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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION




FORM 10-K



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

For the fiscal year ended December 31, 2001

Commission File No. 0-30900

XO COMMUNICATIONS, INC.

|                       |  |                                              
|---------------------- |  | ---------------------------------------------
|A Delaware Corporation |  | I.R.S. Employer Identification No. 54-1983517

11111 Sunset Hills Road, Reston, Virginia 20190



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



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



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

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

The aggregate market value of the Class A and Class B
common stock held by non-affiliates of the Registrant, based
upon the closing sale price of the Class A common stock on
March 1, 2002, as reported on the NASD Over-the-Counter
Bulletin Board, was approximately $30,995,051. Shares of
Class A and Class B common stock held by each
executive officer and director and by certain persons who own 5%
or more of the outstanding Class A and Class B common
stock have been excluded in that such persons may be deemed to
be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of March 1, 2002, the number of outstanding shares of XO
Communications, Inc.s Class A common stock was
337,791,856, par value $0.02 per share and Class B common
stock was 104,423,158, par value $0.02 per share.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by
reference and the Part of the Form 10-K (e.g., Part I,
Part II, etc.) into which the document is incorporated: None



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|Item 5. Market for Registrants Common Stock and Related Stockholder Matters                 
|Item 6. Selected Financial Data                                                              
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosure About Market Risk                           
|Item 8. Financial Statements and Supplementary Data                                          
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|Item 13. Certain Relationships and Related Transactions                                      
|Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.                    
|EXHIBIT INDEX                                                                                
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                                     
|Consolidated Balance Sheets                                                                  
|Consolidated Statements of Operations                                                        
|Consolidated Statements of Stockholders Equity                                              
|EX-10.3.3 EMPLOYMENT AGREEMENT - MICHAEL RULEY                                               
|EX-21 SUBSIDIARES OF THE REGISTRANT                                                          
|Ex.23.1 Consent of Arthur Andersen                                                           
|EX-99.1 LETTER REGARDING ARTHUR ANDERSEN                                                     



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##### Table of Contents



TABLE OF CONTENTS

|         |  |                                                                                        |  |  |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  |  | -- | 
|        
|        
|        
|        
|PART I  
|        
|        
|        
|        
|        
|1.       |  | Business                                                                               |  |  | 1  | 
|        
|        
|        
|        
|2.       |  | Properties                                                                             |  |  | 37 | 
|        
|        
|        
|        
|3.       |  | Legal Proceedings                                                                      |  |  | 38 | 
|        
|        
|        
|        
|4.       |  | Submission of Matters to a Vote of Security
	Holders                                   |  |  | 38 | 
|        
|        
|        
|        
|PART II 
|        
|        
|        
|        
|        
|5.       |  | Market for Registrants Common Stock and
	Related Stockholder Matters                  |  |  | 38 | 
|        
|        
|        
|        
|6.       |  | Selected Financial Data                                                                |  |  | 40 | 
|        
|        
|        
|        
|7.       |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |  | 41 | 
|        
|        
|        
|        
|7A.      |  | Quantitative and Qualitative Disclosures about
	Market Risk                            |  |  | 58 | 
|        
|        
|        
|        
|8.       |  | Financial Statements and Supplementary Data                                            |  |  | 59 | 
|        
|        
|        
|        
|9.       |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |  | 59 | 
|        
|        
|        
|        
|PART III
|        
|        
|        
|        
|        
|10.      |  | Directors and Executive Officers of the Registrant                                     |  |  | 59 | 
|        
|        
|        
|        
|11.      |  | Executive Compensation                                                                 |  |  | 64 | 
|        
|        
|        
|        
|12.      |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |  | 71 | 
|        
|        
|        
|        
|13.      |  | Certain Relationships and Related Transactions                                         |  |  | 74 | 
|        
|        
|        
|        
|PART IV 
|        
|        
|        
|        
|        
|14.      |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |  | 75 | 



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PART I




Item 1.  Business

Introduction

XO Communications, Inc., XO or the Company, a Delaware
corporation, through its predecessor entities, was formed in
1994. The Company was originally organized as a Washington
limited partnership, which in 1995 merged into a Washington
limited liability company, which following several name changes
became known as NEXTLINK Communications, L.L.C. In
January 1997, NEXTLINK Communications, L.L.C. merged into
NEXTLINK Communications, Inc., a Washington corporation, which
in June 1998 reincorporated in Delaware under the same
name. On June 16, 2000, in connection with the
Companys merger with Concentric Network Corporation,
NEXTLINK Communications, Inc. merged with the Company and the
Company, as the surviving corporation in the merger, changed its
name to NEXTLINK Communications, Inc. On September 25,
2000, the Company began doing business as
XO Communications and, on October 25,
2000, the Company changed its name to XO Communications,
Inc. XO conducts its business primarily through the more than 60
subsidiaries it owns and manages.

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

Recapitalization

Background

In light of the substantial declines in market valuation
suffered by telecommunications service providers throughout our
industry in the last 12 months, we will be unable to obtain
the additional funding needed to conduct our business plan
without a significant balance sheet recapitalization. In
January 2002, we entered into a definitive agreement with
certain investors that provides for such funding. Under this
agreement, consummation of the investment transaction is subject
to the satisfaction of a number of conditions, including the
completion of a substantial balance sheet recapitalization. We
have also recently received proposals for such funding from
holders of our senior unsecured notes, which also contemplates
such a recapitalization. We and our advisors are currently
analyzing the most recent of these proposals.

Because discussions with all of these parties and with the
lenders under our senior secured credit facility continue, the
definitive plans for raising the additional capital that we need
and for completing the related balance sheet recapitalization
have not been determined. Nonetheless, it has become clear that
in order to implement the balance sheet recapitalization
required by the current proposals, XO Communications, Inc.,
which we refer to as XO Parent, will need to commence a
bankruptcy proceeding and seek approval of a related plan of
reorganization that would eliminate our outstanding equity and
much of our outstanding debt, and result in a less than full
recovery for our outstanding senior unsecured notes. Such a
proceeding could be commenced in the very near future.

We currently estimate that the we need a minimum of between
$500 million and $600 million in additional funding,
assuming a successful recapitalization of our balance sheet, to
bring us to the point where we expect to generate cash flows
from operations sufficient to meet our operating expenses,
capital expenditure requirements and debt service obligations.
This remains true despite our implementation during 2001 of
measures designed to conserve cash and reduce operating expenses
and capital expenditures.

In the first half of 2001, although the capital markets were
becoming increasingly reluctant to finance many emerging
telecommunications companies, we continued to be able to raise
investment capital. In January 2001, we issued
$517.5 million of 5 3/4% convertible subordinated
notes and, in June 2001, we raised $250 million in a
private placement of common stock with a fund affiliated with
Forstmann Little & Co. In the second half of 2001,
conditions in the capital markets for telecommunications
companies continued to deteriorate until they closed entirely to
companies like us. Market valuations of the debt and equity
securities of telecommunications companies, especially emerging
providers such as us, experienced very significant declines.

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After our discussions with numerous prospective investors failed
to result in any significant financing proposals, in October
2001, we retained Houlihan Lokey Howard & Zukin Capital
as our outside financial advisor to assist us in exploring a
variety of investment and deleveraging alternatives, including
stand-alone recapitalizations and third-party investment
scenarios, both in and out of bankruptcy. At our request,
Houlihan Lokey prepared solicitation materials and, beginning in
November 2001, contacted over fifty potential investors, both
strategic and financial, in an effort to raise new capital. To
assure proper focus, Houlihan Lokey approached potential
third-party investors that had previously made investments in
the telecommunications industry and/or had the financial
wherewithal, either alone or together with one or more financial
partners, to make an investment sufficient to meet our expected
funding needs.

The
Forstmann Little/ Telmex Proposal

On November 21, 2001, Forstmann Little, on behalf of
Forstmann Little & Co. Equity Partnership-VII, L.P., a
Delaware limited partnership, and Forstmann Little &
Co. Subordinated Debt and Equity Management Buyout
Partnership-VIII, L.P., a Delaware limited partnership, which we
refer to together as the Forstmann Little Investors, submitted a
draft term sheet contemplating an equity investment in XO Parent
by the Forstmann Little Investors and Télefonos de
México S.A. de C.V., which we refer to as Telmex, and,
together with the Forstmann Little Investors, as the Investors.
We and our financial and legal advisors, under the supervision
of the disinterested members of our board of directors, engaged
in extensive discussions and negotiations with the Investors
which resulted in terms that were more favorable to us and our
creditors. In the meantime, Houlihan Lokey continued its search
for potential alternative investors.

On November 28, 2001, XO Parent entered into a non-binding
term sheet with the Investors, with respect to an
$800 million investment in XO Parent, and announced
publicly the material terms and conditions of the proposed
investment the following morning. Consistent with the terms of
the Investors earlier proposal, the term sheet provided
that completion of the proposed investment would be subject to
the satisfaction of certain conditions including a substantial
recapitalization of XO Parents balance sheet. A copy of
this term sheet was filed with the Securities and Exchange
Commission as exhibit 10.1 to the Current Report on
Form 8-K of XO Parent on November 29, 2001. Following
the public announcement of the terms of this proposal, we and
members of our board of directors were named as party defendants
in a number of lawsuits that purport to be class action suits
brought on behalf of our stockholders. For further discussion of
these lawsuits, see Item 3. Legal Proceedings
below. Meanwhile, Houlihan Lokey continued its search for
potential alternative investors, including other third parties
who became aware of the Investors proposed terms through
publicly available information.

Following the execution of the term sheet with the Investors,
and in anticipation of the related recapitalization
transactions, we ceased making all cash interest and dividend
payments on XO Parents unsecured debt obligations and
preferred stock that were due on or after December 1, 2001.
In order to provide us with an opportunity to reach agreement
with our creditors regarding the terms of a balance sheet
recapitalization consistent with the requirements contemplated
by that term sheet, on December 14, 2001, XO Parent and all
subsidiary guarantors under the senior secured credit facility
entered into a Forbearance Agreement with the lenders under that
facility. Under the Forbearance Agreement, the lenders agreed,
subject to certain conditions, not to exercise their remedies
under the credit facility prior to April 15, 2002 with
respect to cross default events related to our failure to make
interest payments on our unsecured notes or with respect to a
breach of the covenant in the credit facility relating to our
fourth quarter revenues. A copy of the Forbearance Agreement is
filed as exhibit 10.5.2 to this annual report.

On January 15, 2002, after extensive discussion and
negotiation with the Investors, and having received no
investment proposals from any other prospective investor despite
intensive solicitations, XO Parent entered into a definitive
Stock Purchase Agreement with the Investors. The Stock Purchase

2



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While the terms of the Stock Purchase Agreement were being
negotiated, we and the Investors engaged in further negotiations
with an informal steering committee of the lenders under our
credit facility concerning amendments to the facility that would
facilitate the proposed investment. As a result of these
negotiations, we reached a preliminary understanding with this
informal steering committee of lenders concerning the terms on
which they would agree to support the balance sheet
recapitalization contemplated by the Stock Purchase Agreement
and amend the existing credit facility. These proposed
amendments would leave the entire $1.0 billion principal
amount of the credit facility outstanding, but would extend the
maturity dates and amortization schedules for loans under the
facility for three years. The proposed amendments would also
modify other terms of the facility, including certain financial
and other covenants, in ways that generally provide us with
increased financial flexibility.

Concurrent with the discussions and negotiations with the
informal steering committee of lenders under our credit
facility, certain holders of our senior notes formed an informal
committee of senior noteholders. XO Parent and the Investors
held discussions with the senior noteholders committee and their
financial and legal advisors in an effort to develop the terms
of a recapitalization proposal that would be acceptable to the
Investors and members of this committee. Although during the
course of these discussions the Investors made various proposals
to the senior noteholders committee, on March 8, 2002, the
committee notified us that they had rejected the Investors
proposals.

Concurrent with these discussions, certain holders of our
convertible subordinated notes formed their own informal
committee of subordinated noteholders, to discuss the terms of
the proposed recapitalization with us. Although XO and its
representatives have met with representatives of this committee
and its legal counsel and financial advisors, no agreement has
been reached with this committee regarding such terms.

The
Noteholder Proposals

On March 8, 2002, in connection with the rejection by the
senior noteholders committee of the Investors proposals,
we received a preliminary investment and recapitalization
proposal from certain holders of our senior unsecured notes,
intended by them to replace the investment and recapitalization
transactions contemplated by the Stock Purchase Agreement. Their
proposal contemplated a $500 million investment in XO
Parent in exchange for secured and unsecured debt of XO Parent.
After careful review and analysis of this proposal, we concluded
that it would not represent a feasible alternative for the
successful recapitalization of XO. Based on this assessment, we
notified the senior noteholders committee that we had rejected
this proposal, but we agreed to continue discussions regarding
possible alternative investment proposals.

On March 22, 2002, we received a second preliminary term
sheet describing an alternative investment and recapitalization
proposal sponsored by certain other holders of XO Parents
senior notes. This proposal contemplates a $500 million
investment in XO by an entity controlled by Carl Icahn, who
represents that he holds a substantial amount of the XO Parent
unsecured notes, in exchange for a 50% equity interest in a
recapitalized XO. Completion of this investment would be
conditioned on, among other things, a substantial
recapitalization of XO Parents balance sheet, in which the
remaining 50% equity interest in

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We and our financial and legal advisors are reviewing and
analyzing the terms of this proposal and are in discussions with
the sponsors of the proposal and representatives of the lenders
under our senior secured credit facility regarding its terms. In
this analysis, we also continue to evaluate whether the
interests of the Company and its stakeholders are better served
by proceeding with the transactions contemplated by the Stock
Purchase Agreement.

Proposed
Recapitalization

Because the discussions continue with the Investors, the
sponsors of the second senior noteholders proposal and the
informal steering committee of lenders under our credit
facility, the definitive plans for raising the additional
capital we need and for completing the related balance sheet
recapitalization have not been determined. Nevertheless, based
on the transactions contemplated by the Stock Purchase Agreement
and the senior noteholders proposal, we currently
anticipate that a feasible investment and recapitalization of XO
will entail some or all of the following:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an investment in the Company in exchange for a significant
	equity interest in the recapitalized Company;                                                                                                    
|
| |  | reinstatement of the entire $1.0 billion principal amount
	of our senior secured credit facility with modifications that
	extend maturity dates and amortization schedules for the loans
	under the facility;
|
| |  | holders of certain debt securities of XO Parent receiving
	consideration in the form of cash and/or equity interests in the
	recapitalized Company in exchange for their current interests;
	and             
|
| |  | other secured claims and general unsecured claims of XO being
	paid in full in accordance with their respective terms.                                                                                       

We anticipate that in order to complete any proposed investment
and recapitalization it will be necessary for XO Parent to file
a voluntary petition for relief under chapter 11 of title 11 of
the Bankruptcy Code and that the investment and recapitalization
will be implemented through the confirmation and consummation of
a plan of reorganization approved by the bankruptcy court in the
bankruptcy proceedings. In such a case, we currently anticipate
that the plan of reorganization would provide that holders of
claims and interests with respect to the equity securities of,
or rights to acquire equity securities of, XO Parent would be
entitled to little or no recovery and that those claims and
interests would be cancelled for little or no consideration.
Accordingly, and as indicated in our previous disclosures, we
anticipate that all, or substantially all, of the value of all
investments in common stock of XO Parent will be lost.

We conduct our operations through direct and indirect
subsidiaries of XO Parent. While we implement the proposed
recapitalization, we expect our subsidiaries to continue to
operate in the ordinary course of business. Our plans with
respect to the proposed recapitalization contemplate that our
trade suppliers, unsecured trade creditors, employees and
customers will not be adversely affected while we are involved
in the recapitalization process, even if that process involves
chapter 11 bankruptcy proceedings. During this
recapitalization process, we have attempted to maintain normal
and regular trade terms with our suppliers and customers. There
can be no assurance that our suppliers will continue to provide
normal trade credit or credit on terms acceptable to us, if at
all, or that customers will continue to do business or enter
into new business with us.

For further discussion of our proposed recapitalization, see
Proposed Recapitalization and Liquidity and
Capital Resources in Item 7, Managements
Discussion and Analysis of Financial Condition and

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Overview

We provide a comprehensive array of data and voice
communications services to business customers. Our data services
include the following:



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



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



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



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dedicated transmission capacity on our networks, including
	dedicated circuits and the lease of one or more dedicated
	wavelengths on a fiber optic cable, to customers that desire
	high-bandwidth links between locations;                                           
|
| |  | Virtual private network, or VPN, services, which provide
	customers with a managed, private service over the public
	Internet, designed for medium and large businesses that want to
	create secure, wide-area networks for users at various and
	remote locations; and
|
| |  | Ethernet services, which are designed to connect the local area
	networks, or LANs, of medium and large customers within and
	between metropolitan areas at speeds of up to one gigabit per
	second; and                                                               



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



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

Our voice services include the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bundled local and long distance, and stand-alone long distance
	services, prepaid calling card services and related services
	such as conferencing, domestic and international toll free,
	voicemail and calling cards;                                                                                                                                          
|
| |  | Interactive voice response, or IVR, systems that we develop,
	host and manage that enable our customers end-users to
	order products and services, collect and receive information,
	seek assistance, facilitate bill payment and a host of other
	capabilities over the telephone using natural language speech
	recognition and web-to-phone capabilities; and
|
| |  | Shared tenant services, consisting of telecommunications
	management services provided to groups of small and medium-sized
	businesses located in the same office building.                                                                                                                                                                                      

We also combine many of these services in flat rate service
packages. These packages, generally tailored to the
communications needs of small and medium-sized businesses,
eliminate the separation between local and long-distance
communications services, and combine this all
distance telephone service with high-speed Internet access
and web hosting services, all for one flat monthly rate.

To serve our customers broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network

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To develop these networks, we have assembled a collection of
metro and inter-city network assets in the United States,
substantially all of which we own or control, making us a
facilities-based carrier. These network assets incorporate
state-of-the-art fiber optic cable, dedicated wavelengths and
transmission equipment and fixed wireless spectrum and equipment
capable of carrying high volumes of data, voice, video and
Internet traffic. We operate 37 metro broadband fiber optic
networks in 22 states and the District of Columbia, including 25
of the 30 largest metropolitan areas in the U.S. We have
constructed or acquired many of these metro networks, which
consist of up to 432 strands of fiber optic cable and, in some
cases, additional empty fiber conduits. For our inter-city
network, we have acquired dedicated, high-capacity wavelengths
on fiber optic cables, onto which we have deployed our own
switching, routing and optical equipment, thereby giving us
greater control over the transmission of voice and data
information. We also hold indefeasible exclusive rights to use
unlit fiber optic strands and an empty conduit on the routes
served by our inter-city networks.

Business Strategy

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand Our Targeted Customer Base.In the last two years
	we have added a variety of new services and enhancements to
	existing services to take advantage of our robust networks,
	which are designed to carry high volumes of all types of
	communications traffic. Using these expanded services, we plan
	to continue to expand our targeted customer base, which
	historically has focused on small and medium-sized businesses,
	to include larger national and multi-market customers that can
	benefit from our unique end-to-end broadband
	capabilities.
|
| |  | Utilize a Variety of Sales Channels.We continue to
	complement our direct sales force by developing alternative
	sales channels to distribute the increasing number of products
	and services available to our broadening customer base. These
	channels include numerous national, regional, and local sales
	agents, our telesales operation, and web marketing of DSL,
	hosting, domain name and email services.                                                                                                                                                
|
| |  | Operate Integrated High-Capacity Networks.We have
	created an integrated, end-to-end, facilities-based network in
	the United States, consisting of metro fiber networks connected
	by an inter-city fiber optic network. In addition to traditional
	circuit switching technologies, these networks use state-of-the
	art Internet Protocol, or IP, technologies that enable our
	networks to carry high volumes of data, voice, video and
	Internet traffic as well as other high-bandwidth services.                                                            
|
| |  | Connect Customers Directly to Our Networks.We use a
	variety of technologies to connect our customers directly to our
	networks, including those that use fiber optic cable and fixed
	wireless spectrum. By building our metro fiber networks in
	central business districts, we can connect a high percentage of
	the areas commercial buildings using these technologies,
	rather than connections leased from third parties. We expect
	that this effort will reduce both our costs and the amount of
	time that it takes to connect customers to our network.

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2001 Transactions and Developments

Introduction
of New and Expanded Service Offerings

In 2001, we introduced a number of new data services, some
examples of which are as follows:

Enhanced VPN Service and Customized VPN Bundles.In 2001, we made several important enhancements to our
VPN services. We added VPN capabilities to allow customers to
more easily connect to their networks wherever they are located,
regardless of whether a particular customer location has access
to the Internet via a direct connection to our network or via
another service provider. This capacity allows us to offer VPN
service to most customer locations throughout the country. We
also introduced VPN service bundles, which incorporate common
VPN components, including security, firewall and encryption,
with a choice of high-speed Internet access solutions, including
dedicated access and DSL.

Nationwide Metro and Inter-City Wavelength Services.In 2001, we launched wavelength services, which provide
a customer a wavelength of light on a fiber optic strand that is
used exclusively for that customers service. Wavelengths
can operate at different speeds and support different protocols.
We offer these services on metro networks, to provide transport
capacity between multiple customer sites within a metro area,
and on our inter-city network, which enables large enterprise
and carrier customers to quickly expand and augment high-speed
networks between metropolitan areas.

Enhanced Hosting Services.In 2001, we made
several important enhancements to our hosting services. In
August, we launched a comprehensive Windows 2000 hosting
portfolio as part of our shared and managed hosting platform. In
September, we expanded our managed application capabilities that
run on Microsoft SQL Server 2000 software, which provides XO
managed hosting customers with enhanced data management and
analysis tools.

Nationwide Inter-city Ethernet Services.In
December 2001, we enhanced our Ethernet services by offering
inter-city Ethernet services nationwide between our markets,
which allows customers to efficiently connect multiple local
area networks between two or more metropolitan locations.

Network
Development

In 2001, we made significant progress in the development of our
networks, which are now substantially complete.

Metro Networks.In 2001, we launched services in
Orlando and Ft. Lauderdale, Florida; San Antonio, Texas;
Baltimore, Maryland; and the Greater Minneapolis/ St. Paul area,
bringing to over 60 the total number of markets that we serve
via our metro fiber networks.

Inter-City Network.During 2001, construction was
completed and we took delivery of the remainder of the fiber
backbone segments on our inter-city network that were not
completed and delivered in 2000 from Level 3
Communications. This network requires the purchase and
installation of optical networking equipment in order for the
fiber to be lit and operationally ready for its
intended use. In April 2001, as part of a capital conservation
initiative, we announced that we would postpone
lighting the inter-city networks and in the interim
purchase wavelength capacity from Level 3 along the same
routes as our inter-city network to provide inter-city
transport. As a result, much of the equipment used in connection
with our inter-city network is positioned so that we can easily
transfer from the wavelength capacity provided by Level 3 to
servers on our inter-city fiber network when demand or other
considerations make it more efficient for us to install optical
network equipment on all or a portion of that network. In
November 2001, we announced the completion of our OC-192
capacity Internet backbone, using the Level 3 wavelength
services and our own routers and transport equipment. We have
migrated a substantial amount of services and customer traffic
onto our backbone. This backbone provides our customers with
improved network redundancy, security and performance, and
enables us to offer customers services that take advantage of
future Internet Protocol technologies.

7



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Financing
Transactions

Offering of 5 3/4% Convertible Subordinated Notes.In January 2001, we completed the sale of
$517.5 million of 5 3/4% convertible subordinated
notes due 2009, from which we received net proceeds of
approximately $503.3 million. The notes are convertible at
the option of the holders, prior to maturity or the earlier
termination of the conversion rights, into our Class A
common stock at a conversion price of $25.5438 per share,
subject to adjustment upon the occurrence of certain events.

Senior Secured Credit Facility.During 2001, we
borrowed $625.0 million under our $1.0 billion senior
secured credit facility. As a result, we have borrowed all
amounts available under that facility.

Investment by Forstmann Little & Co.In June
2001, pursuant to a term sheet dated April 20, 2001, an
investment fund affiliated with Forstmann Little & Co.
invested $250.0 million of cash in us to provide additional
funding for general corporate purposes in exchange for
50.0 million shares of our Class A common stock. At
the same time, we amended the terms of the four series of
outstanding convertible preferred stock held by various
investment funds affiliated with Forstmann Little to reduce the
conversion price from $31.625 to $17.00 per share.

Capital
Conservation Initiatives

During 2001, we took a number of steps in an effort to conserve
our available funding and reduce our long-term obligations.

Suspension of European Data-Centric Broadband Strategy.In April 2001, we modified agreements with Level 3
pertaining to our purchase of Level 3 North American and
European fiber networks. Under these arrangements, we canceled
our agreement to purchase European metro and inter-city fiber
networks from Level 3. Under the modified agreements,
$128.6 million in payments that we had previously paid to
Level 3 for the European networks were applied as a credit
to reduce the amounts payable by us to Level 3 under the
North American inter-city fiber network agreement. In addition,
under the modified agreements, we transferred inter-city
transmission equipment to Level 3 in exchange for
$51.4 million of credits to be applied toward the purchase
of wavelength capacity on Level 3s North America
inter-city network. In connection with these modifications, we
decided to purchase these wavelengths in the interim to enable
us to postpone the use of capital that was earmarked for the
purchase and installation of optical networking equipment to
light the fiber in our North American inter-city
network. These wavelength capacity arrangements generally allow
us to use the capacity for a term of five years. We have used
substantially all of the credits relating to the transfer of the
inter-city transmission equipment to purchase the wavelength
capacity.

Repurchase of Senior Notes and Redeemable Preferred Stock.During the second half of 2001, in a series of
transactions, we paid $201.9 million to repurchase
$557.1 million in principal amount of various series of our
senior notes. Also, during the third quarter of 2001, in a
series of transactions, we paid $88.4 million to repurchase
$472.6 million in liquidation preference of our preferred
stock. These repurchases resulted in an extraordinary gain on
the early extinguishments of debt of $345.0 million and a
gain on the repurchases of preferred stock of
$376.9 million.

Restructuring Charges.During 2001, we implemented
a plan to restructure certain of our business operations, which
includes divesting certain assets and businesses, and reducing
our discretionary spending, capital expenditures and workforce,
based on our assessment of current and future market conditions.
Total projected operational cash savings from executing this
restructuring plan are expected to be approximately
$50 million in 2002. In connection with this plan we
recorded $509.2 million of restructuring charges. The
restructuring charges include a $366.8 million write-down
for the excess of carrying value of assets to be sold or
abandoned, including our European business unit. The
consolidation and exiting of domestic facility leases accounted
for $134.4 million of the restructuring charges and was
determined based on the future minimum rent commitments for the
buildings management intends to exit less estimated sublease
rental streams. We also elected to reduce our workforce by
approximately 700 employees and recorded an $8.0 million
restructuring charge related to involuntary termination
severance.

8



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Industry and Market Overview

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

The passage of the Telecommunications Act of 1996, or the
Telecom Act, established a framework for the creation of
competition in the market for local exchange services. Before
passage of this law, in most locations throughout the United
States, the incumbent carrier operated a virtual monopoly in the
provision of most local exchange services. However, just as
competition slowly emerged in the long distance business prior
to the mandated breakup of AT&T, competitive opportunities
also have slowly emerged over the last 10 years at the
local exchange level.

We believe that the Telecom Act provided the opportunity to
accelerate the development of competition at the local level by,
among other things, requiring the incumbent carriers to
cooperate with competitors entry into the local exchange
market. These provisions include:



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

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

Industry sources estimate that in 2000 the total revenues from
local and long distance telecommunications services were
approximately $231 billion, of which approximately
$121 billion were derived from local exchange services and
approximately $110 billion from long distance services.
Based on FCC information, total revenues for local and long
distance services grew at a compounded annual rate of
approximately 5.2% between 1992 and 2000.

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

The emergence of the Internet and the widespread adoption of IP
as a data transmission standard in the 1990s, combined with
deregulation of the telecommunications industry and advances in
telecommunications technology, have significantly increased the
attractiveness of providing data communication applications and
services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and
online computing services and the proliferation of networking

9



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

Industry analysts expect the market size for both value-added IP
data networking services and Internet access to grow rapidly as
businesses and consumers increase their use of the Internet,
intranets and privately managed IP networks. According to
research analysts, the Internet services market in the United
States is expected to grow from $13.1 billion in 2000 to
$39.0 billion in 2005. In addition, research analysts
predict that the market for other data services in the United
States, including dedicated access and private line services,
will increase from $38.4 billion in 2000 to
$90.0 billion in 2005.

The deregulation of the telecommunications industry and the
demand for data communications services have attracted a number
of competitive communication service providers, which were
generally able to access capital from the public and private
markets to fund the massive capital expenditures necessary to
construct networks and fund operating losses and debt service.
Beginning in 2001, conditions in the capital markets for
communications companies began to deteriorate significantly, and
by the second part of 2001, those markets were closed entirely
for all practical purposes. During this time, the market
valuations of the debt and equity securities of
telecommunications companies, especially emerging providers,
experienced significant declines, which contributed to what has
now become a substantial wave of bankruptcies throughout the
industry.

Applications and Services

Historically, our targeted customer base has consisted of
primarily small and medium-sized businesses. In 2000 and 2001,
we expanded both our services and our targeted customers to
include larger national and multi-market customers that can
benefit from the broad range of services supported by our
extensive broadband network assets. We will continue to offer
voice and data service packages tailored to the communication
needs of small and medium-sized businesses, and high-speed
broadband services designed to attract large multi-location
customers.

Data
Applications and Services

Internet
Access

Our Internet access offerings include dedicated access services
targeted at businesses that desire single or multipoint
high-speed, dedicated connections to the Internet, at speeds
ranging from 56 kilobits per second, or kbps, to 155 megabits
per second, or mbps, and digital subscriber line, or DSL,
services that include a wide range of dedicated access speeds.
We are a tier-1 Internet backbone provider in the U.S., with
over 200 public and private peering arrangements, with other
Internet backbones.

10



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Private
Data Networking

We provide dedicated transmission capacity on our networks to
customers that desire high-bandwidth links between locations. We
offer special access and point-to-point circuits to long
distance carriers and other high volume customers, which are
used as both primary and back-up circuits. In addition, fiber
optic technology that enables signals to be transmitted at
different wavelengths on a single fiber allows us to lease one
or more dedicated wavelengths to customers that desire
high-bandwidth links between locations. We currently offer these
services with connections of up to 9.6 gigabits per second, or
what our industry refers to as OC-192. This service supports a
variety of transmission protocols, including ATM, Frame Relay
and SONET.

Our virtual private network, or VPN, services enable customers
to deploy tailored, Internet Protocol-based mission-critical
business applications for secure internal enterprise,
business-to-business and business-to-customer data
communications among geographically dispersed locations, while
also affording high-speed access to the Internet. VPN also
provides secure access for remote users, such as traveling
employees and employees working from home or a remote location,
which is not possible using private line and frame relay
services. We also offer managed firewall services.

We offer a suite of Ethernet services, including Gigabit
Ethernet, or GigE, in all of our U.S. markets, as well as
inter-city Ethernet services between our markets. Our Ethernet
services are designed to provide high-speed, high-capacity
connections between customers local area networks, or
LANs, within and between metropolitan areas, while eliminating
the need for ongoing configuration, management and acquisition
of equipment by the customer. These services are designed to
provide private networking data speeds ranging from 10 or 100
megabits per second to one gigabit per second connections, to
simplify customers network connections, and to
significantly reduce their costs.

Hosting
Services

We offer a range of applications hosting services, which can
manage a customers web-based infrastructure and
operational needs allowing customers to focus on their web-based
content. In addition, we provide server management tools and
services to manage customers servers for them.

To provide this service, we have configured the central offices
of our network backbone with electrical and environmental
controls and 24-hour maintenance and technical support, to
provide an attractive location for our customers to locate their
larger computers (which are known as servers) or from which they
can run important applications on servers that we will maintain.

Our hosting services also include:



| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Web Hosting: support for customers websites,
	including design, maintenance and telecommunications services;                                                                                                                                   
|
| |  | Server Collocation: collocation of customers
	servers in our data centers; and                                                                                                                                                                 
|
| |  | Application Hosting: running our customers
	enterprise-wide applications at our data centers and
	distributing them as needed over our network to ensure
	uniformity, reduce costs and implement upgrades on a continuous
	and immediate basis.

Voice
Applications and Services

Local
and Long Distance Voice Services

We offer a variety of voice applications and services, generally
to businesses at prices significantly lower than for comparable
local services from the incumbent carrier. These voice services
include:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | local standard dial tone, including touch-tone dialing, 911 and
	operator assisted calling;        
|
| |  | local multi-trunk dial tone services, including direct inward
	dialing, and direct outward dialing;
|
| |  | long distance services, including 1+, toll free, calling card
	and operator services;              

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | voice messaging with personalized greetings, send, transfer,
	reply and remote retrieval capabilities;
|
| |  | conferencing services, including voice and web conferencing
	services; and                            
|
| |  | directory listings and assistance.                                                                    

In each of our markets, we have negotiated and entered into
interconnection agreements with the incumbent carrier, and
implemented permanent local number portability, which allows
customers to retain their telephone numbers when changing
telephone service providers.

Shared
Tenant Services

Our voice services also include shared tenant services, which
are telecommunications management services provided to groups of
small and medium-sized businesses located in the same office
building. This service enables businesses too small to justify
hiring their own telecommunications managers to benefit from the
efficiencies, including volume discounts, normally available
only to larger enterprises. We install an advanced
telecommunications system throughout each building we serve,
leasing space for on-site sales and service, and offer tenants
products and services such as telephones, voice mail, local
calling lines, discounted long distance and high-speed Internet
connections, all on a single, detailed invoice.

Interactive
Voice Response

We develop, host and manage interactive voice response, or IVR,
systems for clients that enable end users to order products and
services, collect and receive information, seek assistance,
facilitate bill payments, and a host of other capabilities over
the telephone. Our IVR capabilities utilize a wide range of
technologies, from standard touch-tone / push-button dialing to
natural language speech recognition and web-to-phone
capabilities. We customize for our clients particular
needs telephony-based software applications and technologies
developed by third parties to create IVR systems. We integrate
these IVR systems with our clients other business systems,
such as, order entry and customer relationship management
systems. We host and maintain the IVR systems in data centers
and deploy them to clients across a network, thereby alleviating
the need for our clients to purchase, own, install, or maintain
these applications. Clients pay for the use of these customized
solutions through a combination of upfront payments
for development and recurring fees based on transaction volume.
We also host and manage pre-paid calling card systems for
customers.

Integrated
Voice and Data Services

We offer bundled packages of voice and data products, known as
XOptions, to small and medium-sized businesses, that include
integrated, flat-rate packages for specified amounts of certain
services, including local and long distance voice services,
Internet access and web hosting services. These services include
a variety of service packages designed to accommodate different
sized customers with anywhere from 10 to 100 employees per
location. XOptions eliminates the complexity of working with
multiple service providers for installation, maintenance and
billing, and also can result in significant savings over the
average cost of buying these services from separate competitive
voice and data providers. We also offer Integrated Access
Services, which can reduce telecom costs by combining local
voice, long distance, and dedicated Internet access on a single
facility.

XOs Networks

We have built fiber optic networks with robust capacity in urban
centers in North America. Our IP-optimized inter-city network in
North America connects these local networks to one another. Our
fiber optic and fixed wireless customer connections will
complete our goal of becoming an end-to-end, facilities-based
provider of broadband communications services.

12



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##### Table of Contents



The following diagram depicts the physical components of our
nationwide networks.



Metro
Fiber Optic Networks

The core of each of our metro fiber networks is a ring of fiber
optic cable in a citys central business district that
connects to our central offices. These central offices contain
the switches and routers that direct data and voice traffic to
their destinations, and also have the space to house the
additional equipment necessary for future telecommunications
services. Whenever we can, we build and own these metro fiber
networks ourselves or obtain indefeasible rights to use unlit
fiber so that we can control the design and technology used to
best meet our customers needs. We are now operating 37
metro fiber networks serving over 60 cities, having expanded
into five major metropolitan markets in 2001.

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

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##### Table of Contents



|                     |  |                                                                                                                                                  
|-------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------
|State                |  | Market                                                                                                                                           
|                     |  |                                                                                                                                                  
|Arizona              |  | Phoenix                                                                                                                                          
|                    
|                    
|                    
|                    
|California           |  | Los Angeles Orange County: Anaheim; Costa Mesa;
	Fullerton; Garden Grove; Huntington Beach; Inglewood; Irvine;
	Long Beach; Orange; and Santa Ana
|                     |  | Sacramento                                                                                                                                       
|                     |  | San Diego                                                                                                                                        
|                     |  | San Francisco Bay Area: Fremont; Milpitas;
	Mountain View; Oakland; Palo Alto; San Jose; San Francisco;
	Santa Clara and Sunnyvale               
|                    
|                    
|                    
|                    
|Colorado             |  | Denver                                                                                                                                           
|                    
|                    
|                    
|                    
|Delaware             |  | Wilmington                                                                                                                                       
|                    
|                    
|                    
|                    
|District of Columbia |  | Washington                                                                                                                                       
|                    
|                    
|                    
|                    
|Florida              |  | Miami                                                                                                                                            
|                     |  | Fort Lauderdale                                                                                                                                  
|                     |  | Orlando                                                                                                                                          
|                     |  | Tampa Bay                                                                                                                                        
|                    
|                    
|                    
|                    
|Georgia              |  | Atlanta                                                                                                                                          
|                     |  | Marietta                                                                                                                                         
|                    
|                    
|                    
|                    
|Illinois             |  | Chicago                                                                                                                                          
|                    
|                    
|                    
|                    
|Maryland             |  | Baltimore                                                                                                                                        
|                    
|                    
|                    
|                    
|Massachusetts        |  | Boston                                                                                                                                           
|                    
|                    
|                    
|                    
|Michigan             |  | Detroit                                                                                                                                          
|                    
|                    
|                    
|                    
|Minnesota            |  | Greater Minneapolis/
	St. Paul                                                                                                                   
|                    
|                    
|                    
|                    
|Missouri             |  | St. Louis                                                                                                                                        
|                    
|                    
|                    
|                    
|Nevada               |  | Las Vegas                                                                                                                                        
|                    
|                    
|                    
|                    
|New Jersey           |  | Bergen/ Passaic                                                                                                                                  
|                     |  | Middlesex                                                                                                                                        
|                     |  | Newark                                                                                                                                           
|                    
|                    
|                    
|                    
|New York             |  | Manhattan                                                                                                                                        
|                    
|                    
|                    
|                    
|Ohio                 |  | Cleveland                                                                                                                                        
|                     |  | Columbus                                                                                                                                         
|                     |  | Akron                                                                                                                                            
|                     |  | Canton                                                                                                                                           
|                    
|                    
|                    
|                    
|Oregon               |  | Portland                                                                                                                                         
|                    
|                    
|                    
|                    
|Pennsylvania         |  | Central Pennsylvania: Allentown; Harrisburg;
	Lancaster; and Reading                                                                             
|                     |  | Philadelphia                                                                                                                                     
|                     |  | Scranton/ Wilkes Barre                                                                                                                           
|                    
|                    
|                    
|                    
|Tennessee            |  | Memphis                                                                                                                                          
|                     |  | Nashville                                                                                                                                        
|                    
|                    
|                    
|                    
|Texas                |  | Austin                                                                                                                                           
|                     |  | Dallas                                                                                                                                           
|                     |  | Houston                                                                                                                                          
|                     |  | San Antonio                                                                                                                                      
|                    
|                    
|                    
|                    
|Utah                 |  | Salt Lake City                                                                                                                                   
|                     |  | Orem/ Provo                                                                                                                                      
|                    
|                    
|                    
|                    
|Washington           |  | Seattle                                                                                                                                          
|                     |  | Spokane                                                                                                                                          
|                     |  | Vancouver                                                                                                                                        

We built our high capacity metro fiber networks using a backbone
density ranging between 72 and 432 strands of fiber optic cable.
Fiber optic cables have the capacity, or bandwidth, to carry
tens of thousands times the amount of traffic as
traditionally-configured copper wire. We believe that installing
high-count fiber strands will allow us to offer a higher volume
of broadband and voice services without incurring significant
additional construction costs. To enhance our ability to connect
customers directly to our networks, we design them to serve both
core downtown areas and other metropolitan and suburban areas
where business development supports the capital required for the
network build.

Inter-City
Network

We have created a single, end-to-end network by linking our
metro fiber networks to one another through the use of an
inter-city fiber optic network, which enables us to offer our
customers integrated, end-to-end communications services over
facilities we control. Although we own rights to multiple fibers
and a single empty conduit, our inter-city network currently
consists primarily of dedicated wavelengths on lit fiber optic
cables, onto which we have deployed transmission and routing
equipment. All of our metro networks are connected to this
inter-city network, either directly or through other
connections. As part of our capital conservation initiative, we
announced in April 2001 that we would postpone
lighting our inter-city fibers, and in order to
provide inter-city transport in the interim would purchase
wavelength capacity from Level 3 along the same routes as
our inter-city network assets. By using our own transmission and
routing equipment, we can maximize the capacity and enhance the
performance of the network as needed to meet our customers
current and future broadband data and other communications
needs, rather than relying on the owners of leased lines to make
those upgrades.

In November 2001, we announced the completion of our OC-192
capacity Internet backbone using the Level 3 wavelength
services and our own routers and transport equipment. We have
migrated a

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Our inter-city network assets that we have acquired, but not yet
deployed, consist of the following interests in a fiber network
that traverses over 16,000 miles and connects more than 60
cities in the United States and Canada, including most of the
major metropolitan markets served by our metro networks:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | an exclusive interest in 24 unlit fibers in a shared, filled
	conduit throughout this network; and
|
| |  | an exclusive interest in one empty conduit, with a capacity of
	up to 432 fiber optic strands.    

We currently are holding these inter-city network assets until
such time that market conditions improve and it is economical to
light all or parts of that network. Much of the equipment used
in connection with our inter-city network is positioned so that
we can easily transfer from the wavelength capacity provided by
Level 3 to servers on our inter-city fiber network when demand
or other considerations make it more efficient for us to install
optical network equipment to light all or a portion
of that network.

Connecting
Customers to Our Networks

We attempt to connect our customers directly to our networks
where it is economical to do so. We believe that by deploying
direct connections to our customers, rather than connecting
through the incumbent carriers facilities, we will reduce
our costs and be better positioned to meet our customers
communications requirements and to more rapidly deploy our
service. For example, direct customer connections enhance our
ability to:



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

We maximize the number of customers that can be connected
directly to our networks by deploying high capacity metro fiber
networks and using a variety of technologies, including those
that use fiber optic cable and fixed wireless spectrum. By
having both fiber and fixed wireless spectrum at our disposal,
we can directly connect customers to our network using the most
effective and cost efficient means.

Even in instances where it is not economical to connect
customers using our fiber optic cable or fixed wireless
spectrum, leasing facilities from incumbent carriers remains a
viable alternative. By building our metro networks in central
business districts, in many cases we have minimized the distance
from our network to a potential customer, which results in lower
costs associated with these leased facilities because the cost
of those facilities is generally based, in part, on the length
of the leased connection.

Fiber Optics.In cases where expected revenues
justify the cost, we will construct a new fiber optic extension
from our network to the customers premises. Whether it is
economical to construct a fiber optic extension depends, among
other things, on:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | the existing and potential revenue base located in the building
	in question;
|
| |  | the building location relative to our network, and                           
|
| |  | local permit requirements.                                                   

Even if we initially determine that it is not economical to
construct a fiber connection to a building, we will continually
reexamine the costs and benefits of a fiber connection and may
at a later date determine that construction of one is justified.

Broadband Wireless Spectrum.In cases where
construction of a fiber optic connection is not practical or
economical, under certain circumstances, we may deploy a
high-bandwidth wireless connection between an antenna on the
roof of the customers premises and an antenna attached to
our fiber rings.

15



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We hold licenses to 1,150 to 1,300 MHz of local multipoint
distribution services, or LMDS, spectrum in 58 cities, covering
areas where 95% of the population of the 30 largest U.S. cities
live or work. Our licenses also include 150 MHz of LMDS spectrum
in 10 smaller cities and 300 MHz of spectrum in the five
boroughs that comprise New York City. We also hold ten fixed
wireless licenses in the 39 gigahertz, or GHz, frequency. Eight
such licenses provide from 100 to 300 additional MHz in four
cities where we hold a 150 MHz LMDS license and two 39 GHz
license provide us with 200 MHz of fixed wireless capacity in
Las Vegas, where we do not hold a LMDS license.

The following table provides information on the markets in which
we hold licenses for LMDS and 39 GHz broadband fixed wireless
spectrum in the United States. Unless otherwise noted, the
licenses listed below are for LMDS spectrum.

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

16



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

In order to obtain the necessary access to install equipment to
operate fixed broadband licenses that connect our customers to
our network, we must secure roof and other building access
rights, including access to conduits and wiring from the owners
of each building or other structure on which we propose to
install our equipment, and may need to obtain construction,
zoning, franchise or other governmental permits.

DSL Technology.We have also deployed DSL
technology to meet the high-bandwidth needs of those customers
located less than three miles from the incumbent carriers
central office and whose customer connection remains over copper
wire. DSL technology reduces the bottleneck in the transport of
information, particularly for data services, by increasing the
data carrying capacity of copper telephone lines. We believe
that, for many locations, existing copper connections using DSL
technology from customer buildings to our local fiber optic
networks will offer a lower cost solution for providing
high-quality broadband services than fiber or fixed wireless
connections.

We offer DSL service in numerous markets in the U.S., mainly
through wholesale arrangements with other DSL service providers.
We have introduced our own DSL equipment and services at many
collocation sites, including central offices of the incumbent
carriers.

Technology

Overview

The wires, cables and spectrum that comprise the physical layer
of our networks can support a variety of communications
technologies. We seek to offer customers a set of technology
options to meet their changing needs, and introduce new
technologies as necessary. Specifically, we believe that a
service platform based on Internet Protocol, or IP, will provide
us with significant future opportunities, because it will enable
data, voice and video to be carried inexpensively over our
end-to-end, facilities-based network. We have, therefore, begun
to supplement our current data and voice switching technology
with IP equipment.

Over the past few years, both optical and IP-based networking
technologies have undergone rapid innovation. These technologies
enable us to offer our customers numerous high-speed data
services. Because it is more efficient, these innovations
increase the effective capacity of networks for these types of
applications. In the future, we expect that IP-based technology
will become the preferred technology for voice calls and
facsimile transmission as well. We plan to remain flexible in
our use of technology, so that, as underlying communications
technology changes, we will have the ability to take advantage
of and implement new technologies that best meet our network
requirements and customers needs.

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The illustration below depicts the configured circuit capacities
deployed in the IP network.



Fiber
Optic Technology

To enhance the capacity of our metro networks, we are
incorporating dense wavelength division multiplexing technology,
which increases the capacity of an optical fiber by
simultaneously operating at more than one wavelength, thereby
allowing the transmission of multiple signals through the same
fiber at different wavelengths.

Switching
Technology

There are two widely used switching technologies currently
deployed in communications networks: circuit-switching systems
and packet-switching systems. Circuit switch-based
communications systems, which currently dominate the public
telephone network, establish a dedicated channel for each
communication (such as a telephone call for voice or fax),
maintain the channel for the duration of the call, and
disconnect the channel at the conclusion of the call.

Packet switch-based communications systems, which format the
information to be transmitted into a series of shorter digital
messages called packets, are the preferred means of
data transmission. Each packet consists of a portion of the
complete message plus the addressing information to identify the
destination and return address. A key feature that distinguishes
Internet architecture from the public telephone network is that
on the packet-switched Internet, a single dedicated channel
between communication points is not required.

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Packet switch-based systems offer several advantages over
circuit switch-based systems, particularly the ability to
commingle packets from several communications sources together
simultaneously onto a single channel. For most communications,
particularly those with bursts of information followed by
periods of silence, the ability to commingle packets
provides for superior network utilization and efficiency,
resulting in more information being transmitted through a given
communication channel.

IP technology, an open protocol that allows unrelated computer
networks to exchange data, is the technological basis of the
Internet. The Internets explosive growth in recent years
has focused intensive efforts worldwide on developing IP-based
networks and applications. In contrast to protocols like ATM,
which was the product of elaborate negotiations between the
worlds monopoly telephone companies, IP is an open
standard, subject to continuous improvement.

We believe that a form of IP-based switching will eventually
replace both ATM and circuit switched technologies, and will be
the foundation of integrated networks that treat all
transmissions  including voice, fax and
video  simply as forms of data transmission. Current
implementations of IP technology over the Internet lack the
necessary quality of service to support real-time applications
like voice and fax at commercially acceptable quality levels. We
fully expect that a combination of increased bandwidth and
improved technology will correct these deficiencies.

We have constructed IP points of presence in all of our major
markets using high-capacity IP routers, through which we offer
Internet-related services. We currently connect these points of
presence with our inter-city fiber network, which serves as our
OC-192 IP backbone.

We have deployed a number of next generation switching
technologies, including soft-switch, optical and Ethernet
switching technologies. The soft-switch is a distributed
computer system that performs the same functions as a circuit
switch. It can route and switch information at an extremely fast
rate. Initially, we will use soft-switch technology to
complement and relieve traffic from our circuit switches. We
have deployed optical switching, routing and transmission
equipment on our inter-city network to create an all-optical
network. This technology is designed to make significant amounts
of bandwidth available to our customers. It also is designed to
enable us to more effectively and efficiently manage our
customers transmissions and to enhance our deployment of
dense multiplexing technology. Optical switching will support
all transmission protocols, including IP, ATM, and frame relay.
We also are deploying Ethernet switching technology to support
and expand our Ethernet services.

We believe that the deployment of IP and soft-switch
technologies in our network will enable us to implement new
services based on current IP technology, and position us to
adopt future IP technology implementations as they evolve to
support fully integrated communications networks.

LMDS
and Other Fixed Wireless Technology

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

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

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The spectrum under the licenses we hold is not suitable for
mobile telephones, but can transmit voice, data or video signals
from one fixed antenna to one or many others. As the word
local in the local multipoint distribution service
name implies, the radio links provided using LMDS frequencies
are of limited distance, typically of a few miles or less, due
to the degradation of these high-frequency signals over greater
distances. The same is true of the 39 GHz spectrum.

A wireless connection typically consists of paired antennas that
we anticipate will be placed at a distance of up to
2.5 miles from one another with a direct, unobstructed line
of sight. The antennas are typically installed on rooftops,
towers or windows. Because these connections are affected by
rain attenuation in areas of heavy rainfall, transmission links
are engineered for shorter distances and greater power to
maintain transmission quality. This reduction of path link
distances to maintain transmission quality requires more closely
spaced transceivers and, therefore, tends to increase the cost
of service coverage.

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

With the 39 GHz spectrum, because there are existing users of
that spectrum, we as a new user of the spectrum will be required
to coordinate our use so as not to interfere with an existing
user. We do not believe that the coordination process will
significantly limit our ability to make use of the spectrum.

Sales and Customer Care

Overview

Our sales organization includes a direct field sales force, a
telesales operation and third party sales agents. Our direct
sales force includes two sales organizations. Our market sales
organization focuses on medium-sized customers and larger or
growing businesses within a market and multi-market accounts.
Our national sales organization focuses on targeted larger and
national accounts, and specific enterprise and carrier channels
and customer segments.

Historically, our primary sales efforts focused on selling
switched local and long distance voice services to small and
medium-sized businesses and professional groups with fewer than
50 business lines. The sales effort of our market sales
organization now focuses on selling our full suite of services
to medium and larger businesses and multi-market accounts. Our
market research indicates that these customers prefer a single
source for all of their telecommunications requirements,
including products, billing, installation, maintenance, and
customer service. By offering these customers our bundled local
and long distance services or our XOptions packages, which
bundle local and long distance voice services, Internet access
and web hosting services, we believe we provide our customers a
level of convenience that generally is unavailable in the
communications marketplace.

We market and sell services to other telecommunications carriers
and large commercial users through our national sales team. The
expansion of our data service capabilities has enabled our
national sales team to expand our targeted customers to include
larger national and multi-market accounts customers that can
benefit from our broad range of services.

We market and sell our shared tenant services through a separate
direct sales force, which targets high concentrations of
business customers in multi-tenant commercial office buildings
in the metropolitan areas in which we provide service.

20



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Sales

We have established highly motivated and experienced direct
field and telesales forces that are designed to establish a
direct and personal relationship with our customers. We seek to
recruit salespeople with strong sales and telecommunications
backgrounds, including salespeople from long distance companies,
telecommunications equipment manufacturers, network systems
integrators and the incumbent carriers. Salespeople are offered
incentives through a commission structure that generally targets
40% to 50% of a salespersons total compensation to be
based on performance. The size of our sales organization has
remained relatively constant from 2000 to 2001, with
approximately 1,750 salespeople at December 31, 2001 and
approximately 1,700 salespeople at December 31, 2000.

Other
Sales Channels

We have complemented our direct sales force by developing
alternative sales channels to distribute the increasing number
of products and services available to our broadening customer
base. These channels include numerous third party sales agents.
We currently have distribution arrangements with a number of
national, regional and local agents and agency firms, whose
representatives market a broad range of XO services. Our
alternate distribution channel includes over 500 indirect agents
in markets throughout the United States. We also market via our
telesales operation and via the Internet at www.xo.com.

Customer
Care

Once a customers services have been installed, our
customer care operations support customer retention and
satisfaction. Historically, customers received support from
customer care representatives based in each of our markets. In
2000, we consolidated customer care operations into four primary
centers. Our goal continues to be to provide customers with a
customer care group that has the ability and resources to
respond to and resolve customer questions and issues as they
arise. As the number of markets in which we operate expanded, we
found that centralizing customer care centers enabled us to
provide customers with better care, including the availability
of representatives 24 hours a day, seven days a week. This
structure not only takes advantage of economies of scale, which
we believe improves our cost structure significantly, but also
enables us to provide better customer service. We, however,
still provide locally-based care for our most complex, largest
customers. The size of our customer care organization has
remained relatively constant from 2000 to 2001, with
approximately 1,000 employees at December 31, 2001 and
approximately 900 employees at December 31, 2000.

Regulatory Overview

Overview

In 1996, the Telecom Act, which substantially revised the
Communications Act of 1934, established the regulatory framework
for the introduction of competition for local telecommunications
services throughout the United States by new competitive
entrants such as us. Prior to the passage of the Telecom Act,
states typically granted an exclusive franchise in each local
service area to a single dominant carrier  often a
former subsidiary of AT&T, known as a Regional Bell
Operating Company, or RBOC  which owned and operated
the entire local exchange network. The RBOCs, following some
recent consolidation, now consist of the following companies:
BellSouth, Verizon, Qwest Communications and SBC Communications.
Among other things, the Telecom Act preempts state or local
governments from prohibiting any entity from providing
telecommunications service, which had the effect of eliminating
prohibitions on entry found in almost half of the states at the
time the Telecom Act, was enacted.

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

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At the same time, the Telecom Act preserved state and local
jurisdiction over many aspects of local telephone service, and,
as a result, we are subject to varying degrees of federal, state
and local regulation. Consequently, federal, state and local
regulation, and other legislative and judicial initiatives
relating to the telecommunications industry, could significantly
affect our business.

Federal
Regulation

Although the FCC exercises jurisdiction over our communication
facilities and services, we are not currently required to obtain
FCC authorization for the installation, acquisition or operation
of our wireline network facilities. We have obtained FCC
authority to provide facilities-based domestic and international
services. In addition, we are required to hold and have obtained
FCC authorizations for the operation of our fixed wireless LMDS
and 39 GHz facilities. Unlike incumbent carriers, we are not
currently subject to price cap or rate of return regulation,
which leaves us free to set our own pricing policies. The FCC
does authorize us to file interstate tariffs on an ongoing basis
for interstate access (rates charged among carriers for access
to their networks). The FCC, however, has issued a decision that
required us to withdraw tariffs for interstate domestic long
distance service and international long distance service. We,
however, still are required to make the terms, conditions and
pricing of the detariffed services available to the public on
our Company web page.

The following is a summary of the interconnection and other
rights granted by the Telecom Act that are most important for
full local competition and our belief as to the effect of the
requirements, if properly implemented:



| |   |                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Network interconnection, which permits customers of ours to
	exchange traffic with customers connected to other networks;                                                                                                                                                    
|
| |  | Local loop unbundling, which allows us to selectively gain
	access to incumbent carriers facilities and wires that
	connect the incumbent carriers central offices with
	customer premises, thereby enabling us to serve customers not
	directly connected to our networks;
|
| |  | Reciprocal compensation, which mandates arrangements for local
	traffic exchange between incumbent carriers and XO and other
	competitors, thereby improving our margins for local service;                                                                                  
|
| |  | Number portability, which allows customers to change local
	carriers without changing telephone numbers, thereby removing a
	significant barrier for a potential customer to switch to our
	local voice services; and                                                        
|
| |  | Access to phone numbers, which mandates assignment of new
	telephone numbers to our customers, thereby enabling us to
	provide telephone numbers to new customers on the same basis as
	the incumbent carrier.                                                               

In January 1999, the U.S. Supreme Court upheld key
provisions of the FCC rules implementing the Telecom Act, in a
decision that was generally favorable to competitive telephone
companies such as us. In finding that the FCC has general
jurisdiction to implement the Telecom Acts local
competition provisions, the Supreme Court confirmed the
FCCs role in establishing national telecommunications
policy, and thereby created certainty regarding the rules
governing local competition going forward.

Although the rights established in the Telecom Act are a
necessary prerequisite to the introduction of full local
competition, they must be properly implemented and enforced to
permit competitive telephone companies like us to compete
effectively with the incumbent carriers. Discussed below are
several FCC and court proceedings relating to the application of
certain FCC rules and policies that are significant to our
operations.

Unbundling
of Incumbent Network Elements.

In the January 1999 Supreme Court decision discussed above,
the Court affirmed the FCCs interpretation of matters
related to unbundling of incumbent carriers network
elements. It held that the

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

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

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

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

Regulation
of the RBOCs Ability to Provide Long Distance
Service.

The FCC has primary jurisdiction over the implementation of
Section 271 of the Telecom Act, which provides that the
RBOCs cannot offer in-region long distance services until they
have demonstrated that:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | they have entered into an approved interconnection agreement
	with a facilities-based competitive telephone company or that no
	such competitive telephone company has requested interconnection
	as of a statutorily determined deadline;

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| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | they have satisfied a 14-element checklist designed to ensure
	that the RBOC is offering access and interconnection to all
	local exchange carriers on competitive terms; and
|
| |  | the FCC has determined that allowing the RBOC to offer
	in-region, long distance services is consistent with the public
	interest, convenience and necessity.                

The FCC has granted two RBOCs the authority to provide long
distance service in a few states. Verizon has such authority in
the New York, Massachusetts, Pennsylvania, Connecticut and Rhode
Island and SBC Communications has such authority in Texas,
Kansas, Oklahoma, Arkansas and Missouri. In addition, several
applications by the RBOCs are currently pending before state
commissions and the FCC. We cannot predict if any of these
applications will be approved or when such approval is likely to
occur. Approval could have an adverse affect on our ability to
compete if it is not accompanied by safeguards to ensure that
the RBOC continues to comply with the market-opening
requirements of Section 271 or if it is granted prematurely
before the RBOC has completely satisfied the market-opening
requirements.

Provision
of Broadband Telecommunications Services and Information
Services.

Rules promulgated under the Telecom Act restrict the RBOCs
ability to provide advanced telecommunications services, or
broadband services, such as data and DSL services. The RBOCs are
also required under the FCCs unbundling rules to make
available unbundled network elements for the provision of
broadband services by their competitors. The RBOCs have
challenged these restrictions and obligations at the FCC, in
court appeals and through federal and state legislative efforts.
For example, the U.S. House of Representatives recently passed
H.R. 1542, the Internet Freedom and Broadband Deployment Act of
2001, usually referred to as the Tauzin-Dingell bill, which aims
to exempt the RBOCs broadband access services from
unbundling and other equal access provisions of the Telecom Act.
The bill has now been forwarded by the U.S. House of
Representatives to the U.S. Senate for consideration.

In addition to the Tauzin-Dingell bill, the FCC has initiated
three proceedings that could result in a diminishment of
incumbent carriers requirement to make unbundled network
elements available to competitors for certain broadband or
information services. First, the FCC has issued its
Incumbent LEC Broadband Telecommunications Services
Notice to examine the regulatory requirements for the
incumbent carriers provision of broadband
telecommunications services. Second, under its rules, the FCC is
required to review existing unbundling regulations every three
years to determine whether they remain necessary. As part of
this review, the FCC has issued a Triennial Review
Notice to address whether incumbent carriers should
continue to be required to make their facilities available to
CLECs for the provision of broadband services. Third, the FCC
has issued a Notice of Proposed Rulemaking entitled
Appropriate Framework for Broadband Access to the Internet
Over Wireline Facilities that requests comments on the
proper classification of broadband access services as either
regulated telecommunications services or unregulated information
services. A regulatory decision, legislative change or a court
ruling striking down the FCCs restrictions on RBOCs
ability to provide advanced services, including broadband
services, or broadening the definition of what constitutes
unregulated information services may have the effect of allowing
RBOCs to provide terms, conditions and pricing to their own
affiliates that provide data or information services that are
better than those made available to unaffiliated competitors.
Such a decision could also have the result of increasing our
cost of doing business by restricting the availability of
certain unbundled network elements or increasing the cost of
purchasing or leasing such facilities from the RBOCs.

Universal
Service.

In 1997, the FCC established a significantly expanded federal
telecommunications subsidy regime known as universal
service. For example, the FCC established new subsidies
for services provided to qualifying schools and libraries and
rural health care providers, and expanded existing subsidies to
low income consumers. Most telecommunications companies,
including us, must pay for these programs based on its share of
its interstate telecommunications revenues. In a 1999 decision,
the Fifth Circuit Court of Appeals issued a ruling that had the
net effect of somewhat lowering our contribution of revenues to

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Intercarrier
Compensation Reform.

Currently, communications carriers are required to pay other
carriers for interstate access charges and local reciprocal
compensation charges, both of which are being considered for
reform.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interstate Access Charges.Long distance carriers pay
	local carriers, including us, interstate access charges for both
	originating and terminating the interstate calls of long
	distance customers on the local carriers networks.
	Historically, the RBOCs set access charges higher than cost and
	justified this pricing to regulators as a subsidy to the cost of
	providing local telephone service to higher cost customers. With
	the establishment of an explicit and competitively neutral
	universal service subsidy mechanism, however, the FCC is under
	increasing pressure to revise the current access charge regime
	to bring the charges closer to the cost of providing access. In
	response, the FCC issued a decision in 2001 setting the rates
	that competitive local carriers charge to long distance carriers
	at a level that will gradually decrease over the next three
	years from a maximum of $0.025 per minute to the rates charged
	by incumbent carriers. So long as we are in compliance with the
	FCCs rate schedule, the FCCs order forbids long
	distance carriers from challenging our interstate access rates.
	Although this FCC decision lowering access charges will reduce
	our access charge revenues over time, we do not expect that such
	a reduction will have a material impact on our total revenues or
	financial position.                                                                                                                                                  
|
| | Local Reciprocal Compensation Charges.Local telephone
	companies such as us typically compensate other local carriers
	for terminating traffic on their networks. These payments flow
	in two directions. First, when we terminate traffic for another
	local carrier to a customer on our network, we collect
	compensation. Second, when we send traffic to another carrier
	for termination, we pay compensation. Some competitors, however,
	have a customer base that generates many more minutes of
	terminating traffic from other carriers than originating traffic
	destined for other carriers. For example, a competitor that has
	a customer base that has many information service providers
	typically will have a large amount of compensation being paid to
	it by other carriers, while it will owe very little reciprocal
	compensation to other carriers. The FCC revamped the local
	reciprocal compensation structure in 2001 to eliminate or reduce
	the opportunity for carriers to take advantage of an imbalance
	of originating and terminating traffic flows. Under the
	decision, at the election of the incumbent carrier, terminating
	traffic that is out-of-balance by a ratio of more than 3 to 1
	can be compensated at a lower rate, or in some cases, at no
	charge. Because our traffic is relatively in balance across our
	markets, however, we do not expect the FCC decision to
	restructure reciprocal compensation to have a material impact on
	our total revenues or financial position.

Regulation
of Business Combinations.

The FCC, along with the Department of Justice and state
commissions, has jurisdiction over business combinations
involving telecommunications companies. The FCC has reviewed a
number of recent and proposed combinations to determine whether
the combination would undermine the market-opening incentives of
the Telecom Act by permitting the combined company to expand its
operations without opening its local markets to competition or
have other anti-competitive effects on the telecommunications
and Internet access markets. In some cases, the FCC has set
conditions for its approval of the proposed business
combination. We cannot predict whether any conditions imposed
will be effective, nor can we predict whether the FCC will
impose similar conditions should it approve future business
combinations.

We currently expect that completion of the proposed
recapitalization transactions under consideration will result in
a change of control of XO under applicable FCC regulations so
that the transaction will be

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State
Regulation

State regulatory commissions retain jurisdiction over our
facilities and services to the extent they are used to provide
intrastate communications. We expect that we will be subject to
direct state regulation in most, if not all, states in which we
operate in the future. Many states require certification before
a company can provide intrastate communications services. We are
certified in all states where we have operations and
certification is required. We cannot be sure that we will retain
such certifications or that we will receive authorization for
markets in which we expect to operate in the future.

Most states require us to file tariffs or price lists setting
forth the terms, conditions and prices for services that are
classified as intrastate. In some states, our tariff can list a
range of prices for particular services. In other states, prices
can be set on an individual customer basis. Several states where
we do business, however, do not require us to file tariffs. We
are not subject to price cap or to rate of return regulation in
any state in which we currently provide service.

Under the regulatory arrangement contemplated by the Telecom
Act, state authorities continue to regulate matters related to
universal service, public safety and welfare, quality of service
and consumer rights. All of these regulations, however, must be
competitively neutral and consistent with the Telecom Act, which
generally prohibits state regulation that has the effect of
prohibiting us from providing telecommunications services in any
particular state. State commissions also enforce some of the
Telecom Acts local competition provisions, including those
governing the arbitration of interconnection disputes between
the incumbent carriers and competitive telephone companies.

Local
Government Regulation

In certain locations, we must obtain local franchises, licenses
or other operating rights and street opening and construction
permits to install, expand and operate our fiber-optic networks
in the public right-of-way. In some of the areas where we
provide network services, our subsidiaries pay license or
franchise fees based on a percentage of gross revenues or on a
per linear foot basis. Cities that do not currently impose fees
might seek to impose them in the future, and after the
expiration of existing franchises, fees could increase. Under
the Telecom Act, state and local governments retain the right to
manage the public rights-of-way and to require fair and
reasonable compensation from telecommunications providers, on a
competitively neutral and nondiscriminatory basis, for use of
public rights-of-way. As noted above, these activities must be
consistent with the Telecom Act, and may not have the effect of
prohibiting us from providing telecommunications services in any
particular local jurisdiction.

If an existing franchise or license agreement were to be
terminated prior to its expiration date and we were forced to
remove our fiber from the streets or abandon our network in
place, our operations in that area would cease, which could have
a material adverse effect on our business as a whole. We believe
that the provisions of the Telecom Act barring state and local
requirements that prohibit or have the effect of prohibiting any
entity from providing telecommunications service should be
construed to limit any such action. Although none of our
existing franchise or license agreements has been terminated,
and we have received no threat of such a termination, there can
be no assurance that one or more local authorities will not
attempt to take such action. Nor is it clear that we would
prevail in any judicial or regulatory proceeding to resolve such
a dispute.

Environmental
Regulation

Our switch site and customer premise locations are equipped with
back-up power sources in the event of an electrical failure.
Each of our switch site locations has battery and diesel fuel
powered back-up generators, and we use batteries to back-up some
of our customer premise equipment. Federal, state and local
environmental laws require that we notify certain authorities of
the location of hazardous materials

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Competition

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

Incumbent
Carriers

In each market we serve, we face, and expect to continue to
face, significant competition from the incumbent carriers, which
currently dominate the local telecommunications markets. We
compete with the incumbent carriers in our markets for local
exchange and other services on the basis of product offerings,
quality, capacity and reliability of network facilities,
state-of-the-art technology, price, route diversity, ease of
ordering and customer service. However, the incumbent carriers
have long-standing relationships with their customers and
provide those customers with various transmission and switching
services that we, in many cases, do not currently offer.
Competition, however, is not based on any proprietary
technology. Because our fiber optic networks have been recently
installed compared to those of the incumbent carriers, our
networks dual path architectures and state-of-the-art
technology may provide us with cost, capacity, and service
quality advantages over some existing incumbent carrier networks.

Other
Voice Service Competitors

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

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

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

Data
Service Competitors

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



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | telecommunications companies: AT&T, WorldCom, Sprint, Level
	3, Qwest, and the other incumbent carriers;
|
| |  | online service providers: AOL Time Warner and MSN, the Microsoft
	Network;                              

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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Internet service providers: Genuity, a subsidiary of GTE, Globix
	Corporation, NTT/ Verio, EarthLink Network, Inc., and other
	national and regional providers; and
|
| |  | web hosting providers: MFN, Exodus Communications, IBM, and
	Accenture                                                                                             

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

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

Other
Business Competitors

Our enhanced communications service offerings are also subject
to competition. For example, there are several competitors that
offer interactive voice response services similar to those
offered by our Interactive division, such as Basis, Interactive
Telesis and West Corporation, which we believe focus their sales
efforts on large volume interactive voice response service
users, live agent call centers and IVR hardware sales. The
pre-paid calling card business is intensely competitive.
Competitors include AT&T, MCI WorldCom, Sprint and IDT.

Employees

As of December 31, 2001, we employed approximately 6,700
people, including full-time and part-time employees. We consider
our employee relations to be good. None of our employees is
covered by a collective bargaining agreement.

Risk Factors

Risks
Related to Recapitalization Process

Holders of certain of our unsecured notes and equity
securities are not expected to receive any meaningful recovery
in our proposed recapitalization.

Based on the proposals we have received to date, we currently
anticipate that under any proposed recapitalization, holders of
our senior notes will not receive full value for their claims.
Consequently, any proposed plan of recapitalization likely will
not provide for any meaningful recovery by the holders of our
convertible subordinated notes or our equity and equity related
securities, including our common and preferred stock and
outstanding stock options.

Our proposed recapitalization may not be completed.

The completion of our proposed recapitalization will require
support from our creditors. If it is implemented pursuant to a
bankruptcy proceeding, consummation of any plan of
reorganization will require a favorable vote by certain impaired
classes of creditors, satisfaction of certain bankruptcy law
requirements and confirmation by the bankruptcy court, which, as
a court of equity, may exercise substantial discretion and
choose not to confirm the plan.

Consummations of the transactions contemplated by the Stock
Purchase Agreement are, and consummation of any alternative
investment transaction will likely be, subject to satisfaction
or waiver of certain conditions. With respect to the Stock
Purchase Agreement, the conditions to which consummation of that
investment is subject include the resolution of certain pending
litigation, the absence of a material adverse change in our
business, receipt of regulatory approvals and a reduction in our
total indebtedness outstanding to no more than $1.0 billion
of borrowings in addition to certain other secured indebtedness
and capital lease obligations. Satisfaction of certain of the
conditions under the Stock Purchase Agreement are out of our
control or must be satisfied at the Investors sole
discretion. Accordingly, even if the proposed recapitalization
receives the necessary support from our creditors, there can be
no assurance that it will be completed. If a protracted
reorganization was to occur, or a liquidation would be
necessary, there is a risk that the value of XO would be eroded
to the detriment of all XO stakeholders.

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We and members of our board of directors have been named as
party defendants in a number of lawsuits that purport to be
class action suits brought on behalf of XOs stockholders,
which could impact the completion of our proposed
recapitalization and our financial condition.

We and members of our board of directors have been named as
party defendants in a number of lawsuits that purport to be
class action suits brought on behalf of XOs stockholders.
Some of these actions allege federal securities law violations
by the Company and certain directors relating to certain
financial disclosures during the year 2001 and some allege that
the defendants, including the Company and the members of the
board of directors, breached certain fiduciary duties in
connection with the proposed investments by the Forstmann Little
Investors and Telmex. Satisfactory resolution of these lawsuits
is a condition to the Investors obligation to complete the
investment under the Stock Purchase Agreement, which must be
satisfied in the Investors sole discretion.

The investment contemplated by the Stock Purchase Agreement,
and any alternative investment, may not be completed if
regulatory approvals are not obtained.

It is a condition to the Investors obligations under the
Stock Purchase Agreement that regulatory approvals required in
order to consummate the investment have been obtained or waived
in whole or part by the Investors. If these required approvals
(or waivers) are not obtained by January 15, 2003 and by a
final order (as defined in the Stock Purchase Agreement) on
March 15, 2003, each Investor may terminate their
obligations under the agreement. Completion of alternative
investment proposals also is expected to require regulatory
approvals. The enactment of new federal, state or local
legislation or regulations, including FCC rulemaking, or
judicial interpretations of new or existing legislation or
regulations, could delay receipt of the required approvals or
prevent them from being obtained.

Our operations may be disrupted during the course of the
proposed recapitalization.

It is currently expected that our proposed recapitalization will
be implemented through a chapter 11 bankruptcy filing by XO
Parent and the confirmation of a plan of reorganization in the
bankruptcy proceedings. The uncertainty surrounding our
recapitalization, and any related bankruptcy filing, could have
significant adverse effects on our business, particularly if the
process is protracted. Because the businesses of all of our
operating subsidiaries are closely related and we market
services under the XO brand, any adverse effect caused by the
proposed recapitalization could adversely affect not only XO
Parent, the entity that issued our long-term debt and preferred
stock obligations, but also all XO subsidiaries that are not
involved directly with the proposed recapitalization.
Specifically, this uncertainty could:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | adversely affect customer relations and increase the risk that
	we lose customers or are subject to more aggressive tactics of
	competitors;
|
| |  | adversely affect vendor relations or lead to the tightening of
	trade credit; and                                                           
|
| |  | make it difficult to attract and retain key employees.                                                                                      

Any adverse publicity resulting from any recapitalization
process could contribute to or compound these adverse affects to
our business.

The Stock Purchase Agreement with the Forstmann Little Investors
and Telmex contains covenants regarding the conduct of our
business to which we are subject until the Stock Purchase
Agreement is terminated or the investment transactions
contemplated by it are consummated. The covenants require, among
other things that, unless the Investors consent, we must conduct
our business only in the ordinary course and consistent with
past practice, or as may be ordered by a bankruptcy court and we
must use reasonable best efforts to preserve our assets,
properties and business relationships. The covenants also
preclude a number of actions by us. The covenants may limit our
ability to respond to certain market events or take advantage of
certain market opportunities.

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The tax consequences of the proposed recapitalization are
uncertain.

Although we do not believe that implementation of our proposed
recapitalization will itself result in significant tax
liability, the impact on our ability to use existing net
operating loss carryovers, built-in losses and other favorable
tax attributes following completion of the proposed
recapitalization is uncertain. Limitations on our ability to use
such favorable tax attributes could adversely affect our
financial position.

Risks
Related to Liquidity and Financial Resources

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

For each period since inception, we have incurred substantial
and increasing net losses and negative cash flow from
operations. For 2001, we posted a net loss attributable to
common stockholders of approximately $1.8 billion and
showed negative cash flows from operations of approximately
$560.9 million. Our accumulated deficit was approximately
$4.3 billion at December 31, 2001. We expect that
losses and negative cash flow from operations will continue over
the next several years.

Our existing operations do not currently, and are not expected
in the near future to, generate cash flows from which we can
make interest payments on our currently outstanding indebtedness
and unsecured notes, make dividend payments on our currently
outstanding preferred stock or fund continuing operations and
planned capital expenditures. We cannot know when, if ever, net
cash generated by our operations will support our growth and
continued operations.

Even if our proposed recapitalization is completed, our existing
operations are not expected to generate cash flows sufficient to
pay our expected operating expenses, fund our capital
expenditure requirements and make interest payments on
indebtedness expected to be outstanding after completion of the
recapitalization for a few years.

If we are not successful in raising additional capital, we
may have to drastically alter our business plan or liquidate.

Although our metro and inter-city networks are substantially
complete, our business plan contemplates substantial additional
capital spending. We will need to raise additional capital
because our anticipated future funding requirements for
operating expenses, capital expenditures and debt service exceed
the $755.2 million in cash and marketable securities we had
on hand as of December 31, 2001 and any cash we expect will
be generated from operations.

If our proposed recapitalization is not implemented or, as a
result of these existing market conditions or other factors, we
fail or are unable to raise sufficient capital when needed, we
may have to drastically alter our business plan so as to
conserve cash, or sell all or a portion of our assets, possibly
pursuant to a liquidation proceeding in bankruptcy court, or
both.

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

As of December 31, 2001, we had outstanding ten issues of
senior notes and one issue of convertible subordinated notes
totaling $4.1 billion in principal amount and accreted
value, approximately $6.7 million in miscellaneous debt
obligations of our subsidiaries, and eight series of redeemable
preferred stock with an aggregate liquidation preference of
$1.7 billion. In addition, we have outstanding a
$1.0 billion senior secured credit facility. Based on our
capital structure at December 31, 2001 and the existing
interest rates for obligations with variable interest rates, and
assuming payment of dividends in additional shares of preferred
stock for the series of our preferred stock that permit this
type of dividend payment, we estimate that our cash commitments
for interest expense and dividend payments for 2002, if we were
to pay them, would be approximately $409 million. We,
however, have not been paying scheduled interest payments on our
senior and subordinated notes or dividend payments on our
preferred stock since December 1, 2001, which has resulted
in payment defaults under the indentures governing notes for
which scheduled interest

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Unless our proposed recapitalization is completed, we will
probably require additional financing by the end of 2002, much
of which could be in the form of additional indebtedness, which
would further increase the risk of a additional defaults unless
we can establish an adequate revenue base and generate
sufficient cash flow to repay our indebtedness. We may never
establish an adequate revenue base to produce an operating
profit or generate adequate positive cash flow to provide future
capital expenditures and repayment of debt.

We currently expect that even if the proposed recapitalization
is completed, we will have over $1.0 billion of secured
indebtedness outstanding. Our credit facility, as we anticipate
it will be amended in connection with the implementation of the
proposed recapitalization, will permit us to incur substantial
additional indebtedness.

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

The indentures under which our senior notes have been issued and
our senior secured credit facility contain covenants that
restrict, among other things, our ability to borrow money, grant
additional liens on our assets, make particular types of
investments or other restricted payments, sell assets or merge
or consolidate. Our senior secured credit facility also requires
us to maintain specified financial ratios. As of
December 1, 2001, we stopped paying interest on all of our
senior and subordinated notes that provide for payment of
interest in cash, which resulted in defaults under the
indentures under which our senior and subordinated notes were
issued and under our senior secured credit facility with respect
to cross default events related to our failure to make these
payments. For the fourth quarter 2001, we also failed to satisfy
the covenant in our senior secured credit facility relating to
our fourth quarter revenues.

Because of these defaults, or, in the case of our credit
facility, if we fail to satisfy the conditions under the
Forbearance Agreement, the terms of our indentures and credit
facility provide that the holders of our senior and subordinated
notes or the lenders under our credit facility could declare a
default and demand immediate repayment and, unless we cure the
defaults, they could seek a judgment and attempt to seize our
assets to satisfy the debt to them. The security for our senior
secured credit facility consists of all of the assets purchased
with the proceeds thereof, the stock of certain of our direct
subsidiaries, all of our assets and, to the extent of
$125.0 million of guaranteed debt, assets of our
subsidiaries. The defaults under these agreements could
adversely affect our rights under other commercial agreements.

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



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | they may impair our ability to obtain additional financing in
	the future;                                                                                                                                                                           
|
| |  | they will require that a substantial portion of our cash flow
	from operations and financing activities be dedicated to the
	payment of interest on debt and dividends on preferred stock,
	which will reduce the funds available for other purposes;
|
| |  | they may limit our flexibility in planning for or reacting to
	changes in market conditions; and                                                                                                                                                     
|
| |  | they may cause us to be more vulnerable in the event of a
	downturn in our business.                                                                                                                                                                 

Even if our credit facility is amended in connection with the
implementation of our proposed recapitalization, we will be
subject to covenants that restrict our operational flexibility
and require us to maintain certain financial ratios, and the
lenders under the credit facility will have a security interest
in substantially all of our assets and the assets of our
subsidiaries. As discussed above, the Stock Purchase Agreement
with the Forstmann Little Investors and Telmex contains
covenants regarding the conduct of our business to which we are
subject until the Stock Purchase Agreement is terminated or the
investment transactions contemplated by it are consummated.

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Risks
Related to Network and Product Development

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

We hold some of the unlit fiber that makes up the foundation of
our network, particularly in our inter-city network, through
long-term leases or indefeasible right of use agreements. A
bankruptcy or financial collapse of one of these fiber providers
could result in a loss of our rights under such leases and
agreements with the provider, which in turn could have a
negative impact on the integrity of our network and ultimately
on our results of operations. There has been increasing
financial pressure on some of our fiber providers as part of the
overall weakening of the telecommunications market over the past
twelve to eighteen months. Consequently, in the case of a
bankruptcy or financial collapse by one of our fiber providers,
our rights under our dark fiber agreements remain unclear. In
particular, to our knowledge, the rights of the holder of such
rights in strands of unlit fiber have never been addressed by
the judiciary at the state or federal level in bankruptcy.

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

Each of our networks consists of many different pieces of
hardware, including switches, routers, fiber optic cables,
electronics and combination radio transmitter/receivers, known
as transceivers, and associated equipment, which are difficult
to install. If we cannot install this hardware quickly, the time
in which customers can be connected to our network and we can
begin to generate revenue from our network will be delayed.

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

Some of the operations support systems we employ are
proprietary. Our operations support systems are expected to be
an important factor in our success. If any of these systems fail
or do not perform as expected, we could suffer customer
dissatisfaction, loss of business or the inability to add
customers on a timely basis, any of which would adversely affect
our revenues. Furthermore, problems may arise with higher
processing volumes or with additional automation features, which
could potentially result in system breakdowns and delays and
additional unanticipated expense to remedy the defect or to
replace the defective system with an alternative system.

If our selection of IP technology is incorrect, ineffective
or unacceptably costly, implementation of our business strategy
could be delayed, which would adversely affect our growth and
operating results.

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

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

We must be a party to interconnection agreements with the
incumbent carrier in order to connect our customers to the
public telephone network. We may not be able to renegotiate or
maintain interconnection agreements in all of our markets on
favorable terms. If we are unable to renegotiate or maintain

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We require continued peering arrangements with other ISPs,
particularly the large, national ISPs, to implement our planned
expansion of data services including Internet access services.
Peering arrangements are agreements among Internet backbone
providers to exchange data traffic. Depending on the relative
size of the carriers involved, these exchanges may be made
without settlement charge. We may not be able to renegotiate or
maintain peering arrangements on favorable terms, which would
impair our growth and performance.

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

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

The availability of equipment that takes advantage of the
multipoint characteristics of our broadband wireless spectrum
licenses may continue to experience performance problems.

Although broadband fixed wireless spectrum has the capability to
permit the transmission of voice and data between a fixed point
and multiple receivers, which could reduce installation costs as
compared with traditional point-to-point transmission, we have
encountered significant performance problems with the deployment
of multipoint equipment. Until these performance problems are
resolved satisfactorily, we will not be able to take advantage
of the potential multipoint characteristics of our broadband
wireless spectrum.

It is expensive and difficult to switch new customers to our
network, and lack of cooperation of the incumbent carrier can
slow the new customer connection process, which could impact our
ability to compete.

It is expensive and difficult for us to switch a new customer to
our network because:



| |   |                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------
| |  | a potential customer faces switching costs if it decides to
	become our customer, and                                                     
|
| |  | we require cooperation from the incumbent carrier in instances
	where there is no direct connection between the customer and our
	network.

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

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We depend on our key personnel and qualified technical staff
and, if we lose their services, our ability to manage the
day-to-day aspects of our complex network will be weakened. We
may not be able to hire and retain qualified personnel, which
could adversely affect our operating results.

We are highly dependent on the services of our management and
other key personnel. The loss of the services of our senior
executive management team or other key personnel could cause us
to make less successful strategic decisions, which could hinder
the introduction of new services or the entry into new markets.
We could also be less prepared for technological or marketing
problems, which could reduce our ability to serve our customers
and lower the quality of our services.

We believe that a critical component for our success will be the
attraction and retention of qualified professional and technical
personnel. In addition, we must also develop and retain a large
and sophisticated sales force, particularly in connection with
our plan to target larger national customers. We have
experienced intense competition for qualified personnel in our
business with the technical and other skill sets that we seek.
We may not be able to attract, develop, motivate and retain
experienced and innovative personnel. If we fail to do so, there
will be an adverse effect on our ability to generate revenue
and, consequently, our operating cash flow.

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

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



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

Risks
Related to Competition and Our Industry

We face competition in local markets from other carriers,
putting downward pressure on prices, which could impair our
results.

We face competition in each of our markets principally from the
incumbent carrier in that market, but also from recent and
potential market entrants, including long distance carriers
seeking to enter, reenter or expand entry into the local
exchange marketplace. This competition places downward pressure
on prices for local telephone service and data services, which
can adversely affect our operating results. In addition, we
expect competition from other companies, such as cable
television companies, electric utilities, microwave carriers,
wireless telephone system operators and private networks built
by large end-users. If we are not able to compete effectively
with these industry participants, our operating results could be
adversely affected.

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

We also face intense competition from long distance carriers in
the provision of long distance services. This competition has
substantially reduced prices for long distance services in
recent years. Although the

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

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

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

New technologies, such as voice-over-IP, and regulatory
changes  particularly those permitting incumbent
local telephone companies to provide long distance
services  are blurring the distinctions between
traditional and emerging telecommunications markets. In
addition, the increasing importance of data services has focused
the attention of most telecommunications companies on this
growing sector. As a result, a competitor in any of our business
areas is potentially a competitor in our other business areas,
which could impair our prospects and growth.

Many of our competitors have superior resources, which could
place us at a cost and price disadvantage.

Many of our current and potential competitors have market
presence, engineering, technical and marketing capabilities and
financial, personnel and other resources substantially greater
than ours. As a result, some of our competitors can raise
capital at a lower cost than we can, and they may be able to
develop and expand their communications and network
infrastructures more quickly, adapt more swiftly to new or
emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily,
and devote greater resources to the development, marketing and
sale of products and services than we can. Our current financial
condition, and the fact that we are attempting to recapitalize
our balance sheet and subject to the restrictions contained in
the Stock Purchase Agreement and the Forbearance Agreement,
could make it more difficult for us to respond to any such
action by a competitor. Also, our competitors greater
brand name recognition may require us to price our services at
lower levels in order to win business. Finally, our
competitors cost advantages give them the ability to
reduce their prices for an extended period of time if they so
choose.

The technologies we use may become obsolete, which would
limit our ability to compete effectively and adversely impact
our results.

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

The introduction of new technologies may reduce the cost of
services similar to those that we plan to provide. As a result,
our most significant competitors in the future may be new
entrants to the

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Additionally, the markets for data and Internet-related services
are characterized by rapidly changing technology, evolving
industry standards, changing customer needs, emerging
competition and frequent new product and service introductions.
The future success of our data services business will depend, in
part, on our ability to accomplish the following in a timely and
cost-effective manner:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | effectively use leading technologies;                                                 
|
| |  | continue to develop technical expertise;                                              
|
| |  | develop new services that meet changing customer needs; and                           
|
| |  | influence and respond to emerging industry standards and other
	technological changes.

Our pursuit of necessary technological advances may require
substantial time and expense.

Our Company and industry are highly regulated, which
restricts our ability to compete in our target markets and
imposes substantial compliance costs on us that adversely impact
our results.

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

The requirement that we obtain permits and rights-of-way to
develop our network increases our cost of doing business and
could adversely affect our performance and results.

In order for us to acquire and develop our fiber networks, we
must obtain local franchises and other permits, as well as
rights-of-way and fiber capacity from entities such as incumbent
carriers and other utilities, railroads, long distance
companies, state highway authorities, local governments and
transit authorities. The process of obtaining these permits and
rights-of-way is time-consuming and burdensome and increases our
cost of doing business.

We may not be able to maintain our existing franchises, permits
and rights-of-way that we need to implement our business. We may
also be unable to obtain and maintain the other franchises,
permits and rights that we require. A sustained and material
failure to obtain or maintain these rights could materially
adversely affect our performance and operating results in the
affected metropolitan area.

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

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

We provide a significant portion of our DSL service through
wholesale arrangements with other DSL service providers. To the
extent that DSL service providers are unable to provide
wholesale DSL service to us, we in turn may be unable to provide
that service to our customers if we cannot provide service on
our own DSL equipment or obtain wholesale service from another
DSL service provider. In addition, the transition of our DSL
customers services to another source of DSL service may
cause potential disruptions for the affected DSL customers
services. If we are unable to serve these customers, we will
lose the related revenues.

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Forward-Looking
Statements

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

Some statements and information contained in this prospectus and
in the documents incorporated by reference into this prospectus
are not historical facts, but are forward-looking
statements, as such term is defined in the Private
Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by the use of forward-looking
terminology such as believes, expects,
plans, may, will,
would, could, should, or
anticipates or the negative of these words or other
variations of these words or other comparable words, or by
discussions of strategy that involve risks and uncertainties.
Such forward-looking statements include, but are not limited to,
statements regarding:



| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | product and service development, including the development and
	deployment of data products and services based on IP, Ethernet
	and other technologies and strategies to expand our targeted
	customer base and broaden our sales channels;                                                                                                         
|
| |  | network development, including those with respect to IP network
	and facilities development and deployment, switches using next
	generation switching technology, broadband fixed wireless
	technology, testing and installation, high speed technologies
	such as DSL, and matters relevant to our metro and inter-city
	networks; and             
|
| |  | liquidity and financial resources, including anticipated capital
	expenditures, funding of capital expenditures and anticipated
	levels of indebtedness, and with respect to our proposed
	recapitalization, the transactions contemplated by the Stock
	Purchase Agreement or any alternative investment and related
	recapitalization transaction.

All such forward-looking statements are qualified by the
inherent risks and uncertainties surrounding expectations
generally, and also may materially differ from our actual
experience involving any one or more of these matters and
subject areas. The operation and results of our business also
may be subject to the effect of other risks and uncertainties in
addition to the relevant qualifying factors identified in the
above Risk Factors section and elsewhere in this
prospectus and in the documents incorporated by reference in
this prospectus, including, but not limited to:



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




Item 2.  Properties

We own or lease, in our operating territories, telephone
property which includes: fiber optic backbone and distribution
network facilities; point-to-point distribution capacity;
central office switching equipment; connecting lines between
customers premises and the central offices; and customer
premise equipment. Our central office switching equipment
includes electronic switches and peripheral equipment.

The fiber optic backbone and distribution network and connecting
lines include aerial and underground cable, conduit, and poles
and wires. These facilities are located on public streets and
highways or on privately-owned land. We have permission to use
these lands pursuant to consent or lease, permit, easement, or
other agreements.

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We, and our subsidiaries, lease facilities for our and their
administrative and sales offices, central switching offices,
network nodes and warehouse space. The various leases expire in
years ranging from 2002 to 2021. Most have renewal options.

Our headquarters are located in Reston, Virginia, where we are
currently leasing 212,000 square feet of space.




Item 3.  Legal Proceedings

We and members of our board of directors have been named as
party defendants in a number of lawsuits filed in the federal
courts in Eastern District of Virginia and the Southern District
of California, and in state courts in New York, Delaware and
California. The suits purport to be class action suits brought
on behalf of XOs stockholders. The federal actions contain
allegations of federal securities law violations by the Company
and certain directors relating to certain financial disclosures
during the year 2001. The state court actions, and some of the
federal actions, allege that the defendants including the
Company and the members of the board of directors breached
certain fiduciary duties in connection with the proposed
investments by the Forstmann Little Investors and Telmex. We
believe these claims are without merit and intend to vigorously
contest these suits by appropriate proceedings. The Stock
Purchase Agreement provides that one of the conditions to the
Investors obligations to complete the investment is that
all lawsuits pending or threatened against us and our affiliates
relating to matters specified in the Stock Purchase Agreement,
and the Investors and their affiliates, other than those brought
in the ordinary course of our business, must be resolved to the
satisfaction of the Investors in their sole discretion.
Consequently, satisfactory resolution of the purported class
action suits is a condition to the obligations of the Investors
to complete the investment. XO is not currently a party to any
other legal proceedings, other than regulatory and other
proceedings that are in the normal course of business.




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

No matters were submitted to a vote of security holders during
the quarter ended December 31, 2001.

PART II




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

Market Information

In December 2001, we voluntarily delisted our Class A
common stock from the Nasdaq National Market and began trading
on the NASD Over-the-Counter Bulletin Board on December 17,
2001 under the symbol XOXO. Prior to our voluntary
delisting, our Class A common stock was traded on the
Nasdaq National Market, and trading was halted on
November 29, 2001 following our announcement of the
preliminary agreement with the Forstmann Little Investors and
Telmex relating to the proposed investment contemplated by the
Stock Purchase Agreement. Under the terms of the investment and
recapitalization transactions currently under consideration, it
is not expected that holders of our current outstanding
Class A common stock, or any rights with respect thereto,
will be entitled to any significant recovery. The following
table shows, for the periods indicated, the high and low closing
bid prices for our Class A common stock as reported by the
Nasdaq National Market and NASD Over-the-Counter Bulletin Board.
The prices below have been adjusted for two-for-one stock splits
effected in 2000 and prior periods.

|               |  |      |       |      |  |      |      |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2001 |       | 2000
|               |  |      |       |     
|               |  | High |       | Low  |  | High |      | Low
|               |  |      |       |      |  |      |      |    
|First Quarter  |  | $    | 27.81 |      |  | $    | 6.25 |     |  | $ | 66.25 |  |  | $ | 32.75 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 5.22  |      |  | $    | 1.63 |     |  | $ | 63.91 |  |  | $ | 25.13 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 1.97  |      |  | $    | 0.33 |     |  | $ | 46.00 |  |  | $ | 22.88 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 1.72  |      |  | $    | 0.08 |     |  | $ | 36.25 |  |  | $ | 11.50 | 

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There is no public trading market for our Class B common
stock.

As of March 1, 2002, the approximate number of stockholders
of record of our Class A common stock was 2,583 and of our
Class B common stock was four.

Use of Proceeds

The initial public offering, or IPO, of our Class A
common stock closed in October 1997, pursuant to a
registration statement on Form S-1 filed with the
Securities and Exchange Commission (File No. 333-32001)
that become effective on September 26, 1997. The net
proceeds we received from the offering totaled approximately
$226.8 million. As of December 31, 2001, proceeds from
the IPO remain available for future network build out and other
general corporate purposes. We have raised additional funding
from debt and additional equity offerings in 1999, 2000 and
2001. The proceeds from these more recent offerings were applied
first in funding the expansion of our network and other working
capital requirements.

Dividends

We have not declared a cash dividend on any of our common stock.
Covenants in our credit facility and the indentures pursuant to
which our senior notes have been issued restrict our ability to
pay cash dividends on our capital stock. Effective
December 1, 2001, we ceased making all cash dividend
payments on XO Parents preferred stock.

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##### Table of Contents






Item 6.     Selected Financial
Data

|                                                  |  |                                               |            |         |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           |  
|------------------------------------------------- |  | --------------------------------------------- | ---------- | ------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | - | --------- | -
|                                                  |  |                                              
|                                                  |  | Year Ended December 31,                      
|                                                  |  |                                              
|                                                  |  | 2001(a)(b)                                    |            | 2000(b) |  | 1999 |            | 1998 |  | 1997
|                                                  |  |                                               |            |         |  |      |            |      |  |     
|                                                  |  |                                              
|                                                  |  | (Dollars in thousands, except for share data)
|                                                 
|                                                 
|                                                 
|                                                 
|Statement of Operations Data:                     |  |                                               |            |         |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           |  
|                                                 
|                                                 
|                                                 
|                                                 
|Revenue                                           |  | $                                             | 1,258,567  |         |  | $    | 723,826    |      |  | $    | 274,324    |   |  | $ | 139,667    |   |  | $ | 57,579    |  
|                                                 
|                                                 
|                                                 
|                                                 
|Loss from operations (c)                          |  |                                               | (1,949,891 | )       |  |      | (1,011,652 | )    |  |      | (366,530   | ) |  |   | (206,184   | ) |  |   | (102,621  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss (d)                                      |  |                                               | (2,086,125 | )       |  |      | (1,101,299 | )    |  |      | (558,692   | ) |  |   | (278,340   | ) |  |   | (129,004  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss applicable to common shares (e)          |  |                                               | (1,838,917 | )       |  |      | (1,247,655 | )    |  |      | (627,881   | ) |  |   | (337,113   | ) |  |   | (168,324  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss per common share, basic and diluted (f)  |  |                                               | (4.55      | )       |  |      | (3.87      | )    |  |      | (2.51      | ) |  |   | (1.57      | ) |  |   | (0.98     | )
|                                                 
|                                                 
|                                                 
|                                                 
|Statement of Cash Flow Data:                      |  |                                               |            |         |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           |  
|                                                 
|                                                 
|                                                 
|                                                 
|Net cash used in operating activities             |  | $                                             | (560,877   | )       |  | $    | (559,414   | )    |  | $    | (349,192   | ) |  | $ | (174,484   | ) |  | $ | (97,320   | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net cash used in investing activities             |  |                                               | (708,598   | )       |  |      | (1,464,495 | )    |  |      | (1,050,344 | ) |  |   | (1,276,747 | ) |  |   | (470,195  | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net cash provided by financing activities         |  |                                               | 1,019,647  |         |  |      | 1,648,663  |      |  |      | 1,948,503  |   |  |   | 1,381,653  |   |  |   | 879,782   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Other Data:                                       |  |                                               |            |         |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           |  
|                                                 
|                                                 
|                                                 
|                                                 
|EBITDA, as adjusted (g)                           |  | $                                             | (240,845   | )       |  | $    | (309,444   | )    |  | $    | (214,248   | ) |  | $ | (140,937   | ) |  | $ | (72,184   | )
|                                                 
|                                                 
|                                                 
|                                                 
|Balance Sheet Data:                               |  |                                               |            |         |  |      |            |      |  |      |            |   |  |   |            |   |  |   |           |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cash, cash equivalents and marketable securities  |  | $                                             | 755,167    |         |  | $    | 1,860,963  |      |  | $    | 1,881,764  |   |  | $ | 1,478,062  |   |  | $ | 742,357   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Property and equipment, net                       |  |                                               | 3,742,577  |         |  |      | 2,794,105  |      |  |      | 1,180,021  |   |  |   | 594,408    |   |  |   | 253,653   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Investment in fixed wireless licenses, net        |  |                                               | 947,545    |         |  |      | 997,333    |      |  |      | 926,389    |   |  |   | 67,352     |   |  |   |          |  
|                                                 
|                                                 
|                                                 
|                                                 
|Total assets (h)                                  |  |                                               | 7,930,465  |         |  |      | 9,085,375  |      |  |      | 4,597,108  |   |  |   | 2,483,106  |   |  |   | 1,219,978 |  
|                                                 
|                                                 
|                                                 
|                                                 
|Total long-term debt (a)                          |  |                                               | 5,109,503  |         |  |      | 4,396,596  |      |  |      | 3,733,342  |   |  |   | 2,013,192  |   |  |   | 750,000   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Redeemable preferred stock, net of issuance costs |  |                                               | 1,781,990  |         |  |      | 2,097,016  |      |  |      | 612,352    |   |  |   | 556,168    |   |  |   | 313,319   |  
|                                                 
|                                                 
|                                                 
|                                                 
|Total shareholders equity (deficit)              |  |                                               | 297,416    |         |  |      | 1,838,401  |      |  |      | (13,122    | ) |  |   | (246,463   | ) |  |   | 71,285    |  




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | We have initiated a proposed recapitalization,
	which we believe will materially change our future financial
	condition if completed as currently contemplated. In conjunction
	with these efforts, our long-term debt was in default as of
	December 31, 2001 and therefore, has been reclassified as a
	current liability in the accompanying consolidated balance
	sheet. See further discussion in Managements Discussion
	and Analysis.                                                                                                                                
|   
|(b) | The selected financial data in 2001 and 2000
	includes the accounts and activities of Concentric Network
	Corporation from the merger date of June 16, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(c) | In 2001, loss from operations includes
	restructuring charges totaling $509.2 million associated
	with plans to restructure certain aspects of our business
	operations. In 2000, loss from operations includes a
	$36.2 million charge in connection with the June 2000
	acquisition of Concentric resulting from the allocation of the
	purchase price to in-process research and development. Loss from
	operations in 1999 includes restructuring charges totaling
	$30.9 million associated with relocating our Bellevue,
	Washington headquarters to Northern Virginia.
|   
|(d) | In 2001, net loss includes an extraordinary gain
	of $345.0 million resulting from the repurchase of certain
	of our senior notes and a write-down of $89.0 million for
	an other than temporary decline in the value of certain
	investments. In 2000, net loss includes a $57.7 million
	write-down for an other than temporary decline in the value of
	certain investments and a $225.1 million gain, net of other
	costs associated therewith, from the sale of an equity
	investment.                                                                                  
|   
|(e) | In 2001, net loss applicable to common shares
	includes a gain of $376.9 million resulting from the
	repurchase of certain of our preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                           



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(f) | The net loss per share data above has been
	adjusted for the stock splits effected in 2000 and in prior
	periods.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) | EBITDA is not a generally accepted accounting
	principle measure but rather a measure employed by management to
	view operating results adjusted for major non-cash items.
	EBITDA, as defined by XO, represents operating loss adjusted for
	stock-based compensation, depreciation and amortization,
	restructuring charges, and in-process research and development.                                                                                         
|   
|(h) | In the first quarter of 2002, we expect to write
	off all, or substantially all, of our goodwill, the net carrying
	value of which was $1,878.3 million at December 31,
	2001, as part of the implementation of Statement of Financial
	Accounting Standard No. 142 Goodwill and Other
	Intangible Assets. See further discussion in New
	Accounting Pronouncements in Managements Discussion and
	Analysis of Financial Condition and Results of Operations.

40



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

Forward-looking and Cautionary Statements

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

Proposed Recapitalization

The telecommunications business in which we are engaged has
required substantial amounts of capital to fund the development
of our network and other capital expenditures, operating
expenses and debt service. Since inception, we have raised
billions of dollars in capital. As of December 31, 2001,
our long-term debt totaled over $5.1 billion and the
aggregate liquidation preference on our outstanding preferred
stock totaled approximately $1.7 billion. We currently
estimate that we need a minimum of between $500 million and
$600 million in additional funding to bring us to the point
where we expect to generate cash flows from operations that are
sufficient to meet our operating expenses, capital expenditure
requirements and debt service obligations. This remains true
despite our implementation during 2001 of measures designed to
conserve cash and reduce operating expenses and capital
expenditures.

Since early 2001, we have attempted to identify potential
sources of capital while the capital markets became increasingly
reluctant to finance telecommunications companies generally and
emerging telecommunications companies, such as us, in
particular. During 2001, conditions in the capital markets for
telecommunications companies continued to deteriorate until they
closed entirely to emerging telecommunications companies like
us. After our discussion with numerous prospective investors
failed to result in any significant financing proposals, in
October 2001, we retained Houlihan Lokey Howard & Zukin
Capital as our outside financial advisor to assist us in
exploring a variety of deleveraging alternatives, including
stand-alone recapitalizations and third-party investment
scenarios, both in and out of bankruptcy.

On January 15, 2002, XO Communications, the holding company
that owns and operates our more than 60 operating subsidiaries
and which we refer to as XO Parent, entered into a definitive
Stock Purchase Agreement with two investment partnerships
sponsored by Forstmann Little & Co., Forstmann
Little & Co. Equity Partnership-VII, L.P. and Forstmann
Little & Co. Subordinated Debt and Equity Management
Buyout Partnership-VIII, L.P., which we refer to together as the
Forstmann Little Investors, and Télefonos de México
S.A. de C.V., which we refer to as Telmex. We refer to the
Forstmann Little Investors and Telmex collectively as the
Investors. The Stock Purchase Agreement provides for an
$800 million investment in XO Parent in exchange for an 80%
equity interest in recapitalized XO Parent. Completion of this
investment is conditioned on, among other things, the resolution
of certain pending litigation, the absence of a material adverse
change in our business, receipt of regulatory approvals and a
reduction in our total outstanding indebtedness to no more than
$1.0 billion of borrowings in addition to certain other
secured indebtedness and capital lease obligations. If the
balance sheet recapitalization is implemented through a
bankruptcy proceeding, its completion will require approval of
the bankruptcy court and satisfaction of other conditions under
bankruptcy law. The Stock Purchase Agreement further provides
that 2% of recapitalized XO Parents equity would be
allocated to the Companys senior management team and 18%
of recapitalized XO Parents equity would be allocated to
other persons. The agreement provides that up to
$200 million of the investment could be used in connection
with the recapitalization. A copy of the Stock Purchase
Agreement is filed as exhibit 2.1 to this annual report.

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While the terms of the Stock Purchase Agreement were being
negotiated, we and the Investors engaged in further negotiations
with an informal steering committee of the lenders under our
senior secured credit facility concerning amendments to the
facility that would facilitate the proposed investment. As a
result of these negotiations, we reached a preliminary
understanding with this informal steering committee of lenders
concerning the terms on which they would agree to support the
balance sheet recapitalization contemplated by the Stock
Purchase Agreement and amend the existing credit facility. These
proposed amendments would leave the entire $1.0 billion
principal amount of the credit facility outstanding, but would
extend the maturity dates and amortization schedules for loans
under the facility for three years. The proposed amendments
would also modify other terms of the facility, including certain
financial and other covenants, in ways that generally provide us
with increased financial flexibility.

On March 22, 2002, we received a preliminary term sheet
describing an alternative investment and recapitalization
proposal sponsored by certain holders of XO Parents senior
notes. We and our financial and legal advisors are reviewing and
analyzing the terms of this proposal and are in discussions with
the sponsors of the proposal and representatives of the lenders
under our senior secured credit facility regarding its terms. In
this analysis, we also continue to evaluate whether the
interests of the Company and its stakeholders are better served
by proceeding with the transactions contemplated by the Stock
Purchase Agreement.

We anticipate that, in order to complete any proposed investment
and recapitalization it will be necessary for XO Parent to file
a voluntary petition for relief under chapter 11 of
title 11 of the Bankruptcy Code and that the investment and
recapitalization will be implemented through the confirmation
and consummation of a plan of reorganization approved by the
bankruptcy court in the bankruptcy proceedings. In such a case,
we currently anticipate that the plan of reorganization would
provide that holders of claims and interests with respect to the
equity securities of, or rights to acquire equity securities of,
XO Parent would not be entitled to any significant recovery and
that those claims and interests would be cancelled for no
significant consideration. Accordingly, and as indicated in our
previous disclosures, we anticipate that all, or substantially
all, of the value of all investments in common stock of XO
Parent will be lost.

If our proposed recapitalization is completed and implemented
through a chapter 11 bankruptcy proceeding, we will be
subject to the provisions of Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code. Under this guidance, we may qualify
for and implement Fresh Start reporting upon
emergence from bankruptcy, which would establish a new basis of
accounting for a reorganized company. Under Fresh Start
reporting, the value of the reorganized company will be
determined based on the amount a willing buyer would pay for our
assets upon confirmation of the plan of reorganization by the
bankruptcy court. This value would be allocated, based on
estimated fair market values, to specific tangible and
identifiable intangible assets. Liabilities existing at the
effective date of the plan of reorganization, other than
deferred taxes, would be stated at the present value of amounts
to be paid based on current interest rates. We expect an
implementation of Fresh Start reporting would result in a
substantial reduction in the carrying value of long-lived
assets, including property and equipment, fixed wireless
licenses, and other intangible assets, the aggregate carrying
value of which was $4,841.9 million at December 31,
2001, and other noncurrent assets, the carrying value of which
was $136.6 million at December 31, 2001. Our proposed
recapitalization would also substantially reduce our capital and
net operating loss carryforwards, which totaled approximately
$3.2 billion at December 31, 2001. As discussed in
New Accounting Pronouncements below, we expect that
all, or substantially all, of our goodwill will be written off
in the first quarter of 2002 when we implement the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

We believe that consummation of the investment and transactions
contemplated by our proposed recapitalization would improve our
ability to successfully execute our business plans.
Nevertheless, we are also taking steps to determine what other
actions might be taken to improve operations and cash flows. We
believe that demand for communication services will continue to
increase, and that a recapitalized XO would eventually achieve
profitability and generate sufficient cash from operations to
fund capital expenditures and debt service. As volume increases,
we expect that our strategy of owning or controlling

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Results of Operations

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

Operating
Data

The table below provides a summary of the key operating metrics
used by management to assess our operational performance.

|                                                           |  |                    |           |          |  |          |         |      |  |      |         |  |  |  |      |    |  |  |       |  
|---------------------------------------------------------- |  | ------------------ | --------- | -------- |  | -------- | ------- | ---- |  | ---- | ------- |  |  |  | ---- | -- |  |  | ----- | -
|                                                           |  |                    |           |          |  |         
|                                                           |  | As of December 31, |           |          |  |         
|                                                           |  |                    |           | 2001 vs. |  | 2000 vs.
|                                                           |  | 2001               |           | 2000     |  | 1999     |         | 2000 |  | 1999
|                                                           |  |                    |           |          |  |          |         |      |  |     
|Operating data (a):                                        |  |                    |           |          |  |          |         |      |  |      |         |  |  |  |      |    |  |  |       |  
|                                                          
|                                                          
|                                                          
|                                                          
|Route miles (b)                                            |  |                    | 22,398    |          |  |          | 13,493  |      |  |      | 4,285   |  |  |  | 66.0 | %  |  |  | 214.9 | %
|                                                          
|                                                          
|                                                          
|                                                          
|Fiber miles (c)                                            |  |                    | 1,141,084 |          |  |          | 748,604 |      |  |      | 378,200 |  |  |  | 52.4 | %  |  |  | 97.9  | %
|                                                          
|                                                          
|                                                          
|                                                          
|On-net buildings connected (d)                             |  |                    | 2,379     |          |  |          | 1,947   |      |  |      | 1,320   |  |  |  | 22.2 | %  |  |  | 47.5  | %
|                                                          
|                                                          
|                                                          
|                                                          
|Voice grade equivalents (in thousands) (e)                 |  |                    | 21,155    |          |  |          | 11,211  |      |  |      | 2,437   |  |  |  | 88.7 | %  |  |  | 360.0 | %
|                                                          
|                                                          
|                                                          
|                                                          
|Customers (f)                                              |  |                    | 100,049   |          |  |          | 87,755  |      |  |      | 46,947  |  |  |  | 14.0 | %  |  |  | 86.9  | %
|                                                          
|                                                          
|                                                          
|                                                          
|Average monthly revenue per customer (fourth
	quarter) (g) |  | $                  | 1,066     |          |  | $        | 916     |      |  | $    | 655     |  |  |  | 16.4 | %  |  |  | 39.8  | %
|                                                          
|                                                          
|                                                          
|                                                          
|Employees                                                  |  |                    | 6,700     |          |  |          | 7,400   |      |  |      | 3,500   |  |  |  | (9.5 | %) |  |  | 111.4 | %



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | We define certain business metrics used above as follows:                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(a) | Operating data  Except as noted below, the operating
	data for all periods presented include the statistics of the Las
	Vegas network for which we obtained control in June 2001 and in
	which we have a 90% equity interest as of December 31, 2001.                                                                                                                                                                                                                   
|   
|(b) | Route miles  The number of operational miles of the
	telecommunications path in which XO-owned or controlled fiber
	optic cables are installed. These include metro and inter-city
	miles and exclude wavelength capacity. The 2001 figure does not
	include any of the European networks that we had purchased from
	Level 3, which agreement was cancelled in April 2001 as
	discussed in Business  2001 Transactions and
	Developments.                           
|   
|(c) | Fiber miles  The number of route miles, per
	(b) above, multiplied by our estimate of the number of
	fibers along that path.                                                                                                                                                                                                                                                                                                                                            
|   
|(d) | On-net buildings connected  Buildings connected to
	our networks either by XO-owned or controlled cable or LMDS
	antenna.                                                                                                                                                                                                                                                                                                                                               
|   
|(e) | Voice grade equivalents  Voice grade equivalents, or
	VGEs, is a digital broadband equivalent of 64 kilobits per
	second, known as DS-0 level, the standard capacity of a voice
	grade line, and measures the network utilization of both our
	voice and data services.                                                                                                                                                                                                 
|   
|(f) | Customers  The number of revenue-generating invoices
	as of the current period. This statistic excludes Europe as well
	as consumer dial up and shared hosting accounts. Periods prior
	to 2001 exclude customers serviced over our network in the Las
	Vegas market.                                                                                                                                                                                                   
|   
|(g) | Average monthly revenue per customer  Represents
	average monthly revenue for the quarter divided by the average
	monthly customers for the quarter. These figures relate to the
	fourth quarter of each period presented. This calculation
	excludes both the associated revenue and customer counts for
	Europe, as well as consumer dial-up and shared hosting accounts.
	Periods prior to 2001 exclude customers serviced over our
	network in the Las Vegas market.

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Comparison of Financial Results

Year
Ended December 31, 2001 Compared to Year Ended
December 31, 2000

Revenue

Total revenue in 2001 increased to $1,258.6 million from
$723.8 million in 2000. The increase was primarily due to
the increase in the number of customers and growth in network
traffic and average monthly revenue per customer. The growth in
our customer base was largely due to our penetration of existing
markets, expansion into new markets in 2001 and 2000 and our
June 2000 Concentric acquisition. The growth in network traffic
and average monthly revenue per customer was primarily due to
the expansion of our service offerings and our emphasis on
selling to larger business customers. As we continue to balance
revenue growth with improving profitability, we believe that our
rate of revenue growth in the future may be lower than our
historical trends due to the impact of the weakened economy and
the perceived uncertainties in the market regarding our proposed
recapitalization.

Revenue was earned from providing the following services
(dollars in thousands):

|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |      |      |  
|------------------------- | ------------- | ----------------------- | ------- | --------- |  | ---- | ---- | --------- | - | -------- | ------- | ------- |  |  | ---- | ----- | - |  | ---- | ---- | -
|                          |               |                        
|                          |               | Year Ended December 31,
|                          |               |                        
|                          |               |                         |         | % of 2001 |  |      |      | % of 2000 |   |         
|                          |               | 2001                    |         | Revenue   |  | 2000 |      | Revenue   |   | % Change
|                          |               |                         |         |           |  |      |      |           |   |         
|Voice services            |               | $                       | 606,848 |           |  |      | 48.2 | %         |   | $        | 386,796 |         |  |  | 53.4 | %     |   |  | 56.9 | %   
|                         
|                         
|                         
|                         
|Data services             |               |                         | 596,664 |           |  |      | 47.5 | %         |   |          | 331,892 |         |  |  | 45.9 | %     |   |  | 79.8 | %   
|                         
|                         
|                         
|                         
|Integrated voice and data |               |                         | 52,018  |           |  |      | 4.1  | %         |   |          | 2,693   |         |  |  | 0.4  | %     |   |  | NM   |     
|                         
|                         
|                         
|                         
|Other services            |               |                         | 3,037   |           |  |      | 0.2  | %         |   |          | 2,445   |         |  |  | 0.3  | %     |   |  | 24.2 | %   
|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |      |     
|                          | Total revenue |                         | $       | 1,258,567 |  |      |      | 100.0     | % |          | $       | 723,826 |  |  |      | 100.0 | % |  |      | 73.9 | %
|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |      |     

| | 
| | 
| | 

| |   |                    
| | - | -------------------
| | * | NM  Not Meaningful

Voice services revenue includes revenue from bundled local and
long distance voice services, prepaid calling card processing,
and other voice communications based services, including shared
tenant services, interactive voice response services and
stand-alone long distance services. Voice services revenue in
2001 increased to $606.8 million from $386.8 million
in 2000. The increase was primarily due to the growth in the
number of our voice services customers and our targeting of
larger business customers. We expect voice services revenue to
continue to increase in absolute dollars in future periods, but
at a slower rate, and to decline as a percentage of total
revenue primarily due to projected growth in data and integrated
voice and data services.

Data services revenue includes revenue from Internet access,
network access and applications hosting services. Data services
revenue in 2001 increased to $596.7 million from
$331.9 million in 2000. A primary contributor to this
growth was our migration from voice-centric service offerings to
a more balanced portfolio of voice and data services,
facilitated in large part by our June 2000 acquisition of
Concentric and the integration of its data products with our
pre-existing services and by our development of new and enhanced
data services. Data services revenue increased slightly as a
percentage of total revenue for 2001 compared to 2000 due to a
full year impact of the integration of data products and the new
and enhanced data services we have developed. However, the
majority of the impact realized from fully integrating these
data products was partially offset by new customers choosing our
integrated voice and data services and customer bankruptcies. We
expect data services revenue to continue to grow in absolute
dollars, but at a slower rate, and to remain relatively stable
as a percentage of total revenue as we continue to target larger
business customers and to enhance our available data service
offerings.

Integrated voice and data services revenue is generated largely
from our XOptions product, a flat-rate bundled package offering
a combination of voice and data services. Integrated voice and
data services revenue in 2001 increased to $52.0 million
from $2.7 million in 2000. The increase is primarily
attributable to the addition of XOptions to our product
portfolio beginning in the fourth quarter of 2000. We anticipate
that revenue from integrated voice and data services will
continue to increase in future periods, both in

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Costs
and expenses

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

|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |           |  |  |       |   |  |  |       |      |  
|------------------- | ----------------------------------- | ----------------------- | - | --------- | --------- | ---- |  | --------- | - | -------- | - | ------- | --------- |  |  | ----- | - |  |  | ----- | ---- | -
|                    |                                     |                        
|                    |                                     | Year Ended December 31,
|                    |                                     |                        
|                    |                                     |                         |   | % of 2001 |           |      |  | % of 2000 |   |         
|                    |                                     | 2001                    |   | Revenue   |           | 2000 |  | Revenue   |   | % Change
|                    |                                     |                         |   |           |           |      |  |           |   |         
|Costs and expenses: |                                     |                         |   |           |           |      |  |           |   |          |   |         |           |  |  |       |   |  |  |      
|                   
|                   
|                   
|                   
|                    | Cost of service                     |                         | $ | 527,698   |           |      |  | 41.9      | % |          | $ | 302,666 |           |  |  | 41.8  | % |  |  | 74.3  | %   
|                   
|                   
|                   
|                   
|                    | Selling, operating and general      |                         |   | 971,714   |           |      |  | 77.2      | % |          |   | 730,604 |           |  |  | 100.9 | % |  |  | 33.0  | %   
|                   
|                   
|                   
|                   
|                    | Stock-based compensation            |                         |   | 37,173    |           |      |  | 3.0       | % |          |   | 48,328  |           |  |  | 6.7   | % |  |  | (23.1 | %)  
|                   
|                   
|                   
|                   
|                    | Depreciation and amortization       |                         |   | 1,162,671 |           |      |  | 92.4      | % |          |   | 617,714 |           |  |  | 85.3  | % |  |  | 88.2  | %   
|                   
|                   
|                   
|                   
|                    | Restructuring charge                |                         |   | 509,202   |           |      |  | 40.5      | % |          |   |        |           |  |  |      |   |  |  | NM    |     
|                   
|                   
|                   
|                   
|                    | In-process research and development |                         |   |          |           |      |  |          |   |          |   | 36,166  |           |  |  | 5.0   | % |  |  | NM    |     
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |           |  |  |       |   |  |  |      
|                    |                                     | Total                   |   | $         | 3,208,458 |      |  |           |   |          |   | $       | 1,735,478 |  |  |       |   |  |  |       | 84.9 | %
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |           |  |  |       |   |  |  |      

| | 
| | 
| | 

| |   |                    
| | - | -------------------
| | * | NM  Not Meaningful

Cost
of service

Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2001 was $527.7 million
compared to $302.7 million in 2000. Cost of service for
2001 was consistent as a percentage of revenue as compared to
2000, but increased in absolute dollars on a period-over-period
comparison due to the corresponding increase in revenue. We
expect cost of service as a percentage of revenue to decrease
slightly as we increase on-net traffic as a percentage of total
network traffic and leverage fixed costs through the addition of
incremental customers.

Selling,
operating and general

Selling, operating and general expense includes expenses related
to sales and marketing, internal network operations and
engineering, information systems, and general corporate office
functions. Selling, operating and general expense in 2001 was
$971.7 million compared to $730.6 million in 2000. The
majority of the period-over-period increase was due to the full
year impact of increased sales, network operations and customer
support headcount associated with the expansion of our business
and the June 2000 Concentric acquisition. Selling, operating and
general expense decreased as a percentage of revenue in 2001
compared to the same period in 2000 due to continued
efficiencies generated by the centralization of many functions.
In the short term, we expect to reduce sales, operating and
general expense both in terms of absolute dollars and as a
percentage of revenue as we continue to realize operating
efficiencies from our network infrastructure and centralized
corporate functions.

Stock-based
compensation

Stock-based compensation expense represents non-cash charges
recorded in connection with the grant of compensatory stock
options and restricted stock grants to employees whose
compensation is included in selling, operating and general
expense. Compensation expense is recognized over the vesting
periods of compensatory stock options and restricted stock based
on the excess of the fair value of the common stock

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Depreciation
and amortization

We have constructed and continue to construct integrated
end-to-end facilities-based networks in the United States,
consisting of metro fiber networks and fixed wireless
connections. Our net property and equipment, which also reflects
assets acquired from Concentric in June 2000, increased to
$3,742.6 million as of December 31, 2001 versus
$2,794.1 million as of December 31, 2000. As we
launched and expanded services in new and existing markets, more
assets were placed into service, which caused depreciation
expense to increase to $447.0 million in 2001 from
$223.8 million in 2000. Assuming we complete our proposed
recapitalization and implement Fresh Start reporting, we would
adjust the carrying value of our property and equipment to their
estimated fair values which, are significantly lower than
historical costs due to competitive market conditions and
technology advancements. Accordingly, depreciation expense may
decrease significantly.

Amortization expense includes amortization of goodwill, fixed
wireless licenses and other intangibles. Amortization increased
to $715.7 million in 2001 from $393.9 million in 2000.
Of the total amortization expense, 83.1% relates to goodwill
amortization. The significant increase is primarily due to the
amortization of additional goodwill and intangible assets
recorded as a result of the June 2000 Concentric acquisition,
which are being amortized over a period of up to five years. In
conjunction with the implementation of Statement of Financial
Accounting Standard No. 142, Goodwill and Other
Intangible Assets as discussed in New Accounting
Pronouncements below, we expect to write off all, or
substantially all, of the carrying value of our goodwill in the
first quarter of 2002. Additionally, assuming we complete our
proposed recapitalization and implement Fresh Start reporting,
we would significantly reduce the carrying value of our fixed
wireless licenses and other intangible assets to their estimated
fair values. Accordingly, amortization expense will decrease
significantly after implementing SFAS No. 142 and may
decrease further if we adopt Fresh Start reporting.

Restructuring
charges

During 2001, we recorded $509.2 million of estimated
restructuring charges primarily related to implementation of our
plan to restructure certain of our business operations. The
restructuring plan includes divesting certain assets and
businesses, and reducing our discretionary spending, capital
expenditures and workforce, based on our assessment of current
and future market conditions. The restructuring charges include
a $366.8 million write-down for the excess of carrying
value of assets to be sold or abandoned, including our European
business unit. The consolidation and exiting of domestic
facility leases accounted for $134.4 million of the
restructuring charges and was determined based on the future
minimum rent commitments for the buildings management intends to
exit less estimated sublease rental streams. We also reduced our
workforce by approximately 700 employees and recorded an
$8.0 million restructuring charge related to involuntary
termination severance. The employment of the majority of the
notified employees was terminated by December 31, 2001.
Total projected operational cash savings from executing this
restructuring plan are expected to be approximately
$50 million in 2002.

In-process
research and development

As a result of the Concentric merger in June 2000, we incurred a
$36.2 million one-time charge in the second quarter of 2000
resulting from an allocation of the purchase price to in-process
research and development. The allocation represents the
estimated fair value based on risk-adjusted future cash flows of
Concentrics incomplete projects.

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Interest
income

Interest income in 2001 decreased to $77.9 million from
$180.9 million in 2000. The decrease in interest income
corresponds to the decrease in our average cash and marketable
securities balances and a reduction in interest rates.

Interest
expense, net

Interest expense, net in 2001 increased to $465.4 million
from $434.1 million in 2000. The increase in interest
expense, net was primarily due to an increase in our average
outstanding indebtedness over the respective periods resulting
from our increased borrowings under our senior secured credit
facility during 2000 and 2001, the issuance of
$517.5 million of 5 3/4% convertible subordinated
notes in January 2001, and the assumption of $150.0 million
of debt in connection with our June 2000 acquisition of
Concentric offset in part by the impact of the repurchase of
certain senior notes discussed below, a reduction in interest
rates and increased capitalized interest on constructed assets.
Under our proposed recapitalization, our long-term debt would
decrease significantly, which would result in a substantial
reduction in our interest expense.

Other
income (loss)

Other income (loss) decreased from income of
$163.6 million in 2000 to a loss of $93.8 million in
2001. The 2001 loss relates primarily to an $89.0 million
write down for an other than temporary decline in the value of
certain available-for-sale investments. The other income in 2000
relates primarily to a $225.1 million gain on the sale of
an equity investment partly offset by a $57.7 million
write-down for a non-temporary decline in the value of certain
available-for-sale investments.

Extraordinary
gain on early extinguishments of debt, net

In the second half of 2001, we recorded an extraordinary gain
totaling $345.0 million related to our repurchase of
$557.1 million of senior notes at a substantial discount
from their respective face values.

Net
loss

Net loss in 2001 increased to $2,086.1 million from a net
loss of $1,101.3 million in 2000 due to the foregoing
factors.

Gain
on repurchases of preferred stock, net

In the second half of 2001, we recorded a net gain totaling
$376.9 million related to our repurchase of
$472.6 million in liquidation preference of our preferred
stock at a substantial discount from their respective carrying
amounts.

Preferred
stock dividends and accretion of preferred stock redemption
obligations, net

Preferred stock dividends and the accretion of the preferred
stock redemption decreased to $129.7 million in 2001 from
$146.4 million in 2000 due to the impact of the repurchase
of the preferred stock discussed above offset in part by the
increase in our average outstanding preferred stock balance
during the first half of 2001. Under our proposed
recapitalization, it is expected that all interests in our
preferred stock would be terminated, resulting in no additional
preferred stock dividends or preferred stock redemption
accretions.

Net
loss applicable to common shares

Net loss applicable to common shares in 2001 increased to
$1,838.9 million from $1,247.7 million in 2000 due to
the foregoing factors.

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

Revenue

Total revenue in 2000 increased to $723.8 million from
$274.3 million in 1999. The increase was primarily due to
the increase in the number of our customers and growth in
network traffic and average monthly revenue per customer. The
growth in our customer base was predominantly due to our June
2000 Concentric acquisition, as well as penetration into
existing markets and expansion into new markets. The growth in
network traffic and average monthly revenue per customer was
largely due to the expansion of our service offerings to include
the integration of data products facilitated by the acquisition
of Concentric.

Revenue was earned from providing the following services
(dollars in thousands):

|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |       |       |  
|------------------------- | ------------- | ----------------------- | ------- | --------- |  | ---- | ---- | --------- | - | -------- | ------- | ------- |  |  | ---- | ----- | - |  | ----- | ----- | -
|                          |               |                        
|                          |               | Year Ended December 31,
|                          |               |                        
|                          |               |                         |         | % of 2000 |  |      |      | % of 1999 |   |         
|                          |               | 2000                    |         | Revenue   |  | 1999 |      | Revenue   |   | % Change
|                          |               |                         |         |           |  |      |      |           |   |         
|Voice services            |               | $                       | 386,796 |           |  |      | 53.4 | %         |   | $        | 219,391 |         |  |  | 80.0 | %     |   |  | 76.3  | %    
|                         
|                         
|                         
|                         
|Data services             |               |                         | 331,892 |           |  |      | 45.9 | %         |   |          | 54,032  |         |  |  | 19.7 | %     |   |  | 514.3 | %    
|                         
|                         
|                         
|                         
|Integrated voice and data |               |                         | 2,693   |           |  |      | 0.4  | %         |   |          |        |         |  |  |     |       |   |  | NM    |      
|                         
|                         
|                         
|                         
|Other services            |               |                         | 2,445   |           |  |      | 0.3  | %         |   |          | 901     |         |  |  | 0.3  | %     |   |  | 171.4 | %    
|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |       |      
|                          | Total revenue |                         | $       | 723,826   |  |      |      | 100.0     | % |          | $       | 274,324 |  |  |      | 100.0 | % |  |       | 163.9 | %
|                          |               |                         |         |           |  |      |      |           |   |          |         |         |  |  |      |       |   |  |       |      

| | 
| | 
| | 

| |   |                    
| | - | -------------------
| | * | NM  Not Meaningful

Voice services revenue includes revenue from bundled local and
long distance voice services, prepaid calling card processing,
and other voice communications based services, including shared
tenant services, interactive voice response services and
stand-alone long distance services. Voice services revenue in
2000 increased to $386.8 million from $219.4 million
in 1999 due to penetration into new and existing markets. Voice
services revenue decreased as a percentage of total revenue as a
result of the Concentric acquisition and the integration of data
products with our pre-existing services.

Data services revenue includes revenue from Internet access,
network access and applications hosting services. Data services
revenue in 2000 increased to $331.9 million from
$54.0 million in 1999. A primary contributor to this growth
was our migration from a voice-centric to a more data-centric
business, facilitated in large part by our June 2000 acquisition
of Concentric and the integration of its data products with our
pre-existing services.

Integrated voice and data services revenue is generated largely
from our XOptions product, a flat-rate bundled package offering
a combination of voice and data services. As a result of
introducing bundled data and voice service packages to our
product portfolio in the second quarter of 2000, integrated
voice and data services revenue in 2000 was $2.7 million.

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Costs
and expenses

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

|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |         |  |  |       |   |  |  |       |       |  
|------------------- | ----------------------------------- | ----------------------- | - | --------- | --------- | ---- |  | --------- | - | -------- | - | ------- | ------- |  |  | ----- | - |  |  | ----- | ----- | -
|                    |                                     |                        
|                    |                                     | Year Ended December 31,
|                    |                                     |                        
|                    |                                     |                         |   | % of 2000 |           |      |  | % of 1999 |   |         
|                    |                                     | 2000                    |   | Revenue   |           | 1999 |  | Revenue   |   | % Change
|                    |                                     |                         |   |           |           |      |  |           |   |         
|Costs and expenses: |                                     |                         |   |           |           |      |  |           |   |          |   |         |         |  |  |       |   |  |  |      
|                   
|                   
|                   
|                   
|                    | Cost of service                     |                         | $ | 302,666   |           |      |  | 41.8      | % |          | $ | 133,083 |         |  |  | 48.5  | % |  |  | 127.4 | %    
|                   
|                   
|                   
|                   
|                    | Selling, operating and general      |                         |   | 730,604   |           |      |  | 100.9     | % |          |   | 355,489 |         |  |  | 129.6 | % |  |  | 105.5 | %    
|                   
|                   
|                   
|                   
|                    | Stock-based compensation            |                         |   | 48,328    |           |      |  | 6.7       | % |          |   | 12,872  |         |  |  | 4.7   | % |  |  | 275.5 | %    
|                   
|                   
|                   
|                   
|                    | Depreciation and amortization       |                         |   | 617,714   |           |      |  | 85.3      | % |          |   | 108,475 |         |  |  | 39.5  | % |  |  | 469.5 | %    
|                   
|                   
|                   
|                   
|                    | Restructuring charge                |                         |   |          |           |      |  |          |   |          |   | 30,935  |         |  |  | 11.3  | % |  |  | NM    |      
|                   
|                   
|                   
|                   
|                    | In-process research and development |                         |   | 36,166    |           |      |  | 5.0       | % |          |   |        |         |  |  |      |   |  |  | NM    |      
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |         |  |  |       |   |  |  |      
|                    |                                     | Total                   |   | $         | 1,735,478 |      |  |           |   |          |   | $       | 640,854 |  |  |       |   |  |  |       | 170.8 | %
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |         |         |  |  |       |   |  |  |      

| | 
| | 
| | 

| |   |                    
| | - | -------------------
| | * | NM  Not Meaningful

Cost
of service

Cost of service includes expenses directly associated with
providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting
customers to our networks via leased facilities, the costs of
leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport
services. Cost of service in 2000 was $302.7 million
compared to $133.1 million in 1999. The increase in cost of
service in 2000 as compared to 1999 is primarily due to
increased volumes in our switched local and long distance
communication services and rapid expansion of our data services.

Selling,
operating and general

Selling, operating and general expense includes expenses related
to sales and marketing, internal network operations and
engineering, information systems, and general corporate office
functions. Selling, operating and general expense in 2000 was
$730.6 million compared to $355.5 million in 1999. The
majority of the year over year increase was due to an increase
in sales, network operations and customer support headcount
associated with the expansion of our business and the June 2000
Concentric acquisition.

Stock-based
compensation

Stock-based compensation in 2000 increased to $48.3 million
from $12.9 million in 1999. The year over year increase
resulted from an increase in compensation expense arising from
compensatory stock option grants to new executive management as
well as the vesting of restricted stock granted to key employees
of Concentric in connection with the merger.

Depreciation
and amortization

Our net property and equipment, which also reflects assets
acquired from Concentric in June 2000, increased to
$2,794.1 million as of December 31, 2000 versus
$1,180.0 million as of December 31, 1999. As we
launched and expanded services in new and existing markets, more
assets were placed into service, which caused depreciation
expense to increase to $223.8 million in 2000 from
$93.1 million in 1999. Amortization expense includes
amortization of goodwill, licenses and other intangibles.
Amortization increased to $393.9 million in 2000 from
$15.4 million in 1999. Substantially all of the increase is
attributable to the amortization of goodwill and other
intangibles associated with the Concentric acquisition.

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Restructuring
charge

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

In-process
research and development

As a result of the Concentric merger in June 2000, we incurred a
$36.2 million charge resulting from an allocation of the
purchase price to in-process research and development. The
allocation represents the estimated fair value based on
risk-adjusted future cash flows of Concentrics incomplete
projects.

Interest
income

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

Interest
expense

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

Other
income (loss)

Other income in 2000 relates primarily to a $225.1 million
gain on the sale of an equity investment partly offset by a
$57.7 million write-down for a non-temporary decline in the
value of certain investments.

Net
loss

Net loss in 2000 increased to $1,101.3 million from a net
loss of $558.7 million in 1999 due to the foregoing factors.

Preferred
stock dividends and accretion of preferred stock redemption
obligation, net

Preferred stock dividends and the accretion of the preferred
stock redemption increased to $146.4 million in 2000 from
$69.2 million in 1999. The increase was primarily due to an
increase in our average outstanding preferred stock balance in
2000 as compared to 1999 resulting from the issuance of various
series of our redeemable preferred stock and preferred stock
assumed in connection with the Concentric acquisition.

Net
loss applicable to common shares

Net loss applicable to common shares in 2000 increased to
$1,247.7 million from $627.9 million in 1999 due to
the foregoing factors.

Other Operating Data

EBITDA is not a generally accepted accounting principle measure
but rather a measure employed by management to view operating
results adjusted for major non-cash items. EBITDA, as defined by
XO, represents operating loss adjusted for stock-based
compensation, depreciation and amortization, restructur-

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|       |  |                         |          |           |  |        |        |           |  |        |          |           |  |  |         |  |  |  |            |  |  |  |         | 
|------ |  | ----------------------- | -------- | --------- |  | ------ | ------ | --------- |  | ------ | -------- | --------- |  |  | ------- |  |  |  | ---------- |  |  |  | ------- | 
|       |  |                        
|       |  | Year Ended December 31,
|       |  |                        
|       |  |                         |          |           |  |       
|       |  | 2001                    |          | 2000      |  | 1999  
|       |  |                         |          |           |  |       
|       |  |                         |          | % of 2001 |  |        |        | % of 2000 |  |        |          | % of 1999
|       |  | Amount                  |          | Revenue   |  | Amount |        | Revenue   |  | Amount |          | Revenue  
|       |  |                         |          |           |  |        |        |           |  |        |          |          
|EBITDA |  | $                       | (240,845 | )         |  |        | (19.1% | )         |  | $      | (309,444 | )         |  |  | (42.8%) |  |  |  | $(214,248) |  |  |  | (78.1%) | 

EBITDA has improved year over year as a percentage of revenue,
and in absolute dollars in 2001, due to revenue growth and the
decrease in selling, operating and general expenses as a
percentage of revenue as discussed above. We expect to continue
to reduce our EBITDA loss and ultimately achieve EBITDA
profitability as we grow revenue and improve the efficiency of
our cost structure.

Liquidity and Capital Resources

Our goal is to provide our customers complete, integrated,
end-to-end voice and data network applications and services
primarily through networks that we own or control. Initially,
this strategy has increased our operating losses by requiring us
to incur significant costs and to make substantial capital
investments before we realize related revenue. Consequently, our
business is capital-intensive and, as such, has required and
will continue to require substantial capital investment to bring
our operations to profitability on a company-wide basis. To
date, we have primarily funded these requirements through
private and public equity and debt offerings and loan
facilities. We will continue to incur negative cash flows from
operating and investing activities, unless and until we are able
to establish an adequate customer base.

Recapitalization
Overview

In 2001, the capital markets became increasingly reluctant to
finance telecommunications companies generally and emerging
telecommunication companies, such as XO, in particular. In light
of these market conditions and our funding needs, during 2001,
we took dramatic steps to conserve cash on hand by reducing our
operating expenses, debt service and preferred security dividend
payments, and capital expenditures as follows:



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Restructuring of Certain Operations.We
	implemented restructuring plans to terminate or sublease certain
	excess or underutilized administrative and warehouse facility
	leases, to abandon certain capital initiatives, to reduce our
	workforce by approximately 700 employees, and to dispose of our
	European operations.
|
| |  | Repurchase of Senior Notes and Preferred Shares.We repurchased outstanding obligations at substantial
	discounts, including $557.1 million of our senior notes for
	$201.9 million and $472.6 million of our preferred
	stock for $88.4 million.                                                                             
|
| |  | Reduced Capital Expansion Plan.We amended our
	agreements with Level 3 to acquire network capacity to allow us
	to suspend our European expansion, postpone the lighting of much
	of our domestic inter-city network, and reduce expansion in
	certain metro networks.                                                       

Although we implemented these measures, we currently estimate
that the Company needs a minimum of between $500 million
and $600 million in additional funding, assuming a successful
recapitalization of our balance sheet, to bring us to the point
where we expect to generate cash flows from operations
sufficient to meet our operating expenses, capital expenditure
requirements and debt service obligations. During 2001,
conditions in the capital markets for telecommunication
companies continued to deteriorate until they closed entirely to
emerging telecommunications companies like us. After discussions
with numerous prospective investors failed to result in any
significant financing proposals, in October 2001, we retained

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The
Forstmann Little/ Telmex Stock Purchase Agreement

On November 28, 2001, XO Parent entered into a non-binding
term sheet with the Forstmann Little Investors and Telmex, with
respect to an $800 million investment in XO Parent, which
would be subject to the satisfaction of certain conditions
including a substantial recapitalization of XO Parents
balance sheet. A copy of this term sheet was filed with the
Securities and Exchange Commission as exhibit 10.1 to the
Current Report on Form 8-K of XO Parent on
November 29, 2001.

Following the execution of the term sheet with the Investors and
in anticipation of the related recapitalization transaction, we
ceased making all cash interest and dividend payments on XO
Parents unsecured debt obligations and preferred stock
that were due on or after December 1, 2001. In order to
provide us with an opportunity to reach agreement with our
creditors regarding the terms of an acceptable balance sheet
recapitalization as contemplated by that term sheet, on
December 14, 2001, XO Parent and all subsidiary guarantors
under the senior secured credit facility entered into a
Forbearance Agreement with the lenders under that facility.
Under the Forbearance Agreement, the lenders agreed, subject to
certain conditions, not to exercise their remedies under the
credit facility prior to April 15, 2002 with respect to
cross default events related to our failure to make interest
payments on our unsecured notes or with respect to a breach of
the covenant in the credit facility relating to our fourth
quarter revenues. A copy of the Forbearance Agreement is filed
as exhibit 10.5.2 to this annual report.

On January 15, 2002, XO Parent entered into a definitive
Stock Purchase Agreement with the Investors. The Stock Purchase
Agreement provides for an $800 million investment in XO
Parent as contemplated by the term sheet in exchange for an 80%
equity interest in recapitalized XO Parent. Completion of this
investment is conditioned on, among other things, the resolution
of certain pending litigation, the absence of a material adverse
change in our business, receipt of regulatory approvals and a
reduction in our total outstanding indebtedness to no more than
$1.0 billion of borrowings in addition to certain other
secured indebtedness and capital lease obligations. If the
balance sheet recapitalization is implemented through a
bankruptcy proceeding, its completion will require approval of
the bankruptcy court and satisfaction of other conditions under
bankruptcy law. The Stock Purchase Agreement further provides
that 2% of reorganized XO Parents equity would be
allocated to the its senior management team and 18% of
reorganized XO Parents equity would be allocated to other
persons. The agreement provides that up to $200 million of
the investment could be used in connection with the
recapitalization. A copy of the Stock Purchase Agreement is
filed as exhibit 2.1 to this annual report.

While the terms of the Stock Purchase Agreement were being
negotiated, we and the Investors engaged in further negotiations
with an informal steering committee of the lenders under our
senior secured credit facility concerning amendments to the
facility that would facilitate the proposed investment. As a
result of these negotiations, we reached a preliminary
understanding with this informal steering committee of lenders
concerning the terms on which they would agree to support the
balance sheet recapitalization contemplated by the Stock
Purchase Agreement and amend the existing credit facility. These
proposed amendments would leave the entire $1.0 billion
principal amount of the credit facility outstanding, but would
extend the maturity dates and amortization schedules for loans
under the facility for three years. The proposed amendments
would also modify other terms of the facility, including certain
financial and other covenants, in ways that generally provide us
with increased financial flexibility.

Concurrent with the discussions and negotiations with the
informal steering committee of lenders under our credit
facility, certain holders of our senior notes formed an informal
committee of senior noteholders. XO Parent and the Investors
held discussions with the senior noteholders committee and their
financial and legal advisors in an effort to develop the terms
of a recapitalization proposal that would be acceptable to the
Investors and members of this committee. Although during the
course of these

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Concurrent with these discussions, certain holders of our
convertible subordinated notes formed their own informal
committee of subordinated noteholders, to discuss the terms of
the proposed recapitalization with us. Although XO and its
representatives have met with representatives of this committee
and its legal counsel and financial advisors, no agreement has
been reached with the committee regarding such terms.

The
Noteholder Proposals

On March 8, 2002, in connection with the rejection by the
senior noteholders committee of the Investors proposals,
we received a preliminary investment and recapitalization
proposal from certain holders of our senior unsecured notes,
intended by them to replace the investment and recapitalization
transactions contemplated by the Stock Purchase Agreement. After
careful review and analysis of this proposal, we concluded that
it would not represent a feasible alternative for the successful
recapitalization of XO. Based on this assessment, we notified
the senior noteholders committee that we had rejected this
proposal, but we agreed to continue discussion regarding
possible alternative investment possibilities.

On March 22, 2002, we received a second preliminary term
sheet describing an alternative investment and recapitalization
proposal sponsored by certain other holders of XO Parents
senior notes. We and our financial and legal advisors are
reviewing and analyzing the terms of this proposal and are in
discussions with the sponsors of the proposal and
representatives of the lenders under our senior secured credit
facility regarding its terms. In this analysis, we also continue
to evaluate whether the interests of the Company and its
stakeholders are better served by proceeding with the
transactions contemplated by the Stock Purchase Agreement.

Proposed
Recapitalization

Because the discussions continue with the Investors, the
sponsors of the second senior noteholders proposal and the
informal steering committee of lenders under the credit
facility, the definitive plans for raising the additional
capital we need and for completing the related balance sheet
recapitalization have not been determined. Nevertheless, based
on the transactions contemplated by the Stock Purchase Agreement
and the senior noteholders proposal, we currently
anticipate that a feasible investment and recapitalization of XO
will entail some or all of the following:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an investment in the Company in exchange for a significant
	equity interest in the recapitalized Company;                                                                                                    
|
| |  | reinstatement of the entire $1.0 billion principal amount
	of our senior secured credit facility with modifications that
	extend maturity dates and amortization schedules for the loans
	under the facility;
|
| |  | holders of certain debt securities of XO Parent receiving
	consideration in the form of cash and/or equity interests in the
	recapitalized Company in exchange for their current interests;
	and             
|
| |  | other secured claims and general unsecured claims of XO being
	paid in full in accordance with their respective terms.                                                                                       

We anticipate that in order to complete any proposed investment
and recapitalization it will be necessary for XO Parent to file
a voluntary petition for relief under chapter 11 of title 11 of
the Bankruptcy Code and that the investment and recapitalization
will be implemented through the confirmation and consummation of
a plan of reorganization approved by the bankruptcy court in the
bankruptcy proceedings. In such a case, we currently anticipate
that the plan of reorganization would provide that holders of
claims and interests with respect to the equity securities of,
or rights to acquire equity securities of, XO Parent would be
entitled to little or no recovery and that those claims and
interests would be cancelled for little or no consideration.
Accordingly, and as indicated in our previous

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We conduct our operations through direct and indirect
subsidiaries of XO Parent. While we implement the proposed
recapitalization, we expect our subsidiaries to continue to
operate in the ordinary course of business. Our plans with
respect to the proposed recapitalization contemplate that our
trade suppliers, unsecured trade creditors, employees and
customers will not be adversely affected while we are involved
in the recapitalization process, even if that process involves
chapter 11 bankruptcy proceedings. During this
recapitalization process, we have attempted to maintain normal
and regular trade terms with our suppliers and customers. There
can be no assurance that our suppliers will continue to provide
normal trade credit or credit on terms acceptable to us, if at
all, or that customers will continue to do business or enter
into new business with us.

We anticipate that completion of our proposed recapitalization
will require the support of many of our creditors, as well as
satisfaction or waiver of the conditions to complete the
transactions contemplated by the relevant investment agreements.
If the recapitalization is completed through a chapter 11
bankruptcy proceeding, any proposed plan of reorganization would
be subject to confirmation by the bankruptcy court after it has
been voted on by certain creditors whose interest would be
impaired by the plan, including the lenders under the our credit
facility and holders of our senior notes, and satisfaction or
waiver of certain conditions in addition to the conditions to
complete the transactions contemplated by the relevant
investment agreements. Satisfaction of certain of the conditions
under the Stock Purchase Agreement are either out of our control
or must be satisfied in the Investors sole discretion.

Liquidity
Assessment

As discussed above, we currently estimate that XO needs a
minimum of between $500 million and $600 million in
additional funding, assuming a successful recapitalization of
our balance sheet, to bring us the point where we expect to
generate cash flows from operations sufficient to meet our
operating expenses, capital expenditures, and debt service
obligations. Accordingly, if we complete our proposed
recapitalization, we expect that our business will use the cash
investment expected to be received in the proposed
recapitalization to fund operations and capital expenditures
relating to our existing and planned network development. The
majority of our cash funding required for network development
will be used to purchase and install fiber optic cable,
switches, routers, servers or other customer data-related
equipment and related electronics. In addition, we expect our
network development will require funds to develop our
comprehensive information technology platform to support and
enhance the provisioning, billing and installation of new and
existing customers and to purchase and install equipment to
connect buildings to our network. We will also be required to
fund our operating losses and working capital and possible
expenditures associated with market expansions and potential
acquisitions of businesses or assets. In addition, we will
require funds to pay our current future minimum lease
obligations under noncancelable operating and capital leases and
future minimum commitments under long-term contractual
obligations associated with maintenance and service agreements.
Such future minimum commitments are as follows (dollars in
thousands):

|                                           |  |                 |         |             |  |                 |        |               |  |   |         |  |  |   |           | 
|------------------------------------------ |  | --------------- | ------- | ----------- |  | --------------- | ------ | ------------- |  | - | ------- |  |  | - | --------- | 
|                                           |  |                 |         | Capital     |  | Other long-term |        | Total minimum
|                                           |  | Operating lease |         | lease       |  | contractual     |        | long-term    
|Year Ending December 31,                   |  | obligations     |         | obligations |  | obligations     |        | obligations  
|                                           |  |                 |         |             |  |                 |        |              
|2002                                       |  | $               | 75,753  |             |  | $               | 20,752 |               |  | $ | 81,691  |  |  | $ | 178,196   | 
|                                          
|                                          
|                                          
|                                          
|2003                                       |  |                 | 75,297  |             |  |                 | 3,481  |               |  |   | 69,486  |  |  |   | 148,264   | 
|                                          
|                                          
|                                          
|                                          
|2004                                       |  |                 | 73,070  |             |  |                 | 2,809  |               |  |   | 59,429  |  |  |   | 135,308   | 
|                                          
|                                          
|                                          
|                                          
|2005                                       |  |                 | 70,997  |             |  |                 | 2,556  |               |  |   | 14,382  |  |  |   | 87,935    | 
|                                          
|                                          
|                                          
|                                          
|2006                                       |  |                 | 59,575  |             |  |                 | 2,416  |               |  |   | 14,340  |  |  |   | 76,331    | 
|                                          
|                                          
|                                          
|                                          
|Thereafter                                 |  |                 | 394,956 |             |  |                 | 2,010  |               |  |   | 189,803 |  |  |   | 586,769   | 
|                                           |  |                 |         |             |  |                 |        |               |  |   |         |  |  |   |           | 
|Total future minimum long-term obligations |  | $               | 749,648 |             |  | $               | 34,024 |               |  | $ | 429,131 |  |  | $ | 1,212,803 | 
|                                           |  |                 |         |             |  |                 |        |               |  |   |         |  |  |   |           | 

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If we complete the proposed recapitalization described above and
the transactions contemplated by the relevant investment
agreements, we anticipate that we would:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | emerge from bankruptcy with a $5.9 billion reduction of our
	existing debt and preferred stock obligations;                              
|
| |  | have an amended secured credit facility in place which extends
	the maturity and repayment terms of the underlying loans; and            
|
| |  | have sufficient cash to fund our business operations pending any
	unforeseen future events or further deterioration in the U.S.
	economy.

In conjunction with our plan to recapitalize our balance sheet,
we ceased making interest and dividend payments due under the
terms of XO Parents unsecured notes and preferred stock
effective December 1, 2001. Assuming that we do not pay
cash interest on XO Parents unsecured notes, and cash
dividends on our redeemable preferred stock, we estimate that
our cash and marketable securities on hand as of
December 31, 2001 totaling $755.2 million would be
sufficient to fund our operations through most, if not all, of
2002.

We believe that demand for communication services will continue
to increase and, assuming completion of our proposed
recapitalization, that recapitalized XO will eventually generate
sufficient cash from operations to fund our operating expenses,
capital expenditures and debt service. As volume increases, we
expect that our strategy of owning or controlling facilities,
rather than paying incumbents to use portions of their networks
will result in higher profit margins. No assurance can be given
that our creditors will support our proposed recapitalization,
or that, if the proposed recapitalization is implemented through
consummation of a plan of reorganization pursuant to a
bankruptcy proceeding, parties entitled to vote will vote in
favor of the proposed plan of reorganization or that the plan of
reorganization will be confirmed by the bankruptcy court, or
will not be subsequently modified. If the Investors terminate
the Stock Purchase Agreement, or our proposed recapitalization
is not completed, and if we are not able to develop and
implement a feasible alternative recapitalization transaction,
we may be forced to liquidate under applicable provisions of the
Bankruptcy Code. There can be no assurance of the level of
recovery to which our secured and unsecured creditors would
receive in such a liquidation.

Going
Concern

XOs consolidated financial statements have been prepared
assuming we will continue as a going concern. As shown in our
consolidated financial statements, we have defaulted on our debt
obligations and have incurred recurring operating losses and
negative cash flows from operating activities, which raises
substantial doubt about our ability to continue as a going
concern. Although XO Parent is a party to a definitive Stock
Purchase Agreement with the Forstmann Little Investors and
Telmex, there can be no assurance that we will be able to
successfully recapitalize our balance sheet, receive regulatory
approval and meet the other conditions to consummate the
investment contemplated by the Stock Purchase Agreement, or any
alternative recapitalization transaction, or that our liquidity
and capital resources will be sufficient to maintain our normal
operations. Due to our proposed recapitalization, there is no
assurance that the carrying amounts of assets will be realized
or that liabilities will be liquidated or settled for the
amounts recorded. It is expected that the implementation of our
proposed recapitalization will result in the settlement of
certain liabilities at amounts well below their current carrying
amount and that the application of Fresh Start reporting, if
applicable, upon XO Parents emergence from bankruptcy,
will result in the significant write down of the recorded values
of our long-lived and other assets. Our ability to continue as a
going concern is dependent upon a number of factors including,
but not limited to, completion of the proposed recapitalization
and an infusion of a significant amount of capital, customer and
employee retention, and our continued ability to provide high
quality services. Our consolidated financial statements do not
include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the
amounts and classification of liabilities that might result from
the outcome of this uncertainty.

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Critical
Accounting Policies

Below are our accounting policies which require significant
judgment in determining the underlying estimates and assumptions
that affect the reported financial condition and operating
results and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Management
periodically assesses the accuracy of these estimates and
assumptions. Actual results could differ from these estimates,
as they require assumptions that are inherently uncertain.

Long-lived
Assets

XOs long-lived assets include property and equipment,
fixed wireless licenses, goodwill and identifiable intangible
assets to be held and used.

Property and equipment is stated at historical cost net of
accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the
assets. The estimated useful lives of telecommunications
networks and acquired bandwidth is 5 to 20 years and 3 to
5 years for furniture fixtures, equipment and other. These
useful lives are determined based on historical usage with
consideration given to technological changes and trends in the
industry that could impact the network architecture and asset
utilization.

Investments in fixed wireless licenses consist of direct costs
to acquire fixed wireless licenses. The estimated useful life is
20 years, which represents the estimated license term with
renewal. As discussed in New Accounting
Pronouncements, we expect to continue to amortize these
fixed wireless licenses consistent with our current accounting
policies when we adopt SFAS No. 142 in 2002.

Goodwill and other intangibles consist primarily of goodwill
acquired in the Concentric merger. Such costs are amortized
using the straight-line method over the estimated useful lives
of the assets. Substantially all of our goodwill and other
intangibles are amortized over a period up to 5 years. As
discussed in New Accounting Pronouncements, we
expect to write off all, or substantially all, of our goodwill
in the first quarter of 2002 when we adopt SFAS No. 142. We
expect to continue to amortize other intangibles consistent with
our current accounting policies.

These long-lived assets are currently reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to Statement of
Financial Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. Pursuant to SFAS No. 121, impairment is
determined by comparing the carrying value of these long-lived
assets to managements best estimate of the future
undiscounted cash flows expected to result from the use of the
assets and their eventual disposition. We perform this analysis
at the entity level by grouping together all long-lived assets,
including goodwill, and comparing this amount to expected
undiscounted future cash flows, including expected future
capital expenditures and excluding debt service. The cash flow
projections used to make this assessment are consistent with the
cash flow projections that management uses internally to assist
in making key decisions, including the development of the
proposed recapitalization. In the event an impairment exists, a
loss is recognized based on the amount by which the carrying
value exceeds the fair value of the asset, which is generally
determined by using quoted market prices or valuation techniques
such as the discounted present value of expected future cash
flows, appraisals, or other pricing models as appropriate. We
believe that no such impairment existed in accordance with SFAS
No. 121 as of December 31, 2001 or 2000. In the event
that there are changes in the planned use of our long-term
assets or our expected future undiscounted cash flows are
reduced significantly, our assessment of our ability to recover
the carrying value of these assets under SFAS No. 121 would
change.

Because our best estimate of undiscounted cash flows generated
from these assets exceeds their carrying value for each of the
periods presented, no impairment pursuant to SFAS No. 121
exists. However, as described more fully in New Accounting
Pronouncements, beginning in the first quarter of 2002,
our goodwill will be subject to the impairment test required by
SFAS No. 142, which will likely result in all, or
substantially all, of the amount being written off. Impairment
assessment under SFAS

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Revenue
Recognition

Revenues from telecommunication services are recognized when the
services are performed, evidence of an arrangement exists, the
fee is fixed and determinable and collectibility is probable.
Service discounts and incentives related to telecommunication
services are recorded as a reduction of revenue when granted or
ratably over a contract period. Fees billed in connection with
customer installations and other upfront charges are deferred
and recognized ratably over the estimated customer life. Revenue
from the sale or lease of unlit network capacity is recognized
upon consummation of the transaction and the acquirers
acceptance of the capacity in instances when we receive upfront
cash payments and are contractually obligated to transfer title
to the specified capacity at the end of the contract term. If
the transaction does not meet these criteria, revenue is
recognized ratably over the contract term. In 2001,
approximately 1.5% of our total revenue was attributed to sales
of unlit network capacity.

We establish a valuation allowance for collection of doubtful
accounts and other sales credit adjustments. Valuation
allowances for sales credits are established through a charge to
revenue, while valuation allowances for doubtful accounts are
established through a charge to selling, operating and general
expenses. We assess the adequacy of these reserves monthly
evaluating general factors, such as the length of time
individual receivables are past due, historical collection
experience, the economic and competitive environment, and
changes in the credit worthiness of our customers. As considered
necessary, we also assess the ability of specific customers to
meet their financial obligations to us and establish specific
valuation allowances based on the amount we expect to collect
from these customers. We believe that our established valuation
allowances were adequate as of December 31, 2001 and 2000.
If circumstances relating to specific customers change or
economic conditions worsen such that our past collection
experience and assessment of the economic environment are no
longer relevant, our estimate of the recoverability of our trade
receivables could be further reduced.

New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB,
issued SFAS No. 141, Business Combinations,
which is effective for all business combinations completed after
June 30, 2001 and supercedes Accounting Principles Board
Opinion No. 16, Business Combinations. Under
SFAS No. 141, companies will be required to account for all
business combinations using the purchase method of accounting,
recognize intangible assets if certain criteria are met, as well
as provide additional disclosures regarding business
combinations and the allocation of purchase price. We do not
believe the adoption of SFAS No. 141 will have a material
effect on our results of operations and financial position.

In July 2001, the FASB issued SFAS No. 142, Goodwill
and Other Intangible Assets, which revises the accounting
for purchased goodwill and intangible assets and supercedes APB
Opinion No. 17, Intangible Assets. SFAS
No. 142 is effective for fiscal years beginning after
December 15, 2001 and must be applied to all goodwill and
other intangible assets recorded at that date. However, goodwill
and intangible assets acquired after June 30, 2001 will be
subject immediately to the amortization provisions of this
statement. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives will no longer be amortized but
will be tested for impairment annually or more frequently if an
event indicates that the asset might be impaired. The statement
provides guidance on measuring goodwill and intangible asset
impairments and on determining their fair values based on market
prices, current prices for similar assets and liabilities or a
discounted cash flow methodology. This determination of
impairment differs from SFAS No. 121, which is based on expected
future undiscounted flows and not fair value.

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SFAS No. 142 requires the completion of the initial
impairment analysis of goodwill recorded at December 15,
2001 (other than goodwill associated with acquisitions after
June 30, 2001) by June 30, 2002. If, however, events
or changes in circumstances indicate that goodwill might be
impaired before June 30, 2002, goodwill must be tested for
impairment when this indication of possible impairment arises.
As discussed above, we have defaulted on certain interest
payment obligations and have begun to implement a proposed
recapitalization. We believe such events constitute an event or
change in circumstance that requires us to test our goodwill for
impairment. Using the investment contemplated under the terms of
the Stock Purchase Agreement to estimate the fair value of our
goodwill, we expect to write off all, or substantially all, of
our $1,878.3 million of goodwill in the first quarter of
2002 as a cumulative effect of a change in accounting principle
as of January 1, 2002.

Under SFAS No. 142, the useful life of an intangible asset
is considered indefinite when there are generally no factors
that limit the useful life of the intangible asset to the
company. When we adopt SFAS No. 142 in 2002, we expect to
continue to amortize our $947.5 million of fixed wireless
licenses and our $151.7 million of other intangible assets
over definite useful lives, consistent with our current
accounting policies.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
requires an entity to recognize the fair value of a liability
for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. If
a reasonable estimate of fair value cannot be made in the period
the asset retirement obligation is incurred, SFAS No. 143
requires the liability to be recognized when a reasonable
estimate of the fair value can be made. The provisions of SFAS
No. 143 are effective for financial statements issued for
fiscal years beginning after June 15, 2002. We do not
believe that the adoption of SFAS No. 143 will have a
material effect on our results of operations and financial
position.

In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The provisions of
SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001. We do
not believe that the adoption of SFAS No. 144 will have a
material effect on our results of operations and financial
position.




Item 7A.     Quantitative and
Qualitative Disclosure About Market Risk

We have a $1.0 billion senior secured credit facility, and
the rates at which interest accrues under the entire outstanding
balance are variable. Variable rate debt subjects us to cash
flow exposure resulting from changes in interest rates, as
illustrated in the table below.

We also have existing obligations relating to our outstanding
redeemable preferred stock, senior notes, and subordinated
notes. We do not have significant cash flow exposure to changing
interest rates on our senior and subordinated notes and
redeemable preferred stock because the interest and dividend
rates of these securities are fixed. The fair values of these
financial instruments would normally be subject to interest rate
risk. If our proposed recapitalization is completed, all of our
outstanding senior and subordinated notes and preferred stock
would either be exchanged for consideration consisting of cash
and common stock of recapitalized XO Parent, or be terminated.
We expect that the consideration to be paid in the exchange for
such notes would be substantially below the carrying value of
the securities. Therefore, we believe that the fair value of
these financial obligations will almost entirely be dependent on
the terms and conditions of the proposed recapitalization,
rather than changes in interest rates, and that interest rate
risk associated with these obligations is not material.

Marketable securities consist of an investment portfolio
containing U.S. government agency issued and other securities
with a duration of less than one year. These securities are
classified as available for sale. If interest rates
were to increase or decrease immediately, it would not likely
have a material impact on the fair value of these financial
instruments or on the interest we would earn on our investment
portfolio as illustrated in the table below.

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We are not currently engaged in the use of off-balance sheet
derivative financial instruments, to hedge or partially hedge
interest rate exposure.

Presented below is an analysis of our financial instruments as
of December 31, 2001 that are sensitive to changes in
interest rates. The table demonstrates the change in fair value
in our investment portfolio and the change in cash flow related
to our variable-rate senior secured credit facility, calculated
for an instantaneous parallel shift in interest rates, plus or
minus 50 basis points, or BPS, 100 BPS, and 150 BPS (dollars
in millions).

|                      |  |                                   |       |             |  |                                   |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|--------------------- |  | --------------------------------- | ----- | ----------- |  | --------------------------------- | ----- | ---------- |  | ------ | ----- | ------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                      |  |                                   |       |             |  |                                  
|                      |  | Valuation of Securities Given an  |       | No Change   |  | Valuation of Securities Given an 
|                      |  | Interest Rate Decrease of X Basis |       | in Interest |  | Interest Rate Increase of X Basis
|                      |  | Points                            |       | Rates       |  | Points                           
|                      |  |                                   |       |             |  |                                  
|Interest Rate Risk    |  | (150 BPS)                         |       | (100 BPS)   |  | (50 BPS)                          |       | Fair Value |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                      |  |                                   |       |             |  |                                   |       |            |  |        |       |         |  |        
|Financial Assets:     |  |                                   |       |             |  |                                   |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|                     
|                     
|                     
|                     
|3 months  1 year     |  | $                                 | 267.4 |             |  | $                                 | 267.3 |            |  | $      | 267.1 |         |  | $       | 266.9 |  |  | $ | 266.8 |  |  | $ | 266.6 |  |  | $ | 266.4 | 
|                     
|                     
|                     
|                     
|Over 1 year           |  |                                   | 243.1 |             |  |                                   | 242.7 |            |  |        | 242.4 |         |  |         | 242.1 |  |  |   | 241.6 |  |  |   | 241.2 |  |  |   | 240.7 | 
|                      |  |                                   |       |             |  |                                   |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Marketable securities |  | $                                 | 510.5 |             |  | $                                 | 510.0 |            |  | $      | 509.5 |         |  | $       | 509.0 |  |  | $ | 508.4 |  |  | $ | 507.8 |  |  | $ | 507.1 | 

|                |  |                                      |      |             |  |                                |      |            |  |        |      |         |  |         |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|--------------- |  | ------------------------------------ | ---- | ----------- |  | ------------------------------ | ---- | ---------- |  | ------ | ---- | ------- |  | ------- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                |  |                                      |      |             |  |                               
|                |  | Annual Interest Expense Given        |      | No Change   |  | Annual Interest Expense Given 
|                |  | an Interest Rate decrease of X Basis |      | in Interest |  | an Interest Rate decrease of X
|                |  | Points                               |      | Rates       |  | Basis Points                  
|                |  |                                      |      |             |  |                               
|Cash Flow Risk  |  | (150 BPS)                            |      | (100 BPS)   |  | (50 BPS)                       |      | Fair Value |  | 50 BPS |      | 100 BPS |  | 150 BPS
|                |  |                                      |      |             |  |                                |      |            |  |        |      |         |  |        
|Credit Facility |  | $                                    | 37.1 |             |  | $                              | 42.1 |            |  | $      | 47.1 |         |  | $       | 52.1 |  |  | $ | 57.1 |  |  | $ | 62.1 |  |  | $ | 67.1 | 

The sensitivity analysis provides only a limited, point-in-time
view of the market risk sensitivity of certain of our financial
instruments. The actual impact of market interest rate and price
changes on the financial instruments may differ significantly
from those shown in the sensitivity analysis.




Item 8.     Financial
Statements and Supplementary Data

Our consolidated financial statements are filed under this Item,
beginning on page F-1 of this Report.




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

None.

PART III




Item 10. Directors and Executive Officers of the
Registrant

The names, ages and positions with XO of our directors and
executive officers are listed below.

|                      |  |     |    |          |  |                                                                
|--------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|Daniel F. Akerson (1) |  |     | 53 |          |  | Chief Executive Officer and Chairman of the Board
	of Directors
|                     
|                     
|                     
|                     
|Nathaniel A. Davis    |  |     | 48 |          |  | President, Chief Operating Officer and Director                
|                     
|                     
|                     
|                     
|Joseph L. Cole (2)    |  |     | 46 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Sandra J. Horbach (2) |  |     | 41 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Nicolas Kauser        |  |     | 62 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Craig O. McCaw (1)    |  |     | 52 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|John H. Myers         |  |     | 56 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Sharon L. Nelson (2)  |  |     | 55 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Henry R. Nothhaft     |  |     | 57 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Jeffrey S. Raikes (3) |  |     | 43 |          |  | Director                                                       
|                     
|                     
|                     
|                     
|Peter C. Waal (3)     |  |     | 70 |          |  | Director                                                       

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|                             |  |     |    |          |  |                                                              
|---------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------
|Name                         |  | Age |    | Position
|                             |  |     |    |         
|Dennis M. Weibling (1)(2)(3) |  |     | 51 |          |  | Director                                                     
|                            
|                            
|                            
|                            
|Nancy B. Gofus               |  |     | 48 |          |  | Executive Vice President, Marketing and Customer
	Care       
|                            
|                            
|                            
|                            
|Michael S. Ruley             |  |     | 42 |          |  | Executive Vice President, President, Market Sales
	Operations
|                            
|                            
|                            
|                            
|John Jacquay                 |  |     | 49 |          |  | President, National Sales                                    
|                            
|                            
|                            
|                            
|Gary D. Begeman              |  |     | 43 |          |  | Senior Vice President, General Counsel and
	Secretary        
|                            
|                            
|                            
|                            
|Doug L. Carter               |  |     | 50 |          |  | Senior Vice President, Chief Technology Officer              
|                            
|                            
|                            
|                            
|Mark W. Faris                |  |     | 47 |          |  | Senior Vice President, Network Operations                    
|                            
|                            
|                            
|                            
|Wayne M. Rehberger           |  |     | 45 |          |  | Senior Vice President, Chief Financial Officer               
|                            
|                            
|                            
|                            
|R. Gerard Salemme            |  |     | 48 |          |  | Senior Vice President, Regulatory and Legislative
	Affairs   
|                            
|                            
|                            
|                            
|William Garrahan             |  |     | 44 |          |  | Vice President, Corporate Development and
	Strategic Planning



---



|    |                                                                 
|--- | ----------------------------------------------------------------
|(1) | Member of the Executive Committee of the Board of
	Directors.   
|   
|(2) | Member of the Audit Committee of the Board of
	Directors.       
|   
|(3) | Member of the Compensation Committee of the Board
	of Directors.

Brief biographies of our directors are set forth below.

Daniel F. Akerson.Mr. Akerson has served as our
Chairman of the Board of Directors and Chief Executive Officer
since joining XO in September 1999. From March 1996 to
February 2001, he was the Chairman of the Board of Directors of
Nextel Communications, Inc. From March 1996 to
July 1999, he was Chief Executive Officer of Nextel
Communications, Inc. Mr. Akerson currently serves as a
director of the American Express Company and AOL Time Warner.

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

Joseph L. Cole.Mr. Cole has been a director of XO
since February 2000. Since January 1999, he has been Executive
Vice President and General Counsel of Ampersand Holdings, Inc.,
an investment firm. Since October 2000, Mr. Cole also
has been Publisher of the Santa Barbara News-Press. From 1984 to
1998, Mr. Cole was a partner of the law firm of Seed,
Mackall & Cole LLP, where his practice emphasized
corporate law.

Sandra J. Horbach.Ms. Horbach has been a director
of XO since January 2000. Since January 1993, she has been a
general partner of Forstmann Little & Co.
Ms. Horbach currently serves as a director of Community
Health Systems, Inc., FLCC Holdings, Inc. (parent of Citadel
Communications Corporation) and certain subsidiaries thereof,
and Yankee Candle Company, Inc.

Nicolas Kauser.Mr. Kauser has been a director of XO
since February 1999. From 1994 to 1998, he was an Executive Vice
President and Chief Technology Officer for AT&T Wireless
Services.

Craig O. McCaw.Mr. McCaw has been a director of XO
since September 1994. From September 1994 to July 1997, he was
our Chief Executive Officer. Since 1993, Mr. McCaw has been
Chairman, Chief Executive Officer and a member of Eagle River
Investments, LLC. Since 1993, Mr. McCaw has been Chairman
and Co-Chief Executive Officer of Teledesic Corporation, a
developer of a worldwide satellite-based telecommunications
system. Mr. McCaw also currently serves as a director of
Nextel Communications.

John H. Myers.Mr. Myers has been a director of XO
since October 2001. Since 1997, he has been President and Chief
Executive Officer of General Electric Asset Management
Incorporated (GEAM).

60



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Sharon L. Nelson.Ms. Nelson has been a director of
XO since September 1997. Since September 2000, Ms. Nelson
has been the Director of the Center for Law, Commerce and
Technology at the University of Washington School of Law. From
1985 to 1997, she was Chairman of the Washington Utilities and
Transportation Commission. Ms. Nelson also served on the
Federal-State Joint Board on Universal Service created under the
Telecommunications Act of 1996 and as one of the 20-member
negotiating team appointed by the Governors of Washington,
Idaho, Oregon and Montana to review the Northwest electric power
system.

Henry R. Nothhaft.Mr. Nothhaft has served been a
director of XO since June 2000. Since April 20, 2001,
Mr. Nothhaft has served as the Chief Executive Officer of
SmartPipes, Inc. From June 2000 to April 20, 2001, he
was our Vice Chairman. From May 1995 to June 2000, he
was President and Chief Executive Officer of Concentric, from
August 1995 to June 2000, he served on the Board of
Directors of Concentric, and, from January 1998 to
June 2000, he served as the Chairman of the Board of
Concentric.

Jeffrey S. Raikes.Mr. Raikes has been a director of
XO since September 1997. Since July 1996, he has been a member
of Microsoft Corporations Executive Committee and, since
January 1996, he has been a Group Vice President of Microsoft.

Peter C. Waal. Mr. Waal has been a director of XO
since June 2000. Since 1998, Mr. Waal has been a
private telecommunications consultant. From 1986 to 1998, he was
Vice President, Strategic Planning and Business Development with
DSC Communication Corporation. Mr. Waal currently serves as
a director of InfoVista, S.A.

Dennis M. Weibling.Mr. Weibling has been a director
of XO since January 1997. From September 1994 to January 1997,
he was Executive Vice President of XO. Since January 2002,
Mr. Weibling has been Vice Chairman of Eagle River
Investments, LLC. Since April 2000, he also has been Vice
President of OneWorld Challenge, which owns and operates sailing
vessels. From 1993 to December 2001, he was President of
Eagle River Investments. Mr. Weibling is a member of Eagle
River Investments and he currently serves as a director of
Nextel Communications, Nextel International Inc., and Nextel
Partners, Inc.

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

Michael S. Ruley.Mr. Ruley has been Executive Vice
President, Market Sales Operations since March 2001. From June
1999 to March 2001, he was our President, West Region. From
April 1998 to June 1999, he was the President of our
Southwest Region. From June 1996 to April 1998,
Mr. Ruley held various positions at TCG, including Regional
Vice President of the Pacific Bell Territory and Vice President
and General Manager of both the San Francisco and Colorado
markets.

John Jacquay.Mr. Jacquay has been our President,
National Sales since February 2002. From November 1999 to
February 2002, he was Chairman and Chief Executive Officer of
Pagoo, Inc. From January 1999 to July 1999, Mr. Jacquay was
President and Chief Operating Officer of GRIC Communications.
From 1997 to 1999, he was Chief Operating Executive 
Regulated Industries unit of MCI Systemhouse. From 1996 to 1997,
Mr. Jacquay was President  Network services of
US ONE Communications.

61



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

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

Mark W. Faris.Mr. Faris has been our Senior Vice
President, Network Operations since April 2001. From September
2000 to April 2001, he was the Chief Operating Officer of Gemeni
Networks. From March 2000 to September 2000, Mr. Faris was
President and Chief Operating Officer of BlueStar
Communications. Prior to that, he had been employed by
Southwestern Bell for over 20 years.

Wayne M. Rehberger.Mr. Rehberger has served as our
Senior Vice President, Chief Financial Officer since December
2000. From April 2000 to August 2000, he was Chief Financial
Officer of Nettel Communications. On September 28, 2000,
Nettel filed a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code. From August 2000 to October 2000,
Mr. Rehberger was our Senior Vice President of Finance.
From April 1999 to March 2000, Mr. Rehberger was Senior
Vice President of Finance at MCI WorldCom. From June 1986 to
March 1999, he held other senior level finance positions at MCI.

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

William Garrahan.Mr. Garrahan has served as our
Vice President, Corporate Development and Strategic Planning
since July 2001. From September 1996 to February 2001, he was a
Senior Vice President with Lehman Brothers, in its equity
research department.

Information Regarding Certain Directorships

Daniel F. Akerson. Pursuant to the terms of
Mr. Akersons employment agreement with XO,
Mr. Akerson is entitled to be nominated to serve on the
Board of Directors and to hold the position of Chairman of the
Board of Directors.

Joseph L. Cole. Wendy P. McCaw and Craig O. McCaw are
parties to a XO Stock Distribution Agreement effective as of
November 3, 1997, entered into in connection with a portion
of the settlement of a divorce action between Mr. and
Mrs. McCaw. Under the Stock Distribution Agreement,
Mrs. McCaw is entitled to designate one member of our Board
of Directors. Eagle River Investments, LLC and Mr. McCaw
have agreed to vote, and to cause Mr. McCaws
affiliates to vote, all of their respective shares of XO stock
to support the election to the Board of Directors of
Mrs. McCaws designee. Mr. Cole is
Mrs. McCaws designee to our Board of Directors under
the Stock Distribution Agreement.

Sandra J. Horbach and John H. Myers. Ms. Horbach was
elected to our Board of Directors in January 2000, and
Mr. Myers was elected to our Board of Directors in October
2001, in connection with the purchase by certain Forstmann
Little & Co. investment funds of our series C and
series D preferred stock. Pursuant to their terms, the
holders of series C and series D preferred stock each
have the right to designate a nominee to the Board of Directors
and elect such nominee, each voting as a separate series, for so
long as 40% of the aggregate number of shares of series C
and series D preferred stock originally issued remain
outstanding. Mr. Myers was nominated by the holders of our
series C preferred stock. Ms. Horbach was nominated by the
holders of our series D preferred stock.

62



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##### Table of Contents



At such time as the aggregate number of outstanding shares of
series C and series D preferred stock is less than 40%
of the originally issued shares:



| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our Board of Directors shall cause the total number of directors
	then constituting the entire Board to decrease by one and the
	term of the director designated by the holders of the
	series C preferred stock shall cease, and
|
| |  | the holders of the series C preferred stock shall be
	entitled to designate one board observer, until such time as no
	shares of series C preferred stock are outstanding.                                                       

At such time as the aggregate number of outstanding shares of
series C and series D preferred stock is less than 20%
of the originally issued shares:



| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our Board of Directors shall cause the total number of directors
	then constituting the entire Board to decrease by one and the
	term of the director designated by the holders of the
	series D preferred stock shall cease, and
|
| |  | the holders of the series D preferred stock shall be
	entitled to designate one board observer, until such time as no
	shares of series D preferred stock are outstanding.                                                       

A director designated by either the holders of series C or
series D preferred stock may be removed, with or without
cause, only by the holders of that series. So long as the
holders of series C preferred stock are entitled to
designate a member of our Board of Directors under the terms
summarized above, the holders of series C preferred stock
are not entitled to vote for the election of any other XO
directors. Likewise, so long as the holders of series D
preferred stock are entitled to designate a member of our Board
of Directors under the terms summarized above, the holders of
series D preferred stock are not entitled to vote for the
election of any other XO directors.

In July 2000, certain Forstmann Little & Co. investment
funds also purchased shares of our series G and
series H preferred stock. Pursuant to the terms of the
series G preferred stock, at such time as the holders of
series C preferred stock are no longer entitled to
designate a nominee to our Board of Directors, the holders of
series G preferred stock shall have the right to designate
a Board nominee under substantially the same arrangements as
apply to the series C preferred stock. Likewise, pursuant
to the terms of the series H preferred stock, at such time
as the holders of series D preferred stock are no longer
entitled to designate a nominee to our Board of Directors, the
holders of series H preferred stock shall have the right to
designate a Board nominee under substantially the same
arrangements as apply to the series D preferred stock.

Section 16(a)
Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934
requires our directors, executive officers and any person who
owns more than 10% of our common stock (the Reporting
Persons) to file with the Securities and Exchange
Commission reports of ownership and reports of changes in
ownership of our common stock. Under Securities and Exchange
Commission rules, we receive copies of all Section 16(a)
forms that these Reporting Persons file. We have reviewed copies
of these reports and written representations from the Reporting
Persons. We believe all Reporting Persons complied with their
Section 16(a) reporting obligations during 2000, except for
the following individuals: John H. Myers, who failed to
file his Form 3 at the time of his appointment to our
Board, which form subsequently has been filed, Jeffrey
S. Raikes, who failed to report a November 2001
purchase of 6,000 shares of class A common stock and a
December 2001 sale of 6,000 shares of class A common
stock, and R. Gerard Salemme, who failed to report a May
2001 exercise of an option to purchase 66,200 shares of our
class A common stock.

63



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##### Table of Contents






Item 11.  Executive Compensation

Summary
Compensation Table

The following table sets forth, for the fiscal years ended
December 31, 2001, 2000, and 1999, individual compensation
information for our Chief Executive Officer, and each of our
four most highly compensated executive officers (the Named
Executive Officers).

|                            |                                                            |      |            |                     |                |                |  |                        |         |                |  |        |         |    |  |                  |   |            |  |             |        |        | 
|--------------------------- | ---------------------------------------------------------- | ---- | ---------- | ------------------- | -------------- | -------------- |  | ---------------------- | ------- | -------------- |  | ------ | ------- | -- |  | ---------------- | - | ---------- |  | ----------- | ------ | ------ | 
|                            |                                                            |      |            |                     |                |                |  |                        |         |               
|                            |                                                            |      |            |                     |                |                |  | Long Term Compensation |         |               
|                            |                                                            |      |            |                     |                |                |  | Awards                 |         |               
|                            |                                                            |      |            |                     |                |                |  |                       
|                            |                                                            |      |            | Annual Compensation |                | Restricted     |  | Securities             |         | All Other     
|                            |                                                            |      |            |                     |                | Stock Award(s) |  | Underlying             |         | Compensation  
|Name and Principal Position |                                                            | Year |            | Salary ($)          |                | Bonus ($)(1)   |  | ($)(2)                 |         | Options (#)(3) |  | ($)(4)
|                            |                                                            |      |            |                     |                |                |  |                        |         |                |  |       
|Daniel F. Akerson           |                                                            | 2001 |            |                     | 318,006        | (5)            |  |                        |        | (5)            |  |        |        |    |  |                  |  |            |  |             | 38,331 |       
|                            | Chief Executive Officer and Chairman of the Board          |      | 2000
	1999 |                     | 500,000132,692 |                |  | 477,950300,000         |         |                |  |      |         |    |  | 500,0006,000,000 |   |            |  | 57,580     |       
|                           
|                           
|                           
|                           
|Nathaniel A. Davis          |                                                            | 2001 |            |                     | 375,000        |                |  |                        | 296,136 |                |  |        | 432,500 |    |  |                  |  |            |  |             | 194    |       
|                            | President and Chief Operating Officer                      |      | 2000
	1999 |                     |                | 375,000       |  |                        |         | 239,524       |  |        |         |  |  |                  |   | 1,975,000 |  |             |        | 179   | 
|                           
|                           
|                           
|                           
|R. Gerard Salemme (6)       |                                                            | 2001 |            |                     | 213,200        |                |  |                        | 223,655 |                |  |        | 86,500  |    |  |                  |  |            |  |             | 6,787  |       
|                            | Senior Vice President, Regulatory and Legislative
	Affairs |      | 2000
	1999 |                     | 221,400205,000 |                |  | 205,000205,000         |         |                |  |      |         |    |  | 70,000300        |   |            |  | 8,6878,510  |       
|                           
|                           
|                           
|                           
|Michael S. Ruley            |                                                            | 2001 |            |                     | 268,846        |                |  |                        | 192,653 |                |  |        | 51,900  |    |  |                  |  |            |  |             | 56,848 |       
|                            | Executive Vice-President, Market Sales Operations          |      | 2000
	1999 |                     | 244,443165,000 |                |  | 191,648113,983         |         |                |  |      |         |    |  | 253,100800       |   |            |  | 36,3248,146 |       
|                           
|                           
|                           
|                           
|Nancy B. Gofus              |                                                            | 2001 |            |                     | 275,000        |                |  |                        | 178,503 |                |  |        | 51,900  |    |  |                  |  |            |  |             | 8,950  |       
|                            | Executive Vice President, Marketing and Customer
	Care     |      | 2000
	1999 |                     |                | 253,846       |  |                        |         | 157,723       |  |        |         |  |  |                  |   | 350,000   |  |             |        | 3,154 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes bonuses earned for the corresponding
	fiscal years that were paid subsequent to the stated calendar
	year end.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Represents an award of Class A common stock
	granted on August 20, 2001, which shares are restricted and
	subject to forfeiture until vested. A total of 1,250,000 shares
	were awarded, and all awards vest over a three-year period at
	the rate of one-third per year from the date of grant. At
	December 31, 2001, Mr. Davis held all 250,000 of the
	shares awarded to him, with a value of $24,000, Mr. Salemme
	held all 50,000 of the shares awarded to him, with a value of
	$4,800, and Mr. Ruley and Ms. Gofus each held all 30,000 of
	the shares awarded to him or her, with a value of $2,880. Like
	all shares of our common stock, no dividends have been or are
	expected to be paid on the shares of restricted stock.                                                                                                                                                
|   
|(3) | Represents options to acquire shares of
	Class A common stock. Share figures have been restated
	retroactively to reflect stock splits with respect to our common
	stock. These balances do not include replacement options granted
	on January 17, 2002, in connection with the Offer to
	Exchange that we undertook in May 2001. See Report on
	Repricing of Options below. The grant of the replacement
	options will be reported in our annual report of Form 10-K
	for the year ending December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | For 2001, includes for Mr. Akerson: $28,517
	for personal use of company-owned aircraft, $9,623 for
	contributions made by us on behalf of Mr. Akerson under our
	401(k) Plan and $191 for premiums for group term life insurance
	paid by us; for Mr. Davis: $194 for premiums for group term
	life insurance paid by us; for Mr. Salemme: $6,600 for
	contributions made by us on behalf of Mr. Salemme under our
	401(k) Plan and $187 for premiums for group term life insurance
	paid by us; for Mr. Ruley: $49,923 for reimbursement of
	relocation expenses; $6,800 for contributions made by us on
	behalf of Mr. Ruley under our 401(k) Plan and $125 for
	premiums for group term life insurance paid by us; for
	Ms. Gofus: $8,756 for contributions made by us on behalf of
	Ms. Gofus under our 401(k) Plan and $194 for premiums for
	group term life insurance paid by us.
|   
|(5) | In August 2001, Mr. Akerson elected to forgo
	all of his salary for all periods after August 2001, but for the
	nominal amount necessary to cover medical and related benefits.
	For 2001, he elected not to receive a bonus.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(6) | Salary, bonus and 401(k) Plan payments are made
	to Communications Consultants, Inc., which employs
	Mr. Salemme and from which we retain Mr. Salemme for
	service as our Senior Vice President, Regulatory and Legislative
	Affairs. See Certain Relationships And Related
	Transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

Option
Grants in Last Fiscal Year

We did not grant stock options to any of the Named Executive
Officers during 2001.

64



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##### Table of Contents



Aggregated Option Exercises and Fiscal Year-End Option
Values

|                   |  |                 |         |                |  |                            |           |                          |  |             |           |               |  |  |           |  |  |  |         |  |  |  |        | 
|------------------ |  | --------------- | ------- | -------------- |  | -------------------------- | --------- | ------------------------ |  | ----------- | --------- | ------------- |  |  | --------- |  |  |  | ------- |  |  |  | ------ | 
|                   |  |                 |         |                |  |                            |           |                          |  |            
|                   |  |                 |         |                |  | Number of Securities       |           |                         
|                   |  |                 |         |                |  | Underlying Unexercised     |           | Value of Unexercised In-
|                   |  |                 |         |                |  | Options at Fiscal Year-End |           | the-Money Options at    
|                   |  | Shares Acquired |         |                |  | (#)                        |           | Fiscal Year-End ($)     
|                   |  | on Exercise     |         | Value Realized |  |                            |           |                         
|Name               |  | (#)(1)          |         | ($)(1)         |  | Exercisable                |           | Unexercisable            |  | Exercisable |           | Unexercisable
|                   |  |                 |         |                |  |                            |           |                          |  |             |           |              
|Daniel F. Akerson  |  |                 | 300,000 |                |  |                            | 1,268,813 |                          |  |             | 3,325,000 | (2)           |  |  | 2,875,000 |  |  |  | 161,500 |  |  |  | 95,000 | 
|                  
|                  
|                  
|                  
|Nathaniel A. Davis |  |                 | 100,000 |                |  |                            | 422,938   |                          |  |             |          |               |  |  | 200,000   |  |  |  |        |  |  |  | 19,000 | 
|                  
|                  
|                  
|                  
|R. Gerald Salemme  |  |                 | 144,800 |                |  |                            | 240,256   |                          |  |             | 257,800   |               |  |  | 112,500   |  |  |  |        |  |  |  |       | 
|                  
|                  
|                  
|                  
|Michael S. Ruley   |  |                 | 6,000   |                |  |                            | 6,385     |                          |  |             | 322,300   |               |  |  | 96,000    |  |  |  |        |  |  |  | 1,695  | 
|                  
|                  
|                  
|                  
|Nancy B. Gofus     |  |                 |        |                |  |                            |          |                          |  |             | 25,000    |               |  |  | 75,000    |  |  |  | 2,375   |  |  |  | 7,125  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of the date that we filed this annual report,
	based on reports filed with the Securities and Exchange
	Commission, each Named Executive Officer continues to hold his
	respective shares acquired on exercise set forth in this table.
	As of March 21, 2002, the value of these respective
	holdings was $20,700 for Mr. Akerson, $6,900 for
	Mr. Davis, $9,991 for Mr. Salemme, and $414 for
	Mr. Ruley.
|   
|(2) | At December 31, 2001, of such amount,
	1,700,000 had vested, but were not exercisable pursuant to
	Mr. Akersons employment agreement. See
	Employment Agreements and Other Arrangements below
	for a summary of the terms of Mr. Akersons employment
	agreement.                                                                                                                                          

Employment
Agreements and Other Arrangements

Daniel F. Akerson. We have entered into an
employment agreement with Mr. Akerson that provides for his
employment as Chairman of the Board and Chief Executive Officer
through September 20, 2002. It provides for an annual base
salary of $500,000, which we may increase annually, and for an
annual bonus of up to 100% of base salary, as determined by our
Board of Directors. In August 2001, Mr. Akerson elected to
forgo all of his salary for all periods after August 2001, but
for the nominal amount necessary to cover medical and related
benefits. For 2001, he elected not to receive a bonus. Pursuant
to the agreement, we granted Mr. Akerson the following
stock options:



| |   |                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a non-qualified option to purchase 3,000,000 shares of
	class A common stock for $0.005 per share, vesting
	annually in three equal amounts on September 21, 2000, 2001
	and 2002, but which may not be exercised by Mr. Akerson
	before September 21, 2002, unless his employment is
	terminated before that date; and
|
| |  | a non-qualified option to purchase 3,000,000 shares of
	class A common stock for $26.59375 per share, the
	closing price of such stock on the date of grant according to
	the Nasdaq National Market, vesting annually in four equal
	amounts on September 21, 2000, 2001, 2002 and 2003.                              

In April 2001, the Compensation Committee of the Board of
Directors permitted Mr. Akerson to exercise vested options
with respect to 300,000 shares of class A common stock
that were otherwise not exercisable until September 2002. As of
the date that we filed this annual report, based on reports
filed with the Securities and Exchange Commission,
Mr. Akerson continues to hold these shares.

If Mr. Akersons employment is terminated due to
permanent disability or death, his employment agreement provides
that one additional year of continuous employment from the date
of death or permanent disability will be applied to the stock
option vesting schedules. If Mr. Akersons employment
is constructively terminated, or if specified events
constituting a change in control occur, then the unvested
portion of the options shall vest in full.

Mr. Akersons employment agreement also provides that
in the event of permanent disability during his employment term,
we will pay him his existing base salary and will make all of
his benefit payments for a period of twelve months following the
date of the disability. In addition, it provides that in the
event that Mr. Akersons employment is terminated
other than for cause, is constructively terminated or is
terminated upon or following a change in control, we will pay
him his existing base salary, annual bonus and benefits that he
would have received from the time of termination to the
expiration of the agreements initial term. Under certain
circumstances, we will make additional payments to
Mr. Akerson for taxes due with respect to any payments or
benefits under his agreement treated as an excess
parachute payment

65



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##### Table of Contents





Under the employment agreement, Mr. Akersons
employment is constructively terminated if he terminates his
employment as a direct result of:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | a reduction in his initial base salary or in the maximum
	permitted annual bonus percentage;
|
| |  | a material change in his responsibilities that is inconsistent
	with his position; or       
|
| |  | our material breach of the agreement.                                                       

Under the employment agreement, a change of control means the
occurrence of any of the following events, subject to certain
exceptions:



| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we merge with another company where our stockholders hold less
	than a majority of the combined voting power of the company
	surviving the merger, other than a merger with any entity in
	which Eagle River has invested at least $10 million;
|
| |  | we sell all or substantially all of our assets to any other
	company;                                                                                                                                                                          
|
| |  | 51% or more of our outstanding voting stock is acquired by a
	person, entity or group (within the meaning of
	Rule 13d-5(b) under the Securities Exchange Act of 1934),
	other than Craig O. McCaw and his affiliates; and                   
|
| |  | similar transactions or events.                                                                                                                                                                                                                

Mr. Akerson is subject to confidentiality and
non-competition restrictions during the employment term and for
a period of two years after the termination of the employment.
In the event that Mr. Akersons employment is
constructively terminated or is terminated upon a change in
control, he will not be subject to the non-competition
restrictions.

Nathaniel A. Davis.We have entered into an
employment agreement with Mr. Davis that provides for his
employment as President and Chief Operating Officer through
January 3, 2004. It provides for an annual base salary of
$375,000, which we may increase annually, and for an annual
bonus of up to 70% of base salary, as determined by our Board of
Directors. Pursuant to the agreement, we granted Mr. Davis
the following stock options:



| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a non-qualified option to purchase 300,000 shares of class
	A common stock for $0.005 per share, which vests in full on
	January 4, 2004; and                                                                                                                                         
|
| |  | a non-qualified option to purchase 1,350,000 shares of
	class A common stock for $38.15625 per share, the
	closing price of such stock on the date of grant according to
	the Nasdaq National Market, vesting annually in four equal
	amounts on January 4, 2001, 2002, 2003 and 2004.

In April 2001, the Compensation Committee of the Board of
Directors accelerated the vesting of, and permitted
Mr. Davis to exercise, options with respect to
100,000 shares of class A common stock that were otherwise
not exercisable until January 2004. As of the date that we filed
this annual report, based on reports filed with the Securities
and Exchange Commission, Mr. Davis continues to hold these
shares.

If Mr. Davis employment is terminated due to
permanent disability or death, his employment agreement provides
that one additional year of continuous employment from the date
of death or permanent disability will be applied to the stock
option vesting schedules. If Mr. Davis employment is
constructively terminated, or if specified events constituting a
change in control occur, then the unvested portion of the
options shall vest in full.

Mr. Davis employment agreement also provides that in
the event of permanent disability during his employment term, we
will pay him his existing base salary and will make all of his
benefit payments for a period of twelve months following the
date of the disability. In addition, it provides that in the
event that Mr. Davis employment is terminated other
than for cause, is constructively terminated or is terminated
upon or following a change in control, we will pay him his
existing base salary, annual bonus and benefits

66



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##### Table of Contents





Under the employment agreement, Mr. Davis employment
is constructively terminated if he terminates his employment as
a direct result of:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | a reduction in his initial base salary or in the maximum
	permitted annual bonus percentage;
|
| |  | a material change in his responsibilities that is inconsistent
	with his position; or       
|
| |  | our material breach of the agreement.                                                       

Under the employment agreement, the definition of a change
of control has substantially the same meaning as set forth
in Mr. Akersons employment agreement, the terms of
which are summarized above.

Mr. Davis is subject to confidentiality and non-competition
restrictions during the employment term and for a period of two
years after the termination of the employment. In the event that
Mr. Davis employment is constructively terminated or
is terminated upon a change in control, he will not be subject
to the non-competition restrictions.

Michael S. Ruley. We have entered into an employment
agreement with Mr. Ruley that provides for his employment
through January 13, 2003. It provides for an annual base
salary of $250,000, which we may increase annually, and for an
annual bonus of up to 55% of base salary, as determined by our
Board of Directors.

If Mr. Ruleys employment is terminated due to
permanent disability or death, his employment agreement provides
that one additional year of continuous employment from the date
of death or permanent disability will be applied to the vesting
schedules of certain stock options. If Mr. Ruleys
employment is constructively terminated, or if specified events
constituting a change in control occur, then the unvested
portion of such options shall vest in full.

Mr. Ruleys employment agreement also provides that in
the event of permanent disability during his employment term, we
will pay him his existing base salary and will make all of his
benefit payments for a period of twelve months following the
date of the disability. In addition, it provides that in the
event that Mr. Ruleys employment is terminated other
than for cause, is constructively terminated or is terminated
upon or following a change in control, we will pay him his
existing base salary, annual bonus and benefits that he would
have received from the time of termination to the expiration of
the agreements initial term. Under certain circumstances,
we will make additional payments to Mr. Ruley for taxes due
with respect to any payments or benefits under his agreement
treated as an excess parachute payment within the
meaning of Section 280G of the Internal Revenue Code or any
comparable provision of state or local tax law.

Under the employment agreement, Mr. Ruleys employment
is constructively terminated if he terminates his employment as
a direct result of:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | a reduction in his initial base salary or in the maximum
	permitted annual bonus percentage;
|
| |  | a material change in his responsibilities that is inconsistent
	with his position; or       
|
| |  | our material breach of the agreement.                                                       

Under the employment agreement, the definition of a change
of control has substantially the same meaning as set forth
in Mr. Akersons employment agreement, the terms of
which are summarized above.

Mr. Ruley is subject to confidentiality and non-competition
restrictions during the employment term and for a period of two
years after the termination of the employment. In the event that
Mr. Ruleys

67



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##### Table of Contents





Vesting of Stock Options in Connection With a Change of
Control of XO.In recognition that the possibility of a
change of control exists and the desire to secure both the
present and future continuity of management, our stock option
plan provides that in certain circumstances unvested stock
options granted under the plan will vest in full in connection
with a change of control of XO. Under the plan, options granted
to non-affiliated directors will vest in full immediately upon a
change of control, and options granted to employees whose
employment is terminated without cause, and certain officers
(including those Named Executive Officers who are currently
executive officers of us) whose employment is terminated without
cause or for good reason, within one year of the change of
control will vest in full. Under the plan, a change of control
means the occurrence of any of the following events, subject to
certain exceptions:



| |   |                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we merge with another company where our stockholders hold less
	than a majority of the combined voting power of the company
	surviving the merger, other than a merger with an affiliate of
	Craig O. McCaw;                      
|
| |  | we sell all or substantially all of our assets to any other
	company, other than to Craig O. McCaw or his affiliates;                                                                                                             
|
| |  | 51% or more of the outstanding voting stock of XO is acquired by
	a person, entity or group (within the meaning of
	Rule 13d-5(b) under the Securities Exchange Act of 1934),
	other than Craig O. McCaw and his affiliates; and
|
| |  | similar transactions or events.                                                                                                                                                                                                   

Under the plan, good reason means the occurrence of any of the
following events:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | significant, adverse change in duties, responsibilities and
	authority;
|
| |  | relocation of more than 30 miles;                                      
|
| |  | reduction of salary or bonus potential; and                            
|
| |  | uncured breach of employers contractual obligations.                  

In addition, the terms of certain options granted to
Mr. Salemme provide for accelerated vesting in the event
that Craig O. McCaw, or an entity or entities he controls,
no longer has control of a majority of the votes of us. In
addition, certain other options granted to Mr. Salemme
provide for accelerated vesting upon the happening of certain
mergers, sales of substantially all of our assets, acquisitions
of our voting power, and changes in the composition of our Board
of Directions, or upon our liquidation or dissolution.

Director
Compensation

Each director is entitled to reimbursement for out-of-pocket
expenses incurred for each meeting of the full Board or a
committee of the Board attended. In addition, Mr. Kauser
received $8,169 in 2001 for services as a member of the Board.
Our stock option plan permits grants and awards to non-employee
directors, and we have in the past granted options to directors
who are not affiliated with us, other than in connection with
their service on the Board of Directors, or one of our
significant stockholders. We made no such grants in 2001. The
stock options granted to Mr. Nothhaft in 2000 when he was
employed by us, and the stock options assumed by us in
connection with the Concentric merger, remain outstanding and
continue to vest so long as he remains on our Board.

Compensation
Committee Interlocks and Insider Participation

During 2001, Messrs. Jeffrey S. Raikes, Peter C. Waal and
Dennis M. Weibling served on the Compensation Committee. From
September 1994 to January 1997, Mr. Weibling was Executive
Vice President of XO.

68



---



##### Table of Contents



Report
on Repricing of Stock Options

Stock Option Exchange Program.In May 2001, we offered
our employees the opportunity to exchange outstanding stock
options held under our option plans with an exercise price per
share of $10.00 or more for new options with an exercise price
to be determined, pursuant to the Schedule TO and Offer to
Exchange of XO Communications, Inc., as amended, that was
originally filed with the Securities and Exchange Commission on
May 29, 2001. This Offer to Exchange was open to all
individuals who at the time of the offer had been U.S. employees
of us or one of our U.S. subsidiaries continuously since
March 18, 2001, other than our Chairman of the Board and
Chief Executive Officer and non-employee members of the Board of
Directors.

Under the terms of the Offer to Exchange, in addition to any
such options tendered for exchange, participants were deemed to
have automatically tendered for exchange any option granted by
us on or after December 26, 2000 regardless of whether the
exercise price per share provided in such an option is more or
less than $10.00. The new options covered 85% of the number of
shares covered by the old options tendered and accepted for
exchange. We granted the new options in exchange for the
cancelled options on January 17, 2002. The exercise price
of the new options equaled the fair market value of our common
stock on the date of that grant, which was $0.14 per share. The
new options were 30% vested on the date of grant and the
remaining 70% vest monthly thereafter in equal installments over
the following 36-month period until fully vested.

We grant stock options to provide our employees an opportunity
to acquire or increase a proprietary interest in us, thereby
allowing us to attract and motivate our employees and creating a
stronger incentive for our employees to expend maximum effort
for our growth and success, and to encourage our employees to
continue their employment with us.

At the time of the Exchange Offer, many of our outstanding
options, whether or not they were currently exercisable, had
exercise prices that were significantly higher than the
then-current market price of our common stock. We believed at
the time that these options did not provide the incentive and
retention features intended. By making the Offer to Exchange, we
intended to provide our employees with the benefit of owning
options that over time may have a greater potential to increase
in value, create better performance incentives for employees and
thereby maximize stockholder value. Providing these benefits was
important for all of our employees, but it was particularly
important for our executive officers, including the Named
Executive Officers (other than Mr. Akerson, who was not
eligible to participate), as we wanted to provide them with
strong incentives to continue their employment with us. Given
the compensation structure of and stock options held by our
Chairman and Chief Executive Officer and at
Mr. Akersons request, we did not believe that it
appropriate for him to participant in the Offer to Exchange.
Similarly, because employee retention was an important factor in
our decision to approve the Offer to Exchange, we did not
believe that it was appropriate for non-employee members of our
Board of Directors who hold stock options to participate in the
Offer to Exchange.



| |                           
| | --------------------------
| | The Compensation Committee
| | Dennis M. Weibling, Chair 
| | Jeffrey S. Raikes         
| | Peter C. Waal             

69



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##### Table of Contents



|                   |                                                            |          |               |                      |  |                          |           |                        |  |  |      |      |  |  |          |          | 
|------------------ | ---------------------------------------------------------- | -------- | ------------- | -------------------- |  | ------------------------ | --------- | ---------------------- |  |  | ---- | ---- |  |  | -------- | -------- | 
|                   |                                                            |          |               | Number of Securities |  |                          |           |                       
|                   |                                                            |          |               | Underlying Options/  |  | Market Price of Stock at |           | Exercise Price At Time
|                   |                                                            |          |               | Repriced or          |  | Time of Repricing or     |           | of Repricing or       
|Name               |                                                            | Date (1) |               | Amended (#) (2)      |  | Amendment ($)            |           | Amendment ($)         
|                   |                                                            |          |               |                      |  |                          |           |                       
|Nathaniel A. Davis |                                                            |          | July 16, 2001 |                      |  |                          | 1,350,000 |                        |  |  | 1.58 |      |  |  | 38.15625 |         
|                   | President and Chief                                        |          |               | July 16, 2001        |  |                          |           | 200,000                |  |  |      | 1.58 |  |  |          | 53.34375 | 
|                   | Operating Officer                                          |          |               | July 16, 2001        |  |                          |           | 125,000                |  |  |      | 1.58 |  |  |          | 12.4375  | 
|                  
|                  
|                  
|                  
|Nancy B. Gofus     |                                                            |          | July 16, 2001 |                      |  |                          | 200,000   |                        |  |  | 1.58 |      |  |  | 38.15625 |         
|                   | Executive Vice                                             |          |               | July 16, 2001        |  |                          |           | 25,000                 |  |  |      | 1.58 |  |  |          | 35.063   | 
|                   | President, Marketing                                       |          |               | July 16, 2001        |  |                          |           | 25,000                 |  |  |      | 1.58 |  |  |          | 12.4375  | 
|                   | and Customer Care                                          |          |               |                      |  |                          |           |                        |  |  |      |      |  |  |          |          | 
|                  
|                  
|                  
|                  
|Michael S. Ruley   |                                                            |          | July 16, 2001 |                      |  |                          | 800       |                        |  |  | 1.58 |      |  |  | 18.3125  |         
|                   | Executive Vice                                             |          |               | July 16, 2001        |  |                          |           | 200,000                |  |  |      | 1.58 |  |  |          | 37.1875  | 
|                   | President, Market Sales                                    |          |               | July 16, 2001        |  |                          |           | 1,600                  |  |  |      | 1.58 |  |  |          | 52.34375 | 
|                   | Operations                                                 |          |               | July 16, 2001        |  |                          |           | 27,500                 |  |  |      | 1.58 |  |  |          | 12.4375  | 
|                  
|                  
|                  
|                  
|Gary D. Begeman    |                                                            |          | July 16, 2001 |                      |  |                          | 200,000   |                        |  |  | 1.58 |      |  |  | 28.40625 |         
|                   | Senior Vice President,                                     |          |               | July 16, 2001        |  |                          |           | 40,000                 |  |  |      | 1.58 |  |  |          | 52.34375 | 
|                   | General Counsel and                                        |          |               | July 16, 2001        |  |                          |           | 30,000                 |  |  |      | 1.58 |  |  |          | 12.4375  | 
|                   | Secretary                                                  |          |               |                      |  |                          |           |                        |  |  |      |      |  |  |          |          | 
|                  
|                  
|                  
|                  
|Douglas Carter     |                                                            |          | July 16, 2001 |                      |  |                          | 40,000    |                        |  |  | 1.58 |      |  |  | 52.34375 |         
|                   | Senior Vice President, Chief Technology Officer            |          |               |                      |  |                          |           |                        |  |  |      |      |  |  |          |          | 
|                  
|                  
|                  
|                  
|Wayne M. Rehberger |                                                            |          | July 16, 2001 |                      |  |                          | 250,000   |                        |  |  | 1.58 |      |  |  | 33.00    |         
|                   | Senior Vice President, Chief Financial Officer             |          |               | July 16, 2001        |  |                          |           | 25,000                 |  |  |      | 1.58 |  |  |          | 12.4375  | 
|                  
|                  
|                  
|                  
|R. Gerald Salemme  |                                                            |          | July 16, 2001 |                      |  |                          | 50,000    |                        |  |  | 1.58 |      |  |  | 52.34375 |         
|                   | Senior Vice President, Regulatory and Legislative
	Affairs |          |               | July 16, 2001        |  |                          |           | 20,000                 |  |  |      | 1.58 |  |  |          | 12.4375  | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                   |                                                            |           |      |                    |  |  |            |            | 
|------------------ | ---------------------------------------------------------- | --------- | ---- | ------------------ |  |  | ---------- | ---------- | 
|                   |                                                            |           |      | Length of Original
|                   |                                                            |           |      | Option Term       
|                   |                                                            | New       |      | Remaining at      
|                   |                                                            | Exercise  |      | Date of Repricing 
|Name               |                                                            | Price ($) |      | or Amendment      
|                   |                                                            |           |      |                   
|Nathaniel A. Davis |                                                            |           | 0.14 |                    |  |  | 102 months |           
|                   | President and Chief                                        |           |      | 0.14               |  |  |            | 103 months | 
|                   | Operating Officer                                          |           |      | 0.14               |  |  |            | 113 months | 
|                  
|                  
|                  
|                  
|Nancy B. Gofus     |                                                            |           | 0.14 |                    |  |  | 102 months |           
|                   | Executive Vice                                             |           |      | 0.14               |  |  |            | 111 months | 
|                   | President, Marketing                                       |           |      | 0.14               |  |  |            | 113 months | 
|                   | and Customer Care                                          |           |      |                    |  |  |            |            | 
|                  
|                  
|                  
|                  
|Michael S. Ruley   |                                                            |           | 0.14 |                    |  |  | 93 months  |           
|                   | Executive Vice                                             |           |      | 0.14               |  |  |            | 102 months | 
|                   | President, Market Sales                                    |           |      | 0.14               |  |  |            | 103 months | 
|                   | Operations                                                 |           |      | 0.14               |  |  |            | 113 months | 
|                  
|                  
|                  
|                  
|Gary D. Begeman    |                                                            |           | 0.14 |                    |  |  | 100 months |           
|                   | Senior Vice President,                                     |           |      | 0.14               |  |  |            | 103 months | 
|                   | General Counsel and                                        |           |      | 0.14               |  |  |            | 113 months | 
|                   | Secretary                                                  |           |      |                    |  |  |            |            | 
|                  
|                  
|                  
|                  
|Douglas Carter     |                                                            |           | 0.14 |                    |  |  | 103 months |           
|                   | Senior Vice President, Chief Technology Officer            |           |      |                    |  |  |            |            | 
|                  
|                  
|                  
|                  
|Wayne M. Rehberger |                                                            |           | 0.14 |                    |  |  | 110 months |           
|                   | Senior Vice President, Chief Financial Officer             |           |      | 0.14               |  |  |            | 113 months | 
|                  
|                  
|                  
|                  
|R. Gerald Salemme  |                                                            |           | 0.14 |                    |  |  | 103 months |           
|                   | Senior Vice President, Regulatory and Legislative
	Affairs |           |      | 0.14               |  |  |            | 113 months | 




|    |                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents the date of the consummation of the
	exchange offer. New replacement options were not granted until
	January 17, 2002 pursuant to the terms of the exchange
	offer.
|   
|(2) | Replacement options granted in exchange for the
	cancellation of existing options covered only 85% of the shares
	underlying the canceled options.                            

70



---



##### Table of Contents






Item 12.     Security Ownership
of Certain Beneficial Owners and Management

The following table sets forth information, as of March 1,
2002, with respect to the beneficial ownership of our capital
stock by (1) each member of the Board of Directors,
(2) our Chief Executive Officer and each of the executive
officers named in the executive compensation tables included in
this annual report, and (3) all directors and executive
officers as a group.

|                                                                  |  |                              |         |                  |  |            |             |             |  |                  |       |  |  |  |       |  |  |  |       | 
|----------------------------------------------------------------- |  | ---------------------------- | ------- | ---------------- |  | ---------- | ----------- | ----------- |  | ---------------- | ----- |  |  |  | ----- |  |  |  | ----- | 
|                                                                  |  |                             
|                                                                  |  | Shares Beneficially Owned(1)
|                                                                  |  |                             
|                                                                  |  |                              |         | Percent of Total |  |           
|                                                                  |  |                              |         | Amount and       |  |            |             | Shares      |  | Percent of Total
|                                                                  |  | Title of                     |         | Nature of        |  | Percent of |             | Outstanding |  | Voting Power    
|Name                                                              |  | Class                        |         | Ownership        |  | Class(%)   |             | (%)(2)      |  | (%)(2)          
|                                                                  |  |                              |         |                  |  |            |             |             |  |                 
|Daniel F. Akerson(3)                                              |  |                              | Class A |                  |  |            | 3,750,000   |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Nathaniel A. Davis(4)                                             |  |                              | Class A |                  |  |            | 862,222     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Joseph L. Cole                                                    |  |                              | Class A |                  |  |            | 12,000      |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Sandra J. Horbach(5)                                              |  |                              | Class A |                  |  |            | 123,529,412 |             |  |                  | 30.03 |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | 23.95 |  |  |  | 8.49  | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Nicolas Kauser(6)                                                 |  |                              | Class A |                  |  |            | 516,450     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Craig O. McCaw(7)                                                 |  |                              | Class A |                  |  |            | 14,725,040  |             |  |                  | 3.58  |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 65,432,562  |             |  |                  | 62.66 |  |  |  | 15.54 |  |  |  | 45.93 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|John H. Myers                                                     |  |                              | Class A |                  |  |            | 0           |             |  |                  | 0     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | 0     |  |  |  | 0     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Sharon L. Nelson(8)                                               |  |                              | Class A |                  |  |            | 88,268      |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Henry R. Nothhaft(9)                                              |  |                              | Class A |                  |  |            | 1,358,239   |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Jeffrey S. Raikes(10)                                             |  |                              | Class A |                  |  |            | 588,268     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Peter C. Waal(11)                                                 |  |                              | Class A |                  |  |            | 57,906      |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Dennis M. Weibling(12)                                            |  |                              | Class A |                  |  |            | 7,646,166   |             |  |                  | 1.86  |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 63,743,574  |             |  |                  | 61.04 |  |  |  | 13.84 |  |  |  | 44.32 | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|R. Gerard Salemme(13)                                             |  |                              | Class A |                  |  |            | 521,920     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Michael S. Ruley(14)                                              |  |                              | Class A |                  |  |            | 479,108     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|Nancy Gofus(15)                                                   |  |                              | Class A |                  |  |            | 173,290     |             |  |                  | *     |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 0           |             |  |                  | 0     |  |  |  | *     |  |  |  | *     | 
|                                                                 
|                                                                 
|                                                                 
|                                                                 
|All directors and executive officers as a group
	(22 persons)(16) |  |                              | Class A |                  |  |            | 148,798,780 |             |  |                  | 35.51 |  |  |  |       |  |  |  |       | 
|                                                                  |  |                              | Class B |                  |  |            | 65,432,562  |             |  |                  | 62.66 |  |  |  | 40.92 |  |  |  | 54.88 | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under the rules of the Securities and Exchange
	Commission, a person is deemed to be the beneficial owner of a
	security if such person, directly or indirectly, has or shares
	the power to vote or direct the voting of such security or the
	power to dispose or direct the disposition of such security. A
	person is also deemed to be a beneficial owner of any securities
	if that person has the right to acquire beneficial ownership
	within 60 days after March 1, 2002. Accordingly, more
	than one person may be deemed to be a beneficial owner of the
	same securities. Unless otherwise indicated by footnote, the
	named individuals have sole voting and investment power with
	respect to the shares of our common stock beneficially owned.
|   
|(2) | Percent of Total Shares Outstanding is based on
	the total of the number of shares outstanding, as of
	March 1, 2002, of our class A and class B common
	stock and the number of shares of class A common stock into
	which all our outstanding voting preferred stock, as of
	March 1, 2002, is convertible. Percent of Total Voting
	Power is based on the voting power attributable to the total
	number of shares outstanding, as of March 1, 2002, of our
	class A and class B common stock and our voting
	preferred stock.                                                                                                                                                                                                                              

71



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##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes 3,450,000 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Akerson upon the exercise of nonqualified stock
	options. Of the shares noted in this table, Mr. Akerson
	holds options to purchase 1,700,000 shares of class A
	common stock that are vested, but which are not currently
	exercisable pursuant to the terms of his employment agreement,
	which are summarized below. Beneficial ownership information for
	Mr. Akerson, who is a member of Eagle River Investments,
	does not include shares of our common stock held by or for the
	benefit of Eagle River Investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) | Includes 510,175 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Davis upon the exercise of nonqualified stock
	options. Also includes 250,000 shares of class A common
	stock issued under our Stock Option Plan that remain subject to
	forfeiture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(5) | Includes 584,375 shares of series C preferred
	stock and 268,750 shares of series G preferred stock held
	by Forstmann Little & Co. Subordinated Debt and Equity
	Management Buyout Partnership-VII, L.P., a Delaware limited
	partnership, or MBO-VII, 265,075 shares of series D preferred
	stock and 131,052 of series H preferred stock held by Forstmann
	Little & Co. Equity Partnership-VI, L.P., a Delaware limited
	partnership, or Equity-VI, and 550 shares of series D preferred
	stock and 198 shares of series H preferred stock held by FL
	Fund, LP, a Delaware limited partnership, which, as of
	March 1, 2002, were convertible into a total of 73,529,412
	shares of class A common stock. Also includes 50,000,000 shares
	of class A common stock held by Equity-VI. FLC XXXIII
	Partnership, a New York general partnership, is the general
	partner of MBO-VII. FLC XXXII Partnership, L.P., a New York
	limited partnership, is the general partner of Equity-VI. FLC
	XXXI Partnership, L.P., a New York limited partnership, is the
	general partner of FL Fund. Ms. Horbach, who is a general
	partner of FLC XXXIII Partnership, FLC XXXII Partnership, and
	the general partner of FLC XXXI Partnership, disclaims
	beneficial ownership of all securities of XO held by the
	Forstmann Little partnerships, except to the extent of her
	pecuniary interests therein.
|   
|(6) | Includes 480,450 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Kauser upon the exercise of nonqualified stock
	options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(7) | Includes 7,079,228 shares of class A common
	stock and 63,743,574 shares of class B common stock held by
	Eagle River Investments, held beneficially by Mr. McCaw as
	a result of his ownership interests in Eagle River Investments.
	Also includes 765,750 shares of class A common stock held
	by, and 26,480 shares of class A common stock obtainable as of
	March 1, 2002 or 60 days thereafter upon the exercise of
	nonqualified stock options held by, Eagle River, Inc., which is
	wholly-owned by Mr. McCaw. Pursuant to the terms of the
	Stock Distribution Agreement between Craig O. McCaw and Wendy P.
	McCaw, Mr. McCaw holds a proxy to vote the number of shares
	of XO stock held by Mrs. McCaw that, when added to all XO
	capital stock held by Mr. McCaw or any of his affiliates or
	over which they have voting rights, are necessary for
	Mr. McCaw to hold 51% of the voting power of XO. Mr. McCaw
	also holds a proxy to vote all shares of common stock held by
	his brother, Keith W. McCaw. No shares owned or controlled by
	Wendy P. McCaw or Keith W. McCaw are included in the beneficial
	holdings of Craig O. McCaw.                                                                                                                                                                                                                                          
|   
|(8) | Represents shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Ms. Nelson upon the exercise of nonqualified stock
	options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(9) | Includes 1,160,529 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Nothhaft upon the exercise of nonqualified stock
	options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 22,068 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Raikes upon the exercise of nonqualified stock
	options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|(11) | Represents shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Waal upon the exercise of nonqualified stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(12) | Includes 7,079,228 shares of class A common stock
	and 63,743,574 shares of class B common stock held by Eagle
	River Investments. Mr. Weibling, who is an officer and a
	member of Eagle River Investments, disclaims beneficial
	ownership of all securities of XO held by or for the benefit of
	Eagle River Investments, except to the extent of his pecuniary
	interest therein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|(13) | Includes 279,120 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Salemme upon the exercise of nonqualified stock
	options. Also includes 50,000 shares of class A common
	stock issued under our Stock Option Plan that remain subject to
	forfeiture. Beneficial ownership information for
	Mr. Salemme, who is a member of Eagle River Investments,
	does not include shares of our common stock held by or for the
	benefit of Eagle River Investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(14) | Includes 436,393 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Mr. Ruley upon the exercise of nonqualified stock
	options. Also includes 30,000 shares of class A common
	stock issued under our Stock Option Plan that remain subject to
	forfeiture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|(15) | Includes 126,144 shares of class A common stock
	obtainable as of March 1, 2002 or 60 days thereafter
	by Ms. Gofus upon the exercise of nonqualified stock
	options. Also includes 30,000 shares of class A common
	stock issued under our Stock Option Plan that remain subject to
	forfeiture.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|(16) | Includes (a) an aggregate of 7,715,157
	shares of class A common stock obtainable as of March 1,
	2002 or 60 days thereafter by directors and executive
	officers as a group upon the exercise of nonqualified stock
	options, (b) 620,000 shares of class A common stock
	issued under our Stock Option Plan that remain subject to
	forfeiture, (c) 73,529,410 shares of class A common stock
	into which 584,375 shares of series C preferred stock and
	268,750 shares of series G preferred stock held by MBO-VII,
	265,075 shares of series D preferred stock and 131,052 shares of
	series H preferred stock held by Equity-VI, and 550 shares of
	series D preferred stock and 198 shares of series H preferred
	stock held by FL Fund, were convertible as of March 1,
	2002, (d) 50,000,000 shares of class A common stock held by
	Equity-VI (see footnote 5 above), (e) 7,079,228 shares
	of class A common stock and 63,743,574 shares of
	class B common stock held by Eagle River Investments, held
	beneficially by Mr. McCaw and Mr. Weibling as a result of
	their ownership interests in Eagle River Investments, and
	(f) 765,750 shares of class A common stock held by,
	and 26,480 shares of class A common stock obtainable as of
	March 1, 2002 or 60 days thereafter upon the exercise
	of nonqualified stock options held by, Eagle River, Inc., which
	is wholly-owned by Mr. McCaw (see footnotes 7 and 12
	above).



|  |             
|- | ------------
|* | Less than 1%

The following table sets forth information, as of March 1,
2002, with respect to the beneficial ownership of our capital
stock of persons known to us to be the beneficial owners of more
than five percent of a class of our common stock (other than
officers and directors). The information below has been

72



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##### Table of Contents





|                                                                                                 |                                                                 |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 
|------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ---------------------------- | ------- | ---------------- |  | ---------- | ---------- | ----------- |  | ---------------- | ----- | ----- |  |  | ----- | ----- |  |  | ----- | ----- | 
|                                                                                                 |                                                                 |                             
|                                                                                                 |                                                                 | Shares Beneficially Owned(1)
|                                                                                                 |                                                                 |                             
|                                                                                                 |                                                                 |                              |         | Percent of Total |  |           
|                                                                                                 |                                                                 |                              |         | Amount and       |  |            |            | Shares      |  | Percent of Total
|                                                                                                 |                                                                 | Title of                     |         | Nature of        |  | Percent of |            | Outstanding |  | Voting Power    
|Name                                                                                             |                                                                 | Class                        |         | Ownership        |  | Class (%)  |            | (%)(2)      |  | (%)(2)          
|                                                                                                 |                                                                 |                              |         |                  |  |            |            |             |  |                 
|Eagle River Investments, LLC (3)                                                                 |                                                                 |                              | Class A |                  |  |            | 7,079,288  |             |  |                  | 1.72  |       |  |  |       |       |  |  |       |      
|                                                                                                 | 2300 Carillon Point                                             |                              |         | Class B          |  |            |            | 63,743,574  |  |                  |       | 61.04 |  |  |       | 13.73 |  |  |       | 44.28 | 
|                                                                                                 | Kirkland, WA 98033                                              |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Wendy P. McCaw                                                                                   |                                                                 |                              | Class B |                  |  |            | 38,890,596 |             |  |                  | 37.24 |       |  |  | 7.54  |       |  |  | 26.72 |      
|                                                                                                 | 1332 Anacapa, Suite 200
	Santa Barbara, CA 93101                |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Forstmann Little & Co.
	Equity Partnership-VI, L.P. (4)                                          |                                                                 |                              | Class A |                  |  |            | 73,301,588 |             |  |                  | 17.82 |       |  |  | 14.21 |       |  |  | 5.04  |      
|                                                                                                 | c/o Forstmann Little & Co. 767 Fifth Avenue
	New York, NY 10153 |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Forstmann Little & Co. Subordinated Debt and
	Equity Management Buyout Partnership-VII, L.P. (5) |                                                                 |                              | Class A |                  |  |            | 50,183,824 |             |  |                  | 12.20 |       |  |  | 9.73  |       |  |  | 3.45  |      
|                                                                                                 | c/o Forstmann Little & Co. 767 Fifth Avenue
	New York, NY 10153 |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 
|                                                                                                
|                                                                                                
|                                                                                                
|                                                                                                
|Putnam Investments, Inc. (6)                                                                     |                                                                 |                              | Class A |                  |  |            | 42,912,889 |             |  |                  | 10.43 |       |  |  | 8.32  |       |  |  | 2.95  |      
|                                                                                                 | One Post Office Square
	Boston, MA 02109                        |                              |         |                  |  |            |            |             |  |                  |       |       |  |  |       |       |  |  |       |       | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under the rules of the Securities and Exchange
	Commission, a person is deemed to be the beneficial owner of a
	security if such person, directly or indirectly, has or shares
	the power to vote or direct the voting of such security or the
	power to dispose or direct the disposition of such security. A
	person is also deemed to be a beneficial owner of any securities
	if that person has the right to acquire beneficial ownership
	within 60 days after March 1, 2002. Accordingly, more
	than one person may be deemed to be a beneficial owner of the
	same securities. Unless otherwise indicated by footnote, the
	named individuals or entities have sole voting and investment
	power with respect to the shares of XO common stock beneficially
	owned.                                                 
|   
|(2) | Percent of Total Shares Outstanding is based on
	the total number of shares outstanding, as of March 1,
	2002, of our class A and class B common stock and the
	total number of shares of class A common stock into which
	all our outstanding voting preferred stock, as of March 1,
	2002, is convertible. Percent of Total Voting Power is based on
	the voting power attributable to the total number of shares
	outstanding, as of March 1, 2002, of our class A and
	class B common stock and voting preferred stock.                                                                                                                                                                                                                                                                                                 
|   
|(3) | Messrs. Akerson, McCaw, Salemme and Weibling
	are members of Eagle River Investments. Because
	Messrs. McCaw and Weibling are officers of Eagle River
	Investments, they may be deemed beneficial owners of the shares
	owned by Eagle River Investments. Mr. Weibling disclaims
	beneficial ownership of all securities of XO held by Eagle River
	Investments, except to the extent of his pecuniary interest
	therein.                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) | As reported in the Schedule 13D of
	Equity-VI, Equity-VI directly owns (a) 265,075 shares of
	series D preferred stock and 131,052 shares of
	series H preferred stock, which, pursuant to the respective
	terms of such stock, are convertible into a total of 23,301,588
	shares of class A common stock, and (b) 50,000,000 shares
	of class A common stock. FLC XXXII Partnership, L.P. is the
	general partner of Equity-VI. Theodore J. Forstmann, Sandra J.
	Horbach, an XO director, Thomas H. Lister, Winston W. Hutchins,
	Jamie C. Nicholls and Gordon A. Holmes are the general partners
	of FLC XXXII. Accordingly, each of the individuals named above
	may be deemed the beneficial owners of shares owned by
	Equity-VI. Excludes 800,000 shares of our class A common
	stock held by Theodore J. Forstmann.
|   
|(5) | As reported in the Schedule 13D of MBO-VII,
	MBO-VII directly owns 584,375 shares of series C preferred stock
	and 268,750 shares of series G preferred stock, which, pursuant
	to the respective terms of such stock, are convertible into a
	total of 50,183,824 shares of class A common stock. FLC XXXIII
	Partnership, L.P. is the general partner of MBO-VII. Theodore J.
	Forstmann, Sandra J. Horbach, an XO director, Thomas H. Lister,
	Winston W. Hutchins, Jamie C. Nicholls and Gordon A. Holmes are
	the general partners of FLC XXXIII. Accordingly, each of the
	individuals named above may be deemed the beneficial owners of
	shares owned by MBO-VII. Excludes 800,000 shares of our
	class A common stock held by Theodore J. Forstmann.                                                               
|   
|(6) | As reported in the most recent amendment to
	Schedule 13G of Putnam Investments, Inc., of this amount,
	39,611,688 shares are beneficially held by Putnam Investment
	Management, Inc. and 3,301,201 shares are held by Putnam
	Advising Company, Inc., which is the investment advisor to
	Putnams institutional clients.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

73



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##### Table of Contents






Item 13.     Certain
Relationships and Related Transactions

Craig O. McCaw.In January 2002, we retained an
entity owned by Craig O. McCaw to act as our agent with
respect to the sale of our Falcon 2000 aircraft, for which it
received a commission of $161,250.

Craig O. McCaw owns a 20% interest and R. Gerard
Salemme owns an 80% interest in Communications
Consultants, Inc., which employs Mr. Salemme and from
which we retain Mr. Salemme for service as XOs Senior
Vice President, Regulatory and Legislative Affairs. See the
Summary Compensation Table for information regarding
payments to Communications Consultants.

McLeodUSA Incorporated.In 2001, we completed several
transactions with McLeodUSA Incorporated. Three limited
partnerships affiliated with Forstmann Little & Co., which
we will refer to for purposes of this discussion as the
Forstmann Little/ McLeod Partnerships, collectively own all of
the outstanding shares of two series of McLeodUSA preferred
stock. Sandra J. Horbach, a member of our board of directors, is
a general partner of each of the three respective partnerships
that serves as a the general partnerships of the Forstmann
Little/ McLeod Partnerships. One of the Forstmann Little/ McLeod
Partnerships is Forstmann Little & Co. Subordinated Debt and
Equity Management Buyout Partnership-VII, L.P., or MBO-VII,
which holds 584,375 shares of our series C preferred stock and
268,750 shares of our series G preferred stock. For further
discussion, see Item 12. Security Ownership of
Certain Beneficial Owners and Management. By including
this information regarding certain transactions with McLeodUSA,
we are not conceding that the relationships among these parties
is of a nature that would require disclosure under applicable
regulations promulgated pursuant to the Securities Exchange Act
of 1934, as amended.

In 2001, McLeodUSA provided interconnection and facilities-based
telecommunications services to us, and we acquired unlit metro
network capacity from McLeodUSA as part of the development of
our Greater Minneapolis/ St. Paul metro network. Prior to the
purchase of this unlit fiber, we had constructed a large switch
center in the Minneapolis/ St. Paul metro area. The purchase of
this unlit fiber accelerated our speed to market and utilization
of certain telephone switch assets. We paid McLeodUSA a total of
$15.8 million for all such services and capacity during 2001. In
2001, we provided limited telecommunications services to
McLeodUSA and constructed unlit metro network capacity for
McLeod. We received a total of $8.1 million for all such
services from McLeodUSA in 2001.

Other Transactions and Relationships.In April 2001, we
lent $700,000 to Henry R. Nothhaft, Vice Chairman, to
provide short term bridge financing to Mr. Nothhaft in
connection with the retirement of amounts due to third parties
that were secured by XO stock. The loan has been paid in full.
The loan had a term of 60 days interest accrued at a per
annual rate of 5%, and was secured by approximately
650,000 shares of XO stock owned by Mr. Nothhaft.

Certain holders of our securities, including Craig O.
McCaw, Eagle River Investments, LLC, Wendy P. McCaw
and affiliates of Forstmann Little & Co., have the
right to require us to register, under the Securities Act of
1933, shares of class A common stock acquired by the holders.
The holders also have the right to include shares of class A
common stock held by them in certain registration statements
filed by us.

74



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##### Table of Contents



PART IV




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

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

|                                                                                                                |  |    
|--------------------------------------------------------------------------------------------------------------- |  | ---
|XO Communications, Inc.                                                                                         |  |    
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Report of Independent Public Accountants                                                                        |  | F-1
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                                   |  | F-2
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Consolidated Statements of Operations for the
	Years Ended December 31, 2001, 2000 and 1999                     |  | F-3
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Consolidated Statement of Shareholders
	Equity (Deficit) for the Years Ended December 31, 2001,
	2000 and 1999 |  | F-4
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Consolidated Statements of Cash Flows for the
	Years Ended December 31, 2001, 2000 and 1999                     |  | F-5
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Notes to Consolidated Financial Statements                                                                      |  | F-6
|                                                                                                               
|                                                                                                               
|                                                                                                               
|                                                                                                               
|Schedule II  Valuation and
	Qualifying Accounts                                                                |  | S-1



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

(b) Reports on Form 8-K:



| |     |                                                                                                                                                                                                                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Current Report on Form 8-K, filed on November 29,
	2001, reporting under Item 5 XO announced that it had
	entered into a preliminary agreement with Forstmann Little and
	Télefonos de México S.A. de C.V., pursuant to which XO
	will receive an investment of $400 million from each
	company, or a total of $800 million, in exchange for new
	equity in the company.
|
| | (2) | Current Report on Form 8-K, filed on December 14,
	2001, reporting under Item 5 XO announced that it had
	requested to voluntary delist its stock from the Nasdaq National
	Market.                                                                                                                                                                                     

75



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##### Table of Contents



SIGNATURES

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



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

Date: March 29, 2002

| |     |                      
| | --- | ---------------------
| | By: | /s/ DANIEL F. AKERSON

| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| |                                                                                                                    
| | Daniel
	F. Akerson 
	                Chief
	Executive Officer 
	                Chairman
	of the Board of Directors

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on March 29, 2002
by the following persons on behalf of the Registrant and in the
capacities indicated:

|                                         |  |                                                                                                               
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------
|Name                                     |  | Title                                                                                                         
|                                         |  |                                                                                                               
|/s/ DANIEL F. AKERSONDaniel F. Akerson   |  | Chief Executive Officer (Principal Executive
	Officer)
	Chairman of the Board of Directors                    
|/s/ WAYNE M. REHBERGERWayne M. Rehberger |  | Senior Vice President, Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)
|/s/ JOSEPH L. COLEJoseph L. Cole         |  | Director                                                                                                      
|/s/ NATHANIEL A. DAVISNathaniel A. Davis |  | Director                                                                                                      
|Sandra J. Horbach                        |  | Director                                                                                                      
|/s/ NICHOLAS KAUSERNicolas Kauser        |  | Director                                                                                                      
|Craig O. McCaw                           |  | Director                                                                                                      
|John H. Myers                            |  | Director                                                                                                      
|/s/ SHARON L. NELSONSharon L. Nelson     |  | Director                                                                                                      
|/s/ HENRY R. NOTHHAFTHenry R. Nothhaft   |  | Director                                                                                                      

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|                                         |  |         
|---------------------------------------- |  | --------
|Name                                     |  | Title   
|                                         |  |         
|/s/ JEFFREY S. RAIKESJeffrey S. Raikes   |  | Director
|/s/ PETER C. WAALPeter C. Waal           |  | Director
|/s/ DENNIS M. WEIBLINGDennis M. Weibling |  | Director

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EXHIBIT INDEX

| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1   |  |  | Stock Purchase Agreement by and among XO
	Communications, Inc., Forstmann Little & Co. Equity
	Partnership-VII, L.P. and Forstmann Little & Co.
	Subordinated Debt and Equity Management Buyout Partnership-VIII,
	L.P. dated January 15, 2002 (Incorporated herein by
	reference to exhibit 10.1 filed with the Current Report on
	Form 8-K, filed on January 17, 2002, of XO
	Communications, Inc.)                                                                                                                   
| | 3.1.1 |  |  | Amended and Restated Certificate of Incorporation
	of XO Communications, Inc. (f/k/a NM Acquisition Corp.)
	(Incorporated herein by reference to exhibit 3.1.1 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))                                                                                                                                      
| | 3.1.2 |  |  | Certificate of Amendment of Certificate of
	Incorporation of XO Communications, Inc. (f/k/a NM Acquisition
	Corp.) (Incorporated herein by reference to exhibit 3.1.2
	filed with the Quarterly Report on Form 10-Q for the
	quarterly period ended June 30, 2000 of XO Communications,
	Inc. (f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))                                                                                                                               
| | 3.1.3 |  |  | Certificate of Amendment of Certificate of
	Incorporation of XO Communications, Inc. (f/k/a NEXTLINK
	Communications, Inc.) (Incorporated herein by reference to
	exhibit 3.1.3 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                      
| | 3.1.4 |  |  | Certificate of Amendment of Certificate of
	Incorporation of XO Communications, Inc. (f/k/a NEXTLINK
	Communications, Inc.) (Incorporated herein by reference to
	exhibit 3.1.4 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended September 30,
	2000 of XO Communications, Inc. and XO Capital, Inc.)                                                                                                                                                                                       
| | 3.2.1 |  |  | Certificate of Designation of the Powers,
	Preferences and Relative, Participating, Optional and Other
	Special Rights of 14% Series A Senior Exchangeable
	Redeemable Preferred Shares and Qualifications, Limitations and
	Restrictions Thereof (Incorporated herein by reference to
	exhibit 3.1.4 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 3.2.2 |  |  | Certificate of Designation of Powers, Preferences
	and Relative, Participating, Optional and Other Special Rights
	of 6 1/2% Series B Cumulative Convertible Preferred
	Stock and Qualifications, Limitations and Restrictions Thereof
	(Incorporated herein by reference to exhibit 3.1.5 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc. ) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))         
| | 3.2.3 |  |  | Amended and Restated Certificate of Designation
	of Powers, Preferences and Relative, Participating, Optional and
	Other Special Rights of Series C Cumulative Convertible
	Participating Preferred Stock and Qualifications, Limitations
	and Restrictions Thereof (Incorporated herein by reference to
	exhibit 3.1 filed with the Quarterly Report on Form 10-Q
	for the quarterly period ended June 30, 2001 of XO
	Communications, Inc. and XO Capital, Inc.)                                                      
| | 3.2.4 |  |  | Amended and Restated Certificate of Designation
	of the Powers, Preferences and Relative, Participating, Optional
	and Other Special Rights of Series D Convertible
	Participating Preferred Stock and Qualifications, Limitations
	and Restrictions Thereof (Incorporated herein by reference to
	exhibit 3.2 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2001
	of XO Communications, Inc. and XO Capital, Inc.)                                                             

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.2.5 |  |  | Certificate of Designation of Voting Power,
	Designation Preferences and Relative, Participating, Optional
	and Other Special Rights and Qualifications, Limitations and
	Restrictions of 13 1/2% Series E Senior Redeemable
	Exchangeable Preferred Stock Due 2010 (Incorporated herein by
	reference to exhibit 3.1.8 filed with the Quarterly Report
	on Form 10-Q for the quarterly period ended June 30,
	2000 of XO Communications, Inc. (f/k/a NEXTLINK Communications,
	Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 3.2.6 |  |  | Certificate of Designation of Voting Power,
	Designation Preferences and Relative, Participating, Optional
	and Other Special Rights and Qualifications, Limitations and
	Restrictions of 7% Series F Convertible Redeemable
	Preferred Stock Due 2010 (Incorporated herein by reference to
	exhibit 3.1.9 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))             
| | 3.2.7 |  |  | Amended and Restated Certificate of Designation
	of the Powers, Preferences and Relative, Participating, Optional
	and Other Special Rights of Series G Cumulative Convertible
	Participating Preferred Stock and Qualifications, Limitation and
	Restrictions Thereof (Incorporated herein by reference to
	exhibit 3.3 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2001
	of XO Communications, Inc. and XO Capital, Inc.)                                                                     
| | 3.2.8 |  |  | Amended and Restated Certificate of Designation
	of the Powers, Preferences and Relative, Participating, Optional
	and Other Special Rights of Series H Convertible
	Participating Preferred Stock and Qualifications, Limitation and
	Restrictions Thereof (Incorporated herein by reference to
	exhibit 3.4 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2001
	of XO Communications, Inc. and XO Capital, Inc.)                                                                                
| | 3.3   |  |  | Restated By-laws of XO Communications, Inc.
	(f/k/a NM Acquisition Corp.) (Incorporated herein by reference
	to exhibit 3.2 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                            
| | 4.1.1 |  |  | Form of stock certificate of 14% Senior
	Exchangeable Redeemable Preferred Shares (Incorporated herein by
	reference to exhibit 4.4 filed with the Annual Report on
	Form 10-KSB for the year ended December 31, 1996 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                                       
| | 4.1.2 |  |  | Form of stock certificate of Class A common
	stock (Incorporated herein by reference to exhibit 4.4
	filed with the Registration Statement on Form S-1 of
	NEXTLINK Communications, Inc. (Commission File
	No. 333-32001))                                                                                                                                                                                                                                                                                                                
| | 4.1.3 |  |  | Form of stock certificate of 6 1/2%
	Cumulative Convertible Preferred Stock (Incorporated herein by
	reference to exhibit 4.1.3 filed with the Annual Report on
	Form 10-K for the year ended December 31, 1999 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                                             
| | 4.1.4 |  |  | Form of stock certificate of Series C
	Cumulative Convertible Participating Preferred Stock
	(Incorporated herein by reference to exhibit 4.1.4 filed
	with the Annual Report on Form 10-K for the year ended
	December 31, 1999 of NEXTLINK Communications, Inc. and
	NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                            
| | 4.1.5 |  |  | Form of stock certificate of Series D
	Convertible Participating Preferred Stock (Incorporated herein
	by reference to exhibit 4.1.5 filed with the Annual Report
	on Form 10-K for the year ended December 31, 1999 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                                        
| | 4.1.6 |  |  | Form of stock certificate of 13 1/2%
	Series E Senior Redeemable Exchangeable Preferred Stock Due
	2010 (Incorporated herein by reference to exhibit 4.3 filed
	with the Registration Statement on Form S-4 of Concentric
	Network Corporation (Commission File No. 333-58641))                                                                                                                                                                                                                                                           

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.1.7 |  |  | Form of stock certificate of 7% Series F
	Convertible Redeemable Preferred Stock Due 2010 (Incorporated
	herein by reference to exhibit 4.1.7 filed with the
	Quarterly Report on Form 10-Q for the quarterly period
	ended June 30, 2000 of XO Communications, Inc. (f/k/a
	NEXTLINK Communications, Inc.) and XO Capital, Inc. (f/k/a
	NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                                                       
| | 4.1.8 |  |  | Form of stock certificate of Series G
	Cumulative Convertible Participating Preferred Stock
	(Incorporated herein by reference to exhibit 4.1.8 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                                                     
| | 4.1.9 |  |  | Form of stock certificate of Series H
	Convertible Participating Preferred Stock (Incorporated herein
	by reference to exhibit 4.1.9 filed with the Quarterly
	Report on Form 10-Q for the quarterly period ended
	June 30, 2000 of XO Communications, Inc. (f/k/a NEXTLINK
	Communications, Inc.) and XO Capital, Inc. (f/k/a NEXTLINK
	Capital, Inc.))                                                                                                                                                                                                                                                                                                
| | 4.2.1 |  |  | Indenture, dated as of April 25, 1996, by
	and among NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.), NEXTLINK Capital, Inc. and United States
	Trust Company of New York, as Trustee, relating to 12 1/2%
	Senior Notes due April 15, 2006, including form of global
	note (Incorporated herein by reference to exhibit 4.1 filed
	with the Registration Statement on Form S-4 of NEXTLINK
	Communications, L.L.C. and NEXTLINK Capital, Inc. (Commission
	File No. 333-4603))                                                                                                                                                 
| | 4.2.2 |  |  | First Supplemental Indenture, dated as of
	January 31, 1997, by and among NEXTLINK Communications,
	Inc. (predecessor to XO Communications, Inc.), NEXTLINK
	Communications, L.L.C. (predecessor to XO Communications, Inc.),
	NEXTLINK Capital, Inc. and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.6 filed with the Annual Report on
	Form 10-KSB for the year ended December 31, 1996 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                        
| | 4.2.3 |  |  | Second Supplemental Indenture, dated June 3,
	1998, amending Indenture dated April 25, 1996, by and among
	NEXTLINK Communications, Inc. (predecessor to XO Communications,
	Inc.), NEXTLINK Capital, Inc. and United States Trust Company of
	New York, as Trustee (Incorporated herein by reference to
	exhibit 4.10 filed with the Registration Statement on
	Form S-4 of NEXTLINK Communications, Inc. (Commission File
	No. 333-53975))                                                                                                                                                                                                            
| | 4.2.4 |  |  | Third Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated April 25,
	1996, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., NEXTLINK Capital, Inc., XO
	Communications, Inc., f/k/a NM Acquisition Corp. and successor
	by merger to the Issuer, and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.2.4 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 4.3.1 |  |  | Indenture dated September 25, 1997 between
	United States Trust Company, as Trustee and NEXTLINK
	Communications, Inc. (predecessor to XO Communications, Inc.),
	relating to the 9 5/8% Senior Notes due 2007 (Incorporated
	herein by reference to exhibit 4.7 filed with the
	Registration Statement on Form S-3 of NEXTLINK
	Communications, Inc. (Commission File No. 333-77577))                                                                                                                                                                                                                                                                  
| | 4.3.2 |  |  | First Supplemental Indenture, dated June 3,
	1998, amending Indenture dated September 25, 1997, by and
	between NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.11 filed with the Registration Statement on
	Form S-4 of NEXTLINK Communications, Inc. (Commission File
	No. 333-53975))                                                                                                                                                                                                                               

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| |       |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.3.3 |  |  | Second Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated September 25,
	1997, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and United States Trust Company of New York, as Trustee
	(Incorporated herein by reference to exhibit 4.3.3 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.)) 
| | 4.4.1 |  |  | Indenture, dated March 3, 1998, between
	United States Trust Company, as Trustee and NEXTLINK
	Communications, Inc. (predecessor to XO Communications, Inc.),
	relating to the 9% Senior Notes due 2008 (Incorporated herein by
	reference to exhibit 4.7 filed with the Annual Report on
	Form 10-KSB for the year ended December 31, 1997 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                             
| | 4.4.2 |  |  | First Supplemental Indenture, dated June 3,
	1998, amending Indenture dated March 3, 1998, by and
	between NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.12 filed with the Registration Statement on
	Form S-4 of NEXTLINK Communications, Inc. (Commission File
	No. 333-53975))                                                                                                                                                                                                                  
| | 4.4.3 |  |  | Second Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of March 3,
	1999, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and United States Trust Company of New York, as Trustee
	(Incorporated herein by reference to exhibit 4.4.3 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))
| | 4.5.1 |  |  | Indenture, dated April 1, 1998, between
	United States Trust Company, as Trustee and NEXTLINK
	Communications, Inc. (predecessor to XO Communications, Inc.),
	relating to the 9.45% Senior Discount Notes due 2008
	(Incorporated herein by reference to exhibit 4.9 filed with
	the quarterly report on Form 10-Q for the quarterly period
	ended June 30, 1998 of NEXTLINK Communications, Inc. and
	NEXTLINK Capital, Inc.)                                                                                                                                                                                                       
| | 4.5.2 |  |  | First Supplemental Indenture, dated June 3,
	1998, amending Indenture dated April 1, 1998, by and
	between NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.13 filed with the Registration Statement on
	Form S-4 of NEXTLINK Communications, Inc. (Commission File
	No. 333-53975))                                                                                                                                                                                                                  
| | 4.5.3 |  |  | Second Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of April 1,
	1998, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and United States Trust Company of New York, as Trustee
	(Incorporated herein by reference to exhibit 4.5.3 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))
| | 4.6.1 |  |  | Indenture, dated November 12, 1998, by and
	among NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of New
	York, as trustee relating to the 10 3/4% Senior Notes due
	2008 (Incorporated herein by reference to exhibit 4.1 filed
	with the Registration Statement on Form S-4 of NEXTLINK
	Communications, Inc. (Commission File No. 333-71749))                                                                                                                                                                                                                              

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| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------ |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.6.2  |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of
	November 12, 1998, by and among NEXTLINK Communications,
	Inc., as Issuer and predecessor to NM Acquisition Corp., XO
	Communications, Inc., f/k/a NM Acquisition Corp. and successor
	by merger to the Issuer, and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.6.2 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 4.7.1  |  |  | Indenture, dated June 1, 1999, by and among
	NEXTLINK Communications, Inc. (predecessor to XO Communications,
	Inc.) and United States Trust Company of New York, as Trustee,
	relating to the 10 3/4% Senior Notes due 2009 (Incorporated
	herein by reference to exhibit 4.16 filed with the
	quarterly report on Form 10-Q for the quarterly period
	ended September 30, 1999 of NEXTLINK Communications, Inc.
	and NEXTLINK Capital, Inc.)                                                                                                                                                                                           
| | 4.7.2  |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of June 1,
	1999, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and United States Trust Company of New York, as Trustee
	(Incorporated herein by reference to exhibit 4.7.2 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))     
| | 4.8.1  |  |  | Indenture, dated June 1, 1999, by and among
	NEXTLINK Communications Inc. (predecessor to XO Communications,
	Inc.) and United States Trust Company of Texas, as Trustee,
	related to the 12 1/4% Senior Discount Notes due 2009
	(Incorporated herein by reference to exhibit 4.17 filed
	with the quarterly report on Form 10-Q for the quarterly
	period ended September 30, 1999 of NEXTLINK Communications, Inc.
	and NEXTLINK Capital, Inc.)                                                                                                                                                                                       
| | 4.8.2  |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of June 1,
	1999, by and among NEXTLINK Communications, Inc., as Issuer and
	predecessor to NM Acquisition Corp., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and United States Trust Company of Texas, as Trustee
	(Incorporated herein by reference to exhibit 4.8.2 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))        
| | 4.9.1  |  |  | Indenture, dated November 17, 1999, by and
	among NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of New
	York, as Trustee, relating to the 10 1/2% Senior Notes due
	2009 (Incorporated herein by reference to exhibit 4.1(i)
	filed with the Registration Statement on Form S-4 of
	NEXTLINK Communications, Inc. (Commission File
	No. 333-30388))                                                                                                                                                                                                                            
| | 4.9.2  |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of
	November 17, 1999, by and among NEXTLINK Communications,
	Inc., as Issuer and predecessor to NM Acquisition Corp., XO
	Communications, Inc., f/k/a NM Acquisition Corp. and successor
	by merger to the Issuer, and United States Trust Company of New
	York, as Trustee (Incorporated herein by reference to
	exhibit 4.9.2 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 4.10.1 |  |  | Indenture, dated November 17, 1999, by and
	among NEXTLINK Communications, Inc. (predecessor to XO
	Communications, Inc.) and United States Trust Company of Texas,
	as Trustee, relating to the 12 1/8% Senior Discount Notes
	due 2009 (Incorporated herein by reference to
	exhibit 4.1(ii) filed with the Registration Statement on
	Form S-4 of NEXTLINK Communications, Inc. (Commission File
	No. 333-30388))                                                                                                                                                                                                                     

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| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.10.2 |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated as of
	November 17, 1999, by and among NEXTLINK Communications,
	Inc., as Issuer and predecessor to NM Acquisition Corp., XO
	Communications, Inc., f/k/a NM Acquisition Corp. and successor
	by merger to the Issuer, and United States Trust Company of
	Texas, as Trustee (Incorporated herein by reference to
	exhibit 4.10.2 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                       
| | 4.11.1 |  |  | Indenture, dated as of December 18, 1997,
	between Concentric Network Corporation (predecessor to XO
	Communications, Inc.), as Issuer, and Chase Manhattan Bank and
	Trust Company, National Association, as Trustee (Incorporated
	herein by reference to exhibit 4.2 filed with the
	Registration Statement on Form S-4 of Concentric Network
	Corporation (Commission File No. 333-45055))                                                                                                                                                                                                                                                                
| | 4.11.2 |  |  | First Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated December 18,
	1997, by and among Concentric Network Corporation (predecessor
	to XO Communications, Inc.), as Issuer, and Chase Manhattan Bank
	and Trust Company, National Association, as Trustee
	(Incorporated herein by reference to exhibit 4.11.2 filed
	with the Quarterly Report on Form 10-Q for the quarterly
	period ended June 30, 2000 of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) and XO Capital, Inc.
	(f/k/a NEXTLINK Capital, Inc.))                                                                                               
| | 4.11.3 |  |  | Second Supplemental Indenture, dated as of
	June 15, 2000, amending Indenture dated December 18,
	1997, by and among Concentric Network Corporation, as Issuer and
	predecessor to XO Communications, Inc., XO Communications, Inc.,
	f/k/a NM Acquisition Corp. and successor by merger to the
	Issuer, and Chase Manhattan Bank and Trust Company, National
	Association, as Trustee (Incorporated herein by reference to
	exhibit 4.11.3 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))
| | 4.12   |  |  | Indenture, dated as of January 12, 2001, by
	and among XO Communications, Inc., as Issuer and U.S. Trust
	Company, National Association, as Trustee (Incorporated herein
	by reference to exhibit 4.12 filed with Amendment
	No. 1 on Form S-3 to Registration Statement on
	Form S-4 of XO Communications, Inc. (Commission File
	No. 333-34974))                                                                                                                                                                                                                                                                                                            
| | 4.13.1 |  |  | Warrant Agreement, dated as of December 18,
	1997, between Concentric Network Corporation (predecessor to XO
	Communications, Inc.) and Chase Manhattan Bank and Trust
	Company, National Association, as warrant agent (Incorporated
	herein by reference to exhibit 10.45 filed with the
	Registration Statement on Form S-4 of Concentric Network
	Corporation (Commission File No. 333-45055))                                                                                                                                                                                                                                                            
| | 4.13.2 |  |  | Warrant Registration Rights Agreement, dated as
	of December 18, 1997, between Concentric Network
	Corporation (predecessor to XO Communications, Inc.) and the
	Initial Purchasers. (Incorporated herein by reference to
	exhibit 10.46 filed with the Registration Statement on
	Form S-4 of Concentric Network Corporation (Commission File
	No. 333-45055))                                                                                                                                                                                                                                                                                               
| | 4.13.3 |  |  | Common Stock Purchase Warrant, dated
	June 29, 1999, issued to Microsoft Corporation by
	Concentric Network Corporation (predecessor to XO
	Communications, Inc.) (Incorporated herein by reference to
	exhibit 4.12.5 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2000
	of XO Communications, Inc. (f/k/a NEXTLINK Communications, Inc.)
	and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                     
| | 10.1.1 |  |  | Stock Option Plan of XO Communications, Inc.
	(f/k/a NEXTLINK Communications, Inc.) (Incorporated herein by
	reference to exhibit 10.1.1 filed with the Quarterly Report
	on Form 10-Q for the quarterly period ended June 30,
	2000 of XO Communications, Inc. (f/k/a NEXTLINK Communications,
	Inc.) and XO Capital, Inc. (f/k/a NEXTLINK Capital, Inc.))                                                                                                                                                                                                                                                                                                   

83



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| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                    
| | ------ |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1.2 |  |  | Concentric Network Corporation 1995 Stock
	Incentive Plan for Employees and Consultants (Amended and
	Restated as of May 30, 2001) (Incorporated here by
	reference to exhibit (d)(2) filed with Schedule TO
	(Rule 13e.4) Tender Offer Statement under
	Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act
	of 1934 (Amendment No. 2), filed on June 14, 2001)           
| | 10.1.3 |  |  | Concentric Network Corporation 1996 Stock Plan
	(Amended and Restated as of May 30, 2001) (Incorporated
	here by reference to exhibit (d)(3) filed with
	Schedule TO (Rule 13e.4) Tender Offer Statement under
	Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act
	of 1934 (Amendment No. 2), filed on June 14, 2001)                                                    
| | 10.1.4 |  |  | Delta Internet Services, Inc. 1996 Stock Option
	Plan (Amended and Restated as of May 30, 2001)
	(Incorporated here by reference to exhibit (d)(4) filed
	with Schedule TO (Rule 13e.4) Tender Offer Statement
	under Section 14(d)(1) or 13(e)(1) of the Securities
	Exchange Act of 1934 (Amendment No. 2), filed on
	June 14, 2001)                                             
| | 10.1.5 |  |  | Concentric Network Corporation 1997 Stock Plan
	(Amended and Restated as of May 30, 2001) (Incorporated
	here by reference to exhibit (d)(5) filed with
	Schedule TO (Rule 13e.4) Tender Offer Statement under
	Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act
	of 1934 (Amendment No. 2), filed on June 14, 2001)                                                    
| | 10.1.6 |  |  | Concentric Network Corporation 1999 Nonstatutory
	Stock Option Plan (Amended and Restated as of May 30, 2001)
	(Incorporated here by reference to exhibit (d)(6) filed with
	Schedule TO (Rule 13e.4) Tender Offer Statement under
	Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act
	of 1934 (Amendment No. 2), filed on June 14, 2001)                                
| | 10.2.1 |  |  | Registration Rights Agreement, dated as of
	January 15, 1997, between NEXTLINK Communications, Inc.
	(predecessor to XO Communications, Inc. and the signatories
	listed therein (Incorporated herein by reference to
	exhibit 10.4 filed with the Annual Report on
	Form 10-KSB for the year ended December 31, 1996 of
	NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)
| | 10.2.2 |  |  | Registration Rights Agreement, dated as of
	November 4, 1997, between NEXTLINK Communications, Inc.
	(predecessor to XO Communications, Inc.) and Wendy P. McCaw
	(Incorporated herein by reference to exhibit 10.5 filed
	with the Annual Report on Form 10-K for the year ended
	December 31, 1999 of NEXTLINK Communications, Inc. and
	NEXTLINK Capital, Inc.)                 
| | 10.2.3 |  |  | Registration Right Agreement, dated as of
	June 30, 1999, between NEXTLINK Communications, Inc. and
	Craig O. McCaw (Incorporated herein by reference to
	exhibit 10.6 filed with the Annual Report on Form 10-K
	for the year ended December 31, 1999 of NEXTLINK Communications,
	Inc. and NEXTLINK Capital, Inc.)                                                               
| | 10.2.4 |  |  | Second Amended and Restated Registration Rights
	Agreement, dated as of June 5, 2001, between XO
	Communications, Inc. and the purchasers listed on the signature
	pages thereto, (Incorporated herein by reference to
	exhibit 10.1 filed with the Quarterly Report on
	Form 10-Q for the quarterly period ended June 30, 2001
	of XO Communications, Inc. and XO Capital, Inc.)  
| | 10.2.5 |  |  | Registration Right Agreement, dated as of
	June 16, 2000, between XO Communications, Inc. (f/k/a NM
	Acquisition Corp.) and Craig O. McCaw (Incorporated herein
	by reference to exhibit 99.4 filed with the Current Report
	on Form 8-K filed on June 22, 2000 of NEXTLINK
	Communications, Inc.)                                                                                 
| | 10.3.1 |  |  | Employment Agreement, effective
	September 21, 1999, by and between Daniel Akerson and
	NEXTLINK Communications, Inc. (predecessor to XO Communications,
	Inc.) (Incorporated herein by reference to exhibit 10.11
	filed with the quarterly report on Form 10-Q for the
	quarterly period ended September 30, 1999 of NEXTLINK
	Communications, Inc. and NEXTLINK Capital, Inc.)  

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| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------ |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.3.2 |  |  | Employment Agreement, dated as of January 3,
	2000, by and between Nathaniel A. Davis and NEXTLINK
	Communications, Inc. (Incorporated herein by reference to
	exhibit 10.11 filed with the Annual Report on
	Form 10-K for the year ended December 31, 1999 of NEXTLINK
	Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 10.3.3 |  |  | Employment Agreement, dated as of
	January 13, 2000, by and between Michael S. Ruley and
	XO Communications, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10.4   |  |  | Cost sharing and IRU Agreement, dated
	July 18, 1998, between Level 3 Communications, LLC and
	INTERNEXT LLC (Incorporated herein by reference to
	exhibit 10.8 filed with the quarterly report on
	Form 10-Q for the quarterly period ended September 30,
	1998 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 10.5.1 |  |  | Credit and Guaranty Agreement, dated as of
	February 3, 2000, among NEXTLINK Communications, Inc.
	(predecessor to XO Communications, Inc.), certain subsidiaries
	of NEXTLINK Communications, Inc., as guarantors, various
	lenders, Goldman Sachs Credit Partners L.P., as syndication
	agent, Toronto Dominion (Texas), Inc., as administrative agent,
	Barclays Bank PLC, and The Chase Manhattan Bank, as
	co-documentation agents and Goldman Sachs Credit Partners L.P.,
	and TD Securities (USA) Inc., as joint lead arrangers
	(Incorporated herein by reference to exhibit 10.1 filed
	with the current report on Form 8-K filed on
	February 16, 2000 of NEXTLINK Communications, Inc.)                                                  
| | 10.5.2 |  |  | Forbearance Agreement dated December 14,
	2001 to the Credit and Guaranty Agreement, dated as of
	February 3, 2000, among NEXTLINK Communications, Inc.
	(predecessor to XO Communications, Inc.), certain subsidiaries
	of NEXTLINK Communications, Inc., as guarantors, various
	lenders, Goldman Sachs Credit Partners L.P., as syndication
	agent, Toronto Dominion (Texas), Inc., as administrative agent,
	Barclays Bank PLC, and The Chase Manhattan Bank, as co-
	documentation agents and Goldman Sachs Credit Partners L.P., and
	TD Securities (USA) Inc., as joint lead arrangers
	(Incorporated herein by reference to exhibit 10.2 filed
	with the Current Report on Form 8-K, filed on
	January 17, 2002, of XO Communications, Inc.)
| | 21     |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | 23.1   |  |  | Consent of Arthur Andersen                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 99.1   |  |  | Letter to the Commission regarding Arthur
	Andersen LLPs representations to the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

85



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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of XO Communications, Inc.:

We have audited the accompanying consolidated balance sheets of
XO Communications, Inc. (XO Parent, a Delaware
corporation) and subsidiaries (collectively the
Company) as of December 31, 2001 and 2000, and
the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of XO Communications, Inc. and subsidiaries as of
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred recurring
operating losses and negative cash flows from operating
activities, has defaulted on its debt obligations and has begun
to implement a proposed recapitalization that contemplates XO
Parent filing a voluntary petition for relief under
chapter 11 of the United States Bankruptcy Code. These
matters, among others, raise substantial doubt about the
Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
described in Note 1. The accompanying consolidated
financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might
otherwise be necessary should the Company be unable to continue
as a going concern.

Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed
in the index of financial statements is presented for purposes
of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial
data required to be set forth therein in relation to the basic
financial statements taken as a whole.

/s/ ARTHUR ANDERSEN LLP

Vienna, VA

February 6, 2002

F-1



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##### Table of Contents



XO Communications, Inc.






Consolidated Balance Sheets


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


|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |            |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ---------- | --------- |  | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | December 31,                              
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | 2001                                       |           | 2000      
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |           
|ASSETS                                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Current assets:                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                         |                                            | $         | 246,189    |           |  | $         | 493,004    |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Marketable securities                                                                                                                                                                                                                                                                                                                                                                             |                                            |           | 508,978    |           |  |           | 1,367,959  |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accounts receivable, net of allowance for
	doubtful accounts of $32,492 and $20,999, respectively                                                                                                                                                                                                                                                                                                 |                                            |           | 216,753    |           |  |           | 181,309    |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Other current assets                                                                                                                                                                                                                                                                                                                                                                              |                                            |           | 85,137     |           |  |           | 71,536     |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Pledged securities                                                                                                                                                                                                                                                                                                                                                                                |                                            |           | 16,623     |           |  |           | 17,415     |          
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total current assets                       |           |            | 1,073,680 |  |           |            | 2,131,223 | 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Property and equipment, net                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 3,742,577 |            |           |  | 2,794,105 |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Fixed wireless licenses, net                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 947,545   |            |           |  | 997,333   |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Goodwill and other intangibles, net                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 2,030,030 |            |           |  | 2,914,876 |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Other assets, net                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 136,633   |            |           |  | 247,838   |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total assets                               |           | $          | 7,930,465 |  |           | $          | 9,085,375 | 
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Current liabilities:                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accounts payable                                                                                                                                                                                                                                                                                                                                                                                  |                                            | $         | 156,488    |           |  | $         | 357,451    |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                               |                                            |           | 322,997    |           |  |           | 279,534    |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                                          |                                            |           | 114,882    |           |  |           | 46,018     |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Long-term debt in default                                                                                                                                                                                                                                                                                                                                                                         |                                            |           | 5,109,503  |           |  |           |           |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Current portion of capital lease obligations                                                                                                                                                                                                                                                                                                                                                      |                                            |           | 18,097     |           |  |           | 24,820     |          
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total current liabilities                  |           |            | 5,721,967 |  |           |            | 707,823   | 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Long-term debt                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |          |            |           |  | 4,396,596 |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Other long-term liabilities                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 129,092   |            |           |  | 45,539    |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total liabilities                          |           |            | 5,851,059 |  |           |            | 5,149,958 | 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Redeemable preferred stock, par value $0.01 per
	share, 25,000,000 shares authorized: 7,857,612 and 13,189,227
	shares issued and outstanding on December 31, 2001 and
	December 31, 2000, respectively; aggregate liquidation
	preference of $1,693,328 and $2,100,093 on December 31,
	2001 and December 31, 2000, respectively |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            | 1,781,990 |            |           |  | 2,097,016 |           
|Commitments and contingencies                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|Stockholders equity:                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Common stock, par value $0.02 per share, stated
	at amounts paid in Class A, 1,000,000,000 shares
	authorized: 337,774,204 and 262,010,715 shares issued and
	outstanding on December 31, 2001 and December 31,
	2000, respectively; Class B, 120,000,000 shares authorized:
	104,423,158 and 105,414,226 shares issued and outstanding on
	December 31, 2001 and December 31, 2000, respectively |                                            |           | 4,628,509  |           |  |           | 4,392,646  |          
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Deferred compensation                                                                                                                                                                                                                                                                                                                                                                             |                                            |           | (37,428    | )         |  |           | (72,050    | )        
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                                     |                                            |           | 10,406     |           |  |           | (17,041    | )        
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                  | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                               |                                            |           | (4,304,071 | )         |  |           | (2,465,154 | )        
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total stockholders equity                 |           |            | 297,416   |  |           |            | 1,838,401 | 
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   | Total liabilities and stockholders equity |           | $          | 7,930,465 |  |           | $          | 9,085,375 | 
|                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                   |                                            |           |            |           |  |           |           

See accompanying notes to consolidated financial statements.

F-2



---



##### Table of Contents



XO Communications, Inc.






Consolidated Statements of Operations


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


|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |         |         | 
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------ | ----------- | --------- | --------- | ---- | ----------- | ------- | --------- | - | ----------- | ------- | ------- | 
|                                                                                       |                                                                                   |                         
|                                                                                       |                                                                                   | Year Ended December 31, 
|                                                                                       |                                                                                   |                         
|                                                                                       |                                                                                   | 2001                     |             | 2000      |           | 1999
|                                                                                       |                                                                                   |                          |             |           |           |     
|Revenue                                                                                |                                                                                   | $                        | 1,258,567   |           |           | $    | 723,826     |         |           | $ | 274,324     |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Costs and expenses:                                                                    |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Cost of service                                                                   |                          |             | 527,698   |           |      |             | 302,666 |           |   |             | 133,083 |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Selling, operating and general (excludes
	stock-based compensation)               |                          |             | 971,714   |           |      |             | 730,604 |           |   |             | 355,489 |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Stock-based compensation                                                          |                          |             | 37,173    |           |      |             | 48,328  |           |   |             | 12,872  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Depreciation and amortization                                                     |                          |             | 1,162,671 |           |      |             | 617,714 |           |   |             | 108,475 |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Restructuring charges (including $28,016 in
	non-cash stock compensation in 1999) |                          |             | 509,202   |           |      |             |        |           |   |             | 30,935  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | In-process research and development                                               |                          |             |          |           |      |             | 36,166  |           |   |             |        |        
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|                                                                                       |                                                                                   | Total costs and expenses |             |           | 3,208,458 |      |             |         | 1,735,478 |   |             |         | 640,854 | 
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Loss from operations                                                                   |                                                                                   |                          | (1,949,891  | )         |           |      | (1,011,652  | )       |           |   | (366,530    | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Interest income                                                                        |                                                                                   |                          | 77,938      |           |           |      | 180,905     |         |           |   | 90,961      |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Interest expense, net                                                                  |                                                                                   |                          | (465,401    | )         |           |      | (434,122    | )       |           |   | (283,123    | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Other income (loss), net                                                               |                                                                                   |                          | (93,781     | )         |           |      | 163,570     |         |           |   |            |        
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Net loss before extraordinary item                                                     |                                                                                   |                          | (2,431,135  | )         |           |      | (1,101,299  | )       |           |   | (558,692    | )      
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Extraordinary gain on early extinguishments of
	debt, net                              |                                                                                   |                          | 345,010     |           |           |      |            |         |           |   |            |        
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Net loss                                                                               |                                                                                   |                          | (2,086,125  | )         |           |      | (1,101,299  | )       |           |   | (558,692    | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Gain on repurchases of preferred stock, net                                            |                                                                                   |                          | 376,879     |           |           |      |            |         |           |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Preferred stock dividends and accretion of
	preferred stock redemption obligation, net |                                                                                   |                          | (129,671    | )         |           |      | (146,356    | )       |           |   | (69,189     | )      
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Net loss applicable to common shares                                                   |                                                                                   | $                        | (1,838,917  | )         |           | $    | (1,247,655  | )       |           | $ | (627,881    | )      
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted:                                          |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net loss before extraordinary item                                                     |                                                                                   | $                        | (6.02       | )         |           | $    | (3.42       | )       |           | $ | (2.23       | )      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Extraordinary gain on early extinguishments of
	debt, net                              |                                                                                   |                          | 0.86        |           |           |      |            |         |           |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Gain on repurchases of preferred stock, net                                            |                                                                                   |                          | 0.93        |           |           |      |            |         |           |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Preferred stock dividends and accretion of
	preferred stock redemption obligation, net |                                                                                   |                          | (0.32       | )         |           |      | (0.45       | )       |           |   | (0.28       | )      
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted                                           |                                                                                   | $                        | (4.55       | )         |           | $    | (3.87       | )       |           | $ | (2.51       | )      
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        
|Weighted average shares, basic and diluted                                             |                                                                                   |                          | 403,882,956 |           |           |      | 322,089,883 |         |           |   | 250,264,918 |        
|                                                                                       |                                                                                   |                          |             |           |           |      |             |         |           |   |             |        

See accompanying notes to consolidated financial statements.

F-3



---



##### Table of Contents



XO Communications, Inc.






Consolidated Statements of Stockholders Equity


(Dollars in thousands)


|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |           |  |            |  
|---------------------------- | ------------------------------------------------------------------------------------- | ------------------- | -------------------------------------------------------------------------------------------------------- | ---------- |  | ----------- | ----------- | ------------- | - | ----------- | --------- | --------- |  | ----- | ------- | ------- | - | - | ------- | - |  | -------- | ---------- | - |  | ---------- | --------- | --------- |  | ---------- | -
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |            
|                             |                                                                                       | Common Stock        |                                                                                                          |            |  |             |             |               |   |            
|                             |                                                                                       |                     |                                                                                                          |            |  | Accumulated |             |               |   |            
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             | Other         |   |             |           |          
|                             |                                                                                       | Shares              |                                                                                                          |            |  |             |             | Comprehensive |   |             |           |          
|                             |                                                                                       |                     |                                                                                                          |            |  | Deferred    |             | Income        |   | Accumulated |           |          
|                             |                                                                                       | Class A             |                                                                                                          | Class B    |  | Amount      |             | Compensation  |   | (Loss)      |           | Deficit   |  | Total
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |      
|Balance at December 31, 1998 |                                                                                       |                     | 96,680,468                                                                                               |            |  |             | 121,191,608 |               |   | $           | 354,525   |           |  | $     | (11,370 | )       |   | $ |        |   |  | $        | (589,618   | ) |  | $          | (246,463  | )        
|                            
|                            
|                            
|                            
|                             | Issuance of common stock in public offering                                           |                     |                                                                                                          | 16,928,200 |  |             |             |              |   |             |           | 310,533   |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 310,533   | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock in acquisition                                               |                     |                                                                                                          | 22,863,324 |  |             |             |              |   |             |           | 350,438   |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 350,438   | 
|                            
|                            
|                            
|                            
|                             | Issuance of compensatory stock options                                                |                     |                                                                                                          |           |  |             |             |              |   |             |           | 86,991    |  |       |         | (86,991 | ) |   |         |  |  |          |            |  |  |            |           |          | 
|                            
|                            
|                            
|                            
|                             | Compensation attributable to stock options vesting                                    |                     |                                                                                                          |           |  |             |             |              |   |             |           |          |  |       |         | 12,872  |   |   |         |  |  |          |            |  |  |            |           | 12,872    | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock through employee benefit
	plans                              |                     |                                                                                                          | 9,193,416  |  |             |             |              |   |             |           | 36,468    |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 36,468    | 
|                            
|                            
|                            
|                            
|                             | Conversion of Class B common stock into
	Class A common stock                         |                     |                                                                                                          | 4,782,120  |  |             |             | (4,782,120    | ) |             |           |          |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           |          | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock for purchase of minority
	interest                           |                     |                                                                                                          |           |  |             |             | 1,075,612     |   |             |           | 210       |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 210       | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock under leasing arrangement                                    |                     |                                                                                                          | 9,736      |  |             |             |              |   |             |           | 67        |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 67        | 
|                            
|                            
|                            
|                            
|                             |                                                                                       | Comprehensive loss: |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |           |  |           
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Net loss                                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (558,692   | )         |           |  | (558,692   | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Preferred stock dividends and accretion of
	preferred stock redemption obligation                        |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (69,189    | )         |           |  | (69,189    | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Other comprehensive income  net
	unrealized holding gains                                               |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  | 150,634  |            |   |  |           |           |           |  | 150,634    |  
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|                             |                                                                                       |                     | Total comprehensive loss                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  |           |           |           |  | (477,247   | )
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|Balance at December 31, 1999 |                                                                                       |                     | 150,457,264                                                                                              |            |  |             | 117,485,100 |               |   | $           | 1,139,232 |           |  | $     | (85,489 | )       |   | $ | 150,634 |   |  | $        | (1,217,499 | ) |  | $          | (13,122   | )        
|                            
|                            
|                            
|                            
|                             | Issuance of common stock, options and warrants in
	acquisitions                       |                     |                                                                                                          | 77,536,299 |  |             |             |              |   |             |           | 3,002,309 |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 3,002,309 | 
|                            
|                            
|                            
|                            
|                             | Issuance of compensatory stock options and
	restricted stock                          |                     |                                                                                                          | 200,440    |  |             |             |              |   |             |           | 30,641    |  |       |         | (22,704 | ) |   |         |  |  |          |            |  |  |            |           | 7,937     | 
|                            
|                            
|                            
|                            
|                             | Compensation attributable to stock options vesting                                    |                     |                                                                                                          |           |  |             |             |              |   |             |           |          |  |       |         | 36,143  |   |   |         |  |  |          |            |  |  |            |           | 36,143    | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock through employee benefit
	plans                              |                     |                                                                                                          | 13,150,088 |  |             |             |              |   |             |           | 126,604   |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 126,604   | 
|                            
|                            
|                            
|                            
|                             | Conversion of Class B common stock into
	Class A common stock                         |                     |                                                                                                          | 12,070,874 |  |             |             | (12,070,874   | ) |             |           |          |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           |          | 
|                            
|                            
|                            
|                            
|                             | Conversion of 6 1/2% redeemable cumulative
	preferred stock into Class A common stock |                     |                                                                                                          | 8,595,750  |  |             |             |              |   |             |           | 93,860    |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 93,860    | 
|                            
|                            
|                            
|                            
|                             | Comprehensive loss:                                                                   |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |           | 
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Net loss                                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (1,101,299 | )         |           |  | (1,101,299 | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Preferred stock dividends and accretion of
	preferred stock redemption obligation                        |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (146,356   | )         |           |  | (146,356   | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Other comprehensive income  net
	unrealized holding gains and foreign currency translation
	adjustments |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  | 38,870   |            |   |  |           |           |           |  | 38,870     |  
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Realized net gains transferred to current period
	earnings                                               |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  | (206,545 | )          |   |  |           |           |           |  | (206,545   | )
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|                             |                                                                                       |                     | Total comprehensive loss                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  |           |           |           |  | (1,415,330 | )
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|Balance at December 31, 2000 |                                                                                       |                     | 262,010,715                                                                                              |            |  |             | 105,414,226 |               |   | $           | 4,392,646 |           |  | $     | (72,050 | )       |   | $ | (17,041 | ) |  | $        | (2,465,154 | ) |  | $          | 1,838,401 |          
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|                             | Issuance of common and restricted stock in
	acquisitions                              |                     |                                                                                                          | 11,211,416 |  |             |             |              |   |             |           | 29,055    |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 29,055    | 
|                            
|                            
|                            
|                            
|                             | Issuance of compensatory stock options                                                |                     |                                                                                                          |           |  |             |             |              |   |             |           | 2,551     |  |       |         | (2,551  | ) |   |         |  |  |          |            |  |  |            |           |          | 
|                            
|                            
|                            
|                            
|                             | Compensation attributable to stock options and
	restricted stock vesting              |                     |                                                                                                          |           |  |             |             |              |   |             |           |          |  |       |         | 37,173  |   |   |         |  |  |          |            |  |  |            |           | 37,173    | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock through employee benefit
	plans                              |                     |                                                                                                          | 11,939,685 |  |             |             |              |   |             |           | 30,899    |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 30,899    | 
|                            
|                            
|                            
|                            
|                             | Conversion of Class B common stock into
	Class A common stock                         |                     |                                                                                                          | 991,068    |  |             |             | (991,068      | ) |             |           |          |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           |          | 
|                            
|                            
|                            
|                            
|                             | Conversion of 6 1/2% redeemable cumulative
	preferred stock into Class A common stock |                     |                                                                                                          | 1,621,320  |  |             |             |              |   |             |           | 17,700    |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 17,700    | 
|                            
|                            
|                            
|                            
|                             | Issuance of common stock related to equity
	investment, net of offering costs         |                     |                                                                                                          | 50,000,000 |  |             |             |              |   |             |           | 155,658   |  |       |         |        |   |   |         |  |  |          |            |  |  |            |           | 155,658   | 
|                            
|                            
|                            
|                            
|                             |                                                                                       | Comprehensive loss: |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |           |  |           
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Net loss                                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (2,086,125 | )         |           |  | (2,086,125 | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Gain on repurchases of preferred stock, net                                                              |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | 376,879    |           |           |  | 376,879    |  
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Preferred stock dividends and accretion of
	preferred stock redemption obligation, net                   |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  | (129,671   | )         |           |  | (129,671   | )
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Other comprehensive income  net
	unrealized holding gains and foreign currency translation
	adjustments |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  | 22,556   |            |   |  |           |           |           |  | 22,556     |  
|                            
|                            
|                            
|                            
|                             |                                                                                       |                     | Realized net losses transferred to current period
	earnings                                              |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  | 4,891    |            |   |  |           |           |           |  | 4,891      |  
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|                             |                                                                                       |                     | Total comprehensive loss                                                                                 |            |  |            |             |               |   |            |           |           |  |      |         |         |   |  |         |   |  |         |            |   |  |           |           |           |  | (1,811,470 | )
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          
|Balance at December 31, 2001 |                                                                                       |                     | 337,774,204                                                                                              |            |  |             | 104,423,158 |               |   | $           | 4,628,509 |           |  | $     | (37,428 | )       |   | $ | 10,406  |   |  | $        | (4,304,071 | ) |  | $          | 297,416   |          
|                             |                                                                                       |                     |                                                                                                          |            |  |             |             |               |   |             |           |           |  |       |         |         |   |   |         |   |  |          |            |   |  |            |           |          

See accompanying notes to consolidated financial statements.

F-4



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##### Table of Contents



XO Communications, Inc.

Consolidated Statements of Cash Flows

(Dollars in thousands)


|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------- | ---------- | --------- | - | ---- | ----------- | -------- | - | - | ---------- | ------- | -
|                                                                                      |                                                           |                        
|                                                                                      |                                                           | Year Ended December 31,
|                                                                                      |                                                           |                        
|                                                                                      |                                                           | 2001                    |            | 2000      |   | 1999
|                                                                                      |                                                           |                         |            |           |   |     
|OPERATING ACTIVITIES:                                                                 |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net loss                                                                              |                                                           | $                       | (2,086,125 | )         |   | $    | (1,101,299  | )        |   | $ | (558,692   | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Adjustments to reconcile net loss to net cash
	used in operating activities:          |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Depreciation and amortization                             |                         |            | 1,162,671 |   |      |             | 617,714  |   |   |            | 108,475 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Stock-based compensation                                  |                         |            | 37,173    |   |      |             | 48,328   |   |   |            | 12,872  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Restructuring charges                                     |                         |            | 502,737   |   |      |             |         |   |   |            | 28,016  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | In-process research and development                       |                         |            |          |   |      |             | 36,166   |   |   |            |        |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Equity in losses of unconsolidated entities               |                         |            | 3,492     |   |      |             | 6,417    |   |   |            | 4,386   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Net losses (gains) on impairment or sale of
	investments  |                         |            | 92,312    |   |      |             | (168,846 | ) |   |            |        |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accretion of interest on senior notes                     |                         |            | 135,845   |   |      |             | 119,293  |   |   |            | 68,731  |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Extraordinary gain on early extinguishments of
	debt, net |                         |            | (345,010  | ) |      |             |         |   |   |            |        |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Changes in assets and liabilities, net of effects
	from acquisitions:                 |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accounts receivable                                       |                         |            | (43,254   | ) |      |             | (68,761  | ) |   |            | (44,631 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Other assets                                              |                         |            | (66,566   | ) |      |             | (42,167  | ) |   |            | 4,344   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accounts payable                                          |                         |            | 4,413     |   |      |             | (11,620  | ) |   |            | (6,924  | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                      | Accrued liabilities                                       |                         |            | 41,435    |   |      |             | 5,361    |   |   |            | 34,231  |  
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|Net cash used in operating activities                                                 |                                                           |                         | (560,877   | )         |   |      | (559,414    | )        |   |   | (349,192   | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|INVESTING ACTIVITIES:                                                                 |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchases of property and equipment                                                   |                                                           |                         | (1,433,746 | )         |   |      | (1,380,629  | )        |   |   | (611,511   | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Prepayment for network assets                                                         |                                                           |                         | (120,800   | )         |   |      |            |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Payments to acquire fixed wireless licenses                                           |                                                           |                         | (206       | )         |   |      | (49,502     | )        |   |   | (508,888   | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net releases (assumptions) of pledged
	securities                                     |                                                           |                         | 150        |           |   |      | 33,386      |          |   |   | (19,624    | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Sales of marketable securities and investments                                        |                                                           |                         | 2,912,454  |           |   |      | 19,337,905  |          |   |   | 9,203,057  |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Purchases of marketable securities                                                    |                                                           |                         | (2,031,072 | )         |   |      | (19,381,106 | )        |   |   | (9,095,139 | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cash (paid for) acquired in acquisitions                                              |                                                           |                         | (25,203    | )         |   |      | 46,940      |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Investments in unconsolidated entities                                                |                                                           |                         | (10,175    | )         |   |      | (71,489     | )        |   |   | (18,239    | )      
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|Net cash used in investing activities                                                 |                                                           |                         | (708,598   | )         |   |      | (1,464,495  | )        |   |   | (1,050,344 | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|FINANCING ACTIVITIES:                                                                 |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net proceeds from issuance of redeemable
	preferred stock                             |                                                           |                         |           |           |   |      | 1,248,901   |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Borrowings under senior secured credit facility                                       |                                                           |                         | 625,000    |           |   |      | 375,000     |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Proceeds from issuance of unsecured notes                                             |                                                           |                         | 517,500    |           |   |      |            |          |   |   | 1,651,419  |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net proceeds from sale of common stock and
	modification of preferred stock agreement |                                                           |                         | 248,657    |           |   |      |            |          |   |   | 310,533    |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Proceeds from issuance of common stock under
	employee benefit plans                  |                                                           |                         | 30,899     |           |   |      | 98,655      |          |   |   | 36,468     |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Repurchase of senior notes                                                            |                                                           |                         | (201,883   | )         |   |      |            |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Repurchase of redeemable preferred stock                                              |                                                           |                         | (88,424    | )         |   |      |            |          |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Repayment of capital lease and other obligations                                      |                                                           |                         | (44,124    | )         |   |      | (6,809      | )        |   |   | (2,954     | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Dividends paid on convertible preferred stock                                         |                                                           |                         | (53,778    | )         |   |      | (49,984     | )        |   |   | (13,000    | )      
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Costs incurred in connection with financing
	activities                               |                                                           |                         | (14,200    | )         |   |      | (17,100     | )        |   |   | (33,963    | )      
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|Net cash provided by financing activities                                             |                                                           |                         | 1,019,647  |           |   |      | 1,648,663   |          |   |   | 1,948,503  |        
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|Effect of exchange rate changes on cash                                               |                                                           |                         | 3,013      |           |   |      | (213        | )        |   |   |           |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net increase (decrease) in cash and cash
	equivalents                                 |                                                           |                         | (246,815   | )         |   |      | (375,459    | )        |   |   | 548,967    |        
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Cash and cash equivalents, beginning of year                                          |                                                           |                         | 493,004    |           |   |      | 868,463     |          |   |   | 319,496    |        
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        
|Cash and cash equivalents, end of year                                                |                                                           | $                       | 246,189    |           |   | $    | 493,004     |          |   | $ | 868,463    |        
|                                                                                      |                                                           |                         |            |           |   |      |             |          |   |   |            |        

See accompanying notes to consolidated financial statements.

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##### Table of Contents



XO Communications, Inc.

Notes to Consolidated Financial Statements

December 31, 2001, 2000 and 1999


1.  ORGANIZATION AND DESCRIPTION OF BUSINESS

Overview

XO Communications Inc., a Delaware corporation (XO
Parent), through its subsidiaries, owns and operates an
integrated metropolitan and nationwide fiber optic network that
provides broadband communication services, local and long
distance voice communication services and a wide array of data
services to over 60 United States markets. Voice services
include local and long distance services, interactive voice
response systems and shared tenant services. Offered data
services include Internet access, private data networking and
hosting services. The Company also offers combined voice and
data services in flat rate bundled packages.

Organization

The consolidated financial statements include the accounts and
activities of XO Communications, Inc. (formerly NEXTLINK
Communications, Inc.), and its subsidiaries (collectively
referred to as the Company or XO). The
consolidated financial statements also include the results of
Concentric Network Corporation (Concentric)
commencing June 16, 2000, the date at which Concentric
merged with XO. The Company, through predecessor entities, was
formed in September 1994. As of December 31, 2001, the
Company was majority controlled by Craig O. McCaw through
shares of Class A and Class B common stock held by
Eagle River Investments, LLC, an entity controlled by
Mr. McCaw, and other shares of the Companys
Class A and Class B common stock owned or controlled
by Mr. McCaw.

Recapitalization

In 2001, the capital markets became increasingly reluctant to
finance telecommunications companies generally and emerging
telecommunications companies, such as XO, in particular. In
light of these market conditions and the Companys funding
needs, during 2001, XO took dramatic steps to conserve cash on
hand by reducing its operating expenses, as discussed in
Note 3, reducing its debt service and preferred security
dividend payments as discussed in Notes 9 and 10, and
reducing capital expansion plans which required, among other
things, amending the Companys agreements with Level 3
Communications (Level 3) to acquire network
capacity, as discussed in Note 6. Despite implementation of
these measures, the Company continues to require significant
cash to fund its operating expenses, debt service and capital
expenditures until it generates positive cash flows from
operations.

In the second half of 2001, conditions in the capital markets
for telecommunications companies continued to deteriorate until
they were closed entirely to emerging telecommunications
companies like XO. Consequently, in October 2001, the Company
retained Houlihan Lokey Howard & Zukin Capital as its
outside financial advisor to assist XO in exploring a variety of
deleveraging alternatives, including stand-alone
recapitalizations and third-party investment scenarios, both in
and out of bankruptcy.

On November 28, 2001, XO Parent entered into a non-binding
term sheet with a group of investors with respect to an
$800 million investment in XO Parent subject to the
satisfaction of certain conditions including a substantial
recapitalization of XO Parents balance sheet. The investor
group consisted of two investment partnerships sponsored by
Forstmann Little & Co., Forstmann Little & Co.
Equity Partnership-VII, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership-VIII,
L.P. (together, the Forstmann Little Investors), and
Télefonos de México S.A. de C.V. (Telmex
and, collectively with the Forstmann Little Investors, the
Investors).

Following the execution of the term sheet with the Investors,
and in anticipation of the related recapitalization transaction,
XO Parent ceased making all cash interest and dividend payments
on its

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##### Table of Contents





On January 15, 2002, XO Parent entered into a definitive
Stock Purchase Agreement (the Stock Purchase
Agreement) with the Investors, which contemplates an
$800 million investment by the Investors in exchange for an
80% equity interest in recapitalized XO Parent. Completion of
this investment is conditioned on, among other things, the
resolution of certain pending litigation, the absence of a
material adverse change in the Companys business, receipt
of regulatory approvals and a reduction in its total outstanding
indebtedness to no more than $1.0 billion of borrowings
under the Facility in addition to certain other secured
indebtedness and capital lease obligations. If the balance sheet
recapitalization is implemented through a bankruptcy proceeding,
its completion will require approval of the bankruptcy court and
satisfaction of other conditions under bankruptcy law. The Stock
Purchase Agreement further provides that 2% of reorganized XO
Parents equity would be allocated to the Companys
senior management team and 18% of reorganized XO Parents
equity would be allocated to other persons. The agreement
provides that up to $200 million of the investment could be
used in connection with the recapitalization.

While the terms of the Stock Purchase Agreement were being
negotiated, XO Parent and the Investors engaged in further
negotiations with an informal steering committee of the lenders
under the Facility concerning amendments to the Facility that
would facilitate the proposed investment. As a result of these
negotiations, the Company reached a preliminary understanding
with this informal steering committee of lenders concerning the
terms on which they would agree to support the balance sheet
recapitalization contemplated by the Stock Purchase Agreement
and amend the Facility. These proposed amendments would leave
the entire $1.0 billion principal amount of the Facility
outstanding, but would extend the maturity dates and
amortization schedules for loans under the Facility for three
years. The proposed amendments would also modify other terms of
the Facility, including certain financial and other covenants,
in ways that generally provide us with increased financial
flexibility.

The Company has also received a preliminary term sheet
describing an alternative investment and recapitalization
proposal sponsored by certain holders of XO Parents senior
notes. The Company and its financial and legal advisors are
reviewing and analyzing the terms of this proposal and are in
discussions with the sponsors of the proposal and
representatives of the lenders under the Facility regarding its
terms. In this analysis, the Company also continues to evaluate
whether the interests of the Company and its stakeholders are
better served by proceeding with the transactions contemplated
by the Stock Purchase Agreement.

Because the discussions continue with the Investors, the
sponsors of the second senior noteholders proposal and the
informal steering committee of lenders under the Facility, the
definitive plans for raising the additional capital the Company
needs and for completing the related balance sheet
recapitalization has not been determined. Based on the
transactions contemplated by the Stock Purchase Agreement and
the senior noteholders proposal, the Company currently
anticipates that a feasible investment and recapitalization of
XO would entail some or all of the following (collectively, the
Proposed Recapitalization):



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an investment in the company in exchange for a significant
	equity interest in the recapitalized company;                                                                             
|
| |  | reinstatement of the entire $1.0 billion principal amount
	of the Facility with modifications that extend maturity dates
	and amortization schedules for the loans under the Facility;

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##### Table of Contents





| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | holders of certain debt securities of XO Parent receiving
	consideration in the form of cash and/or equity interests in the
	recapitalized company in exchange for their current interests;
	and
|
| |  | other secured claims and general unsecured claims of XO being
	paid in full in accordance with their respective terms.                                                                          

The Company anticipates that in order to complete any proposed
investment and recapitalization it would be necessary for XO
Parent to file a voluntary petition for relief under
chapter 11 of title 11 of the Bankruptcy Code and that
the investment and recapitalization would be implemented through
the confirmation and consummation of a plan of reorganization
approved by the bankruptcy court in the bankruptcy proceedings.
In such a case, the Company currently anticipates that the plan
of reorganization would provide that holders of claims and
interests with respect to the equity securities of, or rights to
acquire equity securities of, XO Parent would be entitled to
little or no recovery and that those claims and interests would
be cancelled for little or no consideration. Accordingly, and as
indicated in previous disclosures, the Company anticipates that
all, or substantially all, of the value of all current
investments in common stock and equivalents of XO Parent will be
lost.

The Company conducts its operations through subsidiaries of XO
Parent. While it implements the Proposed Recapitalization, the
Company expects its subsidiaries to continue to operate in the
ordinary course of business. The Companys plans with
respect to the Proposed Recapitalization contemplate that its
trade suppliers, unsecured trade creditors, employees and
customers will not be adversely affected while XO Parent is
involved in the recapitalization process, even if that process
involves chapter 11 bankruptcy proceedings. During this
recapitalization process, the Company has attempted to maintain
normal and regular trade terms with its suppliers and customers.
There can be no assurance that suppliers will continue to
provide normal trade credit or credit on terms acceptable to it,
if at all, or that customers will continue to do business or
enter into new business with the Company.

The Company anticipates that the completion of the Proposed
Recapitalization will require the support of many of the
Companys creditors, as well as satisfaction or waiver of
the conditions to complete the transactions contemplated by the
related investment agreements. If the Proposed Recapitalization
is completed through a chapter 11 bankruptcy proceeding,
any proposed plan of reorganization would be subject to
confirmation by the bankruptcy court after it has been voted on
by certain creditors whose interest would be impaired by the
plan, including the lenders under the Facility and holders of XO
Parents senior notes, and satisfaction or waiver of
certain conditions in addition to the conditions to complete the
transactions contemplated by the related investment agreements.

If the Proposed Recapitalization described above and the
transactions contemplated by the relevant investment agreements
are consummated without substantial modification, the Company
anticipates that it would (1) emerge from bankruptcy with a
$5.9 billion reduction of its existing debt and preferred
stock obligations; (2) have an amended Facility in place
which extends the maturity and repayment terms of the underlying
loans; and (3) have sufficient cash to fund its business
operations pending any unforeseen future events or further
deterioration in the U.S. economy.

In conjunction with its plans to recapitalize its balance sheet,
the Company ceased making scheduled interest payments due under
the terms of XO Parents unsecured notes and dividend
payments due on its preferred stock effective December 1,
2001. Assuming that XO Parent does not pay cash interest on its
unsecured notes, or cash dividends on its redeemable preferred
stock, the Company estimates that its cash and marketable
securities on hand as of December 31, 2001 totaling
$755.2 million would be sufficient to fund its operations
through most, if not all, of 2002.

If the Proposed Recapitalization is completed and implemented
through a chapter 11 bankruptcy proceeding, the Company
will be subject to the provisions of Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code
(SOP 90-7). Under this guidance, the Company
may qualify for and implement Fresh Start reporting
upon emergence from bankruptcy, which would establish a new
basis of accounting for the reorganized company. Under Fresh
Start reporting, the value of a reorganized company would be
determined based on the amount a willing buyer

F-8



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##### Table of Contents





No assurance can be given that the Companys creditors will
support the Proposed Recapitalization, or that, if the Proposed
Recapitalization is implemented through consummation of a plan
of reorganization pursuant to a bankruptcy proceeding, parties
entitled to vote will vote in favor of the plan of
reorganization or that the plan of reorganization will be
confirmed by the bankruptcy court, or will not be subsequently
modified. If the Investors terminate the Stock Purchase
Agreement, or the Proposed Recapitalization is not completed,
and if the Company is not able to develop and implement a
feasible alternative recapitalization transaction, it may be
forced to liquidate under applicable provisions of the
Bankruptcy Code. There can be no assurance of the level of
recovery to which the Companys secured and unsecured
creditors would receive.

Going
Concern

The consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The
Company has incurred recurring operating losses and negative
cash flows from operating activities, and, as discussed in
Note 9, XO Parent has defaulted on its debt obligations.
These financial issues raise substantial doubt about the
Companys ability to continue as a going concern. Although
XO Parent is a party to a definitive Stock Purchase Agreement,
there can be no assurance that the Company will be able to
successfully recapitalize its balance sheet, receive regulatory
approval and meet the other conditions to consummate the
investment contemplated by the Stock Purchase Agreement or any
alternative recapitalization transaction, or that its liquidity
and capital resources will be sufficient to maintain its normal
operations. Due to the Proposed Recapitalization, there is no
assurance that the carrying amounts of assets will be realized
or that liabilities will be liquidated or settled for the
amounts recorded. It is expected that the implementation of the
Proposed Recapitalization will result in the settlement of
certain liabilities at amounts well below their current carrying
amount and the application of Fresh Start reporting, if
applicable, upon XO Parents emergence from bankruptcy,
will result in the significant write-down of the recorded values
of the Companys long-lived and other assets. The ability
of the Company to continue as a going concern is dependent upon
a number of factors including, but not limited to, completion of
the Proposed Recapitalization and the infusion of a significant
amount of capital, customer and employee retention, and the
Companys continued ability to provide high quality
services. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and
classification of liabilities that might result from the outcome
of this uncertainty.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles
of Consolidation

The Companys consolidated financial statements include all
of the assets, liabilities and results of operations of
subsidiaries in which the Company has a controlling interest.
All inter-company accounts and transactions among consolidated
entities have been eliminated.

F-9



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##### Table of Contents



Preparation
of Consolidated Financial Statements

The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the reporting
period. Management periodically assesses the accuracy of these
estimates and assumptions. Actual results could differ from
those estimates.

Certain reclassifications have been made to prior period amounts
in order to conform to the current year presentation. Such
reclassifications had no effect on net loss or total
stockholders equity.

Cash
and Cash Equivalents

The Company considers all highly liquid investments with
maturities of three months or less at the time of purchase to be
cash equivalents. Cash equivalents consist primarily of money
market accounts that are available on demand. The carrying
amount of these instruments approximates fair value due to their
short maturities.

Marketable
Securities

The Company classifies investments in equity securities as
available-for-sale and records such investments at fair value.
The fair values are based on quoted market prices. Unrealized
gains and losses on available-for-sale marketable securities are
reported as a separate component of comprehensive income.
Realized gains and losses for available-for-sale securities are
recognized in interest income. The Companys marketable
securities consist of U.S. government agency issued and other
high-grade and highly liquid securities with original maturities
beyond three months.

Pledged
Securities

As of December 31, 2001 and 2000, the Company had pledged
$16.6 million and $17.4 million, respectively, in
marketable securities as collateral for outstanding letters of
credit that expire within one year. The pledged securities are
stated at cost, adjusted for accrued interest. The fair value of
the pledged securities approximates their carrying value.

Long-lived
Assets

Long-lived assets, including property and equipment, fixed
wireless licenses, goodwill and identifiable intangible assets
to be held and used, are currently reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to Statement of
Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121).
Pursuant to SFAS No. 121, impairment is determined by
comparing the carrying value of these long-lived assets to
managements best estimate of the future undiscounted cash
flows expected to result from the use of the assets and their
eventual disposition. The Company performs this analysis at the
entity level by grouping together all long-lived assets,
including goodwill, and comparing this amount to expected
undiscounted future cash flows, including expected future
capital expenditures and excluding debt service. The cash flow
projections used to make this assessment are consistent with the
cash flow projections that management uses internally to assist
in making key decisions, including the development of the
Proposed Recapitalization. In the event an impairment exists, a
loss is recognized based on the amount by which the carrying
value exceeds the fair value of the asset, which is generally
determined by using quoted market prices or valuation techniques
such as the discounted present value of expected future cash
flows, appraisals, or other pricing models as appropriate. The
Company believes that no such impairment existed in accordance
with SFAS No. 121 as of December 31, 2001 or 2000. In
the event that there are changes in the planned use of the
Companys long-term assets or its expected future
undiscounted cash flows are reduced significantly, the
Companys assessment of its ability to recover the carrying
value of these assets under SFAS No. 121 would change.

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Because the Companys best estimate of undiscounted future
cash flows generated from these assets, exceeds their carrying
value for each of the periods presented, no impairment pursuant
to SFAS No. 121 exists. However, as more fully described in
New Accounting Pronouncements, beginning in the
first quarter of 2002, the Companys goodwill will be
subject to the impairment test required by SFAS No. 142
which will likely result in all, or substantially all, of the
amounts attributed to goodwill being written off. Impairment
assessment under SFAS No. 142 is based on fair value,
determined by using market prices, current prices for similar
assets and liabilities or a discounted cash flow methodology.
This determination of impairment differs from the assessment
required under SFAS No. 121, which is based on expected
future undiscounted cash flows and not fair value. In addition,
assuming the Proposed Recapitalization is implemented through
consummation of a plan of reorganization pursuant to a
bankruptcy proceeding, the Company may be required to apply
Fresh Start reporting under which its assets and liabilities
would be recorded at their then fair values. This would result
in a significant write-down of the Companys remaining
long-lived assets.

Property
and Equipment

Property and equipment is stated at historical cost net of
accumulated depreciation. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the
assets beginning in the month telecommunications networks and
acquired bandwidth are substantially complete and available for
use and in the month equipment and furniture are acquired. The
estimated useful lives of property and equipment are determined
based on historical usage with consideration given to
technological changes and trends in the industry that could
impact the network architecture and asset utilization.
Telecommunications networks and bandwidth include the deployment
of fiber optic cable and telecommunications hardware and
software for the expressed purpose of delivering
telecommunications services. Costs of additions and improvements
are capitalized, and repairs and maintenance are charged to
expense as incurred. Direct costs of constructing property and
equipment are capitalized including interest costs related to
construction.

Equipment held under capital leases is stated at the lower of
the fair value of the asset or the net present value of the
minimum lease payments at the inception of the lease. For
equipment held under capital leases, depreciation is provided
using the straight-line method over the shorter of the estimated
useful lives of the assets owned or the related lease term.

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

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

Investments
in Fixed Wireless Licenses

Investments in fixed wireless licenses consist of direct costs
to acquire fixed wireless licenses. The estimated useful life is
20 years, which represents the estimated license term with
renewal. Amortization commences when the license is placed into
use, or when commercial service using fixed wireless technology
is deployed in the licenses geographic area. As discussed
in New Accounting Pronouncements, the Company
expects to continue to amortize its fixed wireless licenses
consistent with the Companys current accounting policies
when it adopts SFAS No. 142 in 2002.

Goodwill
and Other Intangibles

Goodwill and other intangibles consist primarily of goodwill
acquired in the Concentric merger. Such costs are amortized
using the straight-line method over the estimated useful lives
of the assets. Substantially all of the Companys goodwill
and other intangibles are amortized over a period up to
5 years. As discussed in New Accounting
Pronouncements, the Company expects to write off all, or
substantially all, of its goodwill in the first quarter of 2002
when it adopts SFAS No. 142. The Company

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Other
Assets

Other assets consist primarily of investments in both publicly
traded and privately held companies as well as deferred costs.
The Company defers direct financing costs incurred in connection
with obtaining the Companys debt facilities, including
underwriting and advisory fees, which are amortized over the
term of the financing. The Company also defers direct labor
costs related to customer installations, which are amortized
ratably over the estimated customer service period.

The Company uses the equity method to account for its
investments in entities in which it has the ability to
influence, but not control the affiliates operations.
Under the equity method, investments are originally recorded at
cost and adjusted to recognize the Companys proportionate
share of net earnings or losses of the entities as they occur.
Investments in entities in which the Company has no significant
influence are accounted for under the cost method. The Company
regularly reviews its investment portfolio to determine if any
declines in value are other than temporary. Fair market value
for publicly traded companies is based on the current market
price of the securities. With respect to investments in
privately held companies, the Company reviews historical and
forecasted financial information, as well as the market
performance of comparable publicly traded companies, to assess
fair market value. The Company uses the following factors to
assess whether declines in the value of its equity investments
are other than temporary: (1) the length of time historical
cost exceeds fair market value, (2) the Companys
assessment of the financial condition and the near term
prospects of the investee companies, and (3) the
Companys intent with respect to the investments.

During 2001 and 2000, the slowing economy had a negative impact
on the equity value of companies in the telecommunications
sector. In light of these circumstances and based on the
Companys review of its investment portfolio in this
sector, the Company recorded an other than temporary impairment
charge in other income (loss) of $89.0 million in 2001
and $57.7 million in 2000 with respect to its public and
private equity investments. The remaining carrying value is
$5.0 million and $112.0 million as of
December 31, 2001 and 2000, respectively. The Company also
sold an equity investment in 2000 resulting in a
$225.1 million gain, net of other costs, recorded in other
income.

Income
Taxes

The Company accounts for income taxes in accordance with the
provisions of SFAS No. 109, Accounting for Income
Taxes, which requires that deferred income taxes be
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities given the provisions of the enacted tax
laws. Valuation allowances are used to reduce deferred tax
assets to the amount considered likely to be realized.

Revenue
Recognition

Revenues from telecommunication services are recognized when the
services are performed, evidence of an arrangement exists, the
fee is fixed and determinable and collectibility is probable.
Service discounts and incentives related to telecommunication
services are recorded as a reduction of revenue when granted or
ratably over a contract period. Fees billed in connection with
customer installations and other upfront charges are deferred
and recognized ratably over the estimated customer life. Revenue
from the sale or lease of unlit network capacity is recognized
upon consummation of the transaction and the acquirers
acceptance of the capacity in instances when the Company
receives upfront cash payments and is contractually obligated to
transfer title to the specified capacity at the end of the
contract term. If the transaction does not meet these criteria,
revenue is recognized ratably over the contract term. In 2001,
approximately 1.5% of the Companys total revenue was
attributed to sales of unlit network capacity.

The Company establishes a valuation allowance for collection of
doubtful accounts and other sales credit adjustments. Valuation
allowances for sales credits are established through a charge to
revenue,

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Net
Loss Per Share

Net loss per common share is computed by dividing loss
applicable to common shares by the weighted average number of
common shares outstanding for the period. Diluted net loss per
common share is calculated using the weighted average number of
common shares and dilutive common equivalent shares outstanding
during the periods, plus the effects of an assumed conversion of
the Companys convertible securities, if dilutive, after
giving effect to all net income (loss) adjustments that
would result from the assumed conversion. In periods of net
loss, the assumed common share equivalents for options, warrants
and convertible securities are anti-dilutive. Assuming exercise
or conversion of outstanding stock options, warrants and
convertible securities, calculated under the treasury method,
diluted shares would have been 512.6 million for 2001,
398.5 million for 2000, and 280.4 million for 1999.

Stock-Based
Compensation

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

Comprehensive
Loss

Comprehensive loss includes the Companys net loss
applicable to common shares, as well as net unrealized gains and
losses on available-for-sale investments and foreign currency
translation adjustments relating to the Companys European
operations. Comprehensive loss excludes net realized gains and
losses transferred to current period earnings relating to the
sale of available-for-sale investments and other than temporary
impairment charges.

Concentration
of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
receivables. The Companys trade receivables are
geographically dispersed and include customers in many different
industries. However, a portion of the Companys revenue is
generated from services provided to other telecommunications
service providers. Some of these companies have filed for
protection under chapter 11 of the Bankruptcy Code, while others
continue to incur significant losses and negative cash flows.
These market conditions could expose the Company to additional
risk with regard to collectibility of current and future trade
accounts receivable. The Company continually evaluates the
creditworthiness of its customers.

Fair
Value of Financial Instruments

SFAS No. 107, Disclosure about Fair Value of
Financial Instruments, requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Companys financial instruments classified as current
assets and liabilities

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New Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board (the
FASB) issued SFAS No. 141, Business
Combinations, (SFAS No. 141) which is
effective for all business combinations completed after
June 30, 2001 and supercedes APB No. 16,
Business Combinations. Under SFAS No. 141,
companies will be required to account for all business
combinations using the purchase method of accounting, recognize
intangible assets if certain criteria are met, as well as
provide additional disclosures regarding business combinations
and the allocation of purchase price. Management does not
believe the adoption of SFAS No. 141 will have a material
effect on the Companys results of operations and financial
position.

In July 2001, the FASB issued SFAS No. 142, Goodwill
and Other Intangible Assets, which revises the accounting
for purchased goodwill and intangible assets and supercedes APB
Opinion No. 17, Intangible Assets. SFAS
No. 142 is effective for fiscal years beginning after
December 15, 2001 and must be applied to all goodwill and
other intangible assets recorded at that date. However, goodwill
and intangible assets acquired after June 30, 2001 are
immediately subject to the amortization provisions of this
statement. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives will no longer be amortized but
will be tested for impairment annually or more frequently if an
event indicates that the asset might be impaired. The statement
provides guidance on measuring goodwill and intangible asset
impairments and on determining their fair values based on market
prices, current prices for similar assets and liabilities or a
discounted cash flow methodology. This determination of
impairment differs from SFAS No. 121, which is based on expected
future undiscounted cash flows and not fair value.

SFAS No. 142 requires the completion of the initial
impairment analysis of goodwill (other than goodwill associated
with acquisitions after June 30, 2001) by June 30,
2002. If, however, events or changes in circumstances indicate
that goodwill of a reporting unit might be impaired before
June 30, 2002, goodwill must be tested for impairment when
this indication of possible impairment arises. As discussed in
Note 1, the Company has defaulted on certain interest payments
obligations and has begun to implement the Proposed
Recapitalization. The Company believes such events constitute an
event or change in circumstance that requires XO to test its
goodwill for impairment. Using the investment contemplated under
the terms of the Stock Purchase Agreement (as discussed in Note
1) to estimate the fair value of the Companys goodwill,
management expects to write off all, or substantially all, of
its $1,878.3 million of goodwill in the first quarter of
2002 as a cumulative effect of a change in accounting principle
as of January 1, 2002.

Under SFAS No. 142, the useful life of an intangible asset
is considered indefinite when there are generally no factors
that limit the useful life of the intangible asset to the
Company. When the Company adopts SFAS No. 142 in 2002, it
expects to continue to amortize its $947.5 million of fixed
wireless licenses and $151.7 million of other intangible
assets over definite useful lives, consistent with the
Companys current accounting policies.

In June 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations,
(SFAS No. 143) which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred if a reasonable
estimate of fair value can be made. If a reasonable estimate of
fair value cannot be made in the period the asset retirement
obligation is incurred, SFAS No. 143 requires the liability
to be recognized when a reasonable estimate of the fair value
can be made. The provisions of SFAS No. 143 are effective
for financial statements issued for fiscal years beginning after
June 15, 2002. Management does not believe that the
adoption of SFAS No. 143 will have a material effect on the
Companys results of operations and financial position.

In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS No. 144) which supersedes
SFAS No. 121. The provisions of SFAS No. 144 are
effective for financial statements issued for fiscal years
beginning after December 15, 2001.

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3.  RESTRUCTURING CHARGES

In the third quarter of 2001, the Company recorded
$189.1 million of estimated restructuring charges primarily
related to a plan to restructure certain of its business
operations. The restructuring plan includes reducing the
Companys discretionary spending, capital expenditures and
workforce based on its assessment of current and future market
conditions. Additionally, during the fourth quarter of 2001,
management approved and committed XO to a formal plan to dispose
of the Companys European business unit. This divestiture
was completed in February 2002. As a result of the restructuring
plan, the Company recorded $509.2 million of estimated
restructuring charges during the year ended December 31,
2001.

The restructuring charges include a $366.8 million
write-down for the excess of carrying value of assets to be sold
or abandoned, including the Companys European business
unit, over their respective fair values plus certain exit costs.
The consolidation and exiting of domestic facility leases
accounted for $134.4 million of the restructuring charges
and was determined based on the future minimum rent commitments
for the buildings the Company intends to exit less estimated
sublease rental streams. XO also reduced its workforce by
approximately 700 employees and recorded $8.0 million
related to involuntary termination severance. The employment of
the majority of the notified employees was terminated by
December 31, 2001. As of December 31, 2001, the
remaining restructuring accrual was $125.8 million, the
majority of which relates to exited lease facilities. The
portion expected to be paid within one year is included in
accrued liabilities, while the portion that is payable after one
year is in other long-term liabilities.

4.  ACQUISITIONS

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

As a result of the Concentric merger, each issued and
outstanding share of Concentric common stock was converted into
1.2868 shares of the Companys Class A common stock
resulting in approximately 68.0 million shares of the
Companys Class A common stock being issued to
Concentric common stockholders. Outstanding warrants to purchase
Concentric common stock were converted into warrants to acquire
shares of the Companys Class A common stock based on
the 1.2868 exchange ratio. Also, the Company assumed certain
Concentric employee stock option and other benefit plans. As a
result of the Concentric merger, holders of Concentric options
and warrants outstanding at the time of the merger received the
right to acquire approximately 17.6 million shares of the
Companys Class A common stock in the aggregate.

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The Concentric merger was accounted for using the purchase
method of accounting. The consideration and final purchase price
allocation were as follows (dollars in thousands):

|                                          |  |   |           | 
|----------------------------------------- |  | - | --------- | 
|                                         
|                                         
|                                         
|                                         
|Stock issued                              |  | $ | 2,542,356 | 
|                                         
|                                         
|                                         
|                                         
|Liabilities, warrants and options assumed |  |   | 1,042,750 | 
|                                          |  |   |           | 
|Consideration                             |  | $ | 3,585,106 | 
|                                          |  |   |           | 
|In-process research and development       |  | $ | 36,166    | 
|                                         
|                                         
|                                         
|                                         
|Fair value of intangible assets acquired  |  |   | 246,234   | 
|                                         
|                                         
|                                         
|                                         
|Fair value of tangible assets acquired    |  |   | 342,641   | 
|                                         
|                                         
|                                         
|                                         
|Goodwill                                  |  |   | 2,960,065 | 
|                                          |  |   |           | 
|                                          |  | $ | 3,585,106 | 
|                                          |  |   |           | 

The allocation to in-process research and development represents
the estimated fair value based on risk-adjusted future cash
flows related to incomplete projects. At the date of the
Concentric merger, the development of these projects had not yet
reached technological feasibility and the technology had no
alternative future uses. As such, the entire $36.2 million
of acquired in-process research and development was expensed as
of the acquisition date.

Goodwill resulting from the Concentric transaction of
$3.0 billion is amortized on a straight-line basis over
five years. Other acquired intangible assets totaling
$246.2 million, include developed technology, customer
lists, work force and trade names are amortized on a
straight-line basis over four years. The pro forma operating
results of the Company for the year ended December 31, 2000
and 1999 have been prepared assuming the merger occurred on
January 1, 1999 (dollars in thousands, except for per share
amounts):

|                                               |  |                         |            |      |  |   |            |  
|---------------------------------------------- |  | ----------------------- | ---------- | ---- |  | - | ---------- | -
|                                               |  |                        
|                                               |  | Year Ended December 31,
|                                               |  |                        
|                                               |  | 2000                    |            | 1999
|                                               |  |                         |            |     
|Pro forma revenue                              |  | $                       | 830,208    |      |  | $ | 421,384    |  
|                                              
|                                              
|                                              
|                                              
|Pro forma net loss applicable to common shares |  | $                       | (1,566,650 | )    |  | $ | (1,393,237 | )
|                                              
|                                              
|                                              
|                                              
|Pro forma loss per share                       |  | $                       | (4.43      | )    |  | $ | (4.38      | )

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

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

5.  MARKETABLE SECURITIES

Marketable securities consisted of the following (dollars in
thousands):

|                                           |  |              |         |      |  |   |           | 
|------------------------------------------ |  | ------------ | ------- | ---- |  | - | --------- | 
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2001         |         | 2000
|                                           |  |              |         |     
|U.S. Government and agency notes and bonds |  | $            | 242,048 |      |  | $ | 909,324   | 
|                                          
|                                          
|                                          
|                                          
|Corporate notes and bonds                  |  |              | 266,930 |      |  |   | 458,635   | 
|                                           |  |              |         |      |  |   |           | 
|                                           |  | $            | 508,978 |      |  | $ | 1,367,959 | 
|                                           |  |              |         |      |  |   |           | 

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6.  PROPERTY AND EQUIPMENT

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

|                                                   |  |              |           |      |  |   |           | 
|-------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2001         |           | 2000
|                                                   |  |              |           |     
|Telecommunications networks and acquired bandwidth |  | $            | 2,832,878 |      |  | $ | 1,736,920 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Furniture, fixtures, equipment, and other          |  |              | 758,022   |      |  |   | 589,739   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  |              | 3,590,900 |      |  |   | 2,326,659 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Less accumulated depreciation                      |  |              | 795,739   |      |  |   | 396,991   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  |              | 2,795,161 |      |  |   | 1,929,668 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Network construction-in-progress                   |  |              | 947,416   |      |  |   | 864,437   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  | $            | 3,742,577 |      |  | $ | 2,794,105 | 
|                                                   |  |              |           |      |  |   |           | 

During 2001, 2000 and 1999, depreciation expense was
$447.0 million, $223.8 million and $93.1 million,
respectively. During 2001, 2000 and 1999, the Company
capitalized interest on construction costs of
$51.6 million, $31.0 million, and $9.9 million,
respectively.

In 1998 and 2000, the Company entered into agreements with Level
3 to construct fiber optic networks in North America and Europe.
In April 2001, the Company and Level 3 restructured these
agreements and agreed to cancel commitments related to the
European network. Under the restructured agreements
(i) approximately $128.6 million in payments that were
previously made to Level 3 for the European networks (the
European Credit) would be applied as a credit to
reduce the Companys commitment to Level 3 under the North
American inter-city fiber network agreement, (ii) the
Company prepaid $120.8 million (the Prepayment
Credit) to be applied against future amounts due to Level
3 for the North American inter-city network, and (iii) the
Company transferred to Level 3 $51.4 million of inter-city
transmission equipment (the Equipment Credit) to be
applied toward the purchase of wavelength capacity on Level
3s inter-city network in North America and Europe. As of
December 31, 2001, the Company had (i) fully utilized
the European Credit, (ii) fully utilized the Prepayment
Credit, and (iii) utilized $50.3 million of the
Equipment Credit for wavelength capacity.

As of December 31, 2001, the inter-city network in North
America, the cost of which totaled approximately
$695 million, was completed and accepted by the Company.
The inter-city network requires the purchase and installation of
optical networking equipment in order for the fiber to be
lit and operationally ready for its intended use. As
part of the restructured network capacity agreement with Level 3
and the Companys cash conservation initiatives, the
Company has postponed lighting this network and in the interim
has purchased Level 3 wavelength capacity discussed above to
provide inter-city transport. As a result, the inter-city
network has not been placed into service and is included in
network construction-in-progress as of December 31, 2001.

7.  GOODWILL AND OTHER INTANGIBLES

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

|                              |  |              |           |      |  |   |           | 
|----------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                              |  |             
|                              |  | December 31,
|                              |  |             
|                              |  | 2001         |           | 2000
|                              |  |              |           |     
|Goodwill                      |  | $            | 2,697,670 |      |  | $ | 3,001,633 | 
|                             
|                             
|                             
|                             
|Other intangibles             |  |              | 315,145   |      |  |   | 336,399   | 
|                              |  |              |           |      |  |   |           | 
|                              |  |              | 3,012,815 |      |  |   | 3,338,032 | 
|                             
|                             
|                             
|                             
|Less accumulated amortization |  |              | 982,785   |      |  |   | 423,156   | 
|                              |  |              |           |      |  |   |           | 
|                              |  | $            | 2,030,030 |      |  | $ | 2,914,876 | 
|                              |  |              |           |      |  |   |           | 

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Amortization expense for the years ended December 31, 2001,
2000 and 1999 was $715.7 million, $393.9 million and
$15.4 million, respectively.

8.  ACCRUED LIABILITIES

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

|                                 |  |              |         |      |  |   |         | 
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2001         |         | 2000
|                                 |  |              |         |     
|Accrued compensation             |  | $            | 73,807  |      |  | $ | 57,686  | 
|                                
|                                
|                                
|                                
|Accrued telecommunications costs |  |              | 40,955  |      |  |   | 41,306  | 
|                                
|                                
|                                
|                                
|Accrued construction             |  |              | 27,552  |      |  |   | 62,406  | 
|                                
|                                
|                                
|                                
|Other accrued liabilities        |  |              | 180,683 |      |  |   | 118,136 | 
|                                 |  |              |         |      |  |   |         | 
|                                 |  | $            | 322,997 |      |  | $ | 279,534 | 
|                                 |  |              |         |      |  |   |         | 

9.  LONG-TERM DEBT

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

|                                                             |                      |                 |           |              |  |            |           |           |  |   |           |           |  |   |           |           | 
|------------------------------------------------------------ | -------------------- | --------------- | --------- | ------------ |  | ---------- | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                                                             |                      |                 |           |             
|                                                             |                      |                 |           | December 31,
|                                                             |                      |                 |           |             
|                                                             |                      |                 |           |              |  |           
|                                                             |                      |                 |           | 2001         |  | 2000      
|                                                             |                      |                 |           |              |  |           
|                                                             |                      | Face Value at   |           | Carrying     |  | Estimated  |           | Carrying 
|                                                             |                      | Stated Maturity |           | Value        |  | Fair Value |           | Value    
|                                                             |                      |                 |           |              |  |            |           |          
|Senior Notes, 10 1/2%, due December 1,
	2009                 |                      | $               | 400,000   |              |  | $          | 298,830   |           |  | $ | 34,365    |           |  | $ | 400,000   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Discount Notes, 12 1/8%, due
	December 1, 2009        |                      |                 | 455,000   |              |  |            | 322,853   |           |  |   | 24,214    |           |  |   | 285,971   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 10 3/4%, due June 1, 2009                      |                      |                 | 675,000   |              |  |            | 599,573   |           |  |   | 74,947    |           |  |   | 675,000   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Discount Notes, 12 1/4%, due
	June 1, 2009            |                      |                 | 588,900   |              |  |            | 441,960   |           |  |   | 35,357    |           |  |   | 392,417   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 10 3/4%, due November 15,
	2008                |                      |                 | 500,000   |              |  |            | 390,900   |           |  |   | 46,908    |           |  |   | 500,000   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Discount Notes, 9.45%, due
	April 15, 2008            |                      |                 | 637,000   |              |  |            | 565,674   |           |  |   | 59,396    |           |  |   | 514,784   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 9%, due March 15, 2008                         |                      |                 | 335,000   |              |  |            | 223,187   |           |  |   | 26,782    |           |  |   | 334,513   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 12 3/4%, due December 15,
	2007                |                      |                 | 149,400   |              |  |            | 115,488   |           |  |   | 12,704    |           |  |   | 168,911   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 9 5/8%, due October 1,
	2007                   |                      |                 | 400,000   |              |  |            | 307,373   |           |  |   | 36,885    |           |  |   | 400,000   |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Notes, 12 1/2%, due April 15,
	2006                   |                      |                 | 350,000   |              |  |            | 326,165   |           |  |   | 39,140    |           |  |   | 350,000   |          
|                                                             |                      |                 |           |              |  |            |           |           |  |   |           |           |  |   |           |          
|Total Senior Notes                                           |                      | $               | 4,490,300 |              |  | $          | 3,592,003 |           |  | $ | 390,698   |           |  | $ | 4,021,596 |          
|                                                            
|                                                            
|                                                            
|                                                            
|Convertible Subordinated Notes, 5 3/4% due
	January 15, 2009 |                      |                 | 517,500   |              |  |            | 517,500   |           |  |   | 6,469     |           |  |   |          |          
|                                                            
|                                                            
|                                                            
|                                                            
|Senior Secured Credit Facility                               |                      |                 | 1,000,000 |              |  |            | 1,000,000 |           |  |   | 1,000,000 |           |  |   | 375,000   |          
|                                                             |                      |                 |           |              |  |            |           |           |  |   |           |           |  |   |           |          
|                                                             | Total long-term debt |                 | $         | 6,007,800    |  |            | $         | 5,109,503 |  |   | $         | 1,397,167 |  |   | $         | 4,396,596 | 
|                                                             |                      |                 |           |              |  |            |           |           |  |   |           |           |  |   |           |          

The fair values of long-term debt are based on the quoted market
prices for those securities. As discussed in Note 1, based on
the Proposed Recapitalization, it is currently expected that the
$1.0 billion principal amount of the Facility would be
reinstated with modifications, and the holders of certain debt
securities would receive consideration in the form of cash
and/or equity interests in the recapitalized company in exchange
for their interests.

In conjunction with its Proposed Recapitalization, the Company
ceased making all scheduled interest payments due under the
terms of its unsecured notes effective December 1, 2001.
Consequently, on December 31, 2001, the Company was in
default on certain unsecured notes and had triggered
cross-default provisions under the Facility and the indentures
under which all other senior notes were issued. As XO does not
intend to make its interest payments to cure these defaults and
the lenders and noteholders

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While the terms of the Stock Purchase Agreement, as discussed in
Note 1, were being negotiated, the Company and the Investors
engaged in further negotiations with an informal steering
committee of the lenders under the Facility concerning
amendments to the Facility that would facilitate the proposed
investment. As a result of these negotiations, the Company
reached a preliminary understanding with lenders under the
Facility concerning the terms on which they would agree to
support the balance sheet recapitalization contemplated by the
Stock Purchase Agreement and amend the existing Facility. These
proposed amendments would leave the entire $1.0 billion
principal amount of the Facility outstanding, but would extend
the maturity dates and amortization schedules for loans under
the Facility for three years. The proposed amendments would also
modify other terms of the Facility, including certain financial
and other covenants, in ways that generally provide the Company
with increased financial flexibility.

A description of the Companys outstanding debt obligations
as of December 31, 2001 is as follows.

Senior
Secured Credit Facility

The Company and certain of its subsidiaries, as guarantors,
entered into the $1.0 billion Facility with various lenders
in February 2000. At December 31, 2001, the Facility was
comprised of a $387.5 million senior secured multi-draw
term loan A due 2006, a $225.0 million senior secured term
loan B due 2007, and a $387.5 million revolving credit
facility.

The security for the Facility consists of all of the assets
purchased with the proceeds of the Facility, the stock of
certain of the Companys direct subsidiaries, all assets of
the Company and, to the extent of $125.0 million of
guaranteed debt, all assets of certain of the Companys
subsidiaries. The Facility limits additional indebtedness,
dividend payments and certain investments and transactions and
contains certain covenants with respect to minimum revenue
requirements and fixed charges and leverage ratios. Amounts
drawn under the Facility bear interest, at the Companys
option, at an alternate base rate, as defined, or
reserve-adjusted London Interbank Offered Rate
(LIBOR) plus, in each case, applicable margins.
Interest on the term loans and the revolving credit facility is
payable on the earlier of the last day of each interest period,
or each successive date three months after the first day of such
interest period. At December 31, 2001, the annualized
weighted average interest rate applicable to outstanding
borrowings under the Facility was 7.25%.

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

Senior
Notes

During the second half of 2001, in a series of transactions, a
subsidiary of the Company paid $201.9 million to repurchase
$557.1 million of the outstanding principal of certain
series of senior notes at a substantial discount to their
respective face values. As a result of these transactions,
during the year ended December 31, 2001, the Company
recognized an extraordinary gain of $345.0 million, net of
unamortized financing costs.

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##### Table of Contents



In June 2000, the Company assumed all obligations of
Concentrics 12 3/4% Senior Notes due
December 15, 2007. The 12 3/4% Senior Notes original
principal amount was $150.0 million with interest payments
due semi-annually. The terms of the 12 3/4% Senior Notes
required that, in connection with the Concentric merger, the
Company offer to redeem the notes at the option of the holders
in whole or in part, at a price equal to 101% of the principal
amount of the notes. The Company redeemed approximately $630,000
of the original principal amount as part of this offer.

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

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

On November 12, 1998, the Company completed the sale of
$500.0 million of 10 3/4% Senior Notes due
November 15, 2008. The Company received proceeds from the
sale, net of commissions, advisory fees and expenses, totaling
approximately $488.5 million.

On April 1, 1998, the Company completed the sale of
$637.0 million in principal amount at stated maturity of
9.45% Senior Discount Notes due April 15, 2008. The Company
received proceeds, net of discounts, commissions, advisory fees
and expenses, totaling approximately $390.9 million. The
9.45% Notes accrete at a rate of 9.45% compounded semi-annually,
to an aggregate principal amount of approximately
$637.0 million by April 15, 2003. No cash interest
will accrue on the 9.45% Notes until April 15, 2003.
Interest will become payable in cash semi-annually beginning on
October 15, 2003.

On March 3, 1998, the Company completed the sale of
$335.0 million of 9% Senior Notes due March 15, 2008.
The Company received proceeds from the sale, net of discounts,
commissions, advisory fees and expenses, of approximately
$326.5 million.

On October 1, 1997, the Company completed the sale of
$400.0 million in principal amount of 9 3/8% Senior
Notes due October 1, 2007. The Company received proceeds
from the sale, net of underwriting commissions, advisory fees
and expenses, totaling approximately $388.5 million.

On April 25, 1996, the Company completed the sale of
$350.0 million in principal amount of 12 1/2% Senior
Notes due April 15, 2006. The Company received proceeds
from the sale, net of commissions, advisory fees and expenses
totaling approximately $340.2 million. At December 31,
2001 and 2000, XO Capital, Inc. (XO Capital), a
wholly owned finance subsidiary of the Company, was a joint
obligor on XOs 12 1/2% senior notes. XO Capital was
merged into the Company in 2002.

Interest payments on all of the Companys senior notes are
due semi-annually. All of the Companys senior notes and
senior discount notes are redeemable at the option of the
Company, in whole or in part, at any time on or after the fifth
anniversary of their respective issuance dates. Established
redemption prices decline to 100% of the stated principal amount
over three years.

The senior notes rank pari passu with all other senior notes of
the Company. The indentures pursuant to which all of the
Companys senior notes and senior discount notes have been
issued contain covenants

F-20



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Convertible
Subordinated Notes

In January 2001, the Company completed the issuance and sale of
$517.5 million of 5 3/4% convertible subordinated
notes due 2009 for proceeds, net of underwriting and other fees,
totaling $503.3 million. Interest on the notes is payable
semi-annually. The notes are unsecured obligations of the
Company and are subordinated in right of payment to all other
senior indebtedness of the Company. The notes are convertible at
the option of the holders at any time prior to maturity into
shares of Class A common stock at a conversion rate of
39.1484 shares per $1,000 principal amount of notes, subject to
adjustment upon the occurrence of certain events. The Company
may terminate such conversion rights on or after
January 18, 2003 if the current market price of its
Class A common stock equals or exceeds 150%, on or prior to
January 18, 2004, or 135% thereafter, of the $25.5438
implied conversion price for 20 days in a 30 consecutive day
trading period. The notes are not redeemable prior to their
maturity date of January 15, 2009. In the event of a change
in control of the Company as defined in the indentures, holders
of the notes will have the right to require the Company to
purchase their notes, in whole or in part, for up to 100% of the
stated principal amount thereof, plus accrued and unpaid
interest, if any, thereon to the date of purchase.

F-21



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##### Table of Contents



10.     REDEEMABLE PREFERRED
STOCK

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

|                                                                 |  |              |           |              |  |                   |       |                       |  |         |           |      |  |  |            |  |  |   |           |  |  |   |           | 
|---------------------------------------------------------------- |  | ------------ | --------- | ------------ |  | ----------------- | ----- | --------------------- |  | ------- | --------- | ---- |  |  | ---------- |  |  | - | --------- |  |  | - | --------- | 
|                                                                 |  |              |           |              |  |                   |       |                      
|                                                                 |  |              |           |              |  | Shares Issued &   |       | Aggregate Liquidation
|                                                                 |  | Carrying     |           | Fair Value   |  | Outstanding as of |       | Preferences as of    
|                                                                 |  | Value as of  |           | as of        |  | December 31,      |       | December 31,         
|                                                                 |  | December 31, |           | December 31, |  |                   |       |                      
|                                                                 |  | 2001(a)      |           | 2001(a)      |  | 2001              |       | 2000                  |  | 2001(a) |           | 2000
|                                                                 |  |              |           |              |  |                   |       |                       |  |         |           |     
|14% Series A Senior Exchangeable Redeemable
	Preferred Stock     |  | $            | 238,832   |              |  | $                 | 4,720 |                       |  |         | 4,719,925 |      |  |  | 9,552,785  |  |  | $ | 235,996   |  |  | $ | 477,639   | 
|                                                                
|                                                                
|                                                                
|                                                                
|6 1/2% Series B Cumulative Convertible
	Preferred Stock          |  |              | 84,195    |              |  |                   | 2,441 |                       |  |         | 1,768,795 |      |  |  | 2,122,795  |  |  |   | 88,440    |  |  |   | 106,140   | 
|                                                                
|                                                                
|                                                                
|                                                                
|Series C Cumulative Convertible
	Participating Preferred Stock   |  |              | 623,947   |              |  |                   | 468   |                       |  |         | 584,375   |      |  |  | 584,375    |  |  |   | 584,375   |  |  |   | 584,375   | 
|                                                                
|                                                                
|                                                                
|                                                                
|Series D Convertible Participating
	Preferred Stock              |  |              | 283,612   |              |  |                   | 213   |                       |  |         | 265,625   |      |  |  | 265,625    |  |  |   | 265,625   |  |  |   | 265,625   | 
|                                                                
|                                                                
|                                                                
|                                                                
|13 1/2% Series E Senior Redeemable
	Exchangeable Preferred Stock |  |              | 59,486    |              |  |                   | 60    |                       |  |         | 59,749    |      |  |  | 208,469    |  |  |   | 59,749    |  |  |   | 210,815   | 
|                                                                
|                                                                
|                                                                
|                                                                
|7% Series F Convertible Redeemable
	Preferred Stock              |  |              | 64,342    |              |  |                   | 30    |                       |  |         | 59,143    |      |  |  | 55,178     |  |  |   | 59,143    |  |  |   | 55,499    | 
|                                                                
|                                                                
|                                                                
|                                                                
|Series G Cumulative Convertible
	Participating Preferred Stock   |  |              | 287,277   |              |  |                   | 215   |                       |  |         | 268,750   |      |  |  | 268,750    |  |  |   | 268,750   |  |  |   | 268,750   | 
|                                                                
|                                                                
|                                                                
|                                                                
|Series H Convertible Participating
	Preferred Stock              |  |              | 140,299   |              |  |                   | 105   |                       |  |         | 131,250   |      |  |  | 131,250    |  |  |   | 131,250   |  |  |   | 131,250   | 
|                                                                 |  |              |           |              |  |                   |       |                       |  |         |           |      |  |  |            |  |  |   |           |  |  |   |           | 
|Total                                                            |  | $            | 1,781,990 |              |  | $                 | 8,252 |                       |  |         | 7,857,612 |      |  |  | 13,189,227 |  |  | $ | 1,693,328 |  |  | $ | 2,100,093 | 
|                                                                 |  |              |           |              |  |                   |       |                       |  |         |           |      |  |  |            |  |  |   |           |  |  |   |           | 



---

|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Differences between the carrying value and the
	liquidation preference pertain to net issuance costs, accrued
	dividends to be paid in preferred shares, and the net book value
	of the $92.5 million modification credit discussed further
	in Note 11.

The fair values of the Companys preferred stock are based
on quoted market prices for those or similar investments. As
discussed in Note 1, neither of the proposed transactions
under consideration to facilitate the Proposed Recapitalization
contemplates any meaningful recovery for the holders of the
Companys preferred stock.

During the second half of 2001, in a series of transactions, a
subsidiary of the Company paid $88.4 million to repurchase
$301.6 million in liquidation preference of its 14%
Series A senior exchangeable redeemable preferred stock and
$171.0 million in liquidation preference of its
13 1/2% Series E senior redeemable exchangeable
preferred stock at a substantial discount to their respective
carrying amounts. As a result of these transactions, the Company
recognized a gain of $376.9 million, net of unamortized
financing costs.

In July 2000, the Company issued 268,750 shares of Series G
cumulative convertible participating preferred stock and 131,250
shares of Series H convertible participating preferred
stock to several investment funds affiliated with Forstmann
Little & Co. in exchange for $400.0 million. The
Series G and Series H stock are convertible into
shares of the Companys Class A common stock at a
conversion rate of $17.00 per share, and provide for a 3.75%
annual dividend that is payable quarterly. Each share of
Series G and Series H preferred stock has a
liquidation preference of $1,000 per share plus accrued and
unpaid dividends. The holders may convert the preferred stock
into Class A common stock at any time. Holders of the
preferred stock will also have the option of requiring
redemption of the preferred stock during the 180-day period
commencing on July 6, 2010. The Company may redeem the
preferred stock at any time after the later of July 6, 2005
and the date when the Company has redeemed its 12 1/2%
Senior Notes due 2006 in full.

F-22



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##### Table of Contents



As a result of the Concentric merger, certain outstanding shares
of Concentrics preferred stock were converted into 53,296
shares of the Companys 7% Series F convertible
redeemable preferred stock due 2010. Each share of Series F
preferred stock has a liquidation preference of $1,000 per
share. Dividends on the Series F preferred stock accrue at
the rate of 7% per annum of the liquidation preference thereof
and are payable quarterly in arrears. Dividends are payable in
cash, except that on each dividend payment date dividends may be
paid, at the Companys option, by the issuance of
additional Series F preferred stock having an aggregate
liquidation preference equal to the amount of such dividends.
For the year ended December 31, 2001, the Company issued a
total of 3,965 shares of Series F preferred stock as
payment of the quarterly dividends. The Series F preferred
stock is redeemable at the option of the Company, in whole or in
part, at any time on or after June 1, 2003 at redemption
rates commencing with 105.125% declining to 100% on June 1,
2010. The Series F preferred stock is subject to mandatory
redemption at its liquidation preference, plus accumulated and
unpaid dividends on September 1, 2010. The holders of the
Series F preferred stock have the right to convert, at any
time, shares of the Series F preferred stock into shares of
common stock at the conversion price of $31.0258.

As a result of the Concentric merger, certain outstanding shares
of Concentrics preferred stock were converted into 195,079
shares of the Companys 13 1/2% Series E senior
redeemable exchangeable preferred stock due 2010. Each share of
Series E preferred stock has a liquidation preference of
$1,000 per share. Dividends on the Series E preferred stock
accrue at a rate of 13 1/2% per annum of the liquidation
preference thereof and are payable quarterly in arrears
commencing on September 1, 1998. Dividends are payable in
cash, except that on each dividend payment date occurring on or
prior to June 1, 2003, dividends may be paid, at the
Companys option, by the issuance of additional shares of
the Series E preferred stock having an aggregate
liquidation preference equal to the amount of such dividends.
For the year ended December 31, 2001, the Company issued a
total of 22,306 shares of the Series E preferred stock as
payment of the quarterly dividends. The Series E preferred
stock is redeemable at the option of the Company, in whole or in
part, at any time on or after June 1, 2003, at redemption
rates with 106.75% on June 1, 2003 and declining to 100% on
June 1, 2008, plus accumulated and unpaid dividends to the
date of redemption. The Series E preferred stock is subject
to mandatory redemption at its liquidation preference, plus
accumulated and unpaid dividends on June 1, 2010.

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

In January 2000, the Company issued 584,375 shares of
Series C cumulative convertible participating preferred
stock and 265,625 shares of Series D convertible
participating preferred stock to several investment funds
affiliated with Forstmann Little & Co. in exchange for
$850.0 million in cash. The Series C and Series D
stock are convertible into shares of the Companys
Class A common stock at a conversion rate of $17.00 per
share, and provide for a 3.75% annual dividend that is payable
quarterly. Each share of Series C and Series D stock
has a liquidation preference of $1,000 per share plus accrued
and unpaid dividends. The holders may convert the preferred
stock into Class A common stock at any time. Holders of the
Series C and Series D shares may require the Company
to redeem those shares during the 180-day period commencing
January 20, 2010. The Company may redeem the Series C
and Series D shares at any time after the later of
January 20, 2005 and the date when the Company has redeemed
its 12 1/2% Senior Notes due 2006 in full.

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

F-23



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##### Table of Contents





On January 31, 1997, the Company completed the sale of
5.7 million units consisting of 14% Series A senior
exchangeable redeemable preferred shares with a liquidation
preference of $50 per share. The sale generated proceeds net of
commissions, advisory fees and expenses of approximately
$274.0 million. Dividends on the Series A preferred
stock accrue from January 31, 1997 and are payable
quarterly, at an annual rate of 14% of the liquidation
preference thereof. Prior to February 1, 2002, the company
could elect to pay dividends either in cash or by issuing
additional shares of Series A preferred stock with an
aggregate liquidation preference equal to the amount of such
dividends. For the year ended December 31, 2001, the
Company issued a total of 1,199,307 shares of Series A
preferred stock as payment of the quarterly dividends. The
Company is required to redeem all of the Series A preferred
stock outstanding on February 1, 2009 at a redemption price
equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption.

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

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

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

11.     STOCKHOLDERS EQUITY

In December 2001, the Company voluntarily delisted its
Class A common stock from the Nasdaq National Market and
began trading on the NASD Over-the-Counter Bulletin Board on
December 17, 2001 under the symbol XOXO. Prior
to its voluntary delisting, the Companys Class A
common stock was traded on the Nasdaq National Market. Trading
was halted on November 29, 2001 following XOs
announcement that it had reached a preliminary agreement with
the Forstmann Little Investors and Telmex that led to XO
entering into the Stock Purchase Agreement.

Since January 31, 1997, the Company has had two classes of
common stock outstanding, Class A common stock and
Class B common stock. The Companys Class A
common stock and Class B common

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On June 7, 2001, an investment fund affiliated with
Forstmann Little invested $250.0 million of cash in the
Company to provide additional funding for general corporate
purposes. In exchange for the investment, the Company issued
50.0 million shares of its Class A common stock to the
Forstmann Little fund and amended the terms of outstanding
convertible preferred stock held by various funds affiliated
with Forstmann Little to reduce the share conversion price from
$31.625 to $17.00 per share. The value of the Class A
common stock issued at the date the investment closed was
$157.5 million. The remaining $92.5 million,
attributed to the convertible preferred stock amendment, was
recorded as a credit to the preferred stock balance and is being
amortized against the accretion of the preferred stock
redemption obligation.

In June 2000, the Company effected two-for-one stock splits of
the issued and outstanding shares of Class A and
Class B common stock, in the form of stock dividends. The
accompanying consolidated financial statements and the related
notes herein have been adjusted retroactively to reflect the
two-for-one stock splits.

12.  INCOME TAXES

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

|                               |                                                       |              |            |           |   |   |           |           |  
|------------------------------ | ----------------------------------------------------- | ------------ | ---------- | --------- | - | - | --------- | --------- | -
|                               |                                                       |             
|                               |                                                       | December 31,
|                               |                                                       |             
|                               |                                                       | 2001         |            | 2000     
|                               |                                                       |              |            |          
|Deferred tax assets:           |                                                       |              |            |           |   |   |           |          
|                              
|                              
|                              
|                              
|                               | Provisions not currently deductible                   |              | $          | 41,954    |   |   | $         | 32,513    |  
|                              
|                              
|                              
|                              
|                               | Property, equipment and other long-term assets
	(net) |              |            | 348,582   |   |   |           | 83,772    |  
|                              
|                              
|                              
|                              
|                               | Net operating loss and capital loss carryforwards     |              |            | 1,313,477 |   |   |           | 1,028,655 |  
|                               |                                                       |              |            |           |   |   |           |          
|Total deferred tax assets      |                                                       |              | 1,704,013  |           |   |   | 1,144,940 |          
|                              
|                              
|                              
|                              
|Valuation allowance            |                                                       |              | (1,390,017 | )         |   |   | (798,853  | )        
|                               |                                                       |              |            |           |   |   |           |          
|Net deferred tax assets        |                                                       |              | 313,996    |           |   |   | 346,087   |          
|                              
|                              
|                              
|                              
|Deferred tax liabilities:      |                                                       |              |            |           |   |   |           |          
|                              
|                              
|                              
|                              
|                               | Property, equipment and other long-term assets
	(net) |              |            | (72,108   | ) |   |           | (80,459   | )
|                              
|                              
|                              
|                              
|                               | Other identifiable intangibles                        |              |            | (238,465  | ) |   |           | (264,014  | )
|                              
|                              
|                              
|                              
|                               | Other                                                 |              |            | (3,423    | ) |   |           | (1,614    | )
|                               |                                                       |              |            |           |   |   |           |          
|Total deferred tax liabilities |                                                       |              | (313,996   | )         |   |   | (346,087  | )        
|                               |                                                       |              |            |           |   |   |           |          
|Net deferred taxes             |                                                       | $            |           |           |   | $ |          |          
|                               |                                                       |              |            |           |   |   |           |          

The net change in valuation allowance for the year ended
December 31, 2001 was an increase of $591.2 million.
The net change in the valuation allowance for years ended
December 31, 2000 and 1999 was an increase of
$521.2 million and $128.7 million, respectively.

As of December 31, 2001, the Company has capital loss
carryforwards of approximately $62.8 million and net
operating loss carryforwards of approximately $3.1 billion.
A portion of the net operating loss carryforwards is
attributable to tax deductions related to the exercise of stock
options. In computing its income tax expense, the Company
recognizes the tax benefits of stock option deductions after
utilization of the net operating losses from operations
(operating losses determined without deductions for exercised
stock options) to reduce income tax expense. Net operating loss
carryforwards related to stock option deductions will be
credited to stockholders equity when realized.

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##### Table of Contents



If the Company is successful in completing the Proposed
Recapitalization as discussed in Note 1, most of the
capital loss carryforwards and the net operating loss
carryforwards are expected to be eliminated. Other tax
attributes, including asset bases, could also be reduced if the
Proposed Recapitalization is completed. The Company is still
reviewing the overall tax impact of the Proposed
Recapitalization.

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

|                                            |  |      |       |      |  |  |       |   
|------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | --
|                                            |  | 2001 |       | 2000
|                                            |  |      |       |     
|Statutory U.S. federal rate                 |  |      | 35.0  | %    |  |  | 35.0  | % 
|                                           
|                                           
|                                           
|                                           
|State income taxes, net of federal benefit  |  |      | 6.0   | %    |  |  | 6.0   | % 
|                                           
|                                           
|                                           
|                                           
|Valuation allowance for deferred tax assets |  |      | (29.4 | )%   |  |  | (27.7 | )%
|                                           
|                                           
|                                           
|                                           
|Other identifiable intangibles              |  |      | (11.6 | )%   |  |  | (13.3 | )%
|                                            |  |      |       |      |  |  |       |   
|Effective income tax rate                   |  |      |      | %    |  |  |      | % 
|                                            |  |      |       |      |  |  |       |   

13.  STOCK COMPENSATION ARRANGEMENTS

Effective July 1, 1998, the Company adopted the Employee
Stock Purchase Plan, (the Purchase Plan), under
which 12.0 million shares of Class A common stock were
authorized for issuance and 4.7 million shares were
available for issuance at December 31, 2001. Eligible
employees could purchase the Companys Class A common
shares at 85% of the lower of the average market value of the
Class A common stock on the first and the last trading day
of each calendar quarter. Employees who owned 5% or more of the
voting rights of the Companys outstanding common shares
could not participate in the Purchase Plan. During the years
ended December 31, 2001 and 2000, employees purchased
6.3 million and 0.4 million shares of Class A
common stock, respectively, under the Purchase Plan. In November
2001, the Company amended the Purchase Plan to suspend the offer
and sale of stock indefinitely.

The Company also maintains the XO Communications, Inc. Stock
Option Plan (the Stock Option Plan) to provide a
performance incentive for certain officers, employees and
individuals or companies who provide services to the Company.
The Stock Option Plan provides for the granting of qualified and
non-qualified stock options. The options become exercisable over
vesting periods of up to four years and expire no later than
10 years after the date of grant. The Company has
authorized 113.0 million shares of Class A common
stock for issuance under the Stock Option Plan. As of
December 31, 2001, 48.9 million shares were available
for issuance.

In May 2001, the Company offered its employees the opportunity
to exchange certain outstanding options for new options equal to
85% of the number of shares tendered. The Company granted the
new options on January 17, 2002, the first business day
that was six months and one day following the closing of this
exchange offer. The exercise price of the new options was the
last reported sale price of the Class A common stock on the
date of that grant, which was $0.14 per share. The new options
were 30% vested on the date of grant and the remaining 70% vest
monthly in equal installments over the following 36-month period
until fully vested.

As discussed in Note 1, if the Company completes the
Proposed Recapitalization, all interests in the Companys
Class A common stock, including any shares purchased under
the Purchase Plan, and any awards or grants under the Stock
Option Plan, will be terminated and have little or no recovery.

The Company recorded approximately $37.2 million,
$48.3 million, and $12.9 million of stock-based
compensation expense related to the Stock Option Plan for the
years ended December 31, 2001, 2000, and 1999,
respectively. Additionally, $28.0 million of the
Companys 1999 restructuring charge associated with the
relocation of the Companys headquarters from Bellevue,
Washington to Northern Virginia arose due to accelerated vesting
of employee options in conjunction with severance arrangements
for approximately 125 employees.

F-26



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##### Table of Contents



The following two tables summarize information regarding options
under the Companys Stock Option Plan for the last three
years:

|                                  |                        |           |            |                  |   |   |       |       | 
|--------------------------------- | ---------------------- | --------- | ---------- | ---------------- | - | - | ----- | ----- | 
|                                  |                        | Number of |            | Weighted Average
|                                  |                        | Shares    |            | Exercise Price  
|                                  |                        |           |            |                 
|Outstanding at December 31, 1998  |                        |           | 39,265,184 |                  |   | $ | 5.69  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Granted                |           |            | 26,521,992       |   |   | $     | 15.63 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Canceled               |           |            | (4,297,136       | ) |   | $     | 8.06  | 
|                                 
|                                 
|                                 
|                                 
|                                  | Exercised              |           |            | (6,286,506       | ) |   | $     | 4.70  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 1999  |                        |           | 55,203,534 |                  |   | $ | 9.86  |      
|                                 
|                                 
|                                 
|                                 
|                                  | Assumed in acquisition |           |            | 13,086,985       |   |   | $     | 20.51 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Granted                |           |            | 36,850,732       |   |   | $     | 35.17 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Canceled               |           |            | (12,590,334      | ) |   | $     | 19.52 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Exercised              |           |            | (11,310,416      | ) |   | $     | 6.63  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 2000  |                        |           | 81,240,501 |                  |   | $ | 22.77 |      
|                                 
|                                 
|                                 
|                                 
|                                  | Granted                |           |            | 5,909,809        |   |   | $     | 7.72  | 
|                                 
|                                 
|                                 
|                                 
|                                  | Canceled               |           |            | (49,163,452      | ) |   | $     | 28.32 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Exercised              |           |            | (3,677,562       | ) |   | $     | 5.36  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 2001  |                        |           | 34,309,296 |                  |   | $ | 13.91 |      
|                                  |                        |           |            |                  |   |   |       |      
|Exercisable, at December 31, 1999 |                        |           | 10,811,422 |                  |   | $ | 7.23  |      
|                                 
|                                 
|                                 
|                                 
|Exercisable, at December 31, 2000 |                        |           | 16,369,892 |                  |   | $ | 11.30 |      
|                                 
|                                 
|                                 
|                                 
|Exercisable, at December 31, 2001 |                        |           | 18,902,125 |                  |   | $ | 12.38 |      

|                         |                |                     |  |                     |            |          |  |                 |     |          |  |   |       |  |  |  |            |  |  |   |       | 
|------------------------ | -------------- | ------------------- |  | ------------------- | ---------- | -------- |  | --------------- | --- | -------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                         |                |                     |  |                    
|                         |                | Options Outstanding |  | Options Exercisable
|                         |                |                     |  |                    
|                         |                |                     |  | Weighted            |            |          |  |                
|                         |                | Options             |  | Average             |            | Weighted |  | Options         |     | Weighted
|                         |                | Outstanding         |  | Remaining           |            | Average  |  | Exercisable     |     | Average 
|                         |                | at December 31,     |  | Contractual         |            | Exercise |  | at December 31, |     | Exercise
|Range of Exercise Prices |                | 2001                |  | Life                |            | Price    |  | 2001            |     | Price   
|                         |                |                     |  |                     |            |          |  |                 |     |         
|$                        | 0.01  $ 5.22  |                     |  |                     | 8,392,200  |          |  |                 | 7.5 |          |  | $ | 1.34  |  |  |  | 3,952,426  |  |  | $ | 1.23  | 
|$                        | 5.23  $ 7.94  |                     |  |                     | 6,781,264  |          |  |                 | 6.3 |          |  |   | 6.30  |  |  |  | 4,855,528  |  |  |   | 6.29  | 
|$                        | 7.95  $18.00  |                     |  |                     | 9,497,400  |          |  |                 | 7.2 |          |  |   | 10.83 |  |  |  | 5,686,424  |  |  |   | 10.48 | 
|$                        | 18.01  $66.00 |                     |  |                     | 9,638,432  |          |  |                 | 7.7 |          |  |   | 33.23 |  |  |  | 4,407,747  |  |  |   | 31.52 | 
|                         |                |                     |  |                     |            |          |  |                 |     |          |  |   |       |  |  |  |            |  |  |   |       | 
|                         |                |                     |  |                     | 34,309,296 |          |  |                 | 7.2 |          |  | $ | 13.91 |  |  |  | 18,902,125 |  |  | $ | 12.38 | 
|                         |                |                     |  |                     |            |          |  |                 |     |          |  |   |       |  |  |  |            |  |  |   |       | 

The Company uses the Black-Scholes option-pricing model to
determine the pro forma impact under SFAS No. 123,
Accounting for Stock-Based Compensation on the
Companys net loss applicable to common shares and net loss
per common share. The model uses certain information, such as
the interest rate on a risk-free security maturing generally at
the same time as the option being valued, and requires certain
assumptions, such as the expected amount of time an option will
be outstanding until it is exercised or it expires, to calculate
the weighted average fair value per share of stock options
granted. This information and the assumptions used for 2001,
2000, and 1999 are summarized below:

|                                                     |  |      |       |      |  |      |        |   |  |  |        |  
|---------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                     |  | 2001 |       | 2000 |  | 1999
|                                                     |  |      |       |      |  |     
|Expected volatility                                  |  |      | 125.0 | %    |  |      | 77.2   | % |  |  | 70.3   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Risk free interest rate                              |  |      | 4.3   | %    |  |      | 6.2    | % |  |  | 5.3    | %
|                                                    
|                                                    
|                                                    
|                                                    
|Dividend yield                                       |  |      | 0.0   | %    |  |      | 0.0    | % |  |  | 0.0    | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected life (range in years)                       |  |      | 4.0   |      |  |      | 4.0    |   |  |  | 4.0    |  
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average fair value per share at grant
	date |  |      | $5.10 |      |  |      | $19.14 |   |  |  | $12.14 |  

Had compensation costs been recognized based on the calculated
fair value of stock options at the date of grant, the pro forma
amounts of the Companys net loss applicable to common
shares and net loss

F-27



---



##### Table of Contents





|                                                  |  |      |            |      |  |      |            |   |  |   |          |  
|------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | -------- | -
|                                                  |  | 2001 |            | 2000 |  | 1999
|                                                  |  |      |            |      |  |     
|Net loss applicable to common shares 
	pro forma |  | $    | (1,845,882 | )    |  | $    | (1,435,253 | ) |  | $ | (679,046 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss per common share  pro forma             |  | $    | (4.57      | )    |  | $    | (4.46      | ) |  | $ | (2.71    | )

14.  SUPPLEMENTAL DISCLOSURE

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

|                                                              |                                                                                                 |                         |         |        |  |      |         |           |  |   |         |         | 
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ----------------------- | ------- | ------ |  | ---- | ------- | --------- |  | - | ------- | ------- | 
|                                                              |                                                                                                 |                        
|                                                              |                                                                                                 | Year Ended December 31,
|                                                              |                                                                                                 |                        
|                                                              |                                                                                                 | 2001                    |         | 2000   |  | 1999
|                                                              |                                                                                                 |                         |         |        |  |     
|Non-cash financing and investing activities were
	as follows: |                                                                                                 |                         |         |        |  |      |         |           |  |   |         |        
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Class A common stock, warrants and options
	issued in acquisitions and under lease arrangements |                         | $       | 29,055 |  |      | $       | 3,002,309 |  |   | $       | 350,438 | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Redeemable preferred stock dividends, paid in
	shares of redeemable preferred stock             |                         |         | 86,237 |  |      |         | 76,671    |  |   |         | 53,504  | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Accrued redeemable preferred stock dividends,
	payable in shares of redeemable preferred stock  |                         |         | 6,524  |  |      |         | 17,090    |  |   |         | 2,680   | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Assumption of preferred stock and liabilities in
	acquisitions                                  |                         |         | 8,816  |  |      |         | 614,027   |  |   |         |        | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Issuance of Class B common stock for
	purchase of minority interest                             |                         |         |       |  |      |         |          |  |   |         | 269     | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Conversion of 6 1/2% redeemable cumulative
	preferred stock to Class A common stock             |                         |         | 17,700 |  |      |         | 93,860    |  |   |         |        | 
|                                                             
|                                                             
|                                                             
|                                                             
|                                                              | Other obligations assumed                                                                       |                         |         |       |  |      |         | 11,119    |  |   |         |        | 
|                                                             
|                                                             
|                                                             
|                                                             
|Cash paid for interest                                        |                                                                                                 | $                       | 313,178 |        |  | $    | 331,892 |           |  | $ | 202,431 |        

Employee
Savings and Retirement Plan

At December 31, 2001, the Company had a defined
contribution plan, generally covering all full time employees in
the United States. The Company provides a company match to all
eligible employees based on certain plan provisions and the
discretion of the Board of Directors. Company contributions were
$12.5 million, $8.3 million and $4.3 million
during 2001, 2000 and 1999, respectively.

15. OPERATING SEGMENTS

Reportable
Segments

The Company operates its business as one communications segment.
The Companys communications segment includes all of its
products and services including data, voice, integrated voice
and data, and other services. These services have similar
network operations and technology requirements and are sold
through similar sales channels to a similar targeted customer
base. Therefore, the Company manages these services as a single
segment that is divided into profit centers that are focused on
geographic areas, or markets, within the United States, or that
are focused on customers with a presence across geographical
markets.

F-28



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##### Table of Contents



Products
and Services

The Company classifies its products and services revenues
offered by its communications services segment into voice
services, data services, integrated voice and data services, and
other services (dollars in thousands):

|                                   |  |                         |           |      |  |      |         |  |  |   |         | 
|---------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                   |  |                        
|                                   |  | Year Ended December 31,
|                                   |  |                        
|                                   |  | 2001                    |           | 2000 |  | 1999
|                                   |  |                         |           |      |  |     
|Voice services                     |  | $                       | 606,848   |      |  | $    | 386,796 |  |  | $ | 219,391 | 
|                                  
|                                  
|                                  
|                                  
|Data services                      |  |                         | 596,664   |      |  |      | 331,892 |  |  |   | 54,032  | 
|                                  
|                                  
|                                  
|                                  
|Integrated voice and data services |  |                         | 52,018    |      |  |      | 2,693   |  |  |   |        | 
|                                  
|                                  
|                                  
|                                  
|Other services                     |  |                         | 3,037     |      |  |      | 2,445   |  |  |   | 901     | 
|                                   |  |                         |           |      |  |      |         |  |  |   |         | 
|Total revenue                      |  | $                       | 1,258,567 |      |  | $    | 723,826 |  |  | $ | 274,324 | 
|                                   |  |                         |           |      |  |      |         |  |  |   |         | 

16.  SELECTED QUARTERLY DATA (Unaudited)

Quarterly financial information is summarized in the table below
(dollars in thousands, except for share data):

|                                                  |  |                        |          |          |  |               |          |              |  |   |          |   |  |   |          |  
|------------------------------------------------- |  | ---------------------- | -------- | -------- |  | ------------- | -------- | ------------ |  | - | -------- | - |  | - | -------- | -
|                                                  |  |                       
|                                                  |  | Quarter ended 2001 (a)
|                                                  |  |                       
|                                                  |  | March 31,              |          | June 30, |  | September 30, |          | December 31,
|                                                  |  |                        |          |          |  |               |          |             
|Revenue                                           |  | $                      | 277,307  |          |  | $             | 306,779  |              |  | $ | 331,478  |   |  | $ | 343,003  |  
|                                                 
|                                                 
|                                                 
|                                                 
|Cost of service                                   |  |                        | 114,894  |          |  |               | 122,942  |              |  |   | 138,100  |   |  |   | 151,762  |  
|                                                 
|                                                 
|                                                 
|                                                 
|Loss from operations (b)                          |  |                        | (358,248 | )        |  |               | (362,418 | )            |  |   | (547,285 | ) |  |   | (681,940 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss before extraordinary item                |  |                        | (443,511 | )        |  |               | (461,116 | )            |  |   | (734,655 | ) |  |   | (791,853 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss (c)                                      |  |                        | (443,511 | )        |  |               | (461,116 | )            |  |   | (398,917 | ) |  |   | (782,581 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss applicable to common shares (d)          |  |                        | (482,552 | )        |  |               | (500,722 | )            |  |   | (50,752  | ) |  |   | (804,891 | )
|                                                 
|                                                 
|                                                 
|                                                 
|Net loss per common share (basic and diluted) (e) |  |                        | (1.31    | )        |  |               | (1.32    | )            |  |   | (0.12    | ) |  |   | (1.84    | )

|                                                    |  |                        |          |          |  |               |          |              |  |   |          |   |  |   |          |  
|--------------------------------------------------- |  | ---------------------- | -------- | -------- |  | ------------- | -------- | ------------ |  | - | -------- | - |  | - | -------- | -
|                                                    |  |                       
|                                                    |  | Quarter ended 2000 (a)
|                                                    |  |                       
|                                                    |  | March 31,              |          | June 30, |  | September 30, |          | December 31,
|                                                    |  |                        |          |          |  |               |          |             
|Revenue                                             |  | $                      | 105,849  |          |  | $             | 140,649  |              |  | $ | 224,255  |   |  | $ | 253,073  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Cost of service                                     |  |                        | 46,991   |          |  |               | 59,375   |              |  |   | 92,356   |   |  |   | 103,944  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Loss from operations (b)                            |  |                        | (118,122 | )        |  |               | (198,445 | )            |  |   | (336,694 | ) |  |   | (358,391 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Net income (loss) (c)                               |  |                        | 43,244   |          |  |               | (258,798 | )            |  |   | (394,182 | ) |  |   | (491,563 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Net income (loss) applicable to common shares       |  |                        | 9,809    |          |  |               | (290,562 | )            |  |   | (436,488 | ) |  |   | (530,414 | )
|                                                   
|                                                   
|                                                   
|                                                   
|Net earnings (loss) per common
	share  Basic (e)   |  |                        | 0.04     |          |  |               | (0.95    | )            |  |   | (1.20    | ) |  |   | (1.45    | )
|                                                   
|                                                   
|                                                   
|                                                   
|Net earnings (loss) per common
	share  Diluted (e) |  |                        | 0.03     |          |  |               | (0.95    | )            |  |   | (1.20    | ) |  |   | (1.45    | )




|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The selected financial data in 2001 and 2000
	includes the accounts and activities of Concentric from the
	merger date of June 16, 2000.                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(b) | Loss from operations includes restructuring
	charges totaling $189.1 million and $320.1 million in
	the third and fourth quarter of 2001, respectively, associated
	with plans to restructure certain aspects of the Companys
	business. Loss from operations also includes a
	$36.2 million charge in the second quarter of 2000 in
	connection with the June 2000 merger with Concentric resulting
	from the allocation of the purchase price to in-process research
	and development.                                                             
|   
|(c) | Net income (loss) includes a write-down of
	$87.0 million in the third quarter of 2001 and of
	$57.7 million in the fourth quarter of 2000 for other than
	temporary declines in the value of certain investments. In the
	first quarter of 2000, the Company recorded a
	$225.1 million net gain from the sale of an equity
	investment. It also includes a net gain of $335.7 million
	and $9.3 million in the third and fourth quarter of 2001,
	respectively, resulting from the repurchase of certain of the
	Companys senior notes during 2001.
|   
|(d) | Net earnings (loss) applicable to common
	shares includes a gain of $376.9 million resulting from the
	repurchase of certain of the Companys preferred stock
	during the third quarter of 2001.                                                                                                                                                                                                                                                                                                                                                      
|   
|(e) | Net earnings (loss) per share data has been
	adjusted for the stock splits effected in 2000. Additionally, as
	there are changes in the weighted average number of shares
	outstanding each quarter, the sum of net loss per share by
	quarter may not equal the total net loss per share for the
	applicable year.                                                                                                                                                                                                                                   

F-29



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##### Table of Contents



17.  RELATED PARTY TRANSACTIONS

In July 2001, the Company executed a multi-year agreement with
Nextel Communications, Inc. (Nextel) pursuant to
which XO will provide Nextel telecommunications services with an
estimated value of $100 million. Members of the
Companys board of directors also serve on the board of
directors of Nextel. One of these members, Craig O. McCaw,
along with his affiliates, holds a controlling voting interest
in the Company and holds certain management rights related to
his investment in Nextel. Prior to entering the agreement with
Nextel, the Company participated in a competitive proposal
process initiated by Nextel, which included numerous national
telecommunications providers. Therefore, in managements
opinion, the agreement with Nextel was consummated in the normal
course of operations with prices and terms equivalent to those
available to, and transacted with, unrelated parties. The
revenue recognized in 2001 for these and other
telecommunications services provided to Nextel was
$27.6 million, of which $9.8 million remained
outstanding at December 31, 2001. In addition, the Company
purchases various administrative services from Nextel. During
2001, the Company paid Nextel $6.2 million for these
services.

Certain investment funds affiliated with Forstmann
Little & Co. have a significant equity interest in both
the Company and McLeodUSA (McLeod). McLeod provides
interconnection and facilities based telecommunications services
to the Company. In addition, during 2001, XO acquired certain
unlit metro network capacity from McLeod to support
infrastructure requirements in a specific XO market. The Company
paid $15.8 million to McLeod for such services and capacity
during 2001. The Company provides, on a limited basis,
telecommunications service to McLeod. In addition, during 2001
the Company constructed and sold certain unlit metro network
capacity to McLeod. The revenue recognized in 2001 for such
services and capacity was $7.1 million.

18.  COMMITMENTS AND CONTINGENCIES

Operating
Commitments

The Company is leasing premises under various noncancelable
operating leases for administrative space, building access, and
other leases, which, in addition to rental payments, require
payments for insurance, maintenance, property taxes and other
executory costs related to the leases. The lease agreements have
various expiration dates and renewal options through 2021. The
Company also has various noncancelable long-term contractual
obligations associated with maintenance and service agreements.

Future minimum lease commitments required under noncancelable
operating leases and contractual obligations are as follows
(dollars in thousands):

|                                          |  |             |         |                 |  |   |         | 
|----------------------------------------- |  | ----------- | ------- | --------------- |  | - | ------- | 
|                                          |  | Operating   |         | Other long-term
|                                          |  | lease       |         | contractual    
|Year Ending December 31,                  |  | obligations |         | obligations    
|                                          |  |             |         |                
|2002                                      |  | $           | 75,753  |                 |  | $ | 81,691  | 
|                                         
|                                         
|                                         
|                                         
|2003                                      |  |             | 75,297  |                 |  |   | 69,486  | 
|                                         
|                                         
|                                         
|                                         
|2004                                      |  |             | 73,070  |                 |  |   | 59,429  | 
|                                         
|                                         
|                                         
|                                         
|2005                                      |  |             | 70,997  |                 |  |   | 14,382  | 
|                                         
|                                         
|                                         
|                                         
|2006                                      |  |             | 59,575  |                 |  |   | 14,340  | 
|                                         
|                                         
|                                         
|                                         
|Thereafter                                |  |             | 394,956 |                 |  |   | 189,803 | 
|                                          |  |             |         |                 |  |   |         | 
|Total minimum operating lease commitments |  | $           | 749,648 |                 |  | $ | 429,131 | 
|                                          |  |             |         |                 |  |   |         | 

Rent expense for cancelable and noncancelable leases totaled
approximately $100.1 million, $54.6 million, and
$28.0 million for the years ended December 31, 2001,
2000, and 1999, respectively.

Capital
Leases

Network assets under capital leases totaled approximately
$27.2 million and $44.9 million as of
December 31, 2001 and 2000, respectively, and are included
in telecommunications networks in property

F-30



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##### Table of Contents





|                                                   |                                               |   |        |       | 
|-------------------------------------------------- | --------------------------------------------- | - | ------ | ----- | 
|Year Ending December 31,                           |                                               |   |        |      
|                                                  
|                                                  
|                                                  
|                                                  
|2002                                               |                                               | $ | 20,752 |      
|                                                  
|                                                  
|                                                  
|                                                  
|2003                                               |                                               |   | 3,481  |      
|                                                  
|                                                  
|                                                  
|                                                  
|2004                                               |                                               |   | 2,809  |      
|                                                  
|                                                  
|                                                  
|                                                  
|2005                                               |                                               |   | 2,556  |      
|                                                  
|                                                  
|                                                  
|                                                  
|2006                                               |                                               |   | 2,416  |      
|                                                  
|                                                  
|                                                  
|                                                  
|Thereafter                                         |                                               |   | 2,010  |      
|                                                   |                                               |   |        |      
|Total minimum capital lease payments               |                                               |   | 34,024 |      
|                                                  
|                                                  
|                                                  
|                                                  
|Less: imputed interest                             |                                               |   | 6,798  |      
|                                                  
|                                                  
|                                                  
|                                                  
|Less: current portion of capital lease obligations |                                               |   | 18,097 |      
|                                                   |                                               |   |        |      
|                                                   | Long-term portion of capital lease obligation |   | $      | 9,129 | 
|                                                   |                                               |   |        |      

Legal
Proceedings

The Company and members of its board of directors have been
named as party defendants in a number of lawsuits filed in the
federal courts in Eastern District of Virginia and the Southern
District of California, and in state courts in New York,
Delaware and California. The suits purport to be class actions
brought on behalf of XOs stockholders. The federal actions
contain allegations of federal securities law violations by the
Company and certain directors relating to certain financial
disclosures during the year 2001. The state court actions, and
some of the federal actions, allege that the defendants,
including the Company and the members of its board of directors,
breached certain fiduciary duties in connection with the
proposed investments by the Forstmann Little Investors and
Telmex. The Company believes these claims are without merit and
intends to vigorously contest these suits by appropriate
proceedings. However due to the early stage of the proceedings
and inherent uncertainties in litigation, the Company is unable
to predict with any certainty the ultimate outcome.

The Company is not currently a party to any other legal
proceedings, other than regulatory and other proceedings that
are in the normal course of business. While the outcome of these
matters is currently not determinable, management does not
expect that the ultimate costs to resolve these matters will
have a material adverse effect on the Companys
consolidated financial position, results of operations, or cash
flows.

F-31



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##### Table of Contents



XO Communications, Inc.

Schedule II  Consolidated Valuation and
Qualifying Accounts

For The Years Ended December 31, 2001, 2000 and 1999


|                                |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |         | 
|------------------------------- | -------- | --------- | - | ----------------- |  | ---------- | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                                |          | Beginning |   | Additions charged |  |            |   | Ending 
|(in thousands)                  |          | Balance   |   | to expense        |  | Reductions |   | Balance
|                                |          |           |   |                   |  |            |   |        
|Allowance for doubtful accounts |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |        
|                                | 1999     |           | $ | 3,022             |  |            | $ | 8,280   |  |  | $ | (4,087   | ) |  | $ | 7,215   | 
|                                | 2000     |           | $ | 7,215             |  |            | $ | 21,999  |  |  | $ | (8,215   | ) |  | $ | 20,999  | 
|                                | 2001     |           | $ | 20,999            |  |            | $ | 45,757  |  |  | $ | (34,264  | ) |  | $ | 32,492  | 
|Restructuring accrual           |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |        
|                                | 1999     |           | $ |                  |  |            | $ | 30,935  |  |  | $ |         |   |  | $ | 30,935  | 
|                                | 2000     |           | $ | 30,935            |  |            | $ |        |  |  | $ | (30,935  | ) |  | $ |        | 
|                                | 2001 (a) |           | $ |                  |  |            | $ | 509,202 |  |  | $ | (383,429 | ) |  | $ | 125,773 | 




|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Only $16.6 million of the reduction in the
	2001 restructuring accrual was for cash payments. The balance
	was associated with the write down for the excess of carrying
	value of assets to be sold or abandoned and was applied to those
	assets.

S-1