| |   |                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In addition, to improve productivity and to take advantage of
    the combination of the Allegiance and XO assets, XO assessed the
    capabilities of both systems portfolios and delivered a
    combined architecture, leveraging the best systems while
    reducing overall cost. Systems that have been consolidated
    include:



| |   |                            
| | - | ---------------------------
| |  | Network monitoring systems,
|
| |  | Virus management systems,  

34



---



##### 





| |   |                                                
| | - | -----------------------------------------------
| |  | General Ledger and Accounts Receivable systems,
|
| |  | Human Resource systems,                        
|
| |  | Sales commission systems,                      
|
| |  | Telco cost management platforms,               
|
| |  | Carrier Access Billing systems,                
|
| |  | Payroll systems,                               
|
| |  | Time and attendance systems, and               
|
| |  | Call Management systems.                       

Other 2004 Transactions and Developments


Acquisition
of Assets of Allegiance Telecom, Inc.








Convertible
Preferred Stock






35



---



##### 



Liquidity and Capital Resources


Capital
Resources and Liquidity Assessment












36



---



##### 





|                          |  |          |         |                 |             |   |         |                 |  |   |               |  |  |             |        |  |  |   |           | 
|------------------------- |  | -------- | ------- | --------------- | ----------- | - | ------- | --------------- |  | - | ------------- |  |  | ----------- | ------ |  |  | - | --------- | 
|                          |  |          |         | Other long-term |             |   |         |                 |  |   |              
|                          |  | Credit   |         |                 | contractual |   |         | Operating lease |  |   | Capital lease |  |  | Total       |       
|Year Ending December 31,  |  | Facility |         |                 | obligations |   |         | obligations     |  |   | obligations   |  |  | obligations |       
|                          |  |          |         |                 |             |   |         |                 |  |   |               |  |  |             |       
|2005                      |  | $        |        |                 |             | $ | 61,273  |                 |  | $ | 70,822        |  |  | $           | 4,789  |  |  | $ | 136,884   | 
|2006                      |  |          |        |                 |             |   | 52,521  |                 |  |   | 66,657        |  |  |             | 4,537  |  |  |   | 123,715   | 
|2007                      |  |          |        |                 |             |   | 48,806  |                 |  |   | 61,527        |  |  |             | 3,854  |  |  |   | 114,187   | 
|2008                      |  |          |        |                 |             |   | 47,524  |                 |  |   | 51,394        |  |  |             | 2,398  |  |  |   | 101,316   | 
|2009                      |  |          | 366,247 |                 |             |   | 33,679  |                 |  |   | 43,257        |  |  |             | 1,770  |  |  |   | 444,953   | 
|Thereafter                |  |          |        |                 |             |   | 95,787  |                 |  |   | 168,235       |  |  |             | 13,681 |  |  |   | 277,703   | 
|                          |  |          |         |                 |             |   |         |                 |  |   |               |  |  |             |       
|Total minimum commitments |  | $        | 366,247 |                 |             | $ | 339,590 |                 |  | $ | 461,892       |  |  | $           | 31,029 |  |  | $ | 1,198,758 | 
|                          |  |          |         |                 |             |   |         |                 |  |   |               |  |  |             |       





Comparison of Financial Results




XO
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003


Revenue.


37



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##### 





|                                   |               |                         |         |           |                         |  |       |        |           |   |         |           |  |          |       |        |  |  |       |       | 
|---------------------------------- | ------------- | ----------------------- | ------- | --------- | ----------------------- |  | ----- | ------ | --------- | - | ------- | --------- |  | -------- | ----- | ------ |  |  | ----- | ----- | 
|                                   |               | Year Ended December 31, |         |           | Year Ended December 31, |  |       |       
|                                   |               |                         |         |           |                         |  |       |       
|                                   |               |                         |         | % of 2004 |                         |  |       |        | % of 2003 |   |         |          
|                                   |               | 2004                    |         |           | Revenue                 |  |       | 2003   |           |   | Revenue |           |  | % Change |      
|                                   |               |                         |         |           |                         |  |       |        |           |   |         |           |  |          |      
|Voice services                     |               | $                       | 673,318 |           |                         |  | 51.8% |        |           | $ | 572,774 |           |  |          | 51.6% |        |  |  | 17.6% |      
|Data services                      |               |                         | 414,782 |           |                         |  | 31.9% |        |           |   | 392,742 |           |  |          | 35.4% |        |  |  | 5.6%  |      
|Integrated voice and data services |               |                         | 212,320 |           |                         |  | 16.3% |        |           |   | 144,967 |           |  |          | 13.0% |        |  |  | 46.5% |      
|                                   |               |                         |         |           |                         |  |       |        |           |   |         |           |  |          |      
|                                   | Total revenue |                         | $       | 1,300,420 |                         |  |       | 100.0% |           |   | $       | 1,110,483 |  |          |       | 100.0% |  |  |       | 17.1% | 
|                                   |               |                         |         |           |                         |  |       |        |           |   |         |           |  |          |      







Costs and expenses.


|                    |                                     |                         |   |           |                         |  |  |       |           |  |         |         |           |          |  |       |        |  |  |         |       | 
|------------------- | ----------------------------------- | ----------------------- | - | --------- | ----------------------- |  |  | ----- | --------- |  | ------- | ------- | --------- | -------- |  | ----- | ------ |  |  | ------- | ----- | 
|                    |                                     | Year Ended December 31, |   |           | Year Ended December 31, |  |  |      
|                    |                                     |                         |   |           |                         |  |  |      
|                    |                                     |                         |   | % of 2004 |                         |  |  |       | % of 2003 |  |         |        
|                    |                                     | 2004                    |   |           | Revenue                 |  |  | 2003  |           |  | Revenue |         |           | % Change | 
|                    |                                     |                         |   |           |                         |  |  |       |           |  |         |         |           |          | 
|Costs and expenses: |                                     |                         |   |           |                         |  |  |       |           |  |         |         |           |          |  |       |        |  |  |        
|                    | Cost of service                     |                         | $ | 552,735   |                         |  |  | 42.5% |           |  | $       | 422,129 |           |          |  | 38.0% |        |  |  | 30.9%   |      
|                    | Selling, operating and general      |                         |   | 727,666   |                         |  |  | 56.0% |           |  |         | 679,286 |           |          |  | 61.2% |        |  |  | 7.1%    |      
|                    | Depreciation and amortization       |                         |   | 177,781   |                         |  |  | 13.7% |           |  |         | 109,308 |           |          |  | 9.8%  |        |  |  | 62.6%   |      
|                    | Goodwill impairment charge          |                         |   | 212,530   |                         |  |  | 16.3% |           |  |         |        |           |          |  | 0.0%  |        |  |  | 100.0%  |      
|                    | Restructuring and asset write-downs |                         |   |          |                         |  |  | 0.0%  |           |  |         | 11,618  |           |          |  | 1.1%  |        |  |  | (100.0% | )    
|                    |                                     |                         |   |           |                         |  |  |       |           |  |         |         |           |          | 
|                    |                                     | Total                   |   | $         | 1,670,712               |  |  |       | 128.5%    |  |         | $       | 1,222,341 |          |  |       | 110.1% |  |  |         | 36.7% | 
|                    |                                     |                         |   |           |                         |  |  |       |           |  |         |         |           |          | 

Cost of service.


38



---



##### 









Selling, operating and general.




Depreciation and amortization.




Goodwill impairment charge.


Restructuring and asset write-downs.


Investment income, net.


39



---



##### 





Interest expense, net.




| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Reorganized XO Year Ended December 31, 2003 Compared to
    Predecessor XO Year Ended December 31, 2002



Revenue.




|                                   |               |                         |         |           |         |                         |       |        |      |           |   |         |           |  |          |       |        |  |  |        |        |  
|---------------------------------- | ------------- | ----------------------- | ------- | --------- | ------- | ----------------------- | ----- | ------ | ---- | --------- | - | ------- | --------- |  | -------- | ----- | ------ |  |  | ------ | ------ | -
|                                   |               | Reorganized XO          |         |           |         | Predecessor XO          |       |        |     
|                                   |               |                         |         |           |         |                         |       |        |     
|                                   |               | Year Ended December 31, |         |           |         | Year Ended December 31, |       |        |     
|                                   |               |                         |         |           |         |                         |       |        |     
|                                   |               |                         |         | % of 2003 |         |                         |       |        |      | % of 2002 |   |         |          
|                                   |               | 2003                    |         |           | Revenue |                         |       |        | 2002 |           |   | Revenue |           |  | % Change |      
|                                   |               |                         |         |           |         |                         |       |        |      |           |   |         |           |  |          |      
|Voice services                     |               | $                       | 572,774 |           |         |                         | 51.6% |        |      |           | $ | 659,558 |           |  |          | 52.3% |        |  |  | (13.2% | )     
|Data services                      |               |                         | 392,742 |           |         |                         | 35.4% |        |      |           |   | 472,247 |           |  |          | 37.5% |        |  |  | (16.8% | )     
|Integrated voice and data services |               |                         | 144,967 |           |         |                         | 13.0% |        |      |           |   | 128,048 |           |  |          | 10.2% |        |  |  | 13.2%  |       
|                                   |               |                         |         |           |         |                         |       |        |      |           |   |         |           |  |          |      
|                                   | Total revenue |                         | $       | 1,110,483 |         |                         |       | 100.0% |      |           |   | $       | 1,259,853 |  |          |       | 100.0% |  |  |        | (11.8% | )
|                                   |               |                         |         |           |         |                         |       |        |      |           |   |         |           |  |          |      





40



---



##### 





Costs and expenses.


|                    |                                     |                         |   |           |           |                         |  |       |        |           |  |         |         |           |          |  |       |        |  |  |        |        |  
|------------------- | ----------------------------------- | ----------------------- | - | --------- | --------- | ----------------------- |  | ----- | ------ | --------- |  | ------- | ------- | --------- | -------- |  | ----- | ------ |  |  | ------ | ------ | -
|                    |                                     | Reorganized XO          |   |           |           | Predecessor XO          |  |       |       
|                    |                                     |                         |   |           |           |                         |  |       |       
|                    |                                     | Year Ended December 31, |   |           |           | Year Ended December 31, |  |       |       
|                    |                                     |                         |   |           |           |                         |  |       |       
|                    |                                     |                         |   | % of 2003 |           |                         |  |       |        | % of 2002 |  |         |        
|                    |                                     | 2003                    |   |           | Revenue   |                         |  |       | 2002   |           |  | Revenue |         |           | % Change | 
|                    |                                     |                         |   |           |           |                         |  |       |        |           |  |         |         |           |          | 
|Costs and expenses: |                                     |                         |   |           |           |                         |  |       |        |           |  |         |         |           |          |  |       |        |  |  |       
|                    | Cost of service                     |                         | $ | 422,129   |           |                         |  | 38.0% |        |           |  | $       | 522,924 |           |          |  | 41.5% |        |  |  | (19.3% | )     
|                    | Selling, operating and general      |                         |   | 679,286   |           |                         |  | 61.2% |        |           |  |         | 765,853 |           |          |  | 60.8% |        |  |  | (11.3% | )     
|                    | Depreciation and amortization       |                         |   | 109,308   |           |                         |  | 9.8%  |        |           |  |         | 699,806 |           |          |  | 55.5% |        |  |  | (84.4% | )     
|                    | Restructuring and asset write-downs |                         |   | 11,618    |           |                         |  | 1.1%  |        |           |  |         | 480,168 |           |          |  | 38.1% |        |  |  | (97.6% | )     
|                    |                                     |                         |   |           |           |                         |  |       |        |           |  |         |         |           |          | 
|                    |                                     | Total                   |   | $         | 1,222,341 |                         |  |       | 110.1% |           |  |         | $       | 2,468,751 |          |  |       | 196.0% |  |  |        | (50.5% | )
|                    |                                     |                         |   |           |           |                         |  |       |        |           |  |         |         |           |          | 

Cost of service.


Selling, operating and general.


Depreciation and amortization.


Restructuring and asset write-downs.


41



---



##### 







Investment income (loss), net.


Interest expense, net.


Critical Accounting Policies and Estimates




Business
Combinations




|                           |  |   |         |  
|-------------------------- |  | - | ------- | -
|Current assets             |  | $ | 51,618  |  
|Property and equipment     |  |   | 372,405 |  
|Goodwill                   |  |   | 212,530 |  
|Other intangible assets    |  |   | 68,052  |  
|Other long-term assets     |  |   | 2,933   |  
|                           |  |   |        
|Total assets acquired      |  |   | 707,538 |  
|Current liabilities        |  |   | (58,193 | )
|Long-term liabilities      |  |   | (12,790 | )
|                           |  |   |        
|Total liabilities acquired |  |   | (70,983 | )
|                           |  |   |        
|Purchase price             |  | $ | 636,555 |  
|                           |  |   |        

42



---



##### 





Long-Lived
Assets










43



---



##### 





Revenue
Recognition








Cost
of Service




44



---



##### 



Subsequent Events




Off-Balance Sheet Arrangements




Recent Accounting Pronouncements Implemented in 2004




Item 7A.     Quantitative and
Qualitative Disclosure About Market Risk




|                   |  |                               |      |  |             |   |      |                               |  |   |            |  |  |        |      |  |         |   |      |         |  |   |      |  |  |   |      | 
|------------------ |  | ----------------------------- | ---- |  | ----------- | - | ---- | ----------------------------- |  | - | ---------- |  |  | ------ | ---- |  | ------- | - | ---- | ------- |  | - | ---- |  |  | - | ---- | 
|                   |  | Annual Interest Expense Given |      |  | No Change   |   |      | Annual Interest Expense Given | 
|                   |  | an Interest Rate decrease     |      |  | in Interest |   |      | an Interest Rate increase     | 
|                   |  | of X Basis Points             |      |  | Rates       |   |      | of X Basis Points             | 
|                   |  |                               |      |  |             |   |      |                               | 
|Interest Rate Risk |  | (150 BPS)                     |      |  | (100 BPS)   |   |      | (50 BPS)                      |  |   | Fair Value |  |  | 50 BPS |      |  | 100 BPS |   |      | 150 BPS | 
|                   |  |                               |      |  |             |   |      |                               |  |   |            |  |  |        |      |  |         |   |      |         | 
|Credit Facility    |  | $                             | 22.9 |  |             | $ | 24.8 |                               |  | $ | 26.6       |  |  | $      | 28.4 |  |         | $ | 30.3 |         |  | $ | 32.1 |  |  | $ | 33.9 | 





|             |  |                          |      |  |              |   |                         |                          |  |   |      |  |  |    |      |  |     |   |      |     |  |   |      |  |  |   |      | 
|------------ |  | ------------------------ | ---- |  | ------------ | - | ----------------------- | ------------------------ |  | - | ---- |  |  | -- | ---- |  | --- | - | ---- | --- |  | - | ---- |  |  | - | ---- | 
|             |  | Fair value assuming the  |      |  |              |   | Fair value assuming the |                         
|             |  | following percentage     |      |  | No Change in |   |                         | following percentage     | 
|             |  | decrease in market price |      |  | Fair Value   |   |                         | increase in market price | 
|             |  |                          |      |  |              |   |                         |                          | 
|Market Risk  |  | 15%                      |      |  | 10%          |   |                         | 5%                       |  |   | 0%   |  |  | 5% |      |  | 10% |   |      | 15% | 
|             |  |                          |      |  |              |   |                         |                          |  |   |      |  |  |    |      |  |     |   |      |     | 
|Market price |  | $                        | 14.0 |  |              | $ | 14.9                    |                          |  | $ | 15.7 |  |  | $  | 16.5 |  |     | $ | 17.4 |     |  | $ | 18.2 |  |  | $ | 19.0 | 

45



---



##### 



Item 8.     Financial
Statements and Supplementary Data






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





Item 9A.     Controls and
Procedures


Evaluation
of Disclosure Controls and Procedures




Changes
in Internal Controls over Financial Reporting




Management
Report on Internal Control over Financial Reporting




46



---



##### 



Internal
Control  Integrated Framework




Managements
Report on Internal Control Over Financial Reporting and
Certification of Disclosure in Exchange Act Periodic Reports,
Frequently Asked Questions (revised October 6, 2004).


PART III


Item 10.     Directors and
Executive Officers of the Registrant




Audit Committee Financial Expert




Code of Ethics




Item 11.     Executive
Compensation




Item 12.     Security Ownership
of Certain Beneficial Owners and Management




47



---



##### 





Item 13.     Certain
Relationships and Related Transactions




|                     |  |                  |  |                  |  |                  |  |                 |     | 
|-------------------- |  | ---------------- |  | ---------------- |  | ---------------- |  | --------------- | --- | 
|                     |  | Outstanding      |  |                  |  |                  |  | Preferred Stock |    
|                     |  | Common Stock     |  | Warrants         |  | Credit Facility  |  | Outstanding     |    
|                     |  |                  |  |                  |  |                  |  |                 |    
|At December 31, 2004 |  | Greater than 50% |  | Greater than 40% |  | Greater than 90% |  |                 | 95% | 















48



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##### 









Item 14.     Principal
Accounting Fees and Services




PART IV


Item 15.     Exhibits,
Financial Statement Schedules and Reports on Form 8-K




|                                                                                                                                                           |  |     
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|XO Communications, Inc.                                                                                                                                    |  |     
|Reports of KPMG LLP, Independent Registered Public Accounting
    Firm                                                                                     |  | F-1 
|Report of Ernst & Young LLP Independent Registered Public
    Accounting Firm                                                                              |  | F-4 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                                               |  | F-5 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2004, 2003, 2002 and for the portion of
    January 1, 2003                     |  | F-6 
|Consolidated Statements of Stockholders Equity (Deficit)
    for the Years Ended December 31, 2004, 2003, 2002 and for
    the portion of January 1, 2003 |  | F-7 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003, 2002, and for the portion of
    January 1, 2003                    |  | F-9 
|Notes to Consolidated Financial Statements                                                                                                                 |  | F-10
|Schedule II  Consolidated Valuation and
    Qualifying Accounts                                                                                           |  | S-1 



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

49



---



##### 



SIGNATURES






| |                        
| | -----------------------
| | XO Communications, Inc.



| |     |                    
| | --- | -------------------
| | By: | /s/ Carl J. Grivner

| |                                                                                        
| | ---------------------------------------------------------------------------------------
| |                                                                                        
| | Carl
    J. Grivner 
                         President
    and Chief Executive Officer
| | (Principal
    Executive Officer)                                                      



|                                               |  |                                                                                           
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------
|Name                                           |  | Title                                                                                     
|                                               |  |                                                                                           
|/s/ Carl J. GrivnerCarl
    J. Grivner         |  | President and Chief Executive Officer, Director (Principal
    Executive Officer)         
|                                              
|/s/ William GarrahanWilliam
    Garrahan       |  | Senior Vice President and Acting Chief Financial Officer
    (Principal Financial Officer)
|                                              
|/s/ Carl C. IcahnCarl
    C. Icahn             |  | Chairman of the Board of Directors                                                        
|                                              
|/s/ Andrew R. CohenAndrew
    R. Cohen         |  | Director                                                                                  
|                                              
|/s/ Adam DellAdam
    Dell                     |  | Director                                                                                  
|                                              
|/s/ Fredrik GradinFredrik
    Gradin           |  | Director                                                                                  
|                                              
|/s/ Vincent J. IntrieriVincent
    J. Intrieri |  | Director                                                                                  
|                                              
|/s/ Robert L. KnaussRobert
    L. Knauss       |  | Director                                                                                  
|                                              
|/s/ Keith MeisterKeith
    Meister             |  | Director                                                                                  

50



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##### 



EXHIBIT INDEX


| |      |  |  |                                                                                                                                                                                                                                                                                                                                                      
| | ---- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1  |  |  | Third Amended Plan of Reorganization of XO Communications, Inc.,
    dated July 22, 2002, (Incorporated herein by reference to
    exhibit 2.1 filed with the Current Report on Form 8-K/ A of
    XO Communications, Inc., filed on November 26, 2002).                                                                                             
| | 2.2  |  |  | Plan Supplement, dated October 23, 2003, to the Third
    Amended Plan of Reorganization of XO Communications, Inc., dated
    July 22, 2002 (Incorporated herein by reference to exhibit
    2.2 filed with the Current Report on Form 8-K/ A of XO
    Communications, Inc., filed on November 26, 2002).                                          
| | 2.3  |  |  | Order Confirming Third Amended Plan of Reorganization, dated
    November 15, 2002 (Incorporated herein by reference to
    exhibit 99.1 filed with the Current Report on Form 8-K/ A
    of XO Communications, Inc., filed on November 26, 2002).                                                                                                   
| | 2.4  |  |  | Asset Purchase Agreement, dated as of February 18, 2004, by
    and among XO Communications, Inc., Allegiance Telecom, Inc., and
    Allegiance Telecom Company Worldwide (Incorporated herein by
    reference to exhibit 10.1 filed with the Current Report on
    Form 8-K of XO Communications, Inc. filed on
    February 24, 2004).            
| | 3.1  |  |  | Amended and Restated Certificate of Incorporation of XO
    Communications, Inc. (Incorporated herein by reference to
    exhibit 3.1 filed with the Registration Statement on
    Form 8-A of XO Communications, Inc., filed on
    February 7, 2003, pursuant to the Securities Exchange Act).                                                     
| | 3.2  |  |  | Certificate of Designations setting forth the powers,
    preferences and relative, participating, optional and other
    special rights of the 6% Class A Convertible Preferred Stock
    (Incorporated by reference herein to exhibit 3.1 filed with the
    Quarterly Report on Form 10-Q of XO Communications, Inc.
    filed on August 9, 2004).
| | 3.3  |  |  | Amended and Restated Bylaws of XO Communications, Inc.
    (Incorporated by reference herein to exhibit 3.1 filed with the
    Annual Report on Form 10-K of XO Communications, Inc. filed
    on March 15, 2004).                                                                                                                                   
| | 4.1  |  |  | Form of Stock Certificate of Common Stock (Incorporated herein
    by reference to exhibit 4.1 filed with the Annual Report on
    Form 10-K of XO Communications, Inc. for the year ended
    December 31, 2002, filed on March 21, 2003.)                                                                                                          
| | 4.2  |  |  | Series A Warrant Agreement, dated as of January 16,
    2003, by and between XO Communications, Inc. and American Stock
    Transfer & Trust Company (Incorporated herein by reference
    to exhibit 10.1 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003).                                     
| | 4.3  |  |  | Series B Warrant Agreement, dated as of January 16,
    2003, by and between XO Communications, Inc. and American Stock
    Transfer & Trust Company (Incorporated herein by reference
    to exhibit 10.2 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003).                                     
| | 4.4  |  |  | Series C Warrant Agreement, dated as of January 16,
    2003, by and between XO Communications, Inc. and American Stock
    Transfer & Trust Company (Incorporated herein by reference
    to exhibit 10.3 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003).                                     
| | 10.1 |  |  | XO Communications, Inc. 2002 Stock Incentive Plan (Incorporated
    herein by reference to exhibit 10.1.1 to the Annual Report on
    Form 10-K of XO Communications, Inc. for the year ended
    December 31, 2002, filed on March 21, 2003).                                                                                                       
| | 10.2 |  |  | XO Communications, Inc. Retention Bonus and Incentive Plan
    (Incorporated herein by reference to exhibit 10.1.2 to the
    Annual Report on Form 10-K of XO Communications, Inc. for
    the year ended December 31, 2002, filed on March 21,
    2003).                                                                                          
| | 10.3 |  |  | Registration Rights Agreement, dated as of January 16,
    2003, between XO Communications, Inc. and High River Limited
    Partnership and Meadow Walk Limited Partnership (Incorporated
    herein by reference to exhibit 10.4 filed with the Current
    Report on Form 8-K of XO Communications, Inc., filed on
    January 30, 2003).          

51



---



##### 



| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4  |  |  | Registration Rights Agreement, dated as of August 6, 2004,
    by and among XO Communications, Inc., Tramore LLC, Cardiff
    Holdings, LLC and Amalgamated Gadget, L.P. (Incorporated herein
    by reference to exhibit 10.1 filed with the Quarterly
    Report on Form 10-Q filed by XO Communications, Inc.
    for the quarterly period ended June 30, 2004, filed on
    August 9, 2004).                                                                                    
| | 10.5  |  |  | Registration Rights Agreement, dated as of June 23, 2004,
    by and among Allegiance Telecom, Inc., Allegiance Telecom
    Company Worldwide, the Allegiance Telecom Liquidating Trust, and
    XO Communications, Inc.                                                                                                                                                                                                                                                            
| | 10.6  |  |  | Tax Allocation Agreement, dated as of January 16, 2003,
    between XO Communications, Inc. and Starfire Holding Corporation
    (Incorporated herein by reference to exhibit 10.5 filed with the
    Current Report on Form 8-K of XO Communications, Inc.,
    filed on January 30, 2003).                                                                                                                                                                                        
| | 10.7  |  |  | Employment Term Sheet, dated as of April 30, 2003,
    delivered by XO Communications, Inc. to Carl J. Grivner,
    President and Chief Executive Officer of XO Communications, Inc.
    (Incorporated herein by reference to exhibit 10.1 filed with the
    Quarterly Report on Form 10-Q of XO Communications, Inc. for the
    three months ended March 31, 2003, filed on May 15,
    2003).                                                                                   
| | 10.8  |  |  | Change in Control Agreement by and between XO Communications,
    Inc. and Carl J. Grivner, President and Chief Executive Officer
    of XO Communications, Inc. (Incorporated herein by reference to
    exhibit 10.2 filed with the Quarterly Report on Form 10-Q
    of XO Communications, Inc. for the three months ended
    March 31, 2003, filed on May 15, 2003).                                                                                                           
| | 10.9  |  |  | Employment Agreement, effective as of September 25, 2000,
    by and between Wayne M. Rehberger and XO Communications, Inc.
    (Incorporated by reference herein to exhibit 10.10 filed with
    the Annual Report on Form 10-K of XO Communications, Inc.
    filed on March 15, 2004).                                                                                                                                                                                           
| | 10.10 |  |  | Indemnification Agreement by and between Robert Knauss and XO
    Communications, Inc., dated as of November 2, 2004.
    (Incorporated herein by reference to exhibit 10.2 filed
    with the Quarterly Report on Form 10-Q filed by
    XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).                                                                                                                                
| | 10.11 |  |  | Indemnification Agreement by and between Adam Dell and XO
    Communications, Inc., dated as of November 2, 2004.
    (Incorporated herein by reference to exhibit 10.1 filed
    with the Quarterly Report on Form 10-Q filed by
    XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).                                                                                                                                    
| | 10.12 |  |  | Indemnification Agreement by and between Fredrik Gradin and XO
    Communications, Inc., dated as of November 2, 2004.
    (Incorporated herein by reference to exhibit 10.3 filed
    with the Quarterly Report on Form 10-Q filed by
    XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).                                                                                                                               
| | 10.13 |  |  | Cost Sharing and IRU Agreement, dated July 18, 1998,
    between Level 3 Communications, LLC and XO Intercity Holdings
    No. 2, LLC (f/k/a INTERNEXT LLC) (Incorporated herein by
    reference to exhibit 10.8 filed with the quarterly report on
    Form 10-Q for the quarterly period ended September 30,
    1998 of NEXTLINK Communications, Inc. and NEXTLINK Capital,
    Inc., filed on November 16, 1998).                                                              
| | 10.14 |  |  | Master Agreement, dated August 8, 2002, between Level 3
    Communications, Inc. and XO Communications, Inc. (Incorporated
    herein by reference to exhibit 10.4.2 filed with the Annual
    Report on Form 10-K of XO Communications, Inc. for the year
    ended December 31, 2002, filed on March 21, 2003).                                                                                                                                                                   
| | 10.15 |  |  | Amended and Restated Credit and Guaranty Agreement, dated as of
    January 16, 2003, among XO Communications, Inc., certain
    subsidiaries of XO Communications, Inc., the Lenders party
    thereto from time to time, and Mizuho Corporate Bank, as
    Administrative Agent (Incorporated herein by reference to
    exhibit 10.5 filed with the Annual Report on Form 10-K of
    XO Communications, Inc. for the year ended December 31,
    2002, filed on March 21, 2003).
| | 10.16 |  |  | XO Communications, Inc. Code of Ethics (Incorporated by
    reference herein to exhibit 14.1 filed with the Annual Report on
    Form 10-K of XO Communications, Inc. filed on
    March 15, 2004).                                                                                                                                                                                                                                                                                 
| | 21.1  |  |  | Subsidiaries of XO Communications, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 23.1  |  |  | Consent of KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

52



---



##### 



| |      |  |  |                                                                                                                                                   
| | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------
| | 23.2 |  |  | Consent of Ernst & Young LLP                                                                                                                      
| | 31.1 |  |  | Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a) and Rule 15d-14(a) of the Securities
    Exchange Act, as amended.        
| | 31.2 |  |  | Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a) and Rule 15d-14(a) of the Securities
    Exchange Act, as amended.        
| | 32.1 |  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C.
    1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
| | 32.2 |  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C.
    1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.

53



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















F-1



---



##### 





KPMG LLP






F-2



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















KPMG LLP






F-3



---



##### 



REPORT OF ERNST & YOUNG LLP,


INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





F-4



---



##### 



XO Communications, Inc.


Consolidated Balance Sheets


(Dollars in thousands, except for share and per share
data)


|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |          |           | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------- | -------- | ------------ |  | ------- | -------- | --------- | 
|                                                                      |                                                                                                                                                                                                                     | December 31,                                                                |         |          | December 31, | 
|                                                                      |                                                                                                                                                                                                                     | 2004                                                                        |         |          | 2003         | 
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|ASSETS                                                                |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|Current assets:                                                       |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|                                                                      | Cash and cash equivalents                                                                                                                                                                                           |                                                                             | $       | 233,989  |              |  | $       | 478,560  |          
|                                                                      | Marketable securities and other investments                                                                                                                                                                         |                                                                             |         | 17,300   |              |  |         | 42,052   |          
|                                                                      | Accounts receivable, net of allowance for doubtful accounts of
    $38,981 and $32,986, at December 31, 2004 and 2003,
    respectively                                                                             |                                                                             |         | 150,101  |              |  |         | 93,958   |          
|                                                                      | Other current assets                                                                                                                                                                                                |                                                                             |         | 50,864   |              |  |         | 12,421   |          
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total current assets                                                        |         |          | 452,254      |  |         |          | 626,991   | 
|Property and equipment, net                                           |                                                                                                                                                                                                                     |                                                                             | 820,536 |          |              |  | 485,984 |         
|Broadband wireless licenses and other intangibles, net                |                                                                                                                                                                                                                     |                                                                             | 139,866 |          |              |  | 109,515 |         
|Other assets                                                          |                                                                                                                                                                                                                     |                                                                             | 46,729  |          |              |  | 42,675  |         
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total assets                                                                |         | $        | 1,459,385    |  |         | $        | 1,265,165 | 
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
    STOCKHOLDERS EQUITY |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|Current liabilities:                                                  |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|                                                                      | Accounts payable                                                                                                                                                                                                    |                                                                             | $       | 88,010   |              |  | $       | 63,064   |          
|                                                                      | Accrued liabilities                                                                                                                                                                                                 |                                                                             |         | 241,532  |              |  |         | 208,353  |          
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total current liabilities                                                   |         |          | 329,542      |  |         |          | 271,417   | 
|Long-term debt and accrued interest payable                           |                                                                                                                                                                                                                     |                                                                             | 366,247 |          |              |  | 536,791 |         
|Other long-term liabilities                                           |                                                                                                                                                                                                                     |                                                                             | 73,691  |          |              |  | 76,532  |         
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total liabilities                                                           |         |          | 769,480      |  |         |          | 884,740   | 
|Class A convertible preferred stock                                   |                                                                                                                                                                                                                     |                                                                             | 204,353 |          |              |  |        |         
|Commitments and contingencies                                         |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|Stockholders equity:                                                 |                                                                                                                                                                                                                     |                                                                             |         |          |              |  |         |         
|                                                                      | Preferred stock: par value $0.01 per share, 200,000,000 shares
    authorized: 4,000,000 shares of Class A convertible
    preferred stock issued and outstanding on December 31 2004                               |                                                                             |         |         |              |  |         |         |          
|                                                                      | Warrants and common stock, par value $0.01 per share,
    1,000,000,000 shares authorized: 181,933,035 and 96,274,140
    shares issued and outstanding on December 31 2004 and
    December 31, 2003, respectively |                                                                             |         | 989,511  |              |  |         | 482,440  |          
|                                                                      | Subscription rights exercised, 32,503,234 shares authorized:
    none issued and outstanding                                                                                                                        |                                                                             |         |         |              |  |         | 162,516  |          
|                                                                      | Subscription rights receivable, 32,503,234 shares authorized:
    none issued and outstanding                                                                                                                       |                                                                             |         |         |              |  |         | (162,516 | )        
|                                                                      | Deferred compensation                                                                                                                                                                                               |                                                                             |         | (574     | )            |  |         | (839     | )        
|                                                                      | Accumulated other comprehensive income                                                                                                                                                                              |                                                                             |         | 4,712    |              |  |         | 1,378    |          
|                                                                      | Accumulated deficit                                                                                                                                                                                                 |                                                                             |         | (508,097 | )            |  |         | (102,554 | )        
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total stockholders equity                                                  |         |          | 485,552      |  |         |          | 380,425   | 
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 
|                                                                      |                                                                                                                                                                                                                     | Total liabilities, convertible preferred stock and
    stockholders equity |         | $        | 1,459,385    |  |         | $        | 1,265,165 | 
|                                                                      |                                                                                                                                                                                                                     |                                                                             |         |          |              | 



F-5



---



##### 



XO Communications, Inc.


Consolidated Statements of Operations


(Dollars in thousands, except for share and per share
data)


|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |   |   |   |             |         |           | 
|----------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ----------- | ------- | ------------ | - | ---------- | ------- | -------------- |  | - | ------------ | - | - | - | ----------- | ------- | --------- | 
|                                                                                          |                                                          |                          |             |         |              |   |            |         | Predecessor XO | 
|                                                                                          |                                                          | Year Ended               |             |         | Year Ended   |   |            |         | Predecessor XO |  |   | Year Ended   |  
|                                                                                          |                                                          | December 31,             |             |         | December 31, |   |            |         | January 1,     |  |   | December 31, |  
|                                                                                          |                                                          | 2004                     |             |         | 2003         |   |            |         | 2003           |  |   | 2002         |  
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Revenue                                                                                   |                                                          | $                        | 1,300,420   |         |              | $ | 1,110,483  |         |                |  | $ |             |   |   | $ | 1,259,853   |        
|Costs and expenses:                                                                       |                                                          |                          |             |         |              |   |            |         |                |  |   |              |   |   |   |             |        
|                                                                                          | Cost of service (excludes depreciation and amortization) |                          |             | 552,735 |              |   |            | 422,129 |                |  |   |              |  |   |   |             | 522,924 |          
|                                                                                          | Selling, operating and general                           |                          |             | 727,666 |              |   |            | 679,286 |                |  |   |              |  |   |   |             | 765,853 |          
|                                                                                          | Depreciation and amortization                            |                          |             | 177,781 |              |   |            | 109,308 |                |  |   |              |  |   |   |             | 699,806 |          
|                                                                                          | Goodwill impairment charge                               |                          |             | 212,530 |              |   |            |        |                |  |   |              |  |   |   |             |        |          
|                                                                                          | Restructuring and asset write-downs                      |                          |             |        |              |   |            | 11,618  |                |  |   |              |  |   |   |             | 480,168 |          
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|                                                                                          |                                                          | Total costs and expenses |             |         | 1,670,712    |   |            |         | 1,222,341      |  |   |              |   |  |   |             |         | 2,468,751 | 
|Loss from operations                                                                      |                                                          |                          | (370,292    | )       |              |   | (111,858   | )       |                |  |   |             |   |   |   | (1,208,898  | )      
|Investment (loss) income, net                                                             |                                                          |                          | (9,037      | )       |              |   | 46,152     |         |                |  |   |             |   |   |   | 16,278      |        
|Interest expense, net                                                                     |                                                          |                          | (26,214     | )       |              |   | (36,848    | )       |                |  |   |             |   |   |   | (226,451    | )      
|Reorganization gain (expense), net                                                        |                                                          |                          |            |         |              |   |           |         |                |  |   | 3,032,282    |   |   |   | (91,121     | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income before cumulative effect of accounting change                           |                                                          |                          | (405,543    | )       |              |   | (102,554   | )       |                |  |   | 3,032,282    |   |   |   | (1,510,192  | )      
|Cumulative effect of accounting change                                                    |                                                          |                          |            |         |              |   |           |         |                |  |   |             |   |   |   | (1,876,626  | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income                                                                         |                                                          |                          | (405,543    | )       |              |   | (102,554   | )       |                |  |   | 3,032,282    |   |   |   | (3,386,818  | )      
|Recognition of preferred stock modification fee, net 
    reorganization item            |                                                          |                          |            |         |              |   |           |         |                |  |   |             |   |   |   | 78,703      |        
|Preferred stock dividends and accretion of preferred stock
    redemption obligation, net |                                                          |                          | (4,910      | )       |              |   |           |         |                |  |   |             |   |   |   | (42,247     | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income applicable to common shares                                             |                                                          | $                        | (410,453    | )       |              | $ | (102,554   | )       |                |  | $ | 3,032,282    |   |   | $ | (3,350,362  | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income per common share, basic and diluted:                                    |                                                          |                          |             |         |              |   |            |         |                |  |   |              |   |   |   |             |        
|Net (loss) income before cumulative effect of accounting change                           |                                                          | $                        | (2.54       | )       |              | $ | (1.07      | )       |                |  | $ | 6.86         |   |   | $ | (3.42       | )      
|Cumulative effect of accounting change                                                    |                                                          |                          |            |         |              |   |           |         |                |  |   |             |   |   |   | (4.24       | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income                                                                         |                                                          |                          | (2.54       | )       |              |   | (1.07      | )       |                |  |   | 6.86         |   |   |   | (7.66       | )      
|Recognition of preferred stock modification fee, net 
    reorganization item            |                                                          |                          |            |         |              |   |           |         |                |  |   |             |   |   |   | 0.18        |        
|Preferred stock dividends and accretion of preferred stock
    redemption obligation, net |                                                          |                          | (0.03       | )       |              |   |           |         |                |  |   |             |   |   |   | (0.10       | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Net (loss) income per common share, basic and diluted                                     |                                                          | $                        | (2.57       | )       |              | $ | (1.07      | )       |                |  | $ | 6.86         |   |   | $ | (7.58       | )      
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  
|Weighted average shares, basic and diluted                                                |                                                          |                          | 159,883,403 |         |              |   | 95,632,859 |         |                |  |   | 441,964,342  |   |   |   | 441,964,342 |        
|                                                                                          |                                                          |                          |             |         |              |   |            |         |                |  |   |              |  



F-6



---



##### 



XO Communications, Inc.


Consolidated Statements of Stockholders Equity


(Dollars in thousands, except share data)


|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |   |          |   |          |   |       |   |       |   |         |         |          |  
|----------------------------- | ------------------------------------------------------------ | -------------------------------------------------------------------------------------- | ----------- | ------------------- | --------- | - | ------- | ----------------------- | - |  | ---------- | ----------- | ----------- | ----------- | ------- | -------- | ------------- |  | ----------- | ------------ | - | - | -------- | -------- | - | ------ | ---- | ---- | ----- | - | -------- | - | -------- | - | ----- | - | ----- | - | ------- | ------- | -------- | -
|                              |                                                              |                                                                                        |             | Subscription Rights |           |   |         |                         |   |  |            |             | Accumulated |             |         |         
|                              |                                                              | Common Stock                                                                           |             |                     | Exercised |   |         | Subscription Receivable |   |  |            |             |             |             | Other   |          |               | 
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  | Deferred   |             |             | Accumulated |         |          | Comprehensive |  |             |             
|                              |                                                              | Shares                                                                                 |             |                     | Amount    |   |         | Shares                  |   |  | Amount     |             |             | Shares      |         |          | Amount        |  |             | Compensation |   |   | Deficit  |          |   | Income |      |      | Total |  
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  
|Balance at January 1, 2003    |                                                              |                                                                                        |            |                     |           | $ |        |                         |   |  |           |             |             | $           |        |          |               |  |            |              |   | $ |         |          |   | $      |     |      |       | $ |         |   |          | $ |      |   |       | $ |        |        
|                              | Issuance of common stock                                     |                                                                                        |             | 95,000,001          |           |   |         | 475,000                 |   |  |            | 32,503,234  |             |             |         | 162,516  |               |  |             | (32,503,234  | ) |   |          | (162,516 | ) |        |      |     |       |   |          |  |          |   |       |  |       |   |         | 475,000 |         
|                              | Issuance of common stock through employee benefit plans, net |                                                                                        |             | 1,274,139           |           |   |         | 7,440                   |   |  |            |            |             |             |         |         |               |  |             |             |   |   |          |         |   |        |      | (839 | )     |   |          |  |          |   |       |  |       |   |         | 6,601   |         
|                              | Comprehensive loss:                                          |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |   |          |   |          |   |       |   |       |   |         |         |         
|                              |                                                              | Net loss                                                                               |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   | (102,554 | ) |       |   |      |   |         |         | (102,554 | )
|                              |                                                              | Other comprehensive income  unrealized holding gains
    arising during the year      |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   |         |   |       |   | 1,378 |   |         |         | 1,378    |  
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  
|                              |                                                              | Total comprehensive loss                                                               |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   |         |   |       |   |      |   |         |         | (101,176 | )
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  
|Balance at December 31, 2003. |                                                              |                                                                                        | 96,274,140  |                     |           |   | 482,440 |                         |   |  | 32,503,234 |             |             |             | 162,516 |          |               |  | (32,503,234 | )            |   |   | (162,516 | )        |   |        | (839 | )    |       |   | (102,554 | ) |          |   | 1,378 |   |       |   | 380,425 |        
|                              | Issuance of common stock for acquisition                     |                                                                                        |             | 45,380,000          |           |   |         | 311,306                 |   |  |            |            |             |             |         |         |               |  |             |             |   |   |          |         |   |        |      |     |       |   |          |  |          |   |       |  |       |   |         | 311,306 |         
|                              | Issuance of common stock under rights offering               |                                                                                        |             | 39,722,466          |           |   |         | 197,612                 |   |  |            | (32,503,234 | )           |             |         | (162,516 | )             |  |             | 32,503,234   |   |   |          | 162,516  |   |        |      |     |       |   |          |  |          |   |       |  |       |   |         | 197,612 |         
|                              | Issuance of common stock through employee benefit plans, net |                                                                                        |             | 556,429             |           |   |         | 3,063                   |   |  |            |            |             |             |         |         |               |  |             |             |   |   |          |         |   |        |      | 265  |       |   |          |  |          |   |       |  |       |   |         | 3,328   |         
|                              | Preferred stock accretion                                    |                                                                                        |             |                    |           |   |         | (4,910                  | ) |  |            |            |             |             |         |         |               |  |             |             |   |   |          |         |   |        |      |     |       |   |          |  |          |   |       |  |       |   |         | (4,910  | )       
|                              | Comprehensive loss:                                          |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |   |          |   |          |   |       |   |       |   |         |         |         
|                              |                                                              | Net loss                                                                               |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   | (405,543 | ) |       |   |      |   |         |         | (405,543 | )
|                              |                                                              | Other comprehensive income  unrealized holding gains
    arising during the year, net |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   |         |   |       |   | 3,334 |   |         |         | 3,334    |  
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  
|                              |                                                              | Total comprehensive loss                                                               |             |                     |          |   |         |                         |  |  |            |             |            |             |         |          |              |  |             |              |  |   |          |          |  |        |      |      |      |   |          |   |         |   |       |   |      |   |         |         | (402,209 | )
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  
|Balance at December 31, 2004  |                                                              |                                                                                        | 181,933,035 |                     |           | $ | 989,511 |                         |   |  |           |             |             | $           |        |          |               |  |            |              |   | $ |         |          |   | $      | (574 | )    |       | $ | (508,097 | ) |          | $ | 4,712 |   |       | $ | 485,552 |        
|                              |                                                              |                                                                                        |             |                     |           |   |         |                         |   |  |            |             |             |             |         |          |               |  |             |              |   |   |          |          |   |        |      |      |       |  



F-7



---



##### 



XO Communications, Inc.


Consolidated Statements of Stockholders Equity
(Deficit)


(Dollars in thousands, except share data)


|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |        |   |            |           |            |   |            |           |            |  
|---------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ----------- | ------------ | ------- |  | ----------- | ------------ | ------------- | ------ | ------------ | ---------- | ----------- | ------ | ------- | ------ | ------- | - | ------ | ------ | ------ | - | ---------- | --------- | ---------- | - | ---------- | --------- | ---------- | -
|                             |                                                                                                                                                                     | Common Stock                                                                                                |             |              |         |  |             |              |               |        |             
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  | Accumulated |              |               |        |              |           
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             | Other        |               |        |              |            |            
|                             |                                                                                                                                                                     | Shares                                                                                                      |             |              |         |  |             |              | Comprehensive |        |              |            |             |       
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  | Deferred    |              |               | Income |              |            | Accumulated |        |         |       
|Predecessor Company          |                                                                                                                                                                     | Class A                                                                                                     |             |              | Class B |  |             | Amount       |               |        | Compensation |            |             | (Loss) |         |        | Deficit |   |        | Total  |       
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |       
|Balance at December 31, 2001 |                                                                                                                                                                     |                                                                                                             | 337,774,204 |              |         |  | 104,423,158 |              |               | $      | 4,628,509    |            |             | $      | (37,428 | )      |         | $ | 10,406 |        |        | $ | (4,304,071 | )         |            | $ | 297,416    |          
|                             | Compensation attributable to stock options and restricted stock
    vesting                                                                                         |                                                                                                             |             |             |         |  |             |             |               |        |              |           |             |        |         | 28,928 |         |   |        |       |        |   |            |          |            |   |            | 28,928    |           
|                             | Issuance of common stock through employee benefit plans                                                                                                             |                                                                                                             |             | 85,854       |         |  |             |             |               |        |              | 24         |             |        |         |       |         |   |        |       |        |   |            |          |            |   |            | 24        |           
|                             | Conversion of
    61/2%
    redeemable cumulative preferred stock into Class A common
    stock                                                                     |                                                                                                             |             | 3,173        |         |  |             |             |               |        |              | 35         |             |        |         |       |         |   |        |       |        |   |            |          |            |   |            | 35        |           
|                             | Conversion of Preferred Stock                                                                                                                                       |                                                                                                             |             | 23,570       |         |  |             |             |               |        |              |           |             |        |         |       |         |   |        |       |        |   |            |          |            |   |            |          |           
|                             | Refund of Employee Stock Purchase Plan funds withheld after
    cancellation(a)                                                                                     |                                                                                                             |             |              |         |  |             |             |               |        |              | (429       | )           |        |         |       |         |   |        |       |        |   |            |          |            |   |            | (429      | )         
|                             | Cancellation of Craig McCaws Class A common stock                                                                                                                  |                                                                                                             |             | (6,853,582   | )       |  |             |             |               |        |              |           |             |        |         |       |         |   |        |       |        |   |            |          |            |   |            |          |           
|                             | Comprehensive loss:                                                                                                                                                 |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |        |   |            |           |            |   |            |           |           
|                             |                                                                                                                                                                     | Net loss                                                                                                    |             |              |        |  |             |              |              |        |              |            |            |        |         |        |        |   |        |        |       |   |            |           | (3,386,818 | ) |            |           | (3,386,818 | )
|                             |                                                                                                                                                                     | Recognition of preferred stock modification fee, net 
    reorganization item                              |             |              |        |  |             |              |              |        |              |            |            |        |         |        |        |   |        |        |       |   |            |           | 78,703     |   |            |           | 78,703     |  
|                             |                                                                                                                                                                     | Preferred stock dividends and accretion of preferred stock
    redemption obligation, net                   |             |              |        |  |             |              |              |        |              |            |            |        |         |        |        |   |        |        |       |   |            |           | (42,247    | ) |            |           | (42,247    | )
|                             |                                                                                                                                                                     | Realized net losses and foreign currency translation adjustments
    transferred to current period earnings |             |              |        |  |             |              |              |        |              |            |            |        |         |        |        |   |        |        | (7,894 | ) |            |           |           |   |            |           | (7,894     | )
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |       
|                             |                                                                                                                                                                     | Total comprehensive loss                                                                                    |             |              |        |  |             |              |              |        |              |            |            |        |         |        |        |   |        |        |       |   |            |           |           |   |            |           | (3,358,256 | )
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |       
|Balance at December 31, 2002 |                                                                                                                                                                     |                                                                                                             | 331,033,219 |              |         |  | 104,423,158 |              |               |        | 4,628,139    |            |             |        | (8,500  | )      |         |   | 2,512  |        |        |   | (7,654,433 | )         |            |   | (3,032,282 | )        
|                             | Cancellation of predecessor common sock, deferred compensation,
    accumulated deficit and accumulated other comprehensive income
    under Plan of Reorganization |                                                                                                             |             | (331,033,219 | )       |  |             | (104,423,158 | )             |        |              | (4,628,139 | )           |        |         | 8,500  |         |   |        | (2,512 | )      |   |            | 7,654,433 |            |   |            | 3,032,282 |           
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |       
|                             | Balance at January 1, 2003.                                                                                                                                         |                                                                                                             |             |             |         |  |             |             |               |        | $            |           |             |        | $       |       |         |   | $      |       |        |   | $          |          |            |   | $          |          |           
|                             |                                                                                                                                                                     |                                                                                                             |             |              |         |  |             |              |               |        |              |            |             |        |         |        |         |   |        |        |       






|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In the latter half of 2001, the Companys Employee Stock
    Purchase Plan was cancelled; however employee salary deferrals
    continued in December 2001, and were subsequently refunded in
    early 2002.



F-8



---



##### 



XO Communications, Inc.


Consolidated Statements of Cash Flows


(Dollars in thousands)


|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |           |  
|------------------------------------------------------------------------------------------------------ | ---------------------------------------------------- | ----------------------- | -------- | ------- | ---- | -------------- | ---------- | ------- | -------------- |  | - | --------- | ---------- | - | - | ---------- | --------- | -
|                                                                                                       |                                                      |                         |          |         |      |                |            |         | Predecessor XO | 
|                                                                                                       |                                                      |                         |          |         |      |                | Year Ended |        
|                                                                                                       |                                                      | Year Ended December 31, |          |         |      | Predecessor XO |            |         | December 31,   | 
|                                                                                                       |                                                      |                         |          |         |      | January 1,     |            |         |                | 
|                                                                                                       |                                                      | 2004                    |          |         | 2003 |                |            |         | 2003           |  |   | 2002      |           
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|OPERATING ACTIVITIES:                                                                                  |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |          
|Net (loss) income                                                                                      |                                                      | $                       | (405,543 | )       |      | $              | (102,554   | )       |                |  | $ | 3,032,282 |            |   | $ | (3,386,818 | )        
|Adjustments to reconcile net (loss) income to net cash provided
    by (used in) operating activities: |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |          
|                                                                                                       | Goodwill impairment charge                           |                         |          | 212,530 |      |                |            |        |                |  |   |           |           |   |   |            |          |  
|                                                                                                       | Depreciation and amortization                        |                         |          | 177,781 |      |                |            | 109,308 |                |  |   |           |           |   |   |            | 699,806   |  
|                                                                                                       | Accrual of interest                                  |                         |          | 27,068  |      |                |            | 36,791  |                |  |   |           |           |   |   |            |          |  
|                                                                                                       | Stock-based compensation                             |                         |          | 406     |      |                |            | 708     |                |  |   |           |           |   |   |            | 28,928    |  
|                                                                                                       | Realized loss (gain) on investments                  |                         |          | 5,238   |      |                |            | (27,224 | )              |  |   |           |           |   |   |            |          |  
|                                                                                                       | Non-cash restructuring charges and asset write-downs |                         |          | 10,360  |      |                |            | 6,765   |                |  |   |           |           |   |   |            | 477,250   |  
|                                                                                                       | Non-cash reorganization (gain) expense, net          |                         |          |        |      |                |            |        |                |  |   |           | (3,032,282 | ) |   |            | 89,448    |  
|                                                                                                       | Cumulative effect of accounting change               |                         |          |        |      |                |            |        |                |  |   |           |           |   |   |            | 1,876,626 |  
|Changes in assets and liabilities, net of effects from
    acquisitions:                               |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |          
|                                                                                                       | Accounts receivable                                  |                         |          | (8,084  | )    |                |            | 22,583  |                |  |   |           |           |   |   |            | 85,514    |  
|                                                                                                       | Other assets                                         |                         |          | (9,952  | )    |                |            | 1,317   |                |  |   |           |           |   |   |            | (21,572   | )
|                                                                                                       | Accounts payable                                     |                         |          | 8,503   |      |                |            | (7,568  | )              |  |   |           |           |   |   |            |          |  
|                                                                                                       | Accrued liabilities                                  |                         |          | (18,157 | )    |                |            | (33,825 | )              |  |   |           |           |   |   |            |          |  
|                                                                                                       | Other liabilities subject to compromise              |                         |          |        |      |                |            |        |                |  |   |           |           |   |   |            | 195,904   |  
|                                                                                                       | Other liabilities not subject to compromise          |                         |          |        |      |                |            |        |                |  |   |           |           |   |   |            | (27,484   | )
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|Net cash provided by (used in) operating activities                                                    |                                                      |                         | 150      |         |      |                | 6,301      |         |                |  |   |          |            |   |   | 17,602     |          
|INVESTING ACTIVITIES:                                                                                  |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |          
|Capital expenditures, net                                                                              |                                                      |                         | (106,023 | )       |      |                | (82,346    | )       |                |  |   |          |            |   |   | (208,713   | )        
|Sales of marketable securities and investments                                                         |                                                      |                         | 22,848   |         |      |                | 473,423    |         |                |  |   |          |            |   |   | 367,230    |          
|Purchases of marketable securities and investments                                                     |                                                      |                         | (36,413  | )       |      |                | (238,041   | )       |                |  |   |          |            |   |   | (103,935   | )        
|Cash (paid for) received from (acquisitions) divestitures                                              |                                                      |                         | (325,249 | )       |      |                |           |         |                |  |   |          |            |   |   | 3,000      |          
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|Net cash (used in) provided by investing activities                                                    |                                                      |                         | (444,837 | )       |      |                | 153,036    |         |                |  |   |          |            |   |   | 57,582     |          
|FINANCING ACTIVITIES:                                                                                  |                                                      |                         |          |         |      |                |            |         |                |  |   |           |            |   |   |            |          
|Proceeds from issuance of common stock, net                                                            |                                                      |                         | 200,326  |         |      |                | 6,452      |         |                |  |   |          |            |   |   |           |          
|Proceeds from issuance of preferred stock, net                                                         |                                                      |                         | 199,443  |         |      |                |           |         |                |  |   |          |            |   |   |           |          
|Repayments of long term debt and capital leases                                                        |                                                      |                         | (199,653 | )       |      |                | (1,267     | )       |                |  |   |          |            |   |   | (6,079     | )        
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|Net cash provided by (used in) financing activities                                                    |                                                      |                         | 200,116  |         |      |                | 5,185      |         |                |  |   |          |            |   |   | (6,079     | )        
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|Effect of exchange rate changes on cash                                                                |                                                      |                         |         |         |      |                |           |         |                |  |   |          |            |   |   | (1,256     | )        
|Net (decrease) increase in cash and cash equivalents                                                   |                                                      |                         | (244,571 | )       |      |                | 164,522    |         |                |  |   |          |            |   |   | 67,849     |          
|Cash and cash equivalents, beginning of year                                                           |                                                      |                         | 478,560  |         |      |                | 314,038    |         |                |  |   | 314,038   |            |   |   | 246,189    |          
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           
|Cash and cash equivalents, end of year                                                                 |                                                      | $                       | 233,989  |         |      | $              | 478,560    |         |                |  | $ | 314,038   |            |   | $ | 314,038    |          
|                                                                                                       |                                                      |                         |          |         |      |                |            |         |                |  |   |           |           



F-9



---



##### 



XO Communications, Inc.


Notes to Consolidated Financial Statements


December 31, 2004, 2003 and 2002




|   |                                         
|-- | ----------------------------------------
|1. | ORGANIZATION AND DESCRIPTION OF BUSINESS



| |         
| | --------
| | Overview





|   |                      
|-- | ---------------------
|2. | BUSINESS COMBINATIONS









F-10



---



##### 





|                           |  |   |         |  
|-------------------------- |  | - | ------- | -
|Current assets             |  | $ | 51,618  |  
|Property and equipment     |  |   | 372,405 |  
|Goodwill                   |  |   | 212,530 |  
|Other intangible assets    |  |   | 68,052  |  
|Other long-term assets     |  |   | 2,933   |  
|                           |  |   |        
|Total assets acquired      |  |   | 707,538 |  
|Current liabilities        |  |   | (58,193 | )
|Long-term liabilities      |  |   | (12,790 | )
|                           |  |   |        
|Total liabilities acquired |  |   | (70,983 | )
|                           |  |   |        
|Purchase price             |  | $ | 636,555 |  
|                           |  |   |        





|                                              |  |              |             |   |              |   |             |  
|--------------------------------------------- |  | ------------ | ----------- | - | ------------ | - | ----------- | -
|                                              |  | Year Ended   |             |   | Year Ended   |  
|                                              |  | December 31, |             |   | December 31, |  
|                                              |  | 2004         |             |   | 2003         |  
|                                              |  |              |             |   |              |  
|Revenue                                       |  | $            | 1,529,753   |   |              | $ | 1,630,042   |  
|Net loss applicable to common shares          |  | $            | (471,690    | ) |              | $ | (336,580    | )
|Net loss per common share  basic and diluted |  | $            | (2.60       | ) |              | $ | (2.39       | )
|Weighted average shares  basic and diluted   |  |              | 181,457,087 |   |              |   | 141,012,858 |  



|   |                                           
|-- | ------------------------------------------
|3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |                                
| | -------------------------------
| | (a) Principles of Consolidation





| |                                     
| | ------------------------------------
| | (b) Use of Estimates and Assumptions





F-11



---



##### 





| |                              
| | -----------------------------
| | (c) Cash and Cash Equivalents





| |                                                
| | -----------------------------------------------
| | (d) Marketable Securities and Other Investments





| |                      
| | ---------------------
| | (e) Long-Lived Assets







| |                           
| | --------------------------
| | (f) Property and Equipment



F-12



---



##### 







|                                                   |  |                                                                         
|-------------------------------------------------- |  | ------------------------------------------------------------------------
|Telecommunications networks and acquired bandwidth |  | 3-20 years                                                              
|Furniture, fixtures, equipment, and other          |  | 5-7 years                                                               
|Leasehold improvements                             |  | the shorter of the estimated useful lives or the terms of the
    leases





| |                                                      
| | -----------------------------------------------------
| | (g) Broadband Wireless Licenses and Other Intangibles







| |                 
| | ----------------
| | (h) Other Assets





| |                 
| | ----------------
| | (i) Income Taxes





| |                                        
| | ---------------------------------------
| | (j) Class A Convertible Preferred Stock



F-13



---



##### 





| |                        
| | -----------------------
| | (k) Revenue Recognition











| |                    
| | -------------------
| | (l) Cost of Service







| |                                
| | -------------------------------
| | (m) Net Income (Loss) Per Share





| |                             
| | ----------------------------
| | (n) Stock-Based Compensation



F-14



---



##### 





|                                   |  |      |      |   |      |   |                |   |      |  |  |       |  
|---------------------------------- |  | ---- | ---- | - | ---- | - | -------------- | - | ---- |  |  | ----- | -
|                                   |  |      |      |   |      |   | Predecessor XO |  
|                                   |  |      |      |   |      |   |                |  
|                                   |  | 2004 |      |   | 2003 |   |                |   | 2002 | 
|                                   |  |      |      |   |      |   |                |   |      | 
|Expected volatility                |  |      | 61.0 | % |      |   | 75.0           | % |      |  |  | 125.0 | %
|Risk free interest rate            |  |      | 3.14 | % |      |   | 2.6            | % |      |  |  | 4.0   | %
|Dividend yield                     |  |      | 0.0  | % |      |   | 0.0            | % |      |  |  | 0.0   | %
|Expected life (range in years)     |  |      | 4.0  |   |      |   | 4.0            |   |      |  |  | 4.0   |  
|Fair value per share at grant date |  | $    | 2.19 |   |      | $ | 2.95           |   |      |  |  | $0.11 |  



|                                                                                                                           |  |              |          |   |              |   |                |   |              |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ------------ | - | -------------- | - | ------------ |  | - | ---------- | -
|                                                                                                                           |  |              |          |   |              |   | Predecessor XO |  
|                                                                                                                           |  |              |          |   |              |   |                |  
|                                                                                                                           |  | December 31, |          |   | December 31, |   |                |   | December 31, | 
|                                                                                                                           |  | 2004         |          |   | 2003         |   |                |   | 2002         | 
|                                                                                                                           |  |              |          |   |              |   |                |   |              | 
|Net loss applicable to common shares, as reported                                                                          |  | $            | (405,543 | ) |              | $ | (102,554       | ) |              |  | $ | (3,350,362 | )
|Add: Stock-based employee compensation expense included in net
    loss applicable to common shares, as reported           |  |              | 406      |   |              |   | 708            |   |              |  |   | 28,928     |  
|Deduct: Total stock-based employee compensation expense
    determined under fair value based methods for all stock awards |  |              | (7,966   | ) |              |   | (16,189        | ) |              |  |   | (1,462     | )
|                                                                                                                           |  |              |          |   |              |   |                |   |              | 
|Pro forma net loss                                                                                                         |  | $            | (413,103 | ) |              | $ | (118,035       | ) |              |  | $ | (3,322,896 | )
|                                                                                                                           |  |              |          |   |              |   |                |   |              | 
|Net loss per common share, basic and diluted:                                                                              |  |              |          |   |              |   |                |   |              |  |   |            |  
|Net loss per common share, basic and diluted  as
    reported                                                             |  | $            | (2.57    | ) |              | $ | (1.07          | ) |              |  | $ | (7.58      | )
|                                                                                                                           |  |              |          |   |              |   |                |   |              | 
|Net loss per common share, basic and diluted  pro
    forma                                                               |  | $            | (2.58    | ) |              | $ | (1.23          | ) |              |  | $ | (7.52      | )
|                                                                                                                           |  |              |          |   |              |   |                |   |              | 



| |                       
| | ----------------------
| | (o) Comprehensive Loss



(p) Concentration
of Credit Risk




F-15



---



##### 



(q) Fair
Value of Financial Instruments




(r) Recent
Accounting Pronouncements




4.     MARKETABLE SECURITIES AND
OTHER INVESTMENTS




|                            |  |            |        |  |            |                  |        |               |                  |   |                |  |  |   |        |  
|--------------------------- |  | ---------- | ------ |  | ---------- | ---------------- | ------ | ------------- | ---------------- | - | -------------- |  |  | - | ------ | -
|                            |  |            |        |  |            | Gross Unrealized |        |               | Gross Unrealized |  
|                            |  | Fair Value |        |  | Cost Basis |                  |        | Holding Gains |                  |   | Holding Losses | 
|                            |  |            |        |  |            |                  |        |               |                  |   |                | 
|As of December 31, 2004     |  |            |        |  |            |                  |        |               |                  |   |                |  |  |   |        |  
|Equity securities           |  | $          | 6,417  |  |            | $                | 1,705  |               |                  | $ | 4,712          |  |  | $ |       |  
|Debt securities             |  |            | 10,883 |  |            |                  | 10,883 |               |                  |   |               |  |  |   |       |  
|                            |  |            |        |  |            |                  |        |               |                  |   |                | 
|Total marketable securities |  | $          | 17,300 |  |            | $                | 12,588 |               |                  | $ | 4,712          |  |  | $ |       |  
|                            |  |            |        |  |            |                  |        |               |                  |   |                | 
|As of December 31, 2003     |  |            |        |  |            |                  |        |               |                  |   |                |  |  |   |        |  
|Equity securities           |  | $          | 30,041 |  |            | $                | 28,663 |               |                  | $ | 3,001          |  |  | $ | (1,623 | )
|Debt securities             |  |            | 12,011 |  |            |                  | 12,011 |               |                  |   |               |  |  |   |       |  
|                            |  |            |        |  |            |                  |        |               |                  |   |                | 
|Total marketable securities |  | $          | 42,052 |  |            | $                | 40,674 |               |                  | $ | 3,001          |  |  | $ | (1,623 | )
|                            |  |            |        |  |            |                  |        |               |                  |   |                | 



F-16



---



##### 



5.     PROPERTY AND EQUIPMENT




|                                                   |  |              |         |  |      |   |         | 
|-------------------------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                                   |  | December 31, |        
|                                                   |  |              |        
|                                                   |  | 2004         |         |  | 2003 |  
|                                                   |  |              |         |  |      |  
|Telecommunications networks and acquired bandwidth |  | $            | 675,844 |  |      | $ | 382,854 | 
|Furniture, fixtures, equipment, and other          |  |              | 236,788 |  |      |   | 77,783  | 
|                                                   |  |              |         |  |      |  
|                                                   |  |              | 912,632 |  |      |   | 460,637 | 
|Less accumulated depreciation                      |  |              | 208,032 |  |      |   | 79,501  | 
|                                                   |  |              |         |  |      |  
|                                                   |  |              | 704,600 |  |      |   | 381,136 | 
|Construction-in-progress and inventory             |  |              | 115,936 |  |      |   | 104,848 | 
|                                                   |  |              |         |  |      |  
|                                                   |  | $            | 820,536 |  |      | $ | 485,984 | 
|                                                   |  |              |         |  |      |  



6.     BROADBAND WIRELESS LICENSES
AND OTHER INTANGIBLES




|                                      |  |              |         |   |      |   |         |  
|------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                      |  | December 31, |        
|                                      |  |              |        
|                                      |  | 2004         |         |   | 2003 |  
|                                      |  |              |         |   |      |  
|Broadband wireless licenses           |  | $            | 59,508  |   |      | $ | 59,508  |  
|Customer relationships                |  |              | 112,366 |   |      |   | 49,987  |  
|Internally developed technology       |  |              | 9,521   |   |      |   | 9,521   |  
|Acquired tradenames                   |  |              | 5,673   |   |      |   |        |  
|                                      |  |              |         |   |      |  
|                                      |  |              | 187,068 |   |      |   | 119,016 |  
|Less accumulated amortization         |  |              | (63,864 | ) |      |   | (26,163 | )
|                                      |  |              |         |   |      |  
|                                      |  |              | 123,204 |   |      |   | 92,853  |  
|XO Trade name  indefinite life asset |  |              | 16,662  |   |      |   | 16,662  |  
|                                      |  |              |         |   |      |  
|                                      |  | $            | 139,866 |   |      | $ | 109,515 |  
|                                      |  |              |         |   |      |  



F-17



---



##### 



7.     ACCRUED LIABILITIES




|                                 |  |              |         |  |      |   |         | 
|-------------------------------- |  | ------------ | ------- |  | ---- | - | ------- | 
|                                 |  | December 31, |        
|                                 |  |              |        
|                                 |  | 2004         |         |  | 2003 |  
|                                 |  |              |         |  |      |  
|Accrued compensation             |  | $            | 54,405  |  |      | $ | 46,124  | 
|Deferred revenue                 |  |              | 53,556  |  |      |   | 26,011  | 
|Accrued operating taxes          |  |              | 50,277  |  |      |   | 49,046  | 
|Accrued operating expenses       |  |              | 31,937  |  |      |   | 27,837  | 
|Accrued telecommunications costs |  |              | 24,881  |  |      |   | 19,491  | 
|Accrued restructuring charges    |  |              | 13,776  |  |      |   | 20,046  | 
|Other accrued liabilities        |  |              | 12,700  |  |      |   | 19,798  | 
|                                 |  |              |         |  |      |  
|                                 |  | $            | 241,532 |  |      | $ | 208,353 | 
|                                 |  |              |         |  |      |  

8.     ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS




|                                |  |   |        |  
|------------------------------- |  | - | ------ | -
|Balance as of December 31, 2003 |  | $ | 12,855 |  
|Accretion                       |  |   | 776    |  
|Revisions                       |  |   | (7,738 | )
|                                |  |   |       
|Balance as of December 31, 2004 |  | $ | 5,893  |  
|                                |  |   |       



9.     LONG-TERM DEBT




F-18



---



##### 









10.     CONVERTIBLE PREFERRED
STOCK






F-19



---



##### 





11.     STOCKHOLDERS EQUITY








| |   |                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Series A Warrants to purchase 9.5 million shares of XO
    common stock at an exercise price of $6.25 per share;                      
|
| |  | Series B Warrants to purchase approximately
    7.1 million shares of XO common stock at an exercise price
    of $7.50 per share; and
|
| |  | Series C Warrants to purchase approximately
    7.1 million shares of XO common stock at an exercise price
    of $10.00 per share.   





12.     INCOME TAXES




F-20



---



##### 









|                               |                                                      |              |            |           |      |   |            |         |  
|------------------------------ | ---------------------------------------------------- | ------------ | ---------- | --------- | ---- | - | ---------- | ------- | -
|                               |                                                      | December 31, |           
|                               |                                                      |              |           
|                               |                                                      | 2004         |            |           | 2003 |  
|                               |                                                      |              |            |           |      |  
|Deferred tax assets:           |                                                      |              |            |           |      |   |            |        
|                               | Provisions not currently deductible                  |              | $          | 108,959   |      |   | $          | 172,368 |  
|                               | Property, equipment and other long-term assets (net) |              |            | 820,885   |      |   |            | 893,957 |  
|                               | Net operating loss and capital loss carryforwards    |              |            | 1,109,575 |      |   |            | 483,453 |  
|                               |                                                      |              |            |           |      |  
|Total deferred tax assets      |                                                      |              | 2,039,419  |           |      |   | 1,549,778  |        
|Valuation allowance            |                                                      |              | (2,021,103 | )         |      |   | (1,540,612 | )      
|                               |                                                      |              |            |           |      |  
|Net deferred tax assets        |                                                      |              | 18,316     |           |      |   | 9,166      |        
|Deferred tax liabilities:      |                                                      |              |            |           |      |   |            |        
|                               | Other identifiable intangibles                       |              |            | (25,147   | )    |   |            | (15,997 | )
|                               |                                                      |              |            |           |      |  
|Total deferred tax liabilities |                                                      |              | (25,147    | )         |      |   | (15,997    | )      
|                               |                                                      |              |            |           |      |  
|Net deferred tax liability     |                                                      | $            | (6,831     | )         |      | $ | (6,831     | )      
|                               |                                                      |              |            |           |      |  



|                                            |  |      |       |    |      |  |             |    |      |  |  |       |   
|------------------------------------------- |  | ---- | ----- | -- | ---- |  | ----------- | -- | ---- |  |  | ----- | --
|                                            |  |      |       |    |      |  | Predecessor |   
|                                            |  | XO   |       |    | XO   |  |             |    | XO   | 
|                                            |  |      |       |    |      |  |             |    |      | 
|                                            |  | 2004 |       |    | 2003 |  |             |    | 2002 | 
|                                            |  |      |       |    |      |  |             |    |      | 
|Statutory U.S. federal rate                 |  |      | 35.0  | %  |      |  | 35.0        | %  |      |  |  | 35.0  | % 
|State income taxes, net of federal benefit  |  |      | 6.0   | %  |      |  | 6.0         | %  |      |  |  | 6.0   | % 
|Valuation allowance for deferred tax assets |  |      | (22.6 | %) |      |  | (41.0       | %) |      |  |  | (18.3 | %)
|Impairment                                  |  |      | (18.4 | %) |      |  |            | %  |      |  |  | (22.7 | %)
|                                            |  |      |       |    |      |  |             |    |      | 
|Effective income tax rate                   |  |      |      | %  |      |  |            | %  |      |  |  |      | % 
|                                            |  |      |       |    |      |  |             |    |      | 

F-21



---



##### 



13.     STOCK COMPENSATION
ARRANGEMENTS








|                                   |           |           |            |            |                  |   |      |      | 
|---------------------------------- | --------- | --------- | ---------- | ---------- | ---------------- | - | ---- | ---- | 
|                                   |           | Number of |            |            | Weighted Average |  
|                                   |           | Shares    |            |            | Exercise Price   |  
|                                   |           |           |            |            |                  |  
|Outstanding at January 1, 2003.    |           |           |           |            |                  | $ |     |     
|                                   | Granted   |           |            | 15,394,162 |                  |   | $    | 5.09 | 
|                                   | Canceled  |           |            | (3,697,068 | )                |   | $    | 5.02 | 
|                                   | Exercised |           |            | (1,274,139 | )                |   | $    | 5.01 | 
|                                   |           |           |            |            |                  |  
|Outstanding at December 31, 2003.  |           |           | 10,422,955 |            |                  | $ | 5.12 |     
|                                   |           |           |            |            |                  |  
|Exercisable, at December 31, 2003. |           |           | 2,424,903  |            |                  | $ | 5.10 |     
|                                   |           |           |            |            |                  |  
|Outstanding at December 31, 2003.  |           |           | 10,422,955 |            |                  | $ | 5.12 |     
|Granted                            |           |           | 3,577,382  |            |                  | $ | 5.26 |     
|Canceled                           |           |           | (2,184,093 | )          |                  | $ | 5.55 |     
|Exercised                          |           |           | (556,429   | )          |                  | $ | 5.01 |     
|                                   |           |           |            |            |                  |  
|Outstanding at December 31, 2004.  |           |           | 11,259,815 |            |                  | $ | 5.09 |     
|                                   |           |           |            |            |                  |  
|Exercisable, at December 31, 2004. |           |           | 3,726,298  |            |                  | $ | 5.02 |     
|                                   |           |           |            |            |                  |  

|     |  |                   |              |                     |                 |          |                     |             |          |         |          |  |         |                 |      |         |          |  |           |  |  |   |      | 
|---- |  | ----------------- | ------------ | ------------------- | --------------- | -------- | ------------------- | ----------- | -------- | ------- | -------- |  | ------- | --------------- | ---- | ------- | -------- |  | --------- |  |  | - | ---- | 
|     |  |                   |              | Options Outstanding |                 |          |                    
|     |  |                   |              |                     |                 |          | Options Exercisable |            
|     |  |                   |              |                     |                 | Weighted |                     |             |          |         |          | 
|     |  |                   |              |                     |                 | Average  |                     |             | Weighted |         |          |  |         | Weighted        |     
|     |  |                   |              | Options             |                 |          | Remaining           |             |          | Average |          |  | Options |                 |      | Average |         
|     |  | Range of Exercise |              |                     | Outstanding     |          |                     | Contractual |          |         | Exercise |  |         | Exercisable     |      |         | Exercise | 
|     |  | Prices            |              |                     | at December 31, |          |                     | Life        |          |         | Price    |  |         | at December 31, |      |         | Price    | 
|     |  |                   |              |                     |                 |          |                     |             |          |         |          |  |         |                 |      |         |          | 
|2003 |  | $                 | 4.80  $7.05 |                     |                 |          | 10,422,955          |             |          |         | 9.1      |  |         | $               | 5.12 |         |          |  | 2,424,903 |  |  | $ | 5.10 | 
|     |  |                   |              |                     |                 |          |                     |             |          |         |          |  |         |                 |      |         |          | 
|2004 |  | $                 | 4.80  $7.05 |                     |                 |          | 11,259,815          |             |          |         | 8.6      |  |         | $               | 5.09 |         |          |  | 3,726,298 |  |  | $ | 5.02 | 
|     |  |                   |              |                     |                 |          |                     |             |          |         |          |  |         |                 |      |         |          | 

F-22



---



##### 



14.     SUPPLEMENTAL DISCLOSURE


Cash
flows




|                                                             |                                                        |              |       |         |              |   |                |        |              |  |   |        |   | 
|------------------------------------------------------------ | ------------------------------------------------------ | ------------ | ----- | ------- | ------------ | - | -------------- | ------ | ------------ |  | - | ------ | - | 
|                                                             |                                                        |              |       |         |              |   | Predecessor XO |       
|                                                             |                                                        | Year Ended   |       |         | Year Ended   |   |                |        | Year Ended   | 
|                                                             |                                                        | December 31, |       |         | December 31, |   |                |        | December 31, | 
|                                                             |                                                        |              |       |         |              |   |                |        |              | 
|                                                             |                                                        | 2004         |       |         | 2003         |   |                |        | 2002         | 
|                                                             |                                                        |              |       |         |              |   |                |        |              | 
|Non-cash financing and investing activities were as follows: |                                                        |              |       |         |              |   |                |        |              |  |   |        |  
|                                                             | Stock issued for acquired businesses                   |              | $     | 311,306 |              |   | $              |       |              |  |   | $      |  | 
|                                                             | Assets and obligations acquired through capital leases |              |       | 3,932   |              |   |                |       |              |  |   |        |  | 
|                                                             | Conversion of accrued interest to long-term debt       |              |       | 28,746  |              |   |                | 29,901 |              |  |   |        |  | 
|Cash paid for interest                                       |                                                        | $            | 2,481 |         |              | $ | 2,315          |        |              |  | $ | 11,681 |  

Employee
Savings and Retirement Plan




15.     OPERATING SEGMENTS


Reportable
Segments




Products
and Services




|                                   |  |              |           |  |              |   |                |  |              |  |   |           | 
|---------------------------------- |  | ------------ | --------- |  | ------------ | - | -------------- |  | ------------ |  | - | --------- | 
|                                   |  |              |           |  |              |   | Predecessor XO | 
|                                   |  | Year Ended   |           |  | Year Ended   |   |                |  | Year Ended   | 
|                                   |  | December 31, |           |  | December 31, |   |                |  | December 31, | 
|                                   |  | 2004         |           |  | 2003         |   |                |  | 2002         | 
|                                   |  |              |           |  |              |   |                |  |              | 
|Voice services                     |  | $            | 673,318   |  |              | $ | 572,774        |  |              |  | $ | 659,558   | 
|Data services                      |  |              | 414,782   |  |              |   | 392,742        |  |              |  |   | 472,247   | 
|Integrated voice and data services |  |              | 212,320   |  |              |   | 144,967        |  |              |  |   | 128,048   | 
|                                   |  |              |           |  |              |   |                |  |              | 
|Total revenue                      |  | $            | 1,300,420 |  |              | $ | 1,110,483      |  |              |  | $ | 1,259,853 | 
|                                   |  |              |           |  |              |   |                |  |              | 

F-23



---



##### 



16.     SELECTED QUARTERLY DATA
(Unaudited)




|                                              |  |                        |         |   |          |   |         |               |  |   |              |   |  |   |          |  
|--------------------------------------------- |  | ---------------------- | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | -------- | -
|                                              |  | Quarter ended 2004 (a) |        
|                                              |  |                        |        
|                                              |  | March 31,              |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|                                              |  |                        |         |   |          |   |         |               |  |   |              |  
|Revenue                                       |  | $                      | 260,945 |   |          | $ | 278,183 |               |  | $ | 391,885      |   |  | $ | 369,407  |  
|Cost of service                               |  |                        | 109,961 |   |          |   | 118,822 |               |  |   | 161,946      |   |  |   | 162,006  |  
|Loss from operations(c)                       |  |                        | (43,266 | ) |          |   | (34,853 | )             |  |   | (36,227      | ) |  |   | (255,946 | )
|Net loss                                      |  |                        | (48,494 | ) |          |   | (43,820 | )             |  |   | (41,779      | ) |  |   | (271,450 | )
|Net loss applicable to common shares          |  |                        | (48,494 | ) |          |   | (43,820 | )             |  |   | (43,619      | ) |  |   | (274,520 | )
|Net loss per common share (basic and diluted) |  |                        | (0.37   | ) |          |   | (0.31   | )             |  |   | (0.24        | ) |  |   | (1.51    | )

|                                                 |  |                    |         |   |          |   |         |               |  |   |              |   |  |   |         |  
|------------------------------------------------ |  | ------------------ | ------- | - | -------- | - | ------- | ------------- |  | - | ------------ | - |  | - | ------- | -
|                                                 |  | Quarter ended 2003 |        
|                                                 |  |                    |        
|                                                 |  | March 31,          |         |   | June 30, |   |         | September 30, |  |   | December 31, |  
|                                                 |  |                    |         |   |          |   |         |               |  |   |              |  
|Revenue                                          |  | $                  | 286,093 |   |          | $ | 283,918 |               |  | $ | 279,433      |   |  | $ | 261,039 |  
|Cost of service                                  |  |                    | 107,506 |   |          |   | 104,898 |               |  |   | 106,935      |   |  |   | 102,790 |  
|Loss from operations                             |  |                    | (14,015 | ) |          |   | (13,260 | )             |  |   | (35,878      | ) |  |   | (48,705 | )
|Net loss(b)                                      |  |                    | (20,488 | ) |          |   | (19,836 | )             |  |   | (40,787      | ) |  |   | (21,443 | )
|Net loss applicable to common shares             |  |                    | (20,488 | ) |          |   | (19,836 | )             |  |   | (40,787      | ) |  |   | (21,443 | )
|Net loss per common share (basic and diluted)(b) |  |                    | (0.22   | ) |          |   | (0.21   | )             |  |   | (0.42        | ) |  |   | (0.22   | )






|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(a) | The 2004 results include the results of the Acquired Businesses
    from June 23, 2004 through December 31, 2004.
|   
|(b) | Fourth quarter of 2003 includes a $33.5 million realized
    investment gain.                                    
|   
|(c) | Fourth quarter of 2004 includes a $212.5 million non-cash
    goodwill impairment charge.                        

17.     RELATED PARTY
TRANSACTIONS




|                     |  |              |                  |  |                   |  |                  |                 |  |                  |  |  |     | 
|-------------------- |  | ------------ | ---------------- |  | ----------------- |  | ---------------- | --------------- |  | ---------------- |  |  | --- | 
|                     |  | Outstanding  |                  |  | Series A, B and C |  |                  |                 |  |                 
|                     |  | Common Stock |                  |  | Warrants          |  |                  | Credit Facility |  | Preferred Stock  | 
|                     |  |              |                  |  |                   |  |                  |                 |  |                  | 
|At December 31, 2004 |  |              | Greater than 50% |  |                   |  | Greater than 40% |                 |  | Greater than 90% |  |  | 95% | 







F-24



---



##### 













18.     COMMITMENTS AND
CONTINGENCIES


Operating
Commitments






|                          |  |             |         |  |                 |   |         | 
|------------------------- |  | ----------- | ------- |  | --------------- | - | ------- | 
|                          |  | Operating   |         |  | Other long-term |  
|                          |  | lease       |         |  | contractual     |  
|Year Ending December 31,  |  | obligations |         |  | obligations     |  
|                          |  |             |         |  |                 |  
|2005                      |  | $           | 70,822  |  |                 | $ | 61,273  | 
|2006                      |  |             | 66,657  |  |                 |   | 52,521  | 
|2007                      |  |             | 61,527  |  |                 |   | 48,806  | 
|2008                      |  |             | 51,394  |  |                 |   | 47,524  | 
|2009                      |  |             | 43,257  |  |                 |   | 33,679  | 
|Thereafter                |  |             | 168,235 |  |                 |   | 95,787  | 
|                          |  |             |         |  |                 |  
|Total minimum commitments |  | $           | 461,892 |  |                 | $ | 339,590 | 
|                          |  |             |         |  |                 |  



F-25



---



##### 





Capital
Leases




|                                                   |                                               |   |         |        | 
|-------------------------------------------------- | --------------------------------------------- | - | ------- | ------ | 
|Year Ending December 31,                           |                                               |  
|                                                   |                                               |  
|2005                                               |                                               | $ | 4,789   |       
|2006                                               |                                               |   | 4,537   |       
|2007                                               |                                               |   | 3,854   |       
|2008                                               |                                               |   | 2,398   |       
|2009                                               |                                               |   | 1,770   |       
|Thereafter                                         |                                               |   | 13,681  |       
|                                                   |                                               |   |        
|Total minimum capital lease payments               |                                               |   | 31,029  |       
|Less: imputed interest                             |                                               |   | (10,814 | )     
|Less: current portion of capital lease obligations |                                               |   | (2,820  | )     
|                                                   |                                               |   |        
|                                                   | Long-term portion of capital lease obligation |   | $       | 17,395 | 
|                                                   |                                               |   |        



Legal
Proceedings




19.     RESTRUCTURING CHARGES AND
ASSET WRITE-DOWNS




F-26



---



##### 





20.     REORGANIZATION






| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The conversion of $1.0 billion of loans under its
    pre-petition secured credit facility into $500.0 million of
    outstanding principal amount under an amended and restated
    credit agreement;                    
|
| |  | The extinguishment of all amounts due under its pre-petition
    unsecured senior and subordinated notes and certain general
    unsecured obligations;                                                                   
|
| |  | The cancellation of all outstanding shares and interests in its
    pre-petition preferred stock and pre-petition common stock; and                                                                                       
|
| |  | The issuance of approximately 95.0 million shares of common
    stock of the reorganized Company and warrants to purchase up to
    an additional 23.75 million shares of the common stock of
    the reorganized Company.





F-27



---



##### 





|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |            |            |            |      |         |         |           | 
|---------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ---------------------------------------------------- | --------- | ---------- | -------------- | - | ----------- | -------------- | ---------- | ---------- | --------------- | ---------- | ---------- | ---------- | ---- | ------- | ------- | --------- | 
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             | Reorganized    |           
|                                               |                                                                       | Predecessor XO                            |                                                      |           |            |                |   | Fresh Start |                |            | XO         |                
|                                               |                                                                       | December 31, 2002                         |                                                      |           |            | Reorganization |   |             | Adjustments(d) |            |            | January 1, 2003 |           
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|ASSETS                                         |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |            |            |            |      |        
|                                               | Current assets:                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |            |            |            |      |         |        
|                                               |                                                                       | Cash and cash equivalents                 |                                                      | $         | 314,038    |                |   |             | $              |           |            |                 | $          |           |            |      | $       | 314,038 |          
|                                               |                                                                       | Marketable securities                     |                                                      |           | 246,945    |                |   |             |                |           |            |                 |            |           |            |      |         | 246,945 |          
|                                               |                                                                       | Accounts receivable, net                  |                                                      |           | 116,541    |                |   |             |                |           |            |                 |            |           |            |      |         | 116,541 |          
|                                               |                                                                       | Other current assets                      |                                                      |           | 83,480     |                |   |             |                |           |            |                 |            | (48,288    | )          |      |         | 35,192  |          
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               |                                                                       |                                           | Total current assets                                 |           |            | 761,004        |   |             |                |            |           |                 |            |            | (48,288    | )    |         |         | 712,716   | 
|                                               | Property and equipment, net                                           |                                           |                                                      | 2,780,589 |            |                |   |             |               |            |            |                 | (2,304,001 | )          |            |      | 476,588 |        
|                                               | Broadband wireless licenses and other intangibles, net                |                                           |                                                      | 984,614   |            |                |   |             |               |            |            |                 | (848,936   | )          |            |      | 135,678 |        
|                                               | Other assets, net                                                     |                                           |                                                      | 59,289    |            |                |   |             |               |            |            |                 | (36,181    | )          |            |      | 23,108  |        
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               |                                                                       |                                           | Total assets                                         |           | $          | 4,585,496      |   |             |                | $          |           |                 |            | $          | (3,237,406 | )    |         | $       | 1,348,090 | 
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               | Current liabilities:                                                  |                                           |                                                      |           |            |                |   |             |                |            |            |                 |            |            |            |      |         |        
|                                               |                                                                       | Accounts payable                          |                                                      | $         | 63,729     |                |   |             | $              |           |            |                 | $          | 3,539      |            |      | $       | 67,268  |          
|                                               |                                                                       | Accrued liabilities                       |                                                      |           | 266,102    |                |   |             |                |           |            |                 |            | (30,910    | )          |      |         | 235,192 |          
|                                               |                                                                       | Current liabilities subject to compromise |                                                      |           | 5,497,207  |                |   |             |                | (5,466,667 | )(a)       |                 |            | (30,540    | )          |      |         |        |          
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               | Total current liabilities                                             |                                           |                                                      | 5,827,038 |            |                |   |             | (5,466,667     | )          |            |                 | (57,911    | )          |            |      | 302,460 |        
|                                               | Long-term debt                                                        |                                           |                                                      |          |            |                |   |             | 500,000        | (b)        |            |                 |           |            |            |      | 500,000 |        
|                                               | Other long-term liabilities                                           |                                           |                                                      | 75,242    |            |                |   |             |               |            |            |                 | (4,612     | )          |            |      | 70,630  |        
|                                               | Long-term liabilities subject to compromise                           |                                           |                                                      | 7,182     |            |                |   |             |               |            |            |                 | (7,182     | )          |            |      |        |        
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               |                                                                       |                                           | Total liabilities                                    |           |            | 5,909,462      |   |             |                |            | (4,966,667 | )               |            |            | (69,705    | )    |         |         | 873,090   | 
|                                               | Predecessor XO redeemable preferred stock  subject to
    compromise |                                           |                                                      | 1,708,316 |            |                |   |             | (1,708,316     | )(a)       |            |                 |           |            |            |      |        |        
|                                               | Stockholders (deficit) equity:                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |            |            |            |      |         |        
|                                               |                                                                       | Predecessor XO common stock               |                                                      |           | 4,628,139  |                |   |             |                |           |            |                 |            | (4,628,139 | )          |      |         |        |          
|                                               |                                                                       | Reorganized XO common stock and warrants  |                                                      |           |           |                |   |             |                | 475,000    | (c)        |                 |            |           |            |      |         | 475,000 |          
|                                               |                                                                       | Deferred compensation                     |                                                      |           | (8,500     | )              |   |             |                |           |            |                 |            | 8,500      |            |      |         |        |          
|                                               |                                                                       | Accumulated other comprehensive income    |                                                      |           | 2,512      |                |   |             |                |           |            |                 |            | (2,512     | )          |      |         |        |          
|                                               |                                                                       | Accumulated deficit                       |                                                      |           | (7,654,433 | )              |   |             |                | 6,199,983  | (e)        |                 |            | 1,454,450  |            |      |         |        |          
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               |                                                                       |                                           | Total stockholders (deficit) equity                 |           |            | (3,032,282     | ) |             |                |            | 6,674,983  |                 |            |            | (3,167,701 | )(e) |         |         | 475,000   | 
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           
|                                               |                                                                       |                                           | Total liabilities and stockholders (deficit) equity |           | $          | 4,585,496      |   |             |                | $          |           |                 |            | $          | (3,237,406 | )    |         | $       | 1,348,090 | 
|                                               |                                                                       |                                           |                                                      |           |            |                |   |             |                |            |            |                 |           






|    |                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | To record the discharge of pre-petition indebtedness, including
    a $1.0 billion credit facility, $4.2 billion of senior
    and convertible subordinated notes, $245.2 million of
    accrued interest, and the elimination of $1.7 billion of
    pre-petition redeemable preferred stock and $50.6 million
    of accrued dividends, all in accordance with the Plan of
    Reorganization.
|   
|(b) | To record the outstanding principal under the Credit Agreement,
    in accordance with the Plan of Reorganization.                                                                                                                                                                                                                                                                              
|   
|(c) | To record the issuance of 95.0 million shares of New Common
    Stock and warrants in accordance with the Plan of
    Reorganization. Participation in the Rights Offering was
    recorded in the first quarter of 2004.                                                                                                                                                                       
|   
|(d) | To adjust the carrying value of assets, liabilities and
    stockholders equity to fair value, in accordance with
    fresh start.                                                                                                                                                                                                                                                             
|   
|(e) | Net reorganization gain on January 1, 2003 consisted of the
    following (dollars in thousands):                                                                                                                                                                                                                                                                                               

|                                                                                         |  |   |            |  
|---------------------------------------------------------------------------------------- |  | - | ---------- | -
|Net gain resulting from reorganization of debt, preferred stock
    and equity           |  | $ | 6,199,983  |  
|Net loss resulting from fresh start fair value adjustments to
    assets and liabilities |  |   | (3,167,701 | )
|                                                                                         |  |   |           
|Total reorganization gain, net                                                           |  | $ | 3,032,282  |  
|                                                                                         |  |   |           

F-28



---



##### 



21.     SUBSEQUENT EVENTS
(Unaudited)




F-29



---



##### 



XO Communications, Inc.


Schedule II  Consolidated Valuation and
Qualifying Accounts


For The Years Ended December 31, 2004, 2003 and 2002


|                                |          |           |   |         |                |            |   |            |  |  |            |         |        |         |   |          |   |  |   |        | 
|------------------------------- | -------- | --------- | - | ------- | -------------- | ---------- | - | ---------- |  |  | ---------- | ------- | ------ | ------- | - | -------- | - |  | - | ------ | 
|                                |          |           |   |         |                | Additions/ |   |            |  |  |           
|                                |          |           |   |         |                | Reductions |   |            |  |  |           
|                                |          | Beginning |   |         | Reorganization |            |   | charged to |  |  |            |         | Ending |        
|(dollars in thousands)          |          | Balance   |   |         | Adjustments    |            |   | expense    |  |  | Reductions |         |        | Balance |  
|                                |          |           |   |         |                |            |   |            |  |  |            |         |        |         |  
|Allowance for doubtful accounts |          |           |   |         |                |            |   |            |  |  |            |         |        |         |   |          |   |  |   |       
|                                | 2002     |           | $ | 32,492  |                |            | $ |           |  |  | $          | 53,631  |        |         | $ | (49,093  | ) |  | $ | 37,030 | 
|                                | 2003     |           | $ | 37,030  |                |            | $ |           |  |  | $          | 29,998  |        |         | $ | (34,042  | ) |  | $ | 32,986 | 
|                                | 2004     |           | $ | 32,986  |                |            | $ |           |  |  | $          | 34,898  |        |         | $ | (28,903  | ) |  | $ | 38,981 | 
|Restructuring accrual           |          |           |   |         |                |            |   |            |  |  |            |         |        |         |   |          |   |  |   |       
|                                | 2002 (a) |           | $ | 125,773 |                |            |   |           |  |  | $          | 480,168 |        |         | $ | (526,951 | ) |  | $ | 78,990 | 
|                                | 2003 (b) |           | $ | 38,725  |                |            | $ | 26,809     |  |  | $          | 11,618  |        |         | $ | (17,176  | ) |  | $ | 59,976 | 
|                                | 2004     |           | $ | 59,976  |                |            | $ |           |  |  | $          | (2,971  | )      |         | $ | (13,349  | ) |  | $ | 43,656 | 






|    |                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Only $49.7 million of the reduction in 2002 restructuring
    accrual was for cash payments. The balance was associated with
    the non-cash asset write down resulting from an agreement with
    Level 3 to amend various agreements relating to XOs Level
    3 intercity fiber network facilities.
|   
|(b) | The beginning balance was adjusted to its fair value when we
    implemented fresh start.                                                                                                                                                                                                               

S-1