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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, 2002

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

Telephone Number (703) 547-2000


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

NONE


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

Common Stock, Par Value $0.01 Per Share


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

Indicate by check mark whether the Registrant is
an accelerated filer (as defined by Rule 12b-2 of the
Act.).     YES þ          NO o

The aggregate market value of the pre-petition
common stock held by non-affiliates of the Registrant, based
upon the closing sale price of the common stock on June 28,
2002 (which is the last business day of the Registrants
most recently completed second fiscal quarter), as reported on
the NASDAQ Over-the-Counter Bulletin Board, was approximately
$7,200,000. Shares of pre-petition common stock held by each
executive officer and director and by certain persons who own 5%
or more of the outstanding 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, 2003, the number of
outstanding shares of reorganized XO Communications, Inc.s
new common stock was 95,000,001.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN
BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE
YEARS:


Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
Section 12, 13, or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan
confirmed by a
court.     YES þ          NO o

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

|         |  |                                                                                           |  |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  |  | -- | 
|PART I  
|        
|1.       |  | Business                                                                                  |  |  | 1  | 
|2.       |  | Properties                                                                                |  |  | 34 | 
|3.       |  | Legal Proceedings                                                                         |  |  | 35 | 
|4.       |  | Submission of Matters to a Vote of Security
    Holders                                   |  |  | 35 | 
|PART II 
|        
|5.       |  | Market for Registrants Common Stock and
    Related Stockholder Matters                  |  |  | 35 | 
|6.       |  | Selected Financial Data                                                                   |  |  | 36 | 
|7.       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |  | 38 | 
|7A.      |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |  |  | 54 | 
|8.       |  | Financial Statements and Supplementary Data                                               |  |  | 55 | 
|9.       |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |  | 55 | 
|PART III
|        
|10.      |  | Directors and Executive Officers of the Registrant                                        |  |  | 55 | 
|11.      |  | Executive Compensation                                                                    |  |  | 59 | 
|12.      |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |  | 64 | 
|13.      |  | Certain Relationships and Related Transactions                                            |  |  | 67 | 
|14.      |  | Controls and Procedures                                                                   |  |  | 68 | 
|PART IV 
|        
|15.      |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |  | 69 | 
|         |  | Signatures                                                                                |  |  | 70 | 
|         |  | Certifications                                                                            |  |  | 71 | 



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PART I

Item 1.     Business

Introduction

XO Communications, Inc., a Delaware
corporation, which we refer to as XO Parent, through its
predecessor entities, was formed in 1994. XO Parent was
originally organized as a Washington limited partnership and in
1995 merged into a Washington limited liability company, which
following several name changes became known as NEXTLINK
Communications, L.L.C. In January 1997, NEXTLINK Communications,
L.L.C. merged into NEXTLINK Communications, Inc., a Washington
corporation, which in June 1998 reincorporated in Delaware under
the same name. On June 16, 2000, in connection with
XO Parents merger with Concentric Network
Corporation, NEXTLINK Communications, Inc. merged with XO Parent
and XO Parent, as the surviving corporation in the merger,
changed its name to NEXTLINK Communications, Inc. On
September 25, 2000, XO Parent began doing business as
XO Communications and, on October 25,
2000, XO Parent changed its name to XO Communications,
Inc. We conduct our business primarily through the more than 50
subsidiaries that XO Parent owns and manages.

On June 17, 2002, XO Parent filed for
protection under Title 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November 15, 2002, the Bankruptcy Court confirmed
XO Parents plan of reorganization, and, on
January 16, 2003, XO Parent consummated the plan of
reorganization and emerged from its Chapter 11
reorganization proceedings with a significantly restructured
balance sheet.

In December 2001, XO Parent voluntarily
delisted its pre-petition class A common stock from the
Nasdaq National Market, which was traded under the symbol
XOXO, and, on December 17, 2001, began trading
on the Nasdaq Over-the-Counter Bulletin Board, or OTCBB.
XO Parents pre-petition class A common stock
stopped trading on the OTCBB as of January 16, 2003, the
effective date of XO Parents plan of reorganization,
at which time all interests in XO Parents
pre-petition class A common stock were terminated pursuant
to the plan of reorganization. The new common stock of
reorganized XO Parent issued pursuant to its plan of
reorganization began trading on the OTCBB under the symbol
XOCM shortly after the first distribution of common
stock pursuant to the plan.

Our principal executive and administrative
offices are located at 11111 Sunset Hills Road, Reston,
Virginia 20190 and our telephone number is (703) 547-2000.
Our Internet address is www.xo.com, where, under About
XO - Investor Center, you can find copies of this
annual report on Form 10-K, and XO Parents
quarterly reports on Form 10-Q and current reports on
Form 8-K, all of which we make available as soon as
reasonably practicable after the report is filed with the
Securities and Exchange Commission, or SEC.

Overview of Our Company

We provide business customers with a
comprehensive array of communications services, which include
voice, Internet access, private data networking and hosting
services. Our services are designed to take advantage of our
network assets, which are capable of carrying high volumes of
all types of communications traffic, and to meet the needs of
all sizes of business customers, from small and medium
businesses to large enterprise and carrier and wholesale
customers. Although these services are of significant benefit to
businesses of all sizes, we believe them to be of particular
benefit to multi-location businesses that desire to improve
communications among their locations, whether within a single
metropolitan area or across the country. These services include
the following:



| |   |                
| | - | ---------------
| |  | Voice services:



| |   |                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Local and long distance services, both bundled
    and stand-alone, other voice-related services such as
    conferencing, domestic and international toll free services and
    voicemail, and transaction processing services for prepaid
    calling cards; and

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interactive voice response, or IVR, systems that
    we develop, host and manage that enable our customers
    end-users to order products and services, collect and receive
    information, seek assistance, facilitate bill payment and a host
    of other capabilities over the telephone using natural language
    speech recognition and systems that enable persons to access
    web-based information over the telephone;



| |   |                 
| | - | ----------------
| |  | Internet access:



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dedicated Internet access for customers with
    large, high-speed Internet access requirements;                                                       
|
| |  | Digital subscriber line, or DSL, services for
    businesses that require high-speed Internet access over existing
    copper wire telephone lines; and
|
| |  | Dial access, which allows remote users to connect
    to a customers network;                                                                         



| |   |                         
| | - | ------------------------
| |  | Private data networking:



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



| |   |                  
| | - | -----------------
| |  | Hosting services:



| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Web site services, which allow a customer to
    establish a Web presence;                                                                                                                        
|
| |  | Web hosting, including hosting and web site
    traffic management tools, for Internet-centric businesses, and
    streamed media services designed for small and medium-sized
    businesses; and
|
| |  | Server collocation and management and customer
    support to manage a customers hosting needs.                                                                                                  

We also combine many of these services in
integrated, flat rate service packages, known as XOptions that
are tailored to the communications needs of small and
medium-sized businesses and larger businesses with multiple
locations. These packages eliminate the separation between local
and long-distance communications services, and combine this
all distance telephone service with high-speed
Internet access and web hosting services, all for one flat
monthly rate. We also offer shared tenant services, which
consist of telecommunications management services provided to
groups of small and medium-sized businesses located in the same
office building.

We believe that one of the significant factors
used by business customers in making purchase decisions relating
to communications services is the quality of service and
customer support offered by the service provider. Our customer
care representatives offer customer support 24 hours a day,
seven days a week. We focus on proactive resolution of customer
issues by training our customer care representatives extensively
on the services that we offer and promoting accountability of
the customer care team. We also have developed a secure, on-line
Business Center, through which many customers can access
information about their accounts and track requests, review
services, analyze trends, make decisions and pay bills.

To serve our customers broad and expanding
telecommunications needs, we operate a network comprised of a
series of rings of fiber optic cables located in the central
business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily
by a network of numerous dedicated wavelengths of transmission
capacity on fiber optic cables, which we refer to as an
inter-city network. By integrating these networks with advanced
communications technologies, we are able

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to provide a comprehensive array of
communications services primarily or entirely over a network
that we own or control, from the initiation of the voice or data
transmission to the point of termination, which we refer to as
end-to-end service. This capability enables us to provide
communication services between customers connected to our
network, and among a customers multiple locations,
primarily or entirely over our network.


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

Our Chapter 11 Reorganization

On June 17, 2002, XO Parent filed for
protection under the Bankruptcy Code. On November 15, 2002,
the Bankruptcy Court confirmed XO Parents plan of
reorganization, and, on January 16, 2003, XO Parent
consummated the plan of reorganization and emerged from its
Chapter 11 reorganization proceedings with a significantly
restructured balance sheet.

Events
Leading Up to the Chapter 11 Reorganization

From 1996 through 2001, we financed the
construction and acquisition of our networks, our growth and our
working capital requirements through public and private
offerings of senior and subordinated unsecured notes and common
and preferred equity securities. In addition, in 2000, we
financed certain network acquisitions and some of our working
capital requirements through secured borrowings under
XO Parents $1.0 billion senior secured credit
facility, which we refer to as the Pre-Petition Credit Facility.
As of December 31, 2001, we had approximately
$5.2 billion in secured and unsecured long term debt
obligations and approximately $1.8 billion in liquidation
preference of preferred stock.

In 2001, market valuations of debt and equity
securities of telecommunications companies, especially emerging
providers such as us, experienced significant declines, leading
to a wave of bankruptcies in the industry. As a result, the
capital markets were largely closed to emerging
telecommunications companies, which made it difficult or
impossible for companies like us to obtain additional funding.
In response to these conditions, we implemented stringent
measures in 2001 that were designed to conserve cash and reduce
operating expenses and capital expenditures. Despite these
efforts, we concluded that our cash on hand would not be
sufficient to fund operations, capital expenditures and debt
service until such time as we expected our operations to become
profitable and we determined that a restructuring of our balance
sheet was necessary.

The
Chapter 11 Petition and Plan of
Reorganization

During the period preceding and immediately after
the filing of XO Parents Chapter 11 petition, we
met with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured creditors that
represented holders of our unsecured notes (and following the
filing of the Chapter 11 petition, the official committee
of unsecured creditors appointed in the Chapter 11
proceedings) and potential investors to discuss potential
transactions that could be implemented to reorganize our capital
structure. These discussions led to an agreement with certain of
our creditors regarding the terms of a plan of reorganization
that envisioned two reorganization structures, the first of
which was based on, among other things, a proposed cash
investment in XO Parent by third parties

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(which was ultimately abandoned), and the second
of which contemplated a stand-alone restructuring with no new
cash infusion committed in advance. The plan of reorganization,
as supplemented, was filed with the Bankruptcy Court on
July 22, 2002 and distributed to creditors of
XO Parent eligible to vote in the reorganization. We refer
to the stand-alone alternative under the plan of reorganization
that ultimately was confirmed by the Bankruptcy Court as the
Plan of Reorganization.


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

On November 15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January 16, 2003,
XO Parent consummated the Plan of Reorganization and
emerged from its Chapter 11 reorganization proceedings.

Distributions
Under the Plan of Reorganization

After the consummation of the Plan of
Reorganization, and giving effect to the implementation of fresh
start accounting, our capital structure consists of the
following:



| |   |                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $500.0 million in outstanding principal
    amount of loans under a restructured secured credit and guaranty
    agreement, which we refer to as the New Credit Agreement;
|
| |  | $80.2 million of other long-term
    liabilities, which include various capital lease obligations; and                                                                    
|
| |  | 95.0 million outstanding shares of common
    stock, par value $0.01 per share, which we refer to as New
    Common Stock.                                                

We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios.

The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the
Pre-Petition Credit Facility being converted into the following:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | 90.25 million shares of New Common Stock; and                                              
|
| |  | $500.0 million of outstanding principal
    amount of loans under the New Credit Agreement.

The Plan of Reorganization also resulted in the
cancellation of all of XO Parents pre-petition senior
unsecured notes and general unsecured claims in exchange for the
following:



| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4.75 million shares of New Common Stock;                                                                                                                                                                                                                                                                                              
|
| |  | warrants to purchase up to an additional
    23.75 million shares of New Common Stock;                                                                                                                                                                                                                                                
|
| |  | rights to purchase shares of New Common Stock at
    $5.00 per share in the rights offering described below; and                                                                                                                                                                                                                      
|
| |  | a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination
    of the proposed investment transaction that was the basis for
    the first restructuring alternative contemplated by the Plan of
    Reorganization, which we refer to as the Investment Termination
    Payment.

The warrants consist of:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;                  
|
| |  | Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and

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| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.

The warrants will expire 7 years after the
date of issuance. Each series of warrants is identical, except
as to the applicable exercise price. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events.

Under the Plan of Reorganization and after the
SEC has declared effective our registration statement,
XO Parent will issue to certain holders of claims and
interests in XO Parent who held such claims and/or
interests as of the November 15, 2002 record date for
distributions under the Plan of Reorganization, rights to
subscribe for up to 40,000,000 shares of New Common Stock, at
$5.00 per share, for an aggregate purchase price of up to
$200.0 million, through a rights offering, which we refer
to as the Rights Offering. In addition, pursuant to the
stipulation relating to the settlement of claims made against
XO Parent purportedly on behalf of its stockholders, which
we refer to as the Stockholder Stipulation, holders of shares of
pre-petition class A common stock of XO Parent will receive
additional nontransferable rights to the extent that the rights
otherwise allocable to such holders in the Rights Offering are
exercisable for less than 3,333,333 shares of New Common Stock.
Accordingly, no less than 40,000,000 and not more than
43,333,333 shares will be offered in the Rights Offering.

Pursuant to the order confirming our Plan of
Reorganization, the Rights Offering will not take place until
the date a registration statement covering the offer and sale of
such rights and shares to be offered thereunder shall have been
filed with the SEC and such registration statement shall have
become effective. We have not yet filed a registration
statement with respect to the rights and the Rights Offering
will not commence until after the registration statement has
been filed with and declared effective by the SEC.

In addition, under the Plan of Reorganization:



| |   |                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of pre-petition subordinated notes of
    XO Parent had their securities cancelled, and received a
    cash payment from High River based upon the amount of the
    Investment Termination Payment that High River would have been
    entitled to receive as holder of the loans under the New Credit
    Agreement and the right to participate in the Rights Offering;
|
| |  | Holders of pre-petition class A common stock
    of XO Parent had their securities cancelled, and received
    the right to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and                                                                                                     
|
| |  | Holders of pre-petition class B common stock
    and holders of all series of pre-petition preferred stock of
    XO Parent had their securities cancelled and received only
    the right to participate in the Rights Offering.                                                                                                                                                 

Post-Bankruptcy
Interests Held by Entities Controlled by Carl
Icahn

Of the 90.25 million shares of New Common
Stock distributed to the lenders under the Pre-Petition Credit
Facility, approximately 76.6 million shares were issued to
High River upon consummation of the stand-alone restructuring
under the Plan of Reorganization. Immediately following this
distribution, High River transferred all shares of New Common
Stock to Cardiff Holding LLC, a Delaware limited liability
company controlled by Mr. Icahn.

Meadow Walk Limited Partnership, a limited
partnership controlled by Mr. Icahn, owned over
$1.5 billion in principal amount of various tranches of XO
Parents pre-petition senior unsecured notes, representing
approximately 33% in principal amount of such notes. Meadow Walk
has transferred beneficial ownership to all distributions with
respect to such notes under the Plan of Reorganization to
Cardiff.

Giving effect to these transactions and the
distributions of New Common Stock pursuant to the Plan of
Reorganization, Cardiff holds over 80% of the outstanding shares
of the New Common Stock.

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Of the warrants to be distributed under the Plan
of Reorganization to holders of the pre-petition senior
unsecured notes, Cardiff estimates it will receive Series A
Warrants to purchase approximately 3.0 million shares of
New Common Stock, Series B Warrants to purchase
approximately 2.3 million shares of New Common Stock, and
Series C Warrants to purchase approximately
2.3 million shares of New Common Stock. As of the date
hereof, XO has not made any distribution of warrants to any
holder of old senior unsecured notes or general unsecured
creditor of XO Parent.

In connection with the Plan of Reorganization,
High River received approximately 85% of the loans outstanding
under the New Credit Agreement. In January 2003, High River
assigned all of its rights in the loans outstanding under the
New Credit Agreement to Chelonian Corp., a corporation owned and
controlled by Mr. Icahn. Subsequently, these loans were
assigned to Arnos Corp., a corporation owned and controlled by
Mr. Icahn. As a result, Arnos now holds approximately 85%
of the loans outstanding under the New Credit Agreement.

Accounting
for Consummation of Plan of Reorganization

As a result of the consummation of the Plan of
Reorganization, we have determined that XO Parent is
required to implement the fresh start accounting
provisions of AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, which we refer to as SOP 90-7,
to its financial statements. The fresh start accounting
provisions require that we establish a fair value
basis for the carrying value of the assets and liabilities for
reorganized XO, the implementation of which will result in a
substantial reduction in the carrying value of our long-lived
assets, including property and equipment, fixed wireless
licenses, other intangible assets and other noncurrent assets.
As discussed in note 3 to our audited consolidated
financial statements set forth in Item 8 below, the
consolidated balance sheets to such financial statements include
pro forma information as if the fresh start accounting
provisions of SOP 90-7 had been implemented as of
December 31, 2002.

Under SOP 90-7, the implementation of fresh
start reporting is triggered in part by the emergence of
XO Parent from its Chapter 11 proceedings. Although
the effective date of the Plan of Reorganization was
January 16, 2003, we plan to account for the consummation
of the Plan of Reorganization as if it had occurred on
January 1, 2003 and implement fresh start reporting as of
that date.

For further discussion of the effects of the
transactions contemplated by the Plan of Reorganization on our
financial condition and results of operations, see Our
Chapter 11 Reorganization and Liquidity and
Capital Resources in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations.

2002 Capital Conservation
Initiatives

During 2002, in conjunction with the actions
taken in connection with our Chapter 11 reorganization, we
took a number of steps in an effort to conserve our available
funding, including some modest workforce reductions in addition
to those initiated in 2001, and to reduce our long-term
obligations.

Amendment to Level 3 Inter-city
Network Agreement.In August 2002,
we entered into a Master Agreement with Level 3
Communications, Inc., which amends various agreements related to
our acquisition of fiber networks in the United States from
Level 3 and the recurring maintenance charges relating to
those networks. Beginning on January 1, 2003 and continuing
over the remaining term of the initial agreement, Level 3
has reduced the operating and maintenance fees as well as fiber
relocation charges from approximately $17.0 million
annually to a fixed rate of $5.0 million annually. In
exchange for this reduction and certain other concessions, we
surrendered our indefeasible right to use an empty conduit and
our indefeasible right to use six of the 24 fibers previously
acquired from Level 3.

Sale of European
Business.In February 2002, we
completed the sale of the European Internet service provider
business that we acquired as part of the 2000 acquisition of
Concentric Network Corporation.

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Applications and Services

We provide business customers with a
comprehensive array of data and voice communications services,
which include voice, Internet access, private data networking
and hosting services. We have designed these communications
services to meet the needs of all sizes of business customers,
from small and medium businesses to multi-location businesses,
and large enterprise, and carrier and wholesale customers.

Voice
Applications and Services

Local
and Long Distance Voice Services

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



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

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

Hosted
Interactive Voice Response

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

Data
Applications and Services

Internet
Access

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

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Private
Data Networking

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

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

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

Hosting
Services

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

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

Our hosting services include:



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

As part of some of our XOptions integrated
packages of communications services, we offer web hosting with
Microsofts bCentral web-based tools and applications,
which enables customers to conduct targeted email marketing,
register their web site with hundreds of Internet search engines
and directories, build catalogues and sell products over the
web, and coordinate meetings and appointments online. We also
offer a suite of hosting outsourcing services that provide
customers web-based access to email, group distribution lists,
calendaring, contacts databases management and file sharing.
Hosting can be shared, in which we own the equipment
and provide the underlying services, or dedicated,
in which we provide some or all of the hosting and services from
our data centers using the customers own equipment.

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Integrated
Voice and Data Services

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

In 2002, we introduced a number of new XOptions
packages designed to meet the needs of larger customers,
specifically, those with small offices at multiple locations,
those desiring to pool hosting and email accounts across
multiple locations under a single account, and those that rely
heavily on voice communications services. We also introduced
XOptions packages that combine the benefits of XOptions
local and long distance voice, Internet access and web hosting
with Microsofts bCentral web-based tools and applications.

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

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.

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

(NETWORK DIAGRAM)

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 fiber so that we can control the design and
technology used to best meet our customers needs. We
operate 37 metro fiber networks serving the cities noted below.

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

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

Inter-City
Network

We have created a single, end-to-end network by
linking our metro fiber networks to one another through the use
of an inter-city fiber optic network, largely purchased from
Level 3, which enables us to offer our customers
integrated, end-to-end communications services over facilities
we control. All of our metro networks are connected to this
inter-city network, either directly or through other connections.

Although we own rights to multiple fibers
primarily on the Level 3 network, to conserve capital, we
have delayed lighting much of our inter-city fibers
and provide inter-city transport primarily by purchasing
wavelength capacity from Level 3 along the same routes as
our inter-city network assets onto which we have deployed
transmission and routing equipment. By using our own
transmission and routing equipment, we maximize the capacity and
enhance the performance of the network as needed to meet our
customers current and future broadband data and other
communications needs, rather than relying on the owners of
leased lines to make those upgrades.

Using Level 3 wavelength services and our
own routers and transport equipment, we also operate an OC-192
capacity Internet backbone, onto which a substantial amount of
our Internet-related services and

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customer traffic runs. This backbone provides our
customers with improved network redundancy, security and
performance, and enables us to offer customers services that
take advantage of future Internet Protocol technologies.


Our inter-city network assets primarily consist
of an exclusive interest in 18 unlit fibers in a shared, filled
conduit in the Level 3 North American network, which
consists of a fiber network that traverses over 16,000 miles and
connects more than 60 cities in the United States and Canada,
including most of the major metropolitan markets served by our
metro networks. We will install optical network equipment to
light specific segments of this inter-city fiber
where the demand for telecommunications capacity makes the
related capital expenditures economic in comparison to
purchasing wavelength or other capacity. Due to the need for
additional, cost-efficient capacity along the segment of this
network that runs from Los Angeles to San Diego, we are in the
processes of lighting this network segment, which is the only
segment that we have current plans to light. Much of the
equipment used in connection with our inter-city network is
positioned so that we can easily transfer voice and data traffic
from the wavelength capacity purchased from Level 3 to
servers on our inter-city fiber network as portions of that
network are lit.

Connecting
Customers to Our Networks

We attempt to connect our customers directly to
our networks where it is economical to do so. We believe that by
deploying direct connections to our customers, rather than
connecting through the incumbent carriers facilities, we
will reduce our costs and be better positioned to meet our
customers communications requirements and to more rapidly
deploy our service. We connect customers to our networks by
using fiber optic cable and, in limited circumstances, fixed
wireless spectrum,

In many cases, we must lease facilities from an
incumbent carrier to connect a customer to our network. By
building our metro networks in central business districts, in
many cases we have minimized the distance from our network to a
potential customer, which results in lower costs associated with
these leased facilities because the cost of those facilities is
generally based, in part, on the length of the leased connection.

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



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

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

Broadband Wireless
Spectrum.In cases where
construction of a fiber optic connection is not practical or
economical, in limited cases we have deployed a high-bandwidth
wireless connection between an antenna on the roof of the
customers premises and an antenna attached to our fiber
rings. We hold licenses to fixed wireless spectrum in numerous
cities, covering areas where 95% of the population of the 30
largest U.S. cities live or work.

In those limited cases where we decide to install
equipment to operate fixed broadband licenses, we must secure
roof and other building access rights, including access to
conduits and wiring from the owners of each 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

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connection remains over copper wire. DSL
technology reduces the bottleneck in the transport of
information, particularly for data services, by increasing the
data carrying capacity of copper telephone lines. We believe
that, for many small to medium sized customers within the
geographic areas that can be served by DSL technology, existing
copper connections using DSL technology from customer buildings
to our local fiber optic networks will offer a lower cost
solution for providing high-quality broadband services than
fiber or fixed wireless connections.


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

Network Technology

Overview

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

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

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

(NETWORK DIAGRAM)

Fiber
Optic Technology

To enhance the capacity of our metro networks, we
are incorporating dense wavelength division multiplexing
technology, which makes it possible to simultaneously transmit
data at more than one wavelength, thereby allowing the
transmission of multiple signals through the same fiber at
different wavelengths. When applied to the state-of-the-art
optical fiber deployed in many of our metro networks and in our
intercity network, this technology can dramatically increase the
capacity of an optical fiber.

Switching
Technology

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

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

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

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

We believe that a form of IP-based switching will
eventually replace both ATM and circuit switched technologies,
and will be the foundation of integrated networks that treat all
transmissions - including voice, fax and video -
simply as forms of data transmission. Although not always the
case, voice over IP technology now incorporates the quality of
service necessary for commercial deployments, but the pricing of
equipment that must be installed at customer locations in order
to implement voice over IP applications is not yet
cost-effective for widespread application. We expect that over
time improved technology and the manufacture of sufficient
volumes of equipment will make customer adoption of voice over
IP applications more cost-effective.

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

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

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

Fixed
Wireless Technology

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

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

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connections in those limited situations where it
is more cost-efficient than installing a fiber cable or leasing
facilities from the incumbent carrier.


A wireless connection typically consists of
paired antennas placed at a distance of up to 2.5 miles from one
another with a direct, unobstructed line of sight. The antennas
are typically installed on rooftops, towers or windows. Because
these connections are affected by rain attenuation, in areas of
heavy rainfall transmission links are engineered for shorter
distances and greater power to maintain transmission quality,
which tends to increase the cost of service coverage.

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

The term of the licenses for our fixed wireless
spectrum generally is ten years, and the initial term of a few
licenses expires as early as 2006. Although the licenses are
renewable for an additional ten year term, renewal is
conditioned on us satisfying certain utilization requirements
established by the Federal Communications Commission, or FCC.
Our current utilization may not be sufficient to satisfy this
condition for certain licenses, and, unless we begin to use
substantially more fixed wireless spectrum, the FCC may not
renew one or more of our licenses.

Sales and Customer Care

Overview

Our sales organization includes a direct field
sales force and alternative sales channels. Our direct sales
force for services other than shared tenant services includes
two sales organizations. Our market sales organization focuses
on small to medium-sized customers and larger or growing
businesses within a market and multi-market accounts. Our
national sales organization focuses on targeted larger and
national accounts, and specific enterprise and carrier channels.

Our market sales organization focuses on selling
our full suite of services to small to medium and larger
businesses and multi-market accounts. Our market research
indicates that these customers prefer a single source for all of
their telecommunications requirements, including products,
billing, installation, maintenance, and customer service. By
offering these customers our local and long distance services or
our XOptions packages, which combine local and long distance
voice services, Internet access and web hosting services, we
believe we provide our customers a level of convenience that
generally is unavailable in the communications marketplace.

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

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

Direct
Sales Force

We have established highly motivated and
experienced direct sales forces. Our strategy is to design the
structure of our sales efforts so that our sales personnel are
able to establish a direct and personal relationship with our
customers. We seek to recruit salespeople with strong sales and
telecommunications backgrounds, including salespeople from long
distance companies, telecommunications equipment manufacturers,
network systems integrators and the incumbent carriers.
Salespeople are offered incentives through a commission
structure that generally targets 40% to 50% of a
salespersons total compensation to be based on
performance. The size of our sales organization decreased from
2001 to 2002, from

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approximately 1,750 employees at
December 31, 2001 to approximately 1,100 employees at
December 31, 2002.


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. We have a staff of approximately 65 employees
who manage our agent relationship and the over 500 indirect
agents in markets throughout the United States. We also sell and
market certain services via our telesales operation and via the
Internet at www.xo.com.

Customer
Care

Once a customers services have been
installed, our customer care operations support customer
retention and satisfaction. Our goal is to provide customers
with a customer care group that has the ability and resources to
respond to and resolve customer questions and issues as they
arise, 24 hours a day, seven days a week. In 2002, although we
conducted much of our customer care operations from four call
centers, we also provided locally-based care for many large
customers. Although we believe that a centralized care structure
not only takes advantage of economies of scale, but also enables
us to provide better customer service, we intend to close one of
our care facilities in 2003 and are evaluating whether to place
additional customer care resources locally. The size of our
customer care organization decreased from 2001 to 2002, from
approximately 1,000 employees at December 31, 2001 to
approximately 700 employees at December 31, 2002.

Regulatory Overview

Overview

The Telecommunications Act of 1996, or the
Telecom Act, which substantially revised the Communications Act
of 1934, has established the regulatory framework for the
introduction of competition for local telecommunications
services throughout the United States by new competitive
entrants such as us. Prior to the passage of the Telecom Act,
states typically granted an exclusive franchise in each local
service area to a single dominant carrier - often a former
subsidiary of AT&T, known as a Regional Bell Operating
Company, or RBOC - which owned the entire local exchange
network and operated a virtual monopoly in the provision of most
local exchange services in most locations in the United States.
The RBOCs, following some recent consolidation, now consist of
the following companies: BellSouth, Verizon, Qwest
Communications and SBC Communications.

Among other things, the Telecom Act preempts
state and local governments from prohibiting any entity from
providing telecommunications service, which has the effect of
eliminating prohibitions on entry that existed in almost half of
the states at the time the Telecom Act was enacted. At the same
time, the Telecom Act preserved state and local jurisdiction
over many aspects of local telephone service, and, as a result,
we are subject to varying degrees of federal, state and local
regulation. Consequently, federal, state and local regulation,
and other legislative and judicial initiatives relating to the
telecommunications industry could significantly affect our
business.

We believe that the Telecom Act provided the
opportunity to accelerate the development of competition at the
local level by, among other things, requiring the incumbent
carriers to cooperate with competitors entry into the
local exchange market. We have developed our business and
designed and constructed our networks to take advantage of the
features of the Telecom Act that require cooperation from the
incumbent carriers, and believe that the continued viability of
the provisions relating to these matters is critical to the
success of the competitive regime contemplated by the Telecom
Act.

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Although the Telecom Act and the related rules
governing competition issued by the FCC, as well as
pro-competitive policies already developed by state regulatory
commissions, have enabled new entrants like us to capture a
portion of the incumbent carriers market share of local
services, there have been numerous attempts to limit or
eliminate the basic framework for competition in the local
exchange services market established by the Telecom Act through
a combination of federal legislation, new rulemaking by the FCC
and challenges to existing and proposed regulations by the
incumbent carriers. We expect these efforts to limit the
benefits of the Telecom Act to continue. Successfully
implementing our business plan is predicated on the assumption
that the basic competitive framework will remain in place.

Federal
Regulation

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

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



| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interconnection with the networks of incumbents
    and other carriers, which permits customers of ours to exchange
    traffic with customers connected to other networks;                                                                                                                                        
|
| |  | Local loop unbundling, which allows us to
    selectively gain access to incumbent carriers facilities
    and wires that connect the incumbent carriers central
    offices with customer premises, thereby enabling us to serve
    customers on a facilities basis not directly connected to our
    networks;
|
| |  | Reciprocal compensation, which mandates
    arrangements for local traffic exchange between us and both
    incumbent and competitive carriers and compensation for
    terminating local traffic originating on other carriers
    networks, thereby improving our margins for local service;                    
|
| |  | Number portability, which allows customers to
    change local carriers without changing telephone numbers,
    thereby removing a significant barrier for a potential customer
    to switch to our local voice services;                                                                                         
|
| |  | Access to phone numbers, which mandates
    assignment of new telephone numbers to our customers, thereby
    enabling us to provide telephone numbers to new customers on the
    same basis as the incumbent carrier; and                                                                                        
|
| |  | Collocation of telecommunications equipment in
    incumbent central offices, which enables us to have direct
    access to unbundled loops and other network elements and
    facilitates their efficient integration with our switching and
    other network facilities.                                        

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

18



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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 FCC correctly
interpreted the meaning of the term network element,
which defines the parts of an incumbent carriers
operations that may be subject to the unbundling
requirement of the Telecom Act. The Court, however, also held
that the FCC did not correctly determine which network elements
must be unbundled and made available to competitive telephone
companies such as us. In November 1999, the FCC released its
UNE (unbundled network element) Remand Order, which
addressed the deficiencies in the FCCs original ruling
cited by the Supreme Court. The order generally was viewed as
favorable to us and other competitive carriers because it
ensured that incumbent carriers would be required to continue to
make available those network elements, including unbundled
loops, that are crucial to our ability to provide local and
other services. The UNE Remand Order subsequently was appealed
by the incumbent carriers.

On May 24, 2002, the United States Court of
Appeals for the D.C. Circuit released an opinion remanding the
UNE Remand Order to the FCC for further consideration. The Court
of Appeals stated that it had remanded the order because it felt
that:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the FCC had adopted uniform national rules with
    respect to almost every unbundled element for every geographic
    market without regard to the state of competition in any
    particular market; and
|
| |  | the FCCs determination of when cost
    disparities impair a competitors ability to provide
    service without unbundled elements was too broad.                                                       

In response to the Court of Appeals
decision, and as part of its statutorily required periodic
review of its list of unbundled elements, the FCC initiated its
Triennial Review proceeding.

On February 20, 2003, the FCC held an open
meeting and adopted its Triennial Review decision. The full text
of what is expected to be a 300-page order is not yet available,
so we have only a broad outline of the FCCs actions
without the detail required to clearly understand all of the
ramifications of this important decision. Based on the
FCCs press release and the comments of each FCC
Commissioner at the meeting, it appears that, under that order,
our ability to obtain access to certain unbundled network
elements and incumbent network upgrades will be curtailed or
more costly in the future. Also, it appears that the order would
delegate to the states the overall responsibility for deciding
what unbundled elements should be available to competitors like
us in local markets of each of the respective states. Delegation
of these determinations creates the risk that some states may
decide to limit or eliminate unbundled elements to which we have
access today and that we will be faced with different sets of
rules and costs if states issue inconsistent decisions.

Based on the FCCs press release announcing
the Triennial Review decision and related comments of the
Commissioners, the following matters may be of relevance to us
once the order is issued:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Curtailed Access to Broadband: It appears that
    the order will adopt new rules that would restrict competitive
    carriers from leasing as unbundled elements certain upgrades
    that the incumbent carriers make to their networks, such as the
    deployment of new optical fiber or upgrades from copper to
    optical fiber. For example, a new fiber loop to a customer that
    replaces an existing copper loop could be exempt from
    unbundling, except that incumbents must continue to unbundle the
    pre-existing copper loop or provide a voice channel for us on
    the new fiber loops that is equivalent to the old copper loop.
    Although the imposition of any restrictions on our access to the
    incumbents broadband networks is not a favorable
    development for us, we believe that the adverse impact is

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | partially mitigated by the fact that it appears
    that incumbents would be required to continue to provide us with
    basic access to those facilities that we currently lease from
    them to serve many of our customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Unbundled Local Loops: It appears that the order
    will make a general, national finding that competitive carriers
    should have access to certain unbundled loops of the incumbent
    carriers. The states, however, may remove competitive
    carriers access to such loops based on the results of
    specified competitive analyses. Incumbent carriers will no
    longer be required to provide competitive carriers with access
    to certain very high-capacity loops. We believe that the net
    result of such an order would not have a significant impact on
    us, as the access to the vast majority of unbundled loops that
    we use today would be preserved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Unbundled Transport: It appears from the press
    release announcing the Triennial Review decision that the order
    will change the definition of dedicated transport in
    such a way that competitive carriers would have to purchase
    certain transport facilities at higher rates than they do so
    today. It appears that the order would maintain access to many
    types of transport between incumbent facilities, such as
    transport between incumbent central offices, but it redefines
    transport to eliminate the unbundling of other transport. It
    also appears that the order would set forth a test that the
    states must follow in considering whether transport should be
    available in local markets within the states. It appears that
    the order will provide that certain very high-capacity transport
    would no longer be available as an unbundled element and that
    shared transport would be unavailable as an unbundled element in
    most business markets. Although it is not possible to gauge the
    full effect of these changes without seeing the text of the
    order, we believe that it is likely that these actions would
    raise our costs for transport services in the future.
|
| |  | Enhanced Extended Links and Co-mingling: It
    appears that the order will facilitate the ability of
    competitive carriers like us to obtain a loop and transport
    combination of unbundled elements known as enhanced
    extended links, provided that the underlying loop and
    transport elements are available on an unbundled basis. It also
    appears that the order will permit competitive carriers to mix
    unbundled network elements with retail services instead of
    requiring them to artificially segregate unbundled elements from
    the remainder of our network. Because we currently take
    advantage of both services from the incumbent carriers, we
    believe that these developments could result in cost savings for
    us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Calculation of Unbundled Element Rates: It
    appears that the order will allow the incumbent carriers to
    utilize a higher cost of capital and shorter depreciation lives
    to establish rates for unbundled elements. We believe that these
    modifications could raise our costs for leasing unbundled
    elements in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

As indicated above, the text of the Triennial
Review decision has not yet been released. We anticipate that,
once the FCCs new unbundling rules are effective,
incumbent carriers will pursue review in courts, institute
administrative proceedings with the FCC and state regulatory
agencies and lobby the United States Congress, all in an effort
to affect laws and regulations in a manner even more favorable
to them and against the interest of competitive carriers. At the
same time, we would anticipate that the competitive carriers
will endeavor to improve their positions and access to the
incumbents networks through similar means.

Collocation
in Incumbent Central Offices

Collocation regulations promulgated by the FCC
specify in greater detail obligations that the Telecom Act
imposes upon the incumbent carriers to open their local networks
to competition by providing competitors space to locate their
equipment in incumbent central offices and remote terminals for
the purpose of interconnection. This allows the competitive
carriers to provide local telephone services and to use portions
of the incumbent carriers existing networks to offer new
and innovative services. Over the past four years, the
FCCs collocation regulations have been the subject of very
contentious proceedings at the FCC and litigation before several
courts. On remand from a March 2000 decision by the U.S. Court

20



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of Appeals for the D.C. Circuit, the FCC issued a
decision that revised its rules in a manner that permits
incumbent companies to exercise more discretion in determining
the placement of competitors equipment in their central
offices, and does not require the incumbents to allow
competitors to install and maintain cross-connections between
other collocated competitors, but requires the incumbents
themselves to provide this as part of their collocation
services. In June, 2002, the D.C. Circuit Court of Appeals
affirmed the FCCs remand order, and the FCC has since
clarified that incumbents should make their cross-connection
service available in the physical collocation tariffs they file
with the FCC.


In October 2002, Verizon filed an application
with the FCC requesting authority to discontinue providing
federally-tariffed physical collocation services, as required
under current FCC regulations applicable to most incumbent
carriers. Verizon asked the FCC to require its competitors
instead to order collocation services solely pursuant to terms
and conditions approved by state public service commissions.
Verizons application remains pending, but if this
authority is granted, such discontinuance would make it more
costly and difficult for competitors such as us to obtain
collocation services because the rates set by state public
service commissions are typically significantly higher than
those approved by the FCC, and may require competitors to engage
in costly negotiations in different states. If Verizon is
successful, other large incumbent providers are likely to seek
and receive comparable relief.

Regulation
of the RBOCs Ability to Provide Long Distance
Service

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



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | they have entered into an approved
    interconnection agreement with a facilities-based competitive
    telephone company or that no such competitive telephone company
    has requested interconnection as of a statutorily determined
    deadline;
|
| |  | they have satisfied a 14-element checklist
    designed to ensure that the RBOC is offering access and
    interconnection to all local exchange carriers on competitive
    terms; and                                                                
|
| |  | the FCC has determined that allowing the RBOC to
    offer in-region, long distance services is consistent with the
    public interest, convenience and necessity.                                                                                    

The FCC has granted each of the RBOCs the
authority to provide long distance service in a number of
states. We expect that the RBOCs will have received such
authority with respect to most of the remaining states in the
near term. Although we cannot predict when such approval is
likely to occur, it could have an adverse affect on our ability
to compete if it is not accompanied by safeguards to ensure that
the RBOC continues to comply with the market-opening
requirements of Section 271 or if it is granted prematurely
before the RBOC has completely satisfied the market-opening
requirements.

Provision
of Broadband Telecommunications Services and Information
Services

Current federal and state regulation places
certain restrictions and conditions on the provision of advanced
telecommunications services, or broadband services, such as data
and DSL services, by the RBOCs. Furthermore, the network
elements that RBOCs must make available under the FCCs
unbundling rules to competitors may be used for the provision of
broadband services. However, at the urging of the RBOCs and
other incumbent carriers, the FCC in its Triennial Review
decision, appears to have greatly curtail the extent to which
the incumbents must unbundle the broadband portion of their
networks for their competitors. Despite this apparent victory,
the RBOCs have vowed to continue to push for further
deregulation through federal and state legislative efforts. For
example, broadband deregulation legislation is currently under
consideration in several states, including Georgia, Texas and
Missouri. In addition, it is anticipated that deregulatory
legislation will be pursued by the RBOCs in Congress. In
addition to possible legislation, the FCC has initiated another
pending proceeding that could result in a further diminishment
of incumbent carriers requirement to make unbundled
network elements that are used for certain broadband or
information services available to us. The FCC has issued a
Notice of Proposed Rulemaking entitled Appropriate
Framework for Broadband Access to the Internet Over

21



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Wireline Facilities that requests comments
on the proper classification of broadband access services as
either regulated telecommunications services or unregulated
information services. The Triennial Review decision
significantly restricts the availability on an unbundled basis
of certain network elements deploying fiber or packet-switching
technologies. That decision, in conjunction with a decision in
this proceeding, legislative change or a court ruling further
broadening the definition of what constitutes unregulated
information services could have the effect of allowing RBOCs to
provide terms, conditions and pricing to their own affiliates
that provide data or information services that are better than
those made available to us. Such developments could also be
expected to adversely effect our cost of doing business by
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
their share of interstate and international telecommunications
end user revenues. In a 1999 decision, the Fifth Circuit Court
of Appeals issued a ruling that had the net effect of somewhat
lowering our contribution of revenues to universal service,
which stands at 7.28% of end user telecommunications revenues
for the first quarter of 2003. Now, the FCC has taken further
steps to modify the system for assessment and recovery of
universal service funds. In a December 2002 Notice of Proposed
Rulemaking, the FCC has asked many broad-ranging questions
regarding universal service, including whether to change its
method of assessing contributions due from carriers by basing it
on the number and capacity of connections they provide, rather
than on interstate and international end user revenues they
earn. We cannot be sure that legislation or FCC rulemaking will
not increase the size of our subsidy payments, the scope of the
subsidy program or our costs of calculating, collecting and
remitting the universal service related payments.

Intercarrier
Compensation Reform

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

Interstate Access
Charges.Long distance carriers pay
local facilities-based carriers, including us, interstate access
charges for both originating and terminating the interstate
calls of long distance customers on the local carriers
networks. Historically, the RBOCs set access charges higher than
cost and justified this pricing to regulators as a subsidy to
the cost of providing local telephone service to higher cost
customers. With the establishment of an explicit and
competitively neutral universal service subsidy mechanism,
however, the FCC is under increasing pressure to revise the
current access charge regime to bring the charges closer to the
cost of providing access. In response, the FCC issued a decision
in 2001 setting the rates that competitive local carriers charge
to long distance carriers at a level that will gradually
decrease over three years from a maximum of $0.025 per minute to
the rates charged by incumbent carriers. So long as we are in
compliance with the FCCs rate schedule, the FCCs
order forbids long distance carriers from challenging our
interstate access rates. Although this FCC decision lowering
access charges will reduce our access charge revenues over time,
we do not expect that such a reduction will have a material
impact on our total revenues or financial position. The FCC is
also considering, in a declaratory ruling proceeding commenced
in November 2002, the question of whether voice over the
Internet services or services utilizing an Internet protocol
should be made subject to interstate access charges in the same
manner as traditional telephony. Like a growing number of
carriers, we utilize an Internet protocol for a portion of our
traffic as do some of our customers. The FCC has indicated on
several occasions that such services are exempt from interstate
access charges, but until the FCC issues its ruling in the
current proceeding, it is unclear how such traffic will be
treated for intercarrier compensation purposes.

Local Reciprocal Compensation
Charges.Local telephone companies
such as us that originate traffic that is terminated on the
network of other carriers typically compensate the other local
carriers for

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terminating that traffic. These payments flow in
both directions between any two carriers. First, when we
terminate traffic for another local carrier to a customer on our
network, we collect compensation. Second, when we send traffic
to another carrier for termination, we pay compensation. Some
competitors, however, have a customer base that generates many
more minutes of terminating traffic from other carriers than
originating traffic destined for other carriers. For example, a
competitor that has a customer base that has many information
service providers typically will have a large amount of
compensation being paid to it by other carriers, while it will
owe very little reciprocal compensation to other carriers. The
FCC revamped the local reciprocal compensation structure in 2001
on an interim basis for three years to eliminate or reduce the
opportunity for carriers to take advantage of an imbalance of
originating and terminating traffic flows due to traffic
terminated to information service providers. The FCC also
initiated a rulemaking to examine inter-carrier compensation
more comprehensively. Under the decision, at the election of the
incumbent carrier, terminating traffic that is out-of-balance by
a ratio of more than 3 to 1 can be compensated at a lower rate,
or in some cases, at no charge. Because the traffic we exchange
with other local carriers is relatively in balance across our
markets, however, we do not expect FCC decisions to restructure
reciprocal compensation to have a material impact on our total
revenues or financial position vis-à-vis other carriers.


Regulation
of Business Combinations

The FCC, along with the Department of Justice and
state commissions, has jurisdiction over business combinations
involving telecommunications companies. For example, the
FCCs approval was required to implement certain aspects of
our Chapter 11 reorganization. The FCC has reviewed a
number of recent and proposed combinations to determine whether
the combination would undermine the market-opening incentives of
the Telecom Act by permitting the combined company to expand its
operations without opening its local markets to competition or
have other anti-competitive effects on the telecommunications
and Internet access markets. In some cases, the FCC has set
conditions for its approval of the proposed business
combination. We cannot predict whether any conditions imposed
will be effective, nor can we predict whether the FCC will
impose similar conditions should it approve future business
combinations.

State
Regulation

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

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

Under the regulatory arrangement contemplated by
the Telecom Act, state authorities continue to regulate matters
related to universal service, public safety and welfare, quality
of service and consumer rights. All of these regulations,
however, must be competitively neutral and consistent with the
Telecom Act, which generally prohibits state regulation that has
the effect of prohibiting us from providing telecommunications
services in any particular state. State commissions also enforce
some of the Telecom Acts local competition provisions,
including those governing the arbitration of interconnection
disputes between the incumbent carriers and competitive
telephone companies and the setting of rates for unbundled
network elements. Finally, the order expected from the
FCCs Triennial Review decision will delegate to the states
important authority to decide what unbundled elements must be
made available to competitive carriers in each of the
states local markets over a period three to nine months
following the effectiveness of the decision. Consequently, this
authority would give the states a key role regarding our

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continuing access to unbundled elements, such as
loops and transport in particular, that are necessary in many
cases to connect our customers to our metro networks.


Local
Government Regulation

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

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

Environmental
Regulation

Our switch site and customer premise locations
are equipped with back-up power sources in the event of an
electrical failure. Each of our switch site locations has
battery and diesel fuel powered back-up generators, and we use
batteries to back-up some of our customer premise equipment.
Federal, state and local environmental laws require that we
notify certain authorities of the location of hazardous
materials and that we implement spill prevention plans. We
believe that we currently are in compliance with these
requirements in all material respects.

Competition

The industry environment in which we operate has
changed significantly recently. In particular, with the steep
decline in the market valuations of debt and equity securities
of telecommunications companies, particularly emerging
providers, in the last two years the financial condition of many
competitive and other carriers has deteriorated, and a number of
these competitors have attempted to reorganize, or have
completed reorganizations, under Chapter 11 of the
Bankruptcy Code. Several competitors who have completed these
reorganization efforts, have emerged from bankruptcy with
significant improvements to their financial condition or are
newly formed entities that have acquired the assets of others at
substantial discounts when compared to their original cost basis.

At the same time, the regulatory environment has
changed and continues to change rapidly. Although the Telecom
Act and other actions by the FCC and state regulatory
authorities have had the general effect of promoting competition
in the provision of communications services, it also has allowed
the incumbent carriers to begin to provide long distance
services in many states. These effects, together with new
technologies, such as voice-over-IP, and the importance of data
services, have blurred the distinctions among traditional
communications markets. As a result, a competitor in any of our
business areas potentially is a competitor in our other business
areas.

Many of our existing and potential competitors
have greater market presence, including name recognition,
engineering and marketing capabilities, and financial,
technological and personnel resources,

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including resources for the development and
deployment of new technology and services, than those available
to us.


Incumbent
Carriers

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

Other
Voice Service Competitors

We face, and expect to continue to face,
competition for local and long distance telecommunications
services from competitors and potential competitors in addition
to the incumbent carriers, primarily AT&T, WorldCom, Inc.
and Sprint Corporation. With respect to local telecommunications
services, we also face, and expect to continue to face,
competition from other carriers and competitors, such as Time
Warner Telecom, Allegiance Telecom Inc., Focal Communications
and McLeodUSA Incorporated. With respect to long distance
telecommunications services, although the market is dominated by
AT&T, WorldCom, and Sprint, hundreds of other companies,
such as Qwest, also compete in the long distance marketplace. In
addition, as the RBOCs continue to receive FCC authorization to
increase the number of states in which they are authorized to
provide long distance telecommunications services, we would
expect them to become increasingly significant competitors for
those services.

Data
Service Competitors

We face, and expect to continue to face,
competition for Internet access and other data services from
telecommunications companies, including AT&T, WorldCom, and
Sprint, online service providers, DSL service providers, and
Internet service providers and web hosting providers.

Other
Business Competitors

Our enhanced communications service offerings are
also subject to competition. For example, there are several
competitors that offer interactive voice response services
similar to those offered by our Interactive division, such as
Basis, Interactive Telesis and West Corporation, which we
believe focus their sales efforts on large volume interactive
voice response service users, live agent call centers and IVR
hardware sales.

Employees

As of December 31, 2002 we employed
approximately 5,100 and as of February 28, 2003, we
employed approximately 4,900 people, including full-time and
part-time employees. We consider our employee relations to be
good. None of our employees is covered by a collective
bargaining agreement.

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Risk Factors

Risks
Related to Our Operations

The wave of bankruptcies in the Internet and
communications-related industries has diminished our marketing
prospects and may have an adverse effect on the results of our
operations in future periods.

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

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

Our operations support systems are an important
factor in our success. Critical information systems used in
daily operations perform sales and order entry, provisioning,
billing and accounts receivable functions, and cost of service
verification and payment functions, particularly with respect to
facilities leased from incumbent carriers. If any of these
systems fail or do not perform as expected, it would impact our
ability to process orders and provision sales, and to bill for
services efficiently and accurately, which could cause us to
suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would
adversely affect our revenues. In additional, system failure or
performance issues could impact our ability to effectively audit
and dispute invoicing and provisioning data provided by service
providers from whom we lease facilities. Furthermore, problems
may arise with higher processing volumes or with additional
automation features, which could potentially result in system
breakdowns and delays and additional unanticipated expense to
remedy the defect or to replace the defective system with an
alternative system.

We are in the process of updating and replacing
software and related systems for sales tracking, order entry and
provisioning and plan to implement changes to our billing
systems later this year to support our growth and improve the
order and provisioning processes. We have experienced, and may
continue to experience, delays and related problems in
processing orders, provisioning sales and billing in connection
with the transition to these new systems.

Our ability to efficiently and accurately
provision new orders for services on a timely basis is necessary
for us to begin to generate revenue related to those services.
If the delays or related problems continue, or if any unforeseen
problems emerge in connection with our migration to the new
provisioning software and systems, delays and errors may occur
in the provisioning process, which could significantly increase
the time until an order for new service can begin to generate
revenue, which could have a material adverse effect on our
operations.

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

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



| |   |                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we charge the potential customer certain one-time
    installation fees, and, although the fees are less than the cost
    to install a new customer, they may act as a deterrent to become
    our customer, and

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| |   |                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we require cooperation from the incumbent carrier
    in instances where there is no direct connection between the
    customer and our network, which can complicate and add to the
    time that it takes to provision a new customers service.

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

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

We are highly dependent on the services of our
management and other key personnel. The loss of the services of
our senior executive management team or other key personnel
could cause us to make less successful strategic decisions,
which could hinder the introduction of new services or make us
less prepared for technological or marketing problems, which
could reduce our ability to serve our customers or lower the
quality of our services. In particular, the position of chief
executive officer is currently vacant, and the designation of a
new chief executive officer may have a significant impact on our
future performance.

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

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

We hold some of the fiber that makes up the
foundation of our network, particularly in our inter-city
network, through long-term leases or indefeasible right of use
agreements. A bankruptcy or financial collapse of one of these
fiber providers could result in a loss of our rights under such
leases and agreements with the provider, which in turn could
have a negative impact on the integrity of our network and
ultimately on our results of operations. Since early 2001, there
has been increasing financial pressure on some of our fiber
providers as part of the overall weakening of the
telecommunications market. Several such providers have sought
bankruptcy protection. To our knowledge, the rights of the
holder of such rights in strands of fiber have never been
addressed by the judiciary at the state or federal level in
bankruptcy and, therefore, under such circumstances, our rights
under dark fiber agreements would be unclear.

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

We must be a party to interconnection agreements
with the incumbent carrier and certain independent carriers in
order to connect our customers to the public telephone network.
If we are unable to renegotiate or maintain interconnection
agreements in all of our markets on favorable terms, it could
adversely affect our ability to provide services in the affected
markets.

Peering agreements with Internet service
providers allow us to access the Internet and exchange transit
for free with these providers. Depending on the relative size of
the carriers involved, these exchanges may be made without
settlement charge. Recently, many Internet service providers
that previously offered peering have reduced or eliminated
peering relationships or are establishing new, more restrictive
criteria for peering and an increasing number of these service
providers are seeking to impose charges for transit. Increases
in costs associated with Internet and exchange transit could
have a material

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adverse effect on our margins for our products
that require Internet access. We may not be able to renegotiate
or maintain peering arrangements on favorable terms, which would
impair our growth and performance.


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

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

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

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

Our reliance on third-party DSL service
providers could affect adversely our ability to provide service
to our DSL customers.

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

Risks
Related to Competition and Our Industry

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

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

We face competition in each of our markets
principally from the incumbent carrier in that market, but also
from recent and potential market entrants, including long
distance carriers seeking to enter,

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reenter or expand entry into the local exchange
marketplace and incumbent carriers seeking to enter into the
long distance market as they are granted the regulatory
authority to do so. This competition places downward pressure on
prices for local and long distance telephone service and data
services, which can adversely affect our operating results. In
addition, we could face competition from other companies, such
as other competitive carriers, cable television companies,
microwave carriers, wireless telephone system operators and
private networks built by large end-users. If we are not able to
compete effectively with these industry participants, our
operating results could be adversely affected.


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

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

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

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

The introduction of new technologies may reduce
the cost of services similar to those that we plan to provide.
As a result, our most significant competitors in the future may
be new entrants to the telecommunications industry. These new
entrants may not be burdened by an installed base of outdated
equipment and, therefore, may be able to more quickly respond to
customer demands.

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



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

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

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

We are subject to varying degrees of regulation
from federal, state and local authorities. This regulation
imposes substantial compliance costs on us. It also restricts
our ability to compete. For example, in each state in which we
desire to offer our services, we are required to obtain
authorization from the

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appropriate state commission. If any required
authorization for any of our markets or services is revoked or
otherwise terminated, our ability to operate in the affected
markets would be adversely affected.


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

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

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

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

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

Risks
Related to Liquidity and Financial Resources

We incurred a substantial net loss in 2002
and, in the near term, will not generate funds from operations
sufficient to meet all of our cash requirements.

For each period since inception, we have incurred
substantial net losses. For 2002, we posted a net loss
attributable to common stockholders of approximately
$3.4 billion. In the near term, our existing and projected
operations are not expected to generate cash flows sufficient to
pay our expected operating expenses, fund our capital
expenditure requirements and meet our debt service obligations.

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

Our New Credit Agreement contains covenants that
require us to maintain certain amounts of unrestricted cash,
require us to achieve specified operating results, and restrict,
among other things, the amount of our capital expenditures, our
ability to borrow money, grant additional liens on our assets,
make particular types of investments or other restricted
payments, sell assets or merge or consolidate. Arnos Corp., a
company controlled by Mr. Carl Icahn, holds approximately
85% of the principal amount of the loans outstanding under the
New Credit Agreement. Because amendments to or waivers of
covenants under the New Credit Agreement generally require the
approval or consent of holders of only a majority of the
outstanding principal amount under the New Credit Agreement,
decisions whether to amend or waive compliance with such
covenants by the holders of loans under the New Credit Agreement
can be made by Arnos Corp., and ultimately Mr. Icahn,
whether or not the other holders consent.

The security for the New Credit Agreement
consists of substantially all of the assets of XO Parent
and our subsidiaries. A default under the New Credit Agreement
could adversely affect our rights under other commercial
agreements.

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The New Credit Agreement and the existence of the
loans under the New Credit Agreement also could affect our
financial and operational flexibility, as follows:



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

As a result of the recent investment history
of the telecommunications sector, the access of
telecommunications service providers like us to capital for
growth or acquisitions is likely to be limited.

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

Risks
Related to Our New Common Stock

An affiliate controlled by Mr. Carl Icahn
is our majority stockholder.

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

We could be liable for the funding and
termination liabilities of certain pension plans sponsored by
affiliates of Mr. Carl Icahn.

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

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

The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as

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we remain a member of the ACF controlled group,
certain other reportable events, including certain
extraordinary dividends and stock redemptions, must be reported
to the PBGC.


Because our New Common Stock is not listed for
quotation on either the Nasdaq National or Small Cap Market, we
are not subject to certain reporting and corporate governance
provisions.

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



| |   |                                
| | - | -------------------------------
| |  | Distribution of interim reports
|
| |  | Solicitation of proxies        
|
| |  | Independent directors          
|
| |  | Audit committees               
|
| |  | Shareholder approval           
|
| |  | Stockholder voting rights      
|
| |  | Auditor peer review            

As our New Common Stock is not so quoted, we are
not subject to these requirements. As a result, for example, we
are not required to comply with recently adopted rules that will
require listed companies to have increased independent director
representation on their boards of directors or an audit
committee composed solely of independent directors. We currently
do not intend to seek a listing on any exchange or the Nasdaq
National Market or the Nasdaq SmallCap Market.

Limited liquidity of our New Common Stock may
result in delays in your ability to sell your common stock or
lower your returns; you should be prepared to hold your
investment indefinitely.

Although, there currently is a limited trading
market for our New Common Stock on the Nasdaq Over-the-Counter
Bulletin Board, known as the OTCBB, we cannot assure that an
active trading market for our stock will continue. Unlike the
Nasdaq National Market and Small Cap Market where the issuer
applies for listing of its securities, an active and orderly
trading market on the OTCBB depends on the existence, and
individual decisions, of willing buyers and sellers at any given
time. We will not have any control over the willingness of any
such parties to create a trading market. If the OTCBB trading
market does not continue or becomes more sporadic, the market
value of our New Common Stock could be affected adversely and it
would become difficult to buy or sell shares on short notice.
Consequently, you should be prepared to hold your New Common
Stock indefinitely.

As of March 1, 2003, shares of New Common
Stock were trading at less than $5.00 per share on the OTCBB,
which could result in such stock being defined as a penny
stock pursuant to applicable SEC regulations. Accordingly,
the New Common Stock may be subject to penny stock rules, which
could adversely affect the market liquidity of our New Common
Stock. These rules impose additional sales practice requirements
on broker-dealers that sell low-priced securities to persons
other than established customers and institutional accredited
investors and require the delivery of a disclosure schedule
explaining the nature and risks of the penny stock market. As a
result, the ability or willingness of broker-dealers to sell or
make a market in our New Common Stock might decline.

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Future sales of our New Common Stock could
adversely affect its price and/or our ability to raise
capital.

Future sales of substantial amounts of New Common
Stock, or the perception that such sales could occur, could
adversely affect the prevailing market price of the New Common
Stock and our ability to raise capital.

As of March 1, 2003, there were
approximately 95.0 million shares of New Common Stock
outstanding. The shares of New Common Stock owned by Cardiff, an
entity owned and controlled by Mr. Icahn, are restricted
shares that may be sold only under a registration statement or
an exemption from federal securities registration requirements.
Although Cardiff holds restricted stock, it may cause us to
register sales of that stock at any time, whether pursuant to
its contractual registration rights or otherwise.

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

We have options outstanding to purchase
approximately 11.5 million shares of New Common Stock
outstanding under our stock incentive plan as of March 1,
2003, with an exercise price of $5.00 per share. Unless
surrendered or cancelled earlier under the terms of the stock
incentive plan, those options will expire in 2013. In addition,
our stock incentive plan authorizes future grants of options to
purchase New Common Stock, or awards of restricted New Common
Stock, with respect to an additional 6.1 million shares of
New Common Stock in the aggregate.

Other
Risks

Our adoption of fresh start
accounting makes comparisons of our financial position and
results of operations with those of prior periods more
difficult.

Due to our emergence from bankruptcy pursuant to
the Plan of Reorganization, we will implement fresh
start accounting for periods following the restructuring.
Fresh start accounting requires us to restate all our assets and
liabilities to reflect their respective fair values. As a
result, the consolidated financial statements for periods after
our emergence from bankruptcy will not be comparable to our
consolidated financial statements for the periods prior to our
emergence from bankruptcy, which were prepared on an historical
basis. The application of fresh start accounting may
make it more difficult to compare our post-emergence operations
and results to those in pre-emergence periods.

There may be risks related to our use of
Arthur Andersen as our independent auditors for the year ended
December 31, 2001 and prior periods.

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

When we seek to access the capital markets in an
offering that requires registration of securities under the
Securities Act of 1933, as will be the case in the Rights
Offering, current SEC rules require that three years of audited
financial statements be included or incorporated by reference
into the related prospectus. These rules would require that we
present financial statements for one or more fiscal years that
were

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audited by Arthur Andersen, until our audited
financial statements for the year ending December 31, 2004
become available. The SEC recently adopted rules that exempt
certain issuers that file registration statements under the
Securities Act that contain financial statements audited by
Arthur Andersen from having to comply with regulations that
require such issuers to present manually signed
accountants reports and written consents of Arthur
Andersen to include such financial statements in the
registration statement. If the SEC ceases accepting financial
statements audited by Arthur Andersen without such reports and
consents, we could be precluded from filing such a registration
statement, unless our current independent auditors,
Ernst & Young LLP, or another independent accounting
firm, audits the financial statements for the years ended
December 31, 2001 and 2000, which originally were audited
by Arthur Andersen. The time to complete such an audit would
delay, and could prevent, us from accessing the capital markets.


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
Annual Report on Form 10-K are not historical facts, but are
forward-looking statements, as such term is defined
in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements can be identified by the use of
forward-looking terminology such as believes,
expects, plans, may,
will, would, could,
should, or anticipates or the negative
of these words or other variations of these words or other
comparable words, or by discussions of strategy that involve
risks and uncertainties. Such forward-looking statements
include, but are not limited to, statements regarding:



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

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



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

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;

34



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##### 



connecting lines between customers premises
and the central offices; and customer premise equipment. Our
central office switching equipment includes electronic switches
and peripheral equipment.


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

We, and our subsidiaries, lease facilities for
our and their administrative and sales offices, central
switching offices, network nodes and warehouse space. The
various leases expire in years ranging from 2003 to 2021. Most
have renewal options.

Our headquarters are located in Reston, Virginia,
where we are currently leasing approximately 170,000 square feet
of space. In February 2003, Dixon Properties, LLC, which is
owned and controlled by Mr. Carl Icahn, acquired ownership
of the building in which our headquarters is located in a
transaction that was approved by the Bankruptcy Court in our
Chapter 11 proceedings.

Item 3.     Legal
Proceedings

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

As discussed above, on June 17, 2002,
XO Parent filed for protection under the Bankruptcy Code.
Although XO Parent consummated its Plan of Reorganization
and emerged from its Chapter 11 reorganization proceedings
on January 16, 2003, disputes with respect to the amount of
allowed claims owed by XO Parent to certain of its general
unsecured creditors remain outstanding. We expect these disputes
to be resolved in the near term. A resolution adverse to
XO Parent of any or all of these claims would not result in
a change in the distributions under XO Parents Plan
of Reorganization to any of the classes of holders of claims and
interests summarized in Item 1, Business under the caption
Our Chapter 11 ReorganizationDistributions
Under the Plan of Reorganization.



|        |                                                        
|------- | -------------------------------------------------------
|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, 2002.

PART II

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

Market Information

Our pre-petition class A common stock was
traded on the Nasdaq National Market under the symbol
XOXO until December 2001, at which time we
voluntarily delisted it from that market. On December 17,
2001, our pre-petition class A common stock began trading
on the Nasdaq Over-the-Counter Bulletin Board until
January 16, 2003, the effective date of our Plan of
Reorganization, at which time trading was halted on the Nasdaq
Over-the-Counter Bulletin Board.

The following table shows, for the periods
indicated, the high and low closing bid prices for our
pre-petition class A common stock as reported by the Nasdaq
National Market or Nasdaq Over-the-Counter Bulletin Board, as
applicable.

|               |  |      |      |      |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ---- | ---- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |      |      |     
|               |  | 2002 |      | 2001
|               |  |      |      |     
|               |  | High |      | Low  |  | High |      | Low
|               |  |      |      |      |  |      |      |    
|First Quarter  |  | $    | 0.19 |      |  | $    | 0.04 |     |  | $ | 27.81 |  |  | $ | 6.25 | 
|Second Quarter |  | $    | 0.07 |      |  | $    | 0.02 |     |  | $ | 5.22  |  |  | $ | 1.63 | 
|Third Quarter  |  | $    | 0.08 |      |  | $    | 0.02 |     |  | $ | 1.97  |  |  | $ | 0.33 | 
|Fourth Quarter |  | $    | 0.15 |      |  | $    | 0.02 |     |  | $ | 1.72  |  |  | $ | 0.08 | 

35



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##### 



All interests in our pre-petition class A
common stock were cancelled effective as of January 16,
2003, pursuant to our Plan of Reorganization.

Our New Common Stock trades on the Nasdaq
Over-the-Counter Bulletin Board under the symbol
XOCM. It began trading shortly after the first
distribution of New Common Stock pursuant to our Plan of
Reorganization.

As of March 1, 2003, the approximate number
of stockholders of record of our common stock was ten.

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 became effective on September 26, 1997. The net
proceeds we received from the offering totaled approximately
$226.8 million. As of December 31, 2002, proceeds from
the IPO remain available for future capital expenditures,
operating expenses and other general corporate purposes.

Dividends

We never declared or paid a cash dividend on our
pre-petition class A common stock and have not declared or
paid a dividend on our New Common Stock. Covenants in the New
Credit Agreement restrict our ability to pay cash dividends on
our capital stock.

Item 6.     Selected
Financial Data

Because the Plan of Reorganization was not
consummated and effective until January 16, 2003, the
selected financial data below as of and for the year ended
December 31, 2002 does not include the effects of
fresh start accounting provisions of SOP 90-7.
Under SOP 90-7, the implementation of fresh start reporting
is triggered in part by the emergence of XO Parent from its
Chapter 11 proceedings. Although the effective date of the
Plan of Reorganization was January 16, 2003, we plan to
account for the consummation of the Plan of Reorganization as if
it had occurred on January 1, 2003 and implement fresh
start reporting as of that date.

The fresh start accounting provisions will
require that we establish a fair value basis for the
carrying value of the assets and liabilities for reorganized XO,
the implementation of which will result in a substantial
reduction in the carrying value of our long-lived assets,
including property and equipment, fixed wireless licenses, other
intangible assets and other noncurrent assets. As discussed in
note 3 to our audited consolidated financial statements set
forth in Item 8 below, the Consolidated Balance Sheets to
such

36



---



##### 



financial statements include pro forma
information as if the fresh start accounting provisions of
SOP 90-7 had been implemented as of December 31, 2002.


|                                                          |  |                                           |            |      |  |         |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|--------------------------------------------------------- |  | ----------------------------------------- | ---------- | ---- |  | ------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | - |  | - | ---------- | -
|                                                          |  |                                          
|                                                          |  | Year Ended December 31,                  
|                                                          |  |                                          
|                                                          |  | 2002(a)                                   |            | 2001 |  | 2000(b) |            | 1999 |  | 1998
|                                                          |  |                                           |            |      |  |         |            |      |  |     
|                                                          |  |                                          
|                                                          |  | (Dollars in thousands, except share data)
|Statement of Operations Data:                             |  |                                           |            |      |  |         |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Revenue                                                   |  | $                                         | 1,259,853  |      |  | $       | 1,258,567  |      |  | $    | 723,826    |   |  | $ | 274,324    |   |  | $ | 139,667    |  
|Loss from operations (c)                                  |  |                                           | (1,208,898 | )    |  |         | (1,949,891 | )    |  |      | (1,011,652 | ) |  |   | (366,530   | ) |  |   | (206,184   | )
|Net loss (d)                                              |  |                                           | (3,386,818 | )    |  |         | (2,086,125 | )    |  |      | (1,101,299 | ) |  |   | (558,692   | ) |  |   | (278,340   | )
|Net loss applicable to common shares (e)                  |  |                                           | (3,350,362 | )    |  |         | (1,838,917 | )    |  |      | (1,247,655 | ) |  |   | (627,881   | ) |  |   | (337,113   | )
|Net loss per common share, basic and
    diluted (f)      |  |                                           | (7.58      | )    |  |         | (4.55      | )    |  |      | (3.87      | ) |  |   | (2.51      | ) |  |   | (1.57      | )
|Statement of Cash Flow Data:                              |  |                                           |            |      |  |         |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Net cash provided by (used in) operating
    activities   |  | $                                         | 17,602     |      |  | $       | (560,877   | )    |  | $    | (559,414   | ) |  | $ | (349,192   | ) |  | $ | (174,484   | )
|Net cash provided by (used in) investing
    activities   |  |                                           | 57,582     |      |  |         | (708,598   | )    |  |      | (1,464,495 | ) |  |   | (1,050,344 | ) |  |   | (1,276,747 | )
|Net cash (used in) provided by financing
    activities   |  |                                           | (6,079     | )    |  |         | 1,019,647  |      |  |      | 1,648,663  |   |  |   | 1,948,503  |   |  |   | 1,381,653  |  
|Balance Sheet Data:                                       |  |                                           |            |      |  |         |            |      |  |      |            |   |  |   |            |   |  |   |            |  
|Cash, cash equivalents and marketable securities          |  | $                                         | 560,983    |      |  | $       | 755,167    |      |  | $    | 1,860,963  |   |  | $ | 1,881,764  |   |  | $ | 1,478,062  |  
|Property and equipment, net                               |  |                                           | 2,780,589  |      |  |         | 3,742,577  |      |  |      | 2,794,105  |   |  |   | 1,180,021  |   |  |   | 594,408    |  
|Investment in fixed wireless licenses, net                |  |                                           | 911,832    |      |  |         | 947,545    |      |  |      | 997,333    |   |  |   | 926,389    |   |  |   | 67,352     |  
|Total assets (d)                                          |  |                                           | 4,585,496  |      |  |         | 7,930,465  |      |  |      | 9,085,375  |   |  |   | 4,597,108  |   |  |   | 2,483,106  |  
|Total long-term debt (a)                                  |  |                                           | 5,165,718  |      |  |         | 5,109,503  |      |  |      | 4,396,596  |   |  |   | 3,733,342  |   |  |   | 2,013,192  |  
|Redeemable preferred stock, net of issuance costs
    (e) |  |                                           | 1,708,316  |      |  |         | 1,781,990  |      |  |      | 2,097,016  |   |  |   | 612,352    |   |  |   | 556,168    |  
|Total stockholders equity (deficit)                      |  |                                           | (3,032,282 | )    |  |         | 297,416    |      |  |      | 1,838,401  |   |  |   | (13,122    | ) |  |   | (246,463   | )



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | On June 17, 2002, XO Parent filed for
    protection under Chapter 11 of the United States Code. On
    November 15, 2002, the Bankruptcy Court confirmed
    XO Parents Plan of Reorganization, and, on
    January 16, 2003, XO Parent consummated the Plan of
    Reorganization. As of December 31, 2002, our long term debt
    was classified as current liabilities subject to compromise and
    our redeemable preferred stock was classified as redeemable
    preferred stock subject to compromise in the accompanying
    consolidated balance sheet. As of December 31, 2001, as a
    result of our proposed reorganization, our long-term debt was in
    default. Accordingly, our long term debt was then classified as
    a current liability at December 31, 2001 in the
    accompanying consolidated balance sheet. See further discussion
    in Managements Discussion and Analysis of Financial
    Condition and Results of Operations.                                                                                                                                                                                                                                                                                                                                         
|   
|(b) | The selected financial data includes the accounts
    and activities of Concentric Network Corporation since
    June 16, 2000, the date that we merged with Concentric.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(c) | In 2002, loss from operations includes a non-cash
    asset write down totaling $477.3 million resulting from an
    agreement with Level 3 to return previously acquired
    inter-city fiber in exchange for reduced maintenance expenses
    beginning in 2003. In 2001, loss from operations includes
    restructuring charges totaling $509.2 million associated
    with plans to restructure certain aspects of our business
    operations. In 2000, loss from operations includes a
    $36.2 million charge in connection with the June 2000
    acquisition of Concentric resulting from the allocation of the
    purchase price to in-process research and development. Loss from
    operations in 1999 includes restructuring charges totaling $30.9
    million associated with relocating our Bellevue, Washington
    headquarters to Northern Virginia.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(d) | In 2002, net loss and total assets reflects a
    $1,876.6 million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to Statement of Financial Accounting Standards No. 142,
    Goodwill and Other Intangible Assets, or SFAS
    No. 142. During 2002 we ceased accruing interest and
    penalties on our pre-bankruptcy senior unsecured notes,
    subordinated notes and Pre-Petition Credit Facility as of the
    Petition Date, in accordance with SOP 90-7 Financial
    Reporting by Entities in Reorganization under the Bankruptcy
    Code, or SOP 90-7. We also ceased accruing dividends
    and accreting the redemption obligation on all of our
    outstanding preferred stock as of the Petition Date, in
    accordance with SOP 90-7. In 2001, net loss includes 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 net gain from the sale of an equity
    investment.

37



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##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(e) | In 2002, net loss applicable to common shares
    includes a net gain of $78.7 million as our preferred stock
    was deemed subject to compromise under SOP 90-7 as of the
    date XO Parent filed for bankruptcy protection, requiring
    us to recognize the remaining unamortized balance of our
    deferred modification fee and write off our unamortized
    discounts and issuance costs. In 2001, net loss applicable to
    common shares includes a gain of $376.9 million resulting
    from the repurchase of certain of our preferred stock.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(f) | The net loss per share data above has been
    calculated based on the shares outstanding of our class A
    and class B common stock prior to the consummation of our
    Plan of Reorganization. Effective January 16, 2003, the
    effective date of the Plan of Reorganization, all interests in
    our class A and class B common stock were terminated
    and all outstanding shares were cancelled. For further
    discussion of our Plan of Reorganization, see Item 1,
    Business - Our Chapter 11 Reorganization.
    The net loss per share data above has been adjusted for the
    splits of our class A and class B common stock
    effected in 2000 and in prior periods.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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, including those
factors set forth in Item 1, Business - Risk
Factors. 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.

Overview of Our Business

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

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

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

38



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##### 



Our Chapter 11 Reorganization

The
Reorganization Proceedings

On June 17, 2002, XO Parent filed for
protection under Chapter 11 of the Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York. On November 15, 2002, the Bankruptcy Court confirmed
XO Parents plan of reorganization, and, on
January 16, 2003, XO Parent consummated the plan of
reorganization and it emerged from its Chapter 11
reorganization proceedings with a significantly restructured
balance sheet.

During the period immediately preceding and after
the filing of XO Parents Chapter 11 petition, we met
with a committee of lenders under the Pre-Petition Credit
Facility, an informal committee of unsecured creditors that
represented holders of our senior unsecured notes (and following
the filing of the Chapter 11 petition, the official
committee of unsecured creditors appointed in the
Chapter 11 proceedings) and potential investors to discuss
potential restructuring transactions that could be implemented
to reorganize our capital structure. These discussions led to an
agreement with the lenders under the Pre-Petition Credit
Facility regarding the terms of a plan of reorganization that
envisioned two potential reorganization structures the first of
which was based on, among other things, a proposed cash
investment in XO Parent by third parties (which was
ultimately abandoned) and the second of which contemplated a
stand alone restructuring with no new cash infusion. The plan of
reorganization, as supplemented, was filed with the Bankruptcy
Court on July 22, 2002 and distributed to creditors of
XO Parent eligible to vote in the reorganization.

On August 21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr. Carl
Icahn, commenced an offer to purchase loans under our
$1.0 billion secured Pre-Petition Credit Facility at a
purchase price of $0.50 for each $1.00 in principal amount
thereof. Purchases made under this offer, together with the
loans under the Pre-Petition Credit Facility that High River
previously had acquired, resulted in High River holding
approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.

On November 15, 2002, the Bankruptcy Court
confirmed the Plan of Reorganization. On January 16, 2003,
XO Parent consummated the Plan of Reorganization and it
emerged from the Chapter 11 reorganization proceedings. The
consummation of the Plan of Reorganization resulted in the
following changes in our debt and equity capital structure:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $1.0 billion of loans under the Pre-Petition
    Credit Facility were converted into $500.0 million of
    outstanding principal amount under a New Credit Agreement;
|
| |  | The extinguishment of all amounts due under our
    pre-petition unsecured senior and subordinated notes and certain
    general unsecured obligations; and          
|
| |  | The cancellation of all outstanding shares and
    interest in our pre-petition preferred stock and pre-petition
    class A and class B common stock.               

Under our Plan of Reorganization, the following
equity securities have been or will be distributed to holders of
the Pre-Petition Credit Facility and holders of
XO Parents pre-bankruptcy unsecured senior and
subordinated notes and pre-bankruptcy general unsecured claims:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | 95.0 million shares of New Common Stock;                                                                                               
|
| |  | Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;                  
|
| |  | Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and
|
| |  | Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.   

39



---



##### 



Under the Plan of Reorganization and after the
SEC has declared effective our registration statement,
XO Parent will issue to certain holders of claims and
interests in XO Parent who held such claims and/or
interests as of the November 15, 2002 record date, rights
to subscribe for up to 40,000,000 shares of New Common Stock, at
$5.00 per share for an aggregate purchase price of up to
$200.0 million through a rights offering, which we refer as
the Rights Offering. In addition, pursuant to the stipulation
relating to the settlement of a claim made against
XO Parent purportedly on behalf of its stockholders, which
we refer to as the Stockholder Stipulation, holders of shares of
pre-bankruptcy class A common stock of XO Parent will
receive additional nontransferable rights to the extent that the
Rights otherwise allocable to such holders in the Rights
Offering are exercisable for less than 3,333,333 shares of New
Common Stock. Accordingly, not less than 40,000,000 and not more
than 43,333,333 rights at $5.00 per share will be offered in the
Rights Offering.

Pursuant to the order confirming our Plan of
Reorganization, the Rights Offering will not take place until
the date a registration statement covering the offer and sale of
such rights and shares to be offered thereunder is filed with
the SEC and such registration statement becomes effective. We
have not yet filed a registration statement with respect to the
rights and the Rights Offering.

For more information concerning the terms of the
securities and distributions under our Plan of Reorganization,
see Item 1, Business - Our Chapter 11
Reorganization.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Distributions to and Interests Held by
    Entities Controlled by Mr. Carl C. Icahn

After the initial distribution of New Common
Stock pursuant to the Plan of Reorganization, Cardiff Holding
LLC, a Delaware limited liability company controlled by
Mr. Carl C. Icahn, holds more than 80% of the
outstanding shares. Of the warrants to be distributed under the
Plan of Reorganization to holders of the pre-bankruptcy senior
unsecured notes, we estimate Cardiff will receive Series A
Warrants to purchase approximately 3.0 million shares of
New Common Stock, Series B Warrants to purchase
approximately 2.2 million shares of New Common Stock, and
Series C Warrants to purchase approximately
2.2 million shares of New Common Stock. High River assigned
its 85% interest in the $500.0 million in loans outstanding
under the New Credit Agreement to Chelonian Corp., an entity
which is controlled by Mr. Icahn, which subsequently
assigned those loans to Arnos Corp., an entity which is also
controlled by Mr. Icahn.



| |                                                                 
| | ----------------------------------------------------------------
| | Accounting Impact of Implementing the Plan of
    Reorganization

Due to XO Parents Chapter 11
filing, our financial statements have been prepared in
accordance with AICPA Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code, hereinafter referred to as
SOP 90-7. Pursuant to SOP 90-7, the financial
statements for the periods presented distinguish transactions
and events that are directly associated with our reorganization
from our ongoing operations. We have determined that we are
required to implement the fresh start accounting
provisions of SOP 90-7 to our financial statements. The
fresh start accounting provisions require that we establish a
fair value basis for the carrying value of the
assets and liabilities for reorganized XO. As disclosed on the
balance sheet included in the accompanying financial statements
set forth in Item 8 below, and in note 3 to such
financial statements, we currently estimate that the value of
our long-lived assets, including property and equipment, fixed
wireless licenses, other intangibles and other non-current
assets, after implementing SOP 90-7 will decrease to
$661.0 million from $3.8 billion. Accordingly,
depreciation and amortization expense will decline significantly
in future periods.

In addition, as described above and in
Item 1, Business - Our Chapter 11
Reorganization, implementation of the Plan of
Reorganization resulted in the cancellation of over
$6.9 billion in pre-bankruptcy debt and preferred stock
obligations leaving outstanding only the $500.0 million in
debt obligations under the New Credit Agreement, and
$80.1 million of other long term liabilities including
obligations under various capital leases. As a result, our
interest expense and preferred stock dividend obligations in
future periods will decline significantly in comparison to the
interest expense and preferred stock dividend obligations
incurred in periods prior to the consummation of the Plan of
Reorganization. As

40



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a result of the gain resulting from the
cancellation of our pre-bankruptcy debt obligations, a
substantial portion of our capital and net operating loss
carryforwards, which totaled approximately $4.5 billion at
December 31, 2002, is expected to be eliminated.


Under SOP 90-7, the implementation of fresh
start reporting is triggered in part by the emergence of
XO Parent from its Chapter 11 proceedings. Although
the effective date of the Plan of Reorganization was
January 16, 2003, we plan to account for the consummation
of the Plan of Reorganization as if it had occurred on
January 1, 2003 and implement fresh start reporting as of
that date.



| |                                                                         
| | ------------------------------------------------------------------------
| | Operational Impacts of the Restructuring and
    Current Business Trends

XO Parents Chapter 11 proceedings
did not disrupt our ability to operate our networks or provide
our services to new and existing customers. Nevertheless in
2002, due to the financial problems of the telecommunications
industry in general, and emerging communications providers such
as us in particular, we experienced a revenue decline during
2002, from $333.4 million in the first quarter of 2002 to
$299.4 million in the fourth quarter of 2002. This decline
was largely due to customer disconnects exceeding historic
levels and a reduction in our sales productivity. Customer
disconnects increased in part because a number of large
customers sought bankruptcy protection, primarily carrier
customers that procured our data services. We also experienced
lower demand from a number of large telecommunications customers
due to reductions in those customers capacity needs. Our
sales productivity declined in 2002 in part due to a reduction
in the number of direct sales representatives. In addition, we
believe that the adverse public perception that accompanied
XO Parents Chapter 11 proceedings made it
difficult for XO to sell services to potential customers or
increase sales to existing customers.

To increase sales activity in 2003, we are in the
process of hiring additional direct sales personnel. Programs
launched in 2002 to decrease customer disconnects will continue.
New order entry and order processing systems, which will improve
speed and efficiency of installing new customers, are partially
installed and we expect to complete installation in 2003.
Despite these changes, if (i) customer disconnects continue
at current or elevated levels, (ii) sales productivity does
not improve, either because our sales programs do not attract
new customers or the telecommunications environment worsens,
(iii) our systems deployment is not completed this year, or
(iv) a combination of all three factors occur, revenue in
2003 could be significantly lower than 2002 results. See also
Item 1, Business - Risk Factors.

Other 2002 Transactions and
Developments



| |                             
| | ----------------------------
| | Inter-city Network Agreement

On August 8, 2002, we entered into a Master
Agreement with Level 3 Communications, Inc., which amends
various agreements related to XOs acquisition of fiber
networks in the United States from Level 3 and the
recurring maintenance charges relating to those networks.
Beginning on January 1, 2003 and continuing over the
remaining term of the initial agreement, Level 3 will
reduce the operating and maintenance fees as well as fiber
relocation it charges us from approximately $17.0 million
annually to a fixed rate of $5.0 million annually. In exchange
for this reduction and certain other concessions, effective as
of February 11, 2003, the closing date for the transaction,
we surrendered our indefeasible right to use an empty conduit
and our indefeasible right to use six of the 24 fibers
previously acquired from Level 3. Because we had committed
to this plan of disposal and believed at the time that we
entered into the Master Agreement that consummation of the
contemplated transaction was probable, we recorded a
$477.3 million non-cash write-down of these assets during
the third quarter of 2002. Pursuant to applicable accounting
principles, the write-down is based on the book value of the
surrendered facilities and does not reflect the future benefits
to be received by us under the Master Agreement.

Operational
Restructuring

In the second quarter of 2002, we restructured
our operations by reducing our workforce by approximately 350
employees, the majority of whom were employed in network
operations, sales and

41



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marketing and information technology, and
recorded a $2.9 million restructuring charge related to
involuntary termination severance liabilities.




| |                                
| | -------------------------------
| | Prepaid Calling Card Tax Matter

On July 26, 2002, we were advised by the
staff of the SEC that it was conducting an informal inquiry
primarily relating to our obligations with respect to, and our
accrual of liabilities for, specified federal excise and state
sales tax and similar tax obligations arising in connection with
prepaid calling card services and relating to certain other
matters. Sales from prepaid calling card services that are
potentially subject to these taxes accounted for approximately
$56 million of our total revenues from 1999, when we began
providing these services, through June 30, 2002. We believe
that our accounting for these potential obligations is
appropriate and that our accrual of liabilities relating to
these obligations is adequate.

Comparison of Financial Results

Because our Plan of Reorganization was not
consummated until January 16, 2003, the results of our
operations for 2002 do not include the effects of the resulting
cancellations of indebtedness and preferred stock or the
reduction in the carrying value of our long-lived assets from
the implementation of fresh start accounting. The cancellation
of indebtedness and preferred stock will result in a significant
gain that will be partially offset by the loss on the reduction
in the carrying value of our long-lived assets from the
application of fresh start accounting. The net gain and the
adjustment to our financial position will be reflected in our
financial statements for the first quarter of 2003. The
extinguishment of indebtedness and preferred stock will result
in interest expense and preferred stock dividends being lower,
and the reduction in the carrying value of our long-lived assets
will result in depreciation and amortization expense being lower
in periods subsequent to the effective date of the Plan of
Reorganization when compared with historical accounting periods.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared to
    Year Ended December 31, 2001

Revenue.Total revenue in 2002 of $1,259.9 million was consistent
with total revenue in 2001 of $1,258.6 million. The
weakened economy and the perceived uncertainties in the market
regarding XO Parents recently concluded
Chapter 11 proceedings had a negative impact on our ability
to generate new sources of revenue. Consequently, we were not
able to maintain the level of growth that we had historically
achieved. We experienced a high level of customer disconnects in
the current year due to reduced demand from other
telecommunications companies and increased customer bankruptcies
in the telecommunications and dot-com industries. Total revenue
declined from $343.0 million in the fourth quarter of 2001 to
$299.4 million in the fourth quarter of 2002. We believe
that total revenue in the near term will decline slightly from
fourth quarter 2002 levels, with modest growth occurring in the
second half of 2003 assuming no significant further
deterioration of the industry or general economic conditions.
Accordingly, we expect that 2003 total revenue will be slightly
lower than 2002 total revenue.

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

|                                   |               |                         |         |           |  |      |      |           |   |          |         |           |  |  |      |       |   |  |       |     |  
|---------------------------------- | ------------- | ----------------------- | ------- | --------- |  | ---- | ---- | --------- | - | -------- | ------- | --------- |  |  | ---- | ----- | - |  | ----- | --- | -
|                                   |               |                        
|                                   |               | Year Ended December 31,
|                                   |               |                        
|                                   |               |                         |         | % of 2002 |  |      |      | % of 2001 |   |         
|                                   |               | 2002                    |         | Revenue   |  | 2001 |      | Revenue   |   | % Change
|                                   |               |                         |         |           |  |      |      |           |   |         
|Voice services                     |               | $                       | 658,453 |           |  |      | 52.3 | %         |   | $        | 606,848 |           |  |  | 48.2 | %     |   |  | 8.5   | %  
|Data services                      |               |                         | 472,247 |           |  |      | 37.5 | %         |   |          | 596,664 |           |  |  | 47.5 | %     |   |  | (20.9 | %) 
|Integrated voice and data services |               |                         | 128,048 |           |  |      | 10.2 | %         |   |          | 52,018  |           |  |  | 4.1  | %     |   |  | 146.2 | %  
|Other services                     |               |                         | 1,105   |           |  |      | 0.0  | %         |   |          | 3,037   |           |  |  | 0.2  | %     |   |  | (63.6 | %) 
|                                   |               |                         |         |           |  |      |      |           |   |          |         |           |  |  |      |       |   |  |       |    
|                                   | Total revenue |                         | $       | 1,259,853 |  |      |      | 100.0     | % |          | $       | 1,258,567 |  |  |      | 100.0 | % |  |       | 0.1 | %
|                                   |               |                         |         |           |  |      |      |           |   |          |         |           |  |  |      |       |   |  |       |    

Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
interactive voice response services and stand-alone long
distance services. Voice services revenue in 2002 increased to
$658.5 million from

42



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$606.8 million in 2001. The increase was
primarily due to more sales to larger business customers,
including the impact of the rollout of our carrier long distance
service. Voice revenue declined from $166.5 million in the
fourth quarter of 2001 to $157.3 million in the fourth
quarter of 2002. We believe our voice services revenue in the
near term will decline slightly from fourth quarter 2002 levels
with modest growth occurring in the second half of 2003. We
expect 2003 voice services revenues to be slightly lower than
2002 voice services revenues.


Data services revenue includes revenue from
Internet access, network access and web applications hosting
services. Data services revenue in 2002 decreased to
$472.2 million from $596.7 million in 2001. This
decline was attributable primarily to customer bankruptcies
affecting some large network access customers, increased levels
of customer disconnects, and a lower demand from large customers
due to reductions in those customers data and fiber
capacity needs. The sale of our European operations in February
2002 also contributed to this decline. Data service revenue
declined from $152.8 million in the fourth quarter of 2001
to $108.0 million in the fourth quarter of 2002. We expect
our data services revenue in the near term to remain relatively
constant or decline slightly from fourth quarter results and
expect slight growth in the second half of 2003. We expect 2003
data revenue to be less than 2002 results.

Integrated voice and data services revenue is
generated largely from our XOptions service offerings, a
flat-rate bundled package offering a combination of voice and
data services. Integrated voice and data services revenue in
2002 increased to $128.0 million from $52.0 million in
2001. The increase is primarily attributed to an increase in the
number of customers to whom we provide XOptions service. We
expect that the revenue from integrated voice and data services
will be flat in the near term, and experience modest growth in
the second half of 2003, such that 2003 revenue from integrated
voice and data services will grow modestly when compared to 2002
results.

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

|                    |                                     |                         |   |           |           |      |  |           |   |          |   |           |           |  |  |      |   |  |  |       |       |   
|------------------- | ----------------------------------- | ----------------------- | - | --------- | --------- | ---- |  | --------- | - | -------- | - | --------- | --------- |  |  | ---- | - |  |  | ----- | ----- | --
|                    |                                     |                        
|                    |                                     | Year Ended December 31,
|                    |                                     |                        
|                    |                                     |                         |   | % of 2002 |           |      |  | % of 2001 |   |         
|                    |                                     | 2002                    |   | Revenue   |           | 2001 |  | Revenue   |   | % Change
|                    |                                     |                         |   |           |           |      |  |           |   |         
|Costs and expenses: |                                     |                         |   |           |           |      |  |           |   |          |   |           |           |  |  |      |   |  |  |      
|                    | Cost of service                     |                         | $ | 522,924   |           |      |  | 41.5      | % |          | $ | 527,698   |           |  |  | 41.9 | % |  |  | (0.9  | %)   
|                    | Selling, operating and general      |                         |   | 736,925   |           |      |  | 58.5      | % |          |   | 971,714   |           |  |  | 77.2 | % |  |  | (24.2 | %)   
|                    | Stock-based compensation            |                         |   | 28,928    |           |      |  | 2.3       | % |          |   | 37,173    |           |  |  | 3.0  | % |  |  | (22.2 | %)   
|                    | Depreciation and amortization       |                         |   | 699,806   |           |      |  | 55.5      | % |          |   | 1,162,671 |           |  |  | 92.4 | % |  |  | (39.8 | %)   
|                    | Restructuring and asset write-downs |                         |   | 480,168   |           |      |  | 38.1      | % |          |   | 509,202   |           |  |  | 40.5 | % |  |  | (5.7  | %)   
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |           |           |  |  |      |   |  |  |      
|                    |                                     | Total                   |   | $         | 2,468,751 |      |  |           |   |          |   | $         | 3,208,458 |  |  |      |   |  |  |       | (23.1 | %)
|                    |                                     |                         |   |           |           |      |  |           |   |          |   |           |           |  |  |      |   |  |  |      

Cost of
service.Cost of service includes
expenses directly associated with providing telecommunications
services to our customers. Cost of service includes, among other
items, the cost of connecting customers to our networks via
leased facilities, the costs of leasing components of our
network facilities and costs paid to third party providers for
interconnect access and transport services. Cost of service in
2002 was $522.9 million compared to $527.7 million in
2001. The 2002 decline was due primarily to cost optimization
programs to reduce expenses by transferring traffic from leased
facilities onto facilities owned or controlled by us. These cost
reductions were offset to some extent by increased costs of
service that were attributable to the increase in voice and
integrated services revenue as a percentage of our total
revenue, which generally carry lower margins when compared to
data services because voice and integrated services are more
likely to utilize leased versus owned network facilities to
terminate calls. We expect that in the near term cost of service
as a percentage of revenue will remain relatively constant with
slight fluctuations corresponding to trends in revenue, product
mix and the impact of customer bankruptcies. Certain cost of
service rates are subject to state and federal regulatory
control. Should an adverse decision be made by these regulatory
commissions that increase these rates, our costs of service as a
percentage of revenue could increase.

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Selling, operating and general.Selling, operating and general
expense includes expenses related to sales and marketing,
internal network operations and engineering, information
systems, general corporate office functions and expenses
relating to collection risks. Selling, operating and general
expense in 2002 was $736.9 million compared to
$971.7 million in 2001. Selling, operating and general
expense decreased both in absolute dollars and as a percentage
of revenue in 2002 when compared to 2001 due to efficiencies
resulting from the centralization of and process improvements in
many functions and cost reduction and restructuring initiatives
that included significant headcount reductions and savings from
the planned exit of certain leased facilities, as well as the
February 2002 sale of our European operations. We expect 2003
selling, operating and general expense to be less than the 2002
results in both absolute dollars and as a percentage of total
revenue due to benefits from cost cutting initiatives and
implementation of fresh start accounting.

Stock-based
compensation.Stock-based
compensation expense represents non-cash charges recorded in
connection with the grant of compensatory stock options and
restricted stock grants to employees whose compensation is
included in selling, operating and general expense. Compensation
expense is recognized over the vesting periods of such grants
based on the excess of the fair value of the common stock at the
date of grant (determined by reference to the market price on
that date) over the exercise price. Stock-based compensation in
2002 decreased to $28.9 million from $37.2 million in
2001 primarily due to certain grants becoming fully amortized.
In 2003, as part of the implementation of fresh start
accounting, we will eliminate the carrying value of deferred
compensation and, therefore, there will be no related
stock-based compensation expense in future periods with respect
to pre-petition compensatory stock options and restricted stock
grants. The reorganized company will recognize stock based
compensation expense only with respect to any new grants of
compensatory stock options and restricted stock.

Depreciation and
amortization.We have constructed
an integrated facilities-based network in the United States.
Primarily in late 2001 and early 2002, we expanded our services
in existing markets, placed more assets into service, and
increased our obsolescence expense, all of which caused
depreciation expense to increase to $598.5 million in 2002
from $447.0 million in 2001. In 2003, in conjunction with
our implementation of fresh start accounting, we will adjust the
carrying value of our property and equipment to its estimated
fair value of $502.2 million from a net carrying value of
$2,780.6 million at December 31, 2002. Accordingly,
depreciation expense will decrease significantly during 2003 and
in future periods when compared to depreciation expense for
periods prior to the effective date of the Plan of
Reorganization.

Amortization expense includes the amortization of
fixed wireless licenses and other intangibles assets with
definite lives and, for 2001, also includes the amortization of
goodwill. Amortization expense decreased to $101.3 million
in 2002 from $715.7 million in 2001. The significant
decrease is primarily due to our implementation of SFAS
No. 142 and the resulting write-off of all our goodwill as
of January 1, 2002. In conjunction with our implementation
of fresh start accounting in 2003, we will reduce the
$911.8 million December 31, 2002 carrying value of our
fixed wireless licenses to their estimated fair value of
approximately $60.0 million, and increase the
$72.8 million December 31, 2002 net carrying value of
other intangible assets to their estimated fair value of
approximately $76.0 million. Accordingly, amortization
expense will decrease in 2003 and in future periods when
compared to amortization expense for periods prior to the
effective date of the Plan of Reorganization.

As of December 31, 2002, our balance sheet
reflected approximately $731.0 million of long-lived assets,
including construction-in-progress and certain fixed wireless
licenses that had not been placed into service and, accordingly,
were not being depreciated or amortized. As discussed above,
these long-lived assets will be written down to their estimated
fair values when we apply fresh start accounting during the
first quarter of 2003.

Restructuring and asset
write-downs.Restructuring and
asset write-downs were $480.2 million in 2002 and
$509.2 million in 2001. During 2001, restructuring charges
primarily related to the implementation of our plan to
restructure certain of our business operations. The
restructuring plan included divesting certain assets and
businesses, and reducing our discretionary spending, capital
expenditures and workforce, based on our assessment of current
and future market conditions. The 2001 restructuring charges
include a

44



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$366.8 million write-down for the excess of
carrying value of assets to be sold or abandoned, including our
European business unit, and a $134.4 million restructuring
charge relating to the consolidation and exiting of domestic
facility leases, which was determined based on the future
minimum rent commitments for the buildings that management
intends to exit less estimated sublease rental streams. The 2001
restructuring charges also included an $8.0 million
restructuring charge related to involuntary termination
severance costs with respect to 700 persons whose employment was
terminated in connection with a workforce reduction, the
majority of whom were terminated by December 31, 2001.


During 2002, we continued to restructure our
operations and reduced our workforce by approximately 350
additional employees, the majority of whom were employed in
network operations, sales and marketing and information
technology, and recorded a $2.9 million restructuring
charge related to the involuntary termination severance costs.
In addition, we recorded a $477.3 million non-cash asset
write-down during the third quarter of 2002 as a result of
returning inter-city assets to Level 3 in exchange for reduced
future maintenance expenses beginning in 2003.

Interest
income.Interest income in 2002
decreased to $16.5 million from $77.9 million in 2001.
The decrease in interest income corresponds to the decrease in
our average cash and marketable securities balances and a
reduction in interest rates. The amount of interest income
attributable to increased cash balances during the bankruptcy
proceedings was not material.

Interest expense,
net.Interest expense, net in 2002
decreased to $226.5 million from $465.4 million in 2001, as
we ceased accruing interest and penalties on our pre-petition
senior unsecured, subordinated notes and Pre-Petition Facility
as of the petition date, in accordance with SOP 90-7. The
contractual interest amounts of $501.1 million reflected on
the consolidated statement of operations represents the interest
expense that would have been accrued under the relevant
financing agreements had we not ceased accruing interest as
described above. We expect interest expense to decrease in
future periods, given the significant reduction in our debt
obligations as a result of our Plan of Reorganization.

Other income (loss), net.Other income (loss), net was
a loss of $0.2 million in 2002 and a loss of
$93.8 million in 2001. The 2001 balance includes an $89.0
million write-down for an other than temporary decline of the
value of certain equity method investments.

Reorganization.Reorganization expenses include
adjustments to our financial position and professional service
fees that are a direct result of our June 17, 2002
Chapter 11 filing and our application of the accounting
required by SOP 90-7. Reorganization expense in 2002 was
$91.1 million and included the (i) non-cash charges
relating to the write off of issuance costs, discounts and
purchase accounting adjustments to adjust the historical
carrying amounts of our debt to the allowed claim amount by the
Bankruptcy Court, (ii) professional fees associated with
our Plan of Reorganization, (iii) the penalties from the
rejection of contracts, (iv) adjustments to unpaid
pre-petition accounts payable and accrued expenses to the claim
amounts allowed by the bankruptcy court, and (v) the net
gain resulting from payments received by XO Parent in
connection with the settlement and termination of the proposed
investment transaction that was the basis for the first
restructuring alternative contemplated by the Plan of
Reorganization, less amounts paid to settle certain stockholder
claims.

Net loss before extraordinary gain and
cumulative effect of accounting change.Net loss before extraordinary gain
and cumulative effect of accounting change during 2002 improved
to $1,510.2 million from a net loss of $2,431.1 million in
2001 due to the foregoing factors.

Extraordinary gain on repurchases of debt,
net.During 2001, we recorded an
extraordinary gain totaling $345.0 million related to our
repurchase of $557.1 million of senior notes at a
substantial discount from their respective face values.

Cumulative effect of accounting change.We performed the newly required
transitional impairment tests of goodwill as required by SFAS
No. 142 as of January 1, 2002. Based on these tests,
we recorded a $1,876.6 million impairment charge to
write-off all of our goodwill as a cumulative effect of
accounting change during the first quarter of 2002.

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Net loss.Net
loss in 2002 increased to $3,386.8 million from a net loss
of $2,086.1 million in 2001 due to the foregoing factors.

Recognition of preferred stock modification
fee, net - reorganization
item. In order to adjust the
historical carrying amount of our preferred stock to the amount
allowed by the Bankruptcy Court, we recognized the unamortized
balance of a deferred modification fee with respect to our
preferred stock as of the petition date and wrote off certain
unamortized issuance costs and recognized certain purchase
accounting adjustments related to the preferred stock which
netted a $78.7 million gain during 2002.

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

Preferred stock dividends and accretion of
preferred stock redemption obligation, net.As our preferred stock was deemed
subject to compromise under SOP 90-7, we ceased accruing
dividends and accreting the redemption obligation on all of our
outstanding preferred stock as of our petition date. As a
result, we recorded $42.2 million of preferred stock
dividends during 2002 as compared to $129.7 million in such
dividends in 2001. The contractual dividend amount of
$98.8 million reflected on the accompanying condensed
consolidated statement of operations represents the dividends
that would have been accrued under the terms of our preferred
stock had we not ceased accruing such dividends as described
above.

Net loss applicable to common shares.Net loss applicable to common
shares in 2002 increased to $3,350.4 million from
$1,838.9 million in 2001 due to the foregoing factors.

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

Revenue.Total revenue in 2001 increased to $1,258.6 million from
$723.8 million in 2000. The increase was primarily due to the
increase in the number of customers and growth in network
traffic and average monthly revenue per customer. The growth in
our customer base was largely due to our penetration of existing
markets, expansion into new markets in 2001 and 2000 and our
June 2000 Concentric acquisition. The growth in network traffic
and average monthly revenue per customer was primarily due to
the expansion of our service offerings and our emphasis on
selling to larger business customers.

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

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



---

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

Voice services revenue includes revenue from
bundled local and long distance voice services, prepaid calling
card processing, and other voice communications based services,
including shared tenant services, interactive voice response
services and stand-alone long distance services. Voice services
revenue in 2001 increased to $606.8 million from
$386.8 million in 2000. The increase was primarily due to
the growth in the number of our voice services customers and our
targeting of larger business customers.

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

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the integration of its data products with our
pre-existing services and by our development of new and enhanced
data services. Data services revenue increased slightly as a
percentage of total revenue for 2001 compared to 2000 due to a
full year impact of the integration of data products and the new
and enhanced data services we have developed. However, the
majority of the impact realized from fully integrating these
data products was partially offset by new customers choosing our
integrated voice and data services and customer bankruptcies.


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

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

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



---

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

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

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

Stock-based
compensation.Stock-based
compensation in 2001 decreased to $37.2 million from
$48.3 million in 2000 primarily due to the vesting of a
fixed number of shares of restricted stock issued in 2000 in
conjunction with the Concentric acquisition.

Depreciation and
amortization.Our net property and
equipment increased to $3,742.6 million as of
December 31, 2001 versus $2,794.1 million as of
December 31, 2000. As we launched and expanded services in
new and existing markets, more assets were placed into service,
which caused depreciation expense to increase to
$447.0 million in 2001 from $223.8 million in 2000.
Amortization expense increased to $715.7 million in 2001
from $393.9 million in 2000. Of the total 2001 amortization
expense, 83.1%

47



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relates to goodwill amortization. The significant
increase is primarily due to the amortization of additional
goodwill and intangible assets recorded as a result of the June
2000 Concentric acquisition, which are being amortized over a
period of up to five years. In conjunction with the
implementation of SFAS No. 142, we wrote off all of the carrying
value of our goodwill in the first quarter of 2002.


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

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

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

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

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

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

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

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

Preferred stock dividends and accretion of
preferred stock redemption obligation, net.Preferred stock dividends and the
accretion of the preferred stock redemption decreased to
$129.7 million in 2001 from $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.

48



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

Liquidity and Capital Resources

Our goal is to provide our customers complete,
integrated, voice and data network applications and services
primarily through networks that we own or control. Historically,
this strategy has increased our operating losses by requiring us
to incur significant costs and to make substantial capital
investments before we realize related revenue. We have completed
much of the construction relating to our metro fiber networks,
which required substantial capital investment. We believe that
the implementation of the restructuring of our debt and capital
under the Plan of Reorganization and the various initiatives we
have undertaken to reduce operating costs and capital
expenditures over the past two years, positions us to be able to
successfully execute our business plans and generate cash flow
over the long term. However, in the near term we expect to incur
net negative cash flows from operating and investing activities.



| |                                                              
| | -------------------------------------------------------------
| | Reorganization Overview; Changes in our
    Capital Structure

As described in the 2001 Annual Report, in light
of conditions in the capital markets and our funding needs,
XO took a number of steps during 2001 to conserve cash on
hand and raise additional capital. However, conditions in the
capital markets for telecommunications companies continued to
deteriorate, and, in late 2001, we determined that, in light of
the substantial declines in market valuation suffered by
telecommunications service providers throughout the industry in
2001, we would be unable to obtain the additional funding needed
to conduct our business plan without a significant balance sheet
reorganization.

In order to complete this reorganization, on
June 17, 2002, XO Parent filed a voluntary petition
for relief under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court. Concurrent with its Chapter 11 filing,
XO Parent submitted a proposed Plan of Reorganization,
which is discussed in detail in the Overview section above, in
note 2 to the accompanying consolidated financial
statements and in Item 1, Business  Our
Chapter 11 Reorganization. On November 15, 2002,
the Plan of Reorganization was confirmed by the Bankruptcy
Court. On January 16, 2003, XO Parent consummated the
transactions contemplated by the Plan of Reorganization and
emerged from Chapter 11 bankruptcy protection. Under the
Plan of Reorganization, XO Parent has emerged from its
Chapter 11 proceedings with:



| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | no preferred stock and dividend obligations;                                                                                                                           
|
| |  | significantly reduced debt and interest
    obligations; only $500 million of long-term indebtedness
    remains, pursuant to the New Credit Agreement, which includes:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | financial covenants generally more favorable than
    those included in the Pre-Petition Credit Facility,                                                                                          
|
| |  | amended maturity and principal repayment terms
    modified so that required principal payments are deferred by two
    and a half years when compared to the Pre-Petition Credit
    Facility, and
|
| |  | amended interest payment terms modified so that
    no cash interest payments are required to be made by us until we
    achieve specified financial targets.                                      

The maturity date of the outstanding principal
under the New Credit Agreement is July 15, 2009. Automatic
and permanent quarterly reductions of the principal amount
commence on October 15, 2007 with scheduled principal
repayments totaling $25 million in 2007, $150 million
in 2008 and $325 million in 2009. The security for the New
Credit Agreement consists of all of the assets of
XO Parent, including stock of its direct and indirect
subsidiaries, and all assets of virtually all of those
subsidiaries. The New Credit Agreement limits additional
indebtedness, liens, dividend payments and certain investments
and transactions, and contains certain covenants with respect to
minimum cash balance, minimum EBITDA (earnings before interest,
taxes, depreciation and amortization) requirements and maximum
capital expenditures. Loans under the New Credit Agreement bear
interest, at our option, at an alternate base rate, as defined,
or reserve-adjusted London Interbank Offered Rate plus, in each
case, applicable margins.

49



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##### 



We are not required to pay cash interest accrued
on the principal amount under the New Credit Agreement until we
meet certain financial ratios. Nevertheless, we may elect to
begin paying interest in cash earlier than the required date,
but, based on our current funding requirement, we would not
anticipate making such an election in the foreseeable future.
Once we begin to pay accrued interest in cash, even in the case
of an early election, the applicable margins are reduced.
Approximately 85% of the underlying loans of the New Credit
Agreement are held by Arnos Corp., an entity controlled by
Mr. Icahn.


Cash
Conservation Initiatives

Our balance of cash and marketable securities
decreased to $561.0 million at December 31, 2002 from
$755.2 million at December 31, 2001. This decrease
primarily resulted from capital expenditures during the early
part of 2002 relating to the completion of ongoing network
construction projects. We continue to focus on minimizing the
rate at which we use our cash to fund operations and capital
expenditures, and preserving cash and marketable securities. For
the past year, the reduction in the rate at which we use our
cash has been accomplished by:



| |   |                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significantly reducing our capital requirements
    largely due to the completion of several significant technology
    and network enhancements projects and decreases in success-based
    capital spending;                                                
|
| |  | ceasing to pay interest on the Pre-Petition
    Credit Facility and our pre-petition senior and subordinated
    unsecured notes and dividends on our preferred stock;                                                                                        
|
| |  | implementing a series of expense reduction and
    cash conservation initiatives, which have resulted in the
    reduction of cost of service and selling, operating and general
    expenses in both absolute dollars and as a percentage of
    revenue; and
|
| |  | improving working capital mainly through
    aggressive collections of our outstanding accounts receivable,
    and, to a lesser extent, deferred payment of
    XO Parents pre-petition liabilities.                                                        

Future
Funding Needs, Capital Resources and Liquidity
Assessment

We expect that, in the near term, our business
will use existing cash to fund capital expenditures and working
capital requirements. The majority of our planned capital
expenditure requirements will be success-based in
that they will be used to purchase and install switches,
routers, servers or other customer-related equipment and
electronics in connection with adding new customers or
increasing the amount of services provided to existing
customers. Much of the remaining planned capital expenditures
will be for the continued development and implementation of our
information systems to support and enhance the provisioning and
billing of new and existing customers. Part of our working
capital requirements are commitments under lease and contractual
obligations for maintenance and service agreements. Such future
minimum commitments are as follows (dollars in thousands):

|                                           |  |                 |         |               |  |                 |        |               |  |   |         |  |  |   |         | 
|------------------------------------------ |  | --------------- | ------- | ------------- |  | --------------- | ------ | ------------- |  | - | ------- |  |  | - | ------- | 
|                                           |  |                 |         |               |  | Other long-term |        | Total minimum
|                                           |  | Operating lease |         | Capital lease |  | contractual     |        | long-term    
|Year Ending December 31,                   |  | obligations     |         | obligations   |  | obligations     |        | obligations  
|                                           |  |                 |         |               |  |                 |        |              
|2003                                       |  | $               | 62,733  |               |  | $               | 10,031 |               |  | $ | 74,126  |  |  | $ | 146,890 | 
|2004                                       |  |                 | 59,045  |               |  |                 | 2,809  |               |  |   | 57,612  |  |  |   | 119,466 | 
|2005                                       |  |                 | 55,600  |               |  |                 | 2,668  |               |  |   | 17,574  |  |  |   | 75,842  | 
|2006                                       |  |                 | 51,458  |               |  |                 | 2,416  |               |  |   | 14,577  |  |  |   | 68,451  | 
|2007                                       |  |                 | 47,334  |               |  |                 | 1,733  |               |  |   | 11,780  |  |  |   | 60,847  | 
|Thereafter                                 |  |                 | 232,550 |               |  |                 | 277    |               |  |   | 107,277 |  |  |   | 340,104 | 
|                                           |  |                 |         |               |  |                 |        |               |  |   |         |  |  |   |         | 
|Total future minimum long-term obligations |  | $               | 508,720 |               |  | $               | 19,934 |               |  | $ | 282,946 |  |  | $ | 811,600 | 
|                                           |  |                 |         |               |  |                 |        |               |  |   |         |  |  |   |         | 

There are no additional borrowings available
under our New Credit Agreement, although, under certain
circumstances, the New Credit Agreement permits us to obtain a
senior secured facility of up to $200.0 million, less the
amount of any proceeds from the Rights Offering, so long as the
terms are satisfactory to the administrative agent and holders
of a majority of the principal amount of the loans

50



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##### 



outstanding under the New Credit Agreement. Arnos
Corp., a company controlled by Mr. Icahn, holds
approximately 85% of the principal amount of the loans
outstanding under the New Credit Agreement. Under the Plan of
Reorganization and after the SEC has declared effective a
registration statement to be filed with the SEC, XO Parent
will issue to certain holders of claims and interests in
XO Parent who hold such claims and/or interests as of the
November 15, 2002 record date, rights to subscribe for up
to 43,333,333 shares of New Common Stock, at $5.00 per share,
through the Rights Offering. Recently, our New Common Stock has
been trading at less than $4.00 per share and unless such price
increases prior to the conclusion of the Rights Offering, we
would not expect much, if any, additional funds to be raised
through the Rights Offering.


Although we expect that our balance of cash and
marketable securities will decline in the near term to fund
capital expenditures and working capital requirements discussed
above, given (i) our current assumptions with respect to
trends in our business, (ii) our estimates concerning the
substantially lower level of capital expenditures that we will
incur to support our business plan and (iii) the
significant reduction in cash needed to meet our debt service
requirements because we are not required to pay interest accrued
on the New Credit Agreement until we meet certain financial
ratios, we believe that the $561.0 million of cash and
marketable securities on hand as of December 31, 2002 will
be sufficient to fund our operations until the cash flows
generated by our operations are sufficient to fund our capital
expenditures and debt service requirements.

Credit
Risk

Financial instruments that potentially subject us
to concentrations of credit risk consist primarily of trade
receivables. Although our trade receivables are geographically
dispersed and include customers in many different industries, a
portion of our revenue is generated from services provided to
other telecommunications service providers. Several of these
companies have recently filed for protection under
Chapter 11 of the Bankruptcy Code. We believe that our
established valuation and credit allowances are adequate as of
December 31, 2002 to cover these risks.

Critical Accounting Policies

As discussed in note 3 to the financial
statements, we will be adopting fresh start accounting during
the first quarter of 2003, creating, in substance per
SOP 90-7, a new reporting entity. SOP 90-7 also
requires that changes in accounting principles that will be
required in the financial statements of the emerging entity
within twelve months following the adoption of fresh start
reporting be adopted at the time fresh start reporting is
adopted.

The preparation of the financial statements in
accordance with accounting principles generally accepted in the
United States requires management to make judgments, estimates
and assumptions regarding uncertainties that affect the reported
amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses. Management uses historical experience and all
available information to make these judgments and estimates and
actual results could differ from those estimates and assumptions
that are used to prepare our financial statements at any given
time. Despite these inherent limitations, management believes
that Managements Discussion and Analysis and the financial
statements and footnotes provide a meaningful and fair
perspective of the companys financial condition and its
operating results. Management believes the following critical
accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated financial
statements included in this Annual Report on Form 10-K.

Long-Lived
Assets

Our long-lived assets include property and
equipment, fixed wireless licenses, and identifiable intangible
assets to be held and used. Property and equipment 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 are 5 to

51



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20 years and 3 to 5 years for furniture
fixtures, equipment and other. Investments in fixed wireless
licenses consist of direct costs to acquire fixed wireless
licenses. The estimated useful life is 20 years, which
represents the original ten year license term with one ten year
renewal. Renewal is conditioned upon the satisfaction of certain
utilization requirements established by the FCC. Our current
utilization may not be sufficient to satisfy this FCC condition
on certain licenses which could impact the FCCs decision
to renew. These useful lives are determined based on historical
usage with consideration given to technological changes and
trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because we operate within an industry in which new
technological changes could render some or all of our network
related equipment obsolete requiring application of a shorter
useful life or, in a worst case, a write-off of the entire value
of the asset. Accordingly, in making this assessment, we
consider the views of experts both from internal and outside
sources regarding the impact of technological advances and
trends in the industry on the value and useful lives of our
network assets.


Depreciation or amortization of the long-lived
asset begins when the asset is substantially complete or placed
into service. At December 31, 2002, our balance sheet
includes approximately $730.6 million of long-lived assets,
including construction-in-process and certain fixed wireless
licenses, that were either not ready for their intended use or
not placed into service, and accordingly are not being
depreciated or amortized.

In addition, long-lived assets, including
property and equipment, fixed wireless licenses, and intangible
assets with definite useful lives to be held and used, are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount should be
addressed pursuant to SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, or SFAS
No. 144. SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, or SFAS No. 121.
In accordance with implementation requirements, we implemented
the provisions of SFAS No. 144 in 2002.

The criteria for determining impairment for
long-lived assets to be held and used are generally consistent
with SFAS No. 121. Pursuant to SFAS No. 144,
impairment is determined by comparing the carrying value of
these long-lived assets to managements best estimate of
future undiscounted cash flows expected to result from the use
of the assets and their eventual disposition. We believe that no
impairment existed under SFAS No. 144 as of
December 31, 2002 and 2001. In the event that there are
changes in the planned use of our long-lived assets or our
expected future undiscounted cash flows are reduced
significantly, our assessment of our ability to recover the
carrying value of these assets under SFAS No. 144 could
change.

The majority of our goodwill and other
intangibles were acquired in the June 2000 Concentric merger. In
years prior to 2002, all such costs were amortized using the
straight-line method over the estimated useful lives of the
assets. We wrote off all of our goodwill in the first quarter of
2002 when we performed the transitional impairment tests of
goodwill as required by SFAS No. 142. All of our other
intangibles are definite life assets and are amortized over a
period up to 5 years.

With our emergence from bankruptcy in early 2003,
we will apply fresh start accounting which will result in a
significant write-down of our long-lived assets. The fair value
of our long-lived assets for purposes of fresh start accounting
is expected to be approximately $661.0 million.

Revenue
Recognition

Revenues from telecommunications services are
recognized when the services are performed, evidence of an
arrangement exists, the fee is fixed and determinable and
collectibility is probable. Service discounts and incentives
related to telecommunications services are recorded as a
reduction of revenue when granted or ratably over a contract
period. Fees billed in connection with customer installations
and other upfront charges are deferred and recognized ratably
over the estimated customer life. Certain direct costs incurred
for provisioning and installing a customer are also deferred and
recognized ratably over the estimated customer life. Sales and
commission costs associated with acquiring the new customer are
expensed as

52



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##### 



incurred. We believe our methodology
appropriately matches the non-recurring and monthly recurring
fees with the direct non-recurring costs over the estimated
customer life. Any net deferred asset appropriately reflects the
value of the customer base. The estimated customer life is
calculated by analyzing customer disconnects as a percentage of
revenue. This calculation is reviewed every quarter.


Revenue from the sale or lease of unlit network
capacity is recognized upon consummation of the transaction and
the acquirers acceptance of the capacity in instances when
we receive upfront cash payments and are contractually obligated
to transfer title to the specified capacity at the end of the
contract term. If the transaction does not meet these criteria,
revenue is recognized ratably over the contract term. In 2001,
approximately 1.5% of our total revenue was attributed to sales
of unlit network capacity. There were no sales of unlit network
capacity in 2002 or 2000.

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 by 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 can and have experienced material
changes to our reserve requirements on a month to month basis as
significant customers have in the past unexpectedly filed for
bankruptcy or otherwise became insolvent. We believe that our
established valuation allowances were adequate as of
December 31, 2002 and 2001. If circumstances relating to
specific customers change or economic conditions worsen such
that our past collection experience and assessment of the
economic environment are no longer valid, our estimate of the
recoverability of our trade receivables could be changed. If
this occurs, we adjust our valuation allowance in the period the
new information is known.

New Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board, or FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations, or SFAS No. 143, which
requires an entity to recognize the fair value of a liability
for an asset retirement obligation in the period in which a
legal or contractual removal obligation is incurred if a
reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset
retirement obligation is incurred, SFAS No. 143 requires
the liability to be recognized when a reasonable estimate of the
fair value can be made. The provisions of SFAS No. 143 are
effective for financial statements issued for fiscal years
beginning after June 15, 2002. As required by
SOP 90-7, we will implement SFAS No. 143 during the
first quarter of 2003 in conjunction with the implementation of
fresh start accounting. The pro forma balance sheet and
note 3, included in Item 8, includes an estimated
asset retirement obligation of $21.4 million.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002, or SFAS No. 145. SFAS
No. 145 eliminates the requirement to report material gains
or losses from debt extinguishments as an extraordinary item,
net of any applicable income tax effect, in an entitys
statement of operations. SFAS No. 145 instead requires that
a gain or loss recognized from a debt extinguishment be
classified as an extraordinary item only when the extinguishment
meets the criteria of both unusual in nature and
infrequent in occurrence as prescribed under
Accounting Principles Board Opinion, or APB, No. 30,
Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. The provisions of SFAS No. 145 are
effective for fiscal years beginning after May 15, 2002
with respect to the rescission of SFAS No. 4 and for
transactions occurring after May 15, 2002, with respect to
provisions related to SFAS No. 13. We have recognized
extraordinary gains from debt repurchases in 2001 and believe
that the classification of such gains as extraordinary items
will change under SFAS No. 145 when we implement fresh start
accounting in accordance with SOP 90-7.

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In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities or SFAS No. 146. SFAS No. 146
requires that costs, including severance costs, associated with
exit or disposal activities be recorded at their fair value when
a liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements commitment to an exit plan, which is generally
before an actual liability has been incurred. We will apply the
provisions of SFAS No. 146 to any exit or disposal
activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, or SFAS
No. 148. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition to SFAS No. 123s
fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB No. 28,
Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects
of an entitys accounting policy with respect to
stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to
require companies to account for employee stock options using
the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for
that compensation using the fair value method of SFAS
No. 123 or the intrinsic value method of APB No. 28.
The provisions of SFAS No. 148 are effective for fiscal
years beginning after December 15, 2002 with respect to the
amendments of SFAS No. 123 and effective for financial
reports containing condensed financial statements for interim
periods beginning after December 15, 2002 with respect to
the amendments of APB No. 28. We will implement SFAS No.
148 effective January 1, 2003 regarding disclosure
requirements for condensed financial statements for interim
periods. Management is currently evaluating the impact of
applying the fair value method of accounting for stock based
compensation on the Companys results of operations and
financial position.

Item 7A.     Quantitative
and Qualitative Disclosure About Market Risk

As of December 31, 2002, we had obligations
relating to our outstanding pre-petition redeemable preferred
stock, senior notes, and subordinated notes. All such
obligations were cancelled either in exchange for other
consideration or without consideration upon our emergence from
Chapter 11 pursuant to the Plan of Reorganization and,
therefore, do not subject us to future market risk.

On January 16, 2003, the effective date of
XO Parents emergence from Chapter 11, we amended
the $1.0 billion Pre-Petition Credit Facility in accordance
with the Plan of Reorganization. At the effective date, the New
Credit Agreement was comprised of $500.0 million junior
secured loans with principal amounts payable beginning October
2007, and the rate at which interest accrues under the entire
outstanding balance is variable. Currently, we do not pay cash
interest on the New Credit Agreement. However, interest accrues
based on variable rates. Interest expense and future cash flow
exposure are illustrated in the following table (dollars in
millions).

|                     |  |                                  |      |             |  |                               |      |            |  |        |      |         |  |         |      |  |  |   |      |  |  |   |      |  |  |   |      | 
|-------------------- |  | -------------------------------- | ---- | ----------- |  | ----------------------------- | ---- | ---------- |  | ------ | ---- | ------- |  | ------- | ---- |  |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                     |  |                                  |      |             |  |                              
|                     |  | Annual Interest Expense Given an |      | No Change   |  | Annual Interest Expense Given
|                     |  | Interest Rate decrease of        |      | in Interest |  | an Interest Rate increase of 
|                     |  | X Basis Points                   |      | Rates       |  | X Basis Points               
|                     |  |                                  |      |             |  |                              
|Cash Flow Risk       |  | (150 BPS)                        |      | (100 BPS)   |  | (50 BPS)                      |      | Fair Value |  | 50 BPS |      | 100 BPS |  | 150 BPS
|                     |  |                                  |      |             |  |                               |      |            |  |        |      |         |  |        
|New Credit Agreement |  | $                                | 29.2 |             |  | $                             | 31.7 |            |  | $      | 34.2 |         |  | $       | 36.7 |  |  | $ | 39.2 |  |  | $ | 41.7 |  |  | $ | 44.2 | 

Marketable securities 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

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the fair value of these financial instruments or
on the interest we would earn on our investment portfolio as
illustrated in the following table (dollars in millions).


|                                    |  |                                  |       |             |  |                               |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|----------------------------------- |  | -------------------------------- | ----- | ----------- |  | ----------------------------- | ----- | ---------- |  | ------ | ----- | ------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                    |  |                                  |       |             |  |                              
|                                    |  | Annual Interest Expense Given an |       | No Change   |  | Annual Interest Expense Given
|                                    |  | Interest Rate decrease of        |       | in Interest |  | an Interest Rate increase of 
|                                    |  | X Basis Points                   |       | Rates       |  | X Basis Points               
|                                    |  |                                  |       |             |  |                              
|Fair Value Risk                     |  | (150 BPS)                        |       | (100 BPS)   |  | (50 BPS)                      |       | Fair Value |  | 50 BPS |       | 100 BPS |  | 150 BPS
|                                    |  |                                  |       |             |  |                               |       |            |  |        |       |         |  |        
|Financial Assets:                   |  |                                  |       |             |  |                               |       |            |  |        |       |         |  |         |       |  |  |   |       |  |  |   |       |  |  |   |       | 
|Marketable securities - over 1 year |  | $                                | 247.9 |             |  | $                             | 247.5 |            |  | $      | 247.2 |         |  | $       | 246.9 |  |  | $ | 246.6 |  |  | $ | 246.2 |  |  | $ | 245.8 | 

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

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

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

On May 15, 2002, we dismissed our
independent auditors, Arthur Andersen LLP, and appointed Ernst
& Young LLP to serve as our new independent auditors for the
year ending December 31, 2002. Our Board of Directors
approved this decision. We filed a current report on
Form 8-K with the SEC on May 16, 2002, which included
a notification that the change was effective on May 15,
2002.

Arthur Andersens report on our financial
statements for the fiscal year ending December 31, 2000 did
not contain an adverse opinion or disclaimer of opinion, nor
were such reports qualified or modified as to uncertainty, audit
scope or accounting principles. Arthur Andersens report on
the Companys financial statements for the fiscal year
ending December 31, 2001 included an explanatory paragraph
that discussed the substantial doubt concerning our ability to
continue as a going concern.

During each of the two fiscal years ending
December 31, 2000 and 2001, there were: (i) no
disagreements with Arthur Andersen on any matter of accounting
principle or practice, financial statement disclosure or
auditing scope or procedure which, if not resolved to Arthur
Andersens satisfaction, would have caused them to make
reference to the subject matter in connection with their report
on our financial statements for such years; and (ii) there
were no reportable events as defined in Item 304(a)(1)(v)
of Regulation S-K.

During each of our two fiscal years ending
December 31, 2000 and 2001 and through the date of their
appointment, we did not consult Ernst & Young with respect
to the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, or
any other matters or reportable events as set forth in
Items 304(a)(2)(i) and (ii) of Regulation S-K.

PART III

Item 10.     Directors
and Executive Officers of the Registrant

Prior to January 16, 2003, effective date of
our Plan of Reorganization, our Board of Directors was comprised
of the following individuals: Daniel F. Akerson, Nathaniel A.
Davis, Nicolas Kauser, Craig O. McCaw, Sharon L. Nelson, Henry
R. Nothhaft, Jeffrey S. Raikes, Peter C. Waal, and Dennis M.
Weibling. Additional information concerning these former board
members is included in our Annual Report on Form 10-K for
the year ended December 31, 2001.

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

|                           |  |     |    |          |  |                                                                 
|-------------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------
|Name                       |  | Age |    | Position
|                           |  |     |    |         
|Carl C. Icahn (1)          |  |     | 67 |          |  | Chairman of the Board of Directors                              
|Nathaniel A. Davis         |  |     | 49 |          |  | President, Chief Operating Officer and Director                 
|Andrew R. Cohen (1)        |  |     | 41 |          |  | Director                                                        
|Adam Dell (2)              |  |     | 32 |          |  | Director                                                        
|Vincent J. Intrieri (2)(3) |  |     | 46 |          |  | Director                                                        
|Keith Meister (1)(3)       |  |     | 29 |          |  | Director                                                        
|Nancy B. Gofus             |  |     | 49 |          |  | Executive Vice President, Marketing and Customer
    Care       
|Michael S. Ruley           |  |     | 43 |          |  | Executive Vice President, Market Sales Operations               
|Gary D. Begeman            |  |     | 44 |          |  | Senior Vice President, General Counsel and
    Secretary        
|Mark W. Faris              |  |     | 48 |          |  | Senior Vice President, Network Operations                       
|John H. Jacquay            |  |     | 50 |          |  | Senior Vice President, National Sales                           
|Wayne M. Rehberger         |  |     | 46 |          |  | Senior Vice President, Chief Financial Officer                  
|R. Gerard Salemme          |  |     | 49 |          |  | Senior Vice President, Regulatory and Legislative
    Affairs   
|William Garrahan           |  |     | 45 |          |  | 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.

Carl C. Icahn.Mr. Icahn has served as our
Chairman of the Board of Directors since January 2003. Since
1984, he has served as the Chairman of the Board and a Director
of Starfire Holding Corporation (formerly Icahn Holding
Corporation), a privately-held holding company, and Chairman of
the Board and a Director of various subsidiaries of Starfire,
including ACF Industries, Incorporated, a privately-held railcar
leasing and manufacturing company. Since 1968, he served as the
Chairman of the Board and President of Icahn & Co.,
Inc., a registered broker-dealer and a member of the National
Association of Securities Dealers. Since November 1990,
Mr. Icahn has been Chairman of the Board of American
Property Investors, Inc., the general partner of American Real
Estate Partners, L.P., a public limited partnership that invests
in real estate. Since 1993, Mr. Icahn has been a Director
of Cadus Pharmaceutical Corporation, a firm which holds various
biotechnology patents. Since October 1998, Mr. Icahn has
been the President and a Director of Stratosphere Corporation
which operates the Stratosphere Hotel and Casino. Since
September 2000, Mr. Icahn has served as the Chairman of the
Board of GB Holdings, a holding company that owns the Sands
Hotel and Casino in Atlantic City, New Jersey.

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 Executive 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.

Andrew R. Cohen.Mr. Cohen has been a member of
our Board of Directors since January 2003. Since 2000, he has
served as Chief Technology Officer of Icahn Associates Corp.
From 1999 to 2000, Mr. Cohen served as senior vice
president and chief technology officer of American
Greetings & Americangreetings.com. From 1998 to 1999,
he served as President of CNS Development, which provides
website transaction consulting services. From 1992 to 1998,
Mr. Cohen served as vice president of development of
Micrografx, Inc., a consumer and business enterprise software
company.

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Adam Dell.Mr. Dell has been a member of our
Board of Directors since January 2003. Since January 2000, he
has served as the Managing General Partner of Impact Venture
Partners, a venture capital firm focused on information
technology investments. From October 1998 to January 2000,
Mr. Dell was a Senior Associate and subsequently a Partner
with Crosspoint Venture Partners in Northern California. From
July 1997 to August 1998, he was a Senior Associate with
Enterprise Partners in Southern California. From January 1996 to
June 1997 Mr. Dell was associated with the law firm of
Winstead Sechrest & Minick, in Austin, Texas, where he
practiced corporate law.

Vincent J. Intrieri.Mr. Intrieri, has been a member
of our Board of Directors since January 2003. Since March 2003,
he has been Managing Director of Icahn Associates Corp. From
1998 to March 2003, he served as a portfolio manager of High
River Limited Partnership. From 1995 to 1998, Mr. Intrieri
served as portfolio manager for distressed investments with
Elliot Associates L.P., a New York investment fund. Prior to
1995, Mr. Intrieri was a partner at the Arthur Anderson
accounting firm and is a certified public accountant. Mr.
Intrieri currently serves on the board of TransTexas Gas
Corporation.

Keith Meister.Mr. Meister has been a member of
our Board of Directors since January 2003. Since June 2002, he
has served as senior investment analyst of High River Limited
Partnership. From March 2000 through 2001, Mr. Meister
co-founded and served as co-president of J Net Ventures, a
venture capital fund focused on investments in information
technology and enterprise software businesses. From 1997 through
1999, Mr. Meister served as an investment professional at
Northstar Capital Partners, an opportunistic investment
partnership with assets in excess of $2 billion. From 1995
to 1997, Mr. Meister served as an investment analyst in the
investment banking group at Lazard Freres.

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 1999, 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 Teleport
Communications Group, including Regional Vice President of the
Pacific Bell Territory and Vice President and General Manager of
both the San Francisco and Colorado markets.

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.

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.

John H. Jacquay.Mr. Jacquay has been our Senior
Vice 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.

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.

57



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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.

Each director will hold office until the first
meeting of stockholders immediately following expiration of his
one-year term of office and until his successor is qualified and
elected, or until his earlier resignation or removal. We do not
have a classified or staggered board.

As discussed above, on June 17, 2002, XO
Parent filed a voluntary petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Southern District of New
York, and emerged from bankruptcy on January 16, 2003.
Messrs. Davis, Ruley, Jacquay, Begeman, Faris, Rehberger,
Salemme and Garrahan and Ms. Gofus each were executive
officers of XO Parent during the bankruptcy proceedings.

Section 16(a)
Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act
of 1934 requires our directors, executive officers and any
person who owns more than 10% of our common stock, whom were
refer to collectively as the Reporting Persons, to file with the
Securities and Exchange Commission reports of ownership and
reports of changes in ownership of our common stock. Under
Securities and Exchange Commission rules, we receive copies of
all Section 16(a) forms that these Reporting Persons file.
We have reviewed copies of these reports and written
representations from the Reporting Persons. We believe all
Reporting Persons complied with their Section 16(a)
reporting obligations during 2002, except for the following
individuals: Messrs Davis, Begeman, Rehberger, Salemme,
Ms. Gofus and Doug Carter and Scott Macleod, former
executive officers of ours, had a late Form 5 filing with
respect to the cancellation of certain options to purchase
pre-petition class A common stock in connection with our May
2001 option exchange program; Mr. Faris had a late
Form 5 filing with respect to the purchase of shares of
pre-petition class A common stock under our employee stock
purchase plan; and Jeffrey S. Raikes, a former member of our
Board of Directors, had a late Form 4 filing with respect
to the sale of shares of our pre-petition class A common stock.

58



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Item 11. Executive Compensation

Summary
Compensation Table

The following table sets forth, for the fiscal
years ended December 31, 2002, 2001, and 2000, individual
compensation information for our Chief Executive Officer, and
each of our four most highly compensated executive officers,
whom we refer to collectively as the Named Executive Officers.

|                            |                                    |      |      |                     |         |                |     |                        |         |                |     |        |   |         |  |  |           |           |  |  |        |        | 
|--------------------------- | ---------------------------------- | ---- | ---- | ------------------- | ------- | -------------- | --- | ---------------------- | ------- | -------------- | --- | ------ | - | ------- |  |  | --------- | --------- |  |  | ------ | ------ | 
|                            |                                    |      |      |                     |         |                |     |                        |         |               
|                            |                                    |      |      |                     |         |                |     | Long Term Compensation |         |               
|                            |                                    |      |      |                     |         |                |     | Awards                 |         |               
|                            |                                    |      |      |                     |         |                |     |                       
|                            |                                    |      |      | Annual Compensation |         | Restricted     |     | Securities             |         | All Other     
|                            |                                    |      |      |                     |         | Stock Award(s) |     | Underlying             |         | Compensation  
|Name and Principal Position |                                    | Year |      | Salary ($)          |         | Bonus ($)(1)   |     | ($)(2)                 |         | Options (#)(3) |     | ($)(4)
|                            |                                    |      |      |                     |         |                |     |                        |         |                |     |       
|Daniel F. Akerson           |                                    | 2002 |      |                     | 377,303 | (5)            |     |                        |        | (5)            |     |        |  |         |  |  |          |           |  |  | 5,606  |       
|                            | Chief Executive Officer            |      | 2001 |                     |         | 318,006        | (5) |                        |         |               | (5) |        |   |        |  |  |           |          |  |  |        | 38,331 | 
|                            |                                    | 2000 |      |                     | 500,000 |                |     |                        | 477,950 |                |     |        |  |         |  |  | 500,000   |           |  |  | 57,580 |       
|Nathaniel A. Davis          |                                    | 2002 |      |                     | 382,212 |                |     |                        |        |                |     |        |  |         |  |  | 1,423,750 |           |  |  | 8,769  |       
|                            | President and Chief Operating      |      | 2001 |                     |         | 375,000        |     |                        |         | 296,136        |     |        |   | 432,500 |  |  |           |          |  |  |        | 194    | 
|                            | Officer                            |      | 2000 |                     |         | 375,000        |     |                        |         | 239,524        |     |        |   |        |  |  |           | 1,975,000 |  |  |        | 179    | 
|R. Gerard Salemme (6)       |                                    | 2002 |      |                     | 217,300 |                |     |                        | 85,417  |                |     |        |  |         |  |  | 59,500    |           |  |  | 3,224  |       
|                            | Senior Vice President,             |      | 2001 |                     |         | 213,200        |     |                        |         | 223,655        |     |        |   | 86,500  |  |  |           |          |  |  |        | 6,787  | 
|                            | Regulatory and Legislative Affairs |      | 2000 |                     |         | 221,400        |     |                        |         | 205,000        |     |        |   |        |  |  |           | 70,000    |  |  |        | 8,687  | 
|Michael S. Ruley            |                                    | 2002 |      |                     | 280,289 |                |     |                        |        |                |     |        |  |         |  |  | 301,665   |           |  |  | 9,329  |       
|                            | Executive Vice President,          |      | 2001 |                     |         | 268,846        |     |                        |         | 192,653        |     |        |   | 51,900  |  |  |           |          |  |  |        | 56,848 | 
|                            | Market Sales Operations            |      | 2000 |                     |         | 244,443        |     |                        |         | 191,648        |     |        |   |        |  |  |           | 253,100   |  |  |        | 36,324 | 
|Nancy B. Gofus              |                                    | 2002 |      |                     | 275,000 |                |     |                        |        |                |     |        |  |         |  |  | 212,500   |           |  |  | 9,489  |       
|                            | Executive Vice President,          |      | 2001 |                     |         | 275,000        |     |                        |         | 178,503        |     |        |   | 51,900  |  |  |           |          |  |  |        | 8,950  | 
|                            | Marketing and Customer Care        |      | 2000 |                     |         | 253,846        |     |                        |         | 157,723        |     |        |   |        |  |  |           | 350,000   |  |  |        | 3,154  | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes bonuses earned for the corresponding
    fiscal years that were paid subsequent to the stated calendar
    year end. No bonuses were paid to any Named Executive Officer
    with respect to performance for 2002, other than to
    Mr. Salemme. In connection with XO Parents
    Chapter 11 proceedings, we adopted the XO Communications,
    Inc. Employee Retention and Incentive Plan. For a summary of the
    terms of the Employee Retention and Incentive Plan and
    Mr. Salemmes compensation arrangements, please see
    Employment Agreements and Other Arrangements below.                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Represents an award of shares of our pre-petition
    class A common stock granted on August 20, 2001, which
    shares were restricted and subject to forfeiture until vested.
    All such shares were forfeited in 2002, and no shares were
    outstanding at December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Represents options to acquire shares of class A
    common stock. Share figures have been restated retroactively to
    reflect stock splits with respect to our class A common stock.
    Grants in 2002 were made in connection with the Offer to
    Exchange with respect to outstanding options that we undertook
    in May 2001. See Report on Repricing of Options in
    our Annual Report on Form 10-K for the year ended
    December 31, 2001. Pursuant to XO Parents Plan of
    Reorganization, all interests in such stock options and such
    shares of class A common stock issued upon exercise thereof,
    were cancelled and terminated effective January 16, 2003,
    the date that the Plan of Reorganization was consummated.                                                                                                                                                                                                             
|   
|(4) | For 2002, includes for Mr. Akerson: $5,404
    for contributions made by us on behalf of Mr. Akerson under
    our 401(k) Plan and $202 for premiums for group term life
    insurance paid by us; for Mr. Davis: $8,558 for
    contributions made by us on behalf of Mr. Davis under our
    401(k) Plan and $211 for premiums for group term life insurance
    paid by us; for Mr. Salemme: $3,116 for contributions made
    by us on behalf of Mr. Salemme under our 401(k) Plan and
    $108 for premiums for group term life insurance paid by us; for
    Mr. Ruley: $1,216 for reimbursement of relocation expenses;
    $8,000 for contributions made by us on behalf of Mr. Ruley
    under our 401(k) Plan and $113 for premiums for group term life
    insurance paid by us; for Ms. Gofus: $9,309 for
    contributions made by us on behalf of Ms. Gofus under our
    401(k) Plan and $180 for premiums for group term life insurance
    paid by us.
|   
|(5) | In August 2001, Mr. Akerson elected to forgo
    all of his salary for the period between August 2001 and April
    2002, after which time he elected to receive his salary. For
    2001, he elected not to receive a bonus. In January 2003,
    Mr. Akerson received a payment of $750,000 under the XO
    Communications, Inc. Employee Retention and Incentive Plan
    described below. Mr. Akerson resigned as Chief Executive
    Officer effective January 17, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(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. For a summary of Mr. Salemmes
    compensation arrangements, please see Employment
    Agreements and Other Arrangements below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Option
Grants in Last Fiscal Year

Share and per share figures (including exercise
or base price figures) have been restated retroactively to
reflect stock splits with respect to our pre-petition class A
common stock. All option grants in 2002

59



---



##### 



were made in connection with the Offer to
Exchange with respect to outstanding options that we undertook
in May 2001. See Report on Repricing of Options in
our Annual Report on Form 10-K for the year ended
December 31, 2001. Pursuant to XO Parents Plan of
Reorganization, all interests in such stock options and all such
shares issuable upon exercise thereof were cancelled and
terminated effective January 16, 2003, the date that the
Plan of Reorganization was consummated.


|                   |  |                      |           |            |  |          |      |                            |  |                 |      |                              |  |    |      |     |  |                  |  |  |     |  |  |  |         |  |  |  |         | 
|------------------ |  | -------------------- | --------- | ---------- |  | -------- | ---- | -------------------------- |  | --------------- | ---- | ---------------------------- |  | -- | ---- | --- |  | ---------------- |  |  | --- |  |  |  | ------- |  |  |  | ------- | 
|                   |  |                      |           |            |  |          |      |                           
|                   |  | Individual Grants(1) |           |            |  |          |      |                           
|                   |  |                      |           |           
|                   |  |                      |           | % of Total |  |          |      | Potential Realizable Value
|                   |  | Number of            |           | Options    |  |          |      | Market                     |  |                 |      | at Assumed Annual Rates of  
|                   |  | Securities           |           | Granted to |  | Exercise |      | Price on                   |  |                 |      | Stock Price Appreciation for
|                   |  | Underlying           |           | Employees  |  | or Base  |      | Date of                    |  |                 |      | Option Terms ($)(2)         
|                   |  | Options              |           | in Fiscal  |  | Price    |      | Grant                      |  |                 |      |                             
|Name               |  | Granted (#)          |           | Year (%)   |  | ($/Sh)   |      | ($/Sh)                     |  | Expiration Date |      | 0%                           |  | 5% |      | 10%
|                   |  |                      |           |            |  |          |      |                            |  |                 |      |                              |  |    |      |    
|Daniel F. Akerson  |  |                      |          |            |  |          |     |                            |  |                 | N/A  |                              |  |    | N/A  |     |  | N/A              |  |  | N/A |  |  |  | N/A     |  |  |  | N/A     | 
|Nathaniel A. Davis |  |                      | 1,423,750 |            |  |          | 5.71 |                            |  |                 | 0.14 |                              |  |    | 0.14 |     |  | January 16, 2012 |  |  | 0   |  |  |  | 125,355 |  |  |  | 317,673 | 
|R. Gerard Salemme  |  |                      | 59,500    |            |  |          | 0.24 |                            |  |                 | 0.14 |                              |  |    | 0.14 |     |  | January 16, 2012 |  |  | 0   |  |  |  | 5,239   |  |  |  | 13,276  | 
|Michael S. Ruley   |  |                      | 301,665   |            |  |          | 1.21 |                            |  |                 | 0.14 |                              |  |    | 0.14 |     |  | January 16, 2012 |  |  | 0   |  |  |  | 26,561  |  |  |  | 67,308  | 
|Nancy B. Gofus     |  |                      | 212,500   |            |  |          | 0.86 |                            |  |                 | 0.14 |                              |  |    | 0.14 |     |  | January 16, 2012 |  |  | 0   |  |  |  | 18,710  |  |  |  | 47,413  | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All options were granted on January 17,
    2002, at which time 30% of the shares subject to the option were
    vested, with the remainder vesting monthly on a ratable basis
    over the 36-month period commencing on the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(2) | The potential realizable value illustrates value
    that might be realized upon exercise of the options immediately
    prior to the expiration of their terms, assuming the specified
    compounded rates of appreciation of the market price per share
    from the date of grant to the end of the option term. The gains
    shown are net of the option exercise price, but do not include
    deductions for taxes and other expenses payable upon the
    exercise of the option or for sale of underlying shares of
    pre-petition class A common stock. No Named Executive Officer,
    however, realized or can realize any value with respect to such
    grants because, pursuant to XO Parents Plan of
    Reorganization, all interests in such stock options and all such
    shares issuable upon exercise thereof were cancelled and
    terminated effective January 16, 2003, the date that the
    Plan of Reorganization was consummated, and no Named Executive
    Officer exercised any such option prior to January 16, 2003.

Aggregated Option Exercises and Fiscal
Year-End Option Values

|                   |  |                 |   |                |  |                            |   |                      |  |             |           |               |  |  |           |  |  |  |         |  |  |  |       | 
|------------------ |  | --------------- | - | -------------- |  | -------------------------- | - | -------------------- |  | ----------- | --------- | ------------- |  |  | --------- |  |  |  | ------- |  |  |  | ----- | 
|                   |  |                 |   |                |  |                            |   |                     
|                   |  |                 |   |                |  | Number of Securities       |   | Value of Unexercised
|                   |  |                 |   |                |  | Underlying Unexercised     |   | In-the-Money Options
|                   |  |                 |   |                |  | Options at Fiscal Year-End |   | at Fiscal Year-End  
|                   |  | Shares Acquired |   |                |  | (#)(1)                     |   | ($)(2)              
|                   |  | on Exercise     |   | Value Realized |  |                            |   |                     
|Name               |  | (#)(1)          |   | ($)(1)         |  | Exercisable                |   | Unexercisable        |  | Exercisable |           | Unexercisable
|                   |  |                 |   |                |  |                            |   |                      |  |             |           |              
|Daniel F. Akerson  |  |                 |  |                |  |                            |  |                      |  |             | 5,200,000 |               |  |  | 1,000,000 |  |  |  | 129,600 |  |  |  | 0     | 
|Nathaniel A. Davis |  |                 |  |                |  |                            |  |                      |  |             | 731,648   |               |  |  | 892,102   |  |  |  | 0       |  |  |  | 9,600 | 
|R. Gerald Salemme  |  |                 |  |                |  |                            |  |                      |  |             | 400,876   |               |  |  | 28,924    |  |  |  | 0       |  |  |  | 0     | 
|Michael S. Ruley   |  |                 |  |                |  |                            |  |                      |  |             | 561,319   |               |  |  | 158,646   |  |  |  | 283     |  |  |  | 566   | 
|Nancy B. Gofus     |  |                 |  |                |  |                            |  |                      |  |             | 159,201   |               |  |  | 153,299   |  |  |  | 2,400   |  |  |  | 2,400 | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to XO Parents Plan of
    Reorganization, all interests in such stock options, all such
    shares issued upon exercise thereof, were cancelled and
    terminated effective January 16, 2003, the date that the
    Plan of Reorganization was consummated.                                                                                                                                                                                                                                                                       
|   
|(2) | For purposes of these calculations, the value of
    our pre-petition class A common stock was $0.053 per share,
    which was derived based on trading on the Nasdaq
    Over-the-Counter Bulletin Board. Nevertheless, XO Parents
    Plan of Reorganization provided that interests in its
    pre-petition class A common stock would be cancelled and
    terminated without any recovery, and none of the Named Executive
    Officers exercised any exercisable options set forth above prior
    to the effective date of such plan.

Employment
Agreements and Other Arrangements

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 options to
purchase 1,650,000 shares of our pre-bankruptcy class A common
stock. Of these options, Mr. Davis exchanged options to
purchase 1,350,000 shares of class A common stock for options to
purchase 1,147,500 shares class A common stock in connection
with the Offer to Exchange with respect to outstanding options
that we undertook in May 2001. See Report on Repricing of
Options in our Annual Report on Form 10-K for the
year ended December 31, 2001. All of the options granted to
Mr. Davis and

60



---



##### 



all shares of class A common stock issued or
issuable upon exercise thereof, were cancelled and terminated
effective January 16, 2003, the date that XO Parents
Plan of Reorganization was consummated.


Mr. Davis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. Daviss employment
is terminated by us 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. Davis 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. Davis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;                               
|
| |  | 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); and
|
| |  | similar transactions or events.                                                                                                                                                        

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s employment is
constructively terminated or terminates following the occurrence
of a change in control, he will not be subject to the
non-competition restrictions. The transactions contemplated by
or Plan of Reorganization resulted in a change of control for
purposes of this agreement.

R. Gerard Salemme.We have entered into a letter
agreement, by and among Communications Consultants, Inc., XO
Communications, Inc., Eagle River Investments, L.L.C. and
Mr. Salemme, which sets forth the terms and conditions
under which we have agreed to retain Mr. Salemme for
service as XO Parents Senior Vice President, Regulatory
and Legislative Affairs through November 1, 2003. Pursuant
to the letter agreement, Mr. Salemme, who is employed by
Communications Consultants, Inc., is required to spend at least
82% of his business time and effort providing services to us,
and we are responsible for 82% of his salary and bonus
compensation. Pursuant to his arrangements with Communications
Consultants, Mr. Salemme received a bonus of $208,333 paid
in two installments, the first as of the December 17, 2002
date of the agreement and the second as of the January 16,
2003 date that our Plan of Reorganization was consummated. We
were responsible for 82% of those bonus installments. Mr.
Salemme is not a participant in the XO Communications, Inc.
Employee Retention and Incentive Plan.

Michael S. Ruley.We
have entered into an employment agreement with Mr. Ruley.
Although the initial term of the agreement has expired,
Mr. Ruleys employment is governed by the terms of the
employment agreement until one party provides 60 days prior
written notice to the other of a termination of employment, or
Mr. Ruleys employment otherwise terminates pursuant
to the terms of the agreement.

61



---



##### 



The agreement 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.


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 by us 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 for the six-month
period following the date of termination. 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. Davis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 employment is
constructively terminated or terminates following the occurrence
of a change in control, he will not be subject to the
non-competition restrictions. The transactions contemplated by
our Plan of Reorganization resulted in a change of control for
the purposes of this agreement.

Daniel F. Akerson.We had entered into an employment
agreement with Mr. Akerson. The initial term of the agreement
expired in September 2002, and Mr. Akerson resigned his position
with us and our Board of Directors effective January 17,
2003. Following expiration of the initial term,
Mr. Akersons employment was governed by the terms of
the employment agreement until one party provided 60 days
prior written notice to the other of a termination of
employment, or Mr. Akersons employment otherwise
terminates pursuant to the terms of the agreement. The agreement
provided for an annual base salary of $500,000, 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 2002, he elected not to receive a bonus. In April
2002, Mr. Akerson elected to receive his salary again.

Pursuant to the agreement, we granted
Mr. Akerson options to purchase 6,000,000 shares of our
pre-bankruptcy class A common stock. All of the options granted
to Mr. Akerson and all shares of class A common stock
issued or issuable upon exercise thereof, were cancelled and
terminated effective January 16, 2003, the date that XO
Parents Plan of Reorganization was consummated.

Employee Retention and Incentive Plan.In connection with our Plan of
Reorganization, we established the XO Communications, Inc.
Employee Retention and Incentive Plan, which we refer to as the
Retention and Incentive Plan. The Retention and Incentive Plan
became effective on October 23, 2002 with the Bankruptcy
Courts approval. The primary purposes of the Retention and
Incentive Plan (a) was to encourage certain of our key
employees (including the Named Executive Officers) to continue
their employment with us during the period of our restructuring
and (b) is to establish incentives for those employees to
achieve certain corporate performance goals, including the
completion of XO Parents Chapter 11 reorganization
and achieving certain earnings objectives.

The Retention and Incentive Plan provides that
bonuses, in amounts for each employee as determined by the
compensation committee of our board of directors, will be earned
and paid in three installments

62



---



##### 



upon our successful emergence from bankruptcy and
upon the achievement of certain earnings targets after such
emergence as follows:




| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Twenty-five percent (25%) of each
    participants bonus target was paid concurrent with the
    consummation of the Plan of Reorganization, which bonuses were
    paid to all eligible participants;                                                                
|
| |  | Up to 37.5% of each participants bonus
    target will be paid as soon as practical following the date that
    we file with the SEC our quarterly report on Form 10-Q for
    the quarter ended June 30, 2003, which we refer to as the
    First Bonus; and         
|
| |  | Up to an additional 37.5% of each
    participants bonus target will be paid as soon as
    practical following the date that we file with the SEC our
    annual report on Form 10-K for the year ended
    December 31, 2003, which we refer to as the Second Bonus.

The amount of a participants First Bonus
and Second Bonus will be based on our EBITDA (as defined below)
reported on, and continued employment until, the respective
dates that we file the applicable quarterly and annual reports
with the SEC. If our EBITDA is less than 75% of the Target
EBITDA (as defined below) for the applicable period, then the
amount of the First Bonus and/or Second Bonus, as applicable,
shall be zero and no bonuses shall be paid with respect to such
date(s). If our EBITDA is 75% to 100% of the Target EBITDA for
the applicable period, then the amount of the First Bonus and/or
Second Bonus, as applicable, shall be 75% of the applicable
bonus target. If our EBITDA is greater than 100% of the Target
EBITDA for the applicable period, then 100% the applicable bonus
target shall be paid with respect to such date(s).

For purposes of the Retention and Incentive Plan,
EBITDA generally means, for the applicable 6-month
period, subject to further definition in the Retention and
Incentive Plan, an amount determined for us on a consolidated
basis equal to (i) the sum of the amounts for such period
of (a) consolidated net income, (b) consolidated
interest expense, (c) provisions for taxes, (d) total
depreciation expense, (e) total amortization expense, and
(f) other non-cash items reducing consolidated net income,
minus (ii) other non-cash items increasing consolidated net
income; provided, however that, when calculating EBITDA for
purposes of the Retention and Incentive Plan, earnings shall not
be reduced by any payment made pursuant to the Retention and
Incentive Plan.

For purposes of the Retention and Incentive Plan,
Target EBITDA means, with respect to the First
Bonus, $14.3 million, and, with respect to the Second
Bonus, $27.1 million.

The maximum amount available under the Retention
and Incentive Plan for all Retention Bonuses is $25,000,000.

The plan administrator for the Retention and
Incentive Plan is authorized to reduce on a pro-rata basis or
eliminate a bonus for any participant whose employment with us
is terminated for any reason prior to the applicable target
dates.

The table below sets forth the maximum amounts
that may be earned under the Retention and Incentive Plan by the
Named Executive Officers. Mr. Salemme is not eligible to
participate in the Retention and Incentive Plan.

|                   |  |              |         |    
|------------------ |  | ------------ | ------- | ---
|Name               |  | Dollar Value
|                   |  |             
|Daniel F. Akerson  |  | $            | 750,000 | (1)
|Nathaniel A. Davis |  | $            | 562,500 | (2)
|R. Gerard Salemme  |  |              | N/A     |    
|Michael S. Ruley   |  | $            | 343,750 | (2)
|Nancy Gofus        |  | $            | 343,750 | (2)



---

|    |                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Pursuant to the terms of the Retention and
    Incentive Plan, this amount was paid in full in connection with
    our emergence from bankruptcy on January 16, 2003.                                                                                                                                                                                                             
|   
|(2) | Pursuant to the terms of the Retention and
    Incentive Plan, 25% of these amounts were paid in connection
    with our emergence from bankruptcy on January 16, 2003. The
    remaining 75% of these amounts are subject to forfeiture in
    connection with the terms of the Retention and Incentive Plan
    related to the First Bonus and the Second Bonus described above.

63



---



##### 



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, the XO Communications, Inc 2002 Stock Incentive
Plan provides that in certain circumstances unvested stock
options granted under the Stock Incentive Plan will vest in full
in connection with a change of control of XO. Under the Stock
Incentive 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 by us without cause or by such an
officer for good reason, within one year of the change of
control will vest in full. Under the Stock Incentive 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;                                     
|
| |  | we sell all or substantially all of our assets to
    any other company;                                                                                                                     
|
| |  | 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); and
|
| |  | similar transactions or events.                                                                                                                                                              

Because the Stock Incentive Plan took effect in
connection with the consummation of our Plan of Reorganization,
the transactions contemplated thereby were not deemed a change
of control for purposes of the Stock Incentive Plan.

Under the Stock Incentive 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.                 

Director
Compensation

Each director is entitled to reimbursement for
out-of-pocket expenses incurred for each meeting of the full
Board or a committee of the Board attended. Our pre-petition
stock option plans permitted, and our 2002 Stock Incentive Plan
permits, grants and awards to non-employee directors. We made no
such grants in 2002.

Compensation
Committee Interlocks and Insider Participation

During 2002, Messrs. Jeffrey S. Raikes,
Peter C. Waal and Dennis M. Weibling served on the Compensation
Committee of our Board of Directors. From September 1994 to
January 1997, Mr. Weibling was Executive Vice President of
XO. Effective January 16, 2003, each of
Messrs. Raikes, Waal and Weibling resigned from our Board
of Directors and all committees thereof.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The following table sets forth information, as of
March 1, 2003, with respect to the beneficial ownership of
our New Common Stock by (1) each member of the Board of
Directors, (2) the Named

64



---



##### 



Executive Officers (3) all directors and
executive officers as a group, and (4) persons known to us
to be the beneficial owners of more than five percent of a class
of our New Common Stock.


|                                                                     |  |                           |            |            |  |  |      | 
|-------------------------------------------------------------------- |  | ------------------------- | ---------- | ---------- |  |  | ---- | 
|                                                                     |  |                          
|                                                                     |  | Shares Beneficially Owned
|                                                                     |  |                          
|                                                                     |  | Amount and Nature         |            | Percent of
|Name                                                                 |  | of Ownership (1)          |            | Class (%) 
|                                                                     |  |                           |            |           
|Carl Icahn (2)                                                       |  |                           | 85,583,827 |            |  |  | 83.5 | 
|Nathaniel A. Davis (3)                                               |  |                           | 325,000    |            |  |  | *    | 
|Andrew R. Cohen                                                      |  |                           | 0          |            |  |  |     | 
|Adam Dell                                                            |  |                           | 0          |            |  |  |     | 
|Vincent J. Intrieri                                                  |  |                           | 0          |            |  |  |     | 
|Keith Meister                                                        |  |                           | 0          |            |  |  |     | 
|R. Gerard Salemme (4)                                                |  |                           | 81,250     |            |  |  | *    | 
|Michael S. Ruley (5)                                                 |  |                           | 112,500    |            |  |  | *    | 
|Nancy Gofus (6)                                                      |  |                           | 97,500     |            |  |  | *    | 
|All directors and executive officers as a group
    (13 persons) (7) |  |                           | 86,613,827 |            |  |  | 83.7 | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, 2003. Accordingly, more
    than one person may be deemed to be a beneficial owner of the
    same securities. Unless otherwise indicated by footnote, the
    named individuals have sole voting and investment power with
    respect to the shares of our common stock beneficially owned.
    Share figures do not represent any right to participate in the
    Rights Offering pursuant to the Plan of Reorganization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | As reported in the Schedule 13D of
    Mr. Icahn and other parties to a joint filing agreement
    filed with the SEC, represents 78,078,993 shares of New Common
    Stock held by Cardiff Holding LLC, a Delaware limited liability
    company, and 3,001,936 shares of New Common Stock issuable upon
    exercise of Series A warrants, 2,251,449 shares of New
    Common Stock issuable upon exercise of Series B warrants,
    and 2,251,449 shares of New Common Stock issuable upon exercise
    of Series C warrants, all held by Cardiff. Cardiff is
    wholly-owned by ACF Industries Holding Corp., a Delaware
    corporation, which is wholly-owned by Highcrest Investors Corp.,
    a Delaware corporation, which is approximately 99% owned by
    Buffalo Investors Corp., a New York corporation, which is
    wholly-owned by Starfire Holding Corporation, a Delaware
    corporation, which is wholly-owned by Mr. Icahn.
    Mr. Icahn is the chairman and sole director of Starfire
    Holding, and the chairman and a director of each of Cardiff, ACF
    Industries, Highcrest Investors and Buffalo Investors.
    Additional shares of New Common Stock and warrants to purchase
    shares of New Common Stock may be allocated to Cardiff on a pro
    rata basis under the Plan of Reorganization to the extent that
    shares and warrants held back in respect of claims of general
    unsecured creditors of XO Parent ultimately are redistributed
    under the terms of the Plan of Reorganization.
|   
|(3) | Represents shares of New Common Stock obtainable
    as of March 1, 2003 or 60 days thereafter by
    Mr. Davis upon the exercise of nonqualified stock options,
    which options were granted to Mr. Davis in conjunction with
    consummation of XO Parents Plan of Reorganization and its
    emergence from its Chapter 11 proceeding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | Represents shares of New Common Stock obtainable
    as of March 1, 2003 or 60 days thereafter by
    Mr. Salemme upon the exercise of nonqualified stock
    options, which options were granted to Mr. Salemme in
    conjunction with consummation of XO Parents Plan of
    Reorganization and its emergence from its Chapter 11
    proceeding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(5) | Represents shares of New Common Stock obtainable
    as of March 1, 2003 or 60 days thereafter by
    Mr. Ruley upon the exercise of nonqualified stock options,
    which options were granted to Mr. Ruley in conjunction with
    consummation of XO Parents Plan of Reorganization and its
    emergence from its Chapter 11 proceeding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(6) | Represents shares of New Common Stock obtainable
    as of March 1, 2003 or 60 days thereafter by
    Ms. Gofus upon the exercise of nonqualified stock options,
    which options were granted to Ms. Gofus in conjunction with
    consummation of XO Parents Plan of Reorganization and its
    emergence from its Chapter 11 proceeding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(7) | Represents (a) 78,078,993 shares of New
    Common Stock held by Cardiff, as described in note 2 above,
    (b) warrants to purchase 7,504,834 shares of New Common
    Stock held by Cardiff, as described in note 2 above, and (c)
    1,030,000 shares of New Common Stock obtainable as of
    March 1, 2003 or 60 days thereafter by executive officers
    as a group upon the exercise of nonqualified stock options,
    which options were granted to such executive officers in
    conjunction with consummation of XO Parents Plan of
    Reorganization and its emergence from its Chapter 11
    proceeding. See notes (3), (4), (5) and (6) above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|*   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Equity Compensation Plan Information

Our
Pre-Petition Stock Option Plans

As of December 31, 2002, options to purchase
securities had been issued and were outstanding under the
following equity compensation plans: XO Communications, Inc.
Stock Option Plan; and the following stock options plans assumed
in connection with the acquisition of Concentric Network
Corporation: Delta Internet Services, Inc. 1996 Stock Option
Plan; Concentric Network Corporation 1995 Stock Incentive

65



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##### 



Plan for Employees and Consultants; Concentric
Network Corporation 1996 Stock Plan; Concentric Network
Corporation 1997 Stock Plan; Concentric Network Corporation 1999
Nonstatutory Stock Option Plan; and certain grants of stock
options to Concentric employees not pursuant to any plan.
Pursuant to our Plan of Reorganization, which became effective
as of January 16, 2003, interests in each such plan, and
rights to securities to be issued upon the exercise of options
outstanding under each such plan, were terminated and cancelled,
and holders of such interests and options under each such plan
were not entitled to any distribution pursuant to the Plan of
Reorganization. The table below presents information with
respect to the above referenced plans as of December 31,
2002.


Equity Compensation Plan Information

|                                                               |       |                         |            |                         |  |                           |      |      |  |  |            |            | 
|-------------------------------------------------------------- | ----- | ----------------------- | ---------- | ----------------------- |  | ------------------------- | ---- | ---- |  |  | ---------- | ---------- | 
|                                                               |       | Number of securities to |            | Weighted-average        |  | Number of securities     
|                                                               |       | be issued upon exercise |            | exercise price of       |  | remaining available for  
|                                                               |       | of outstanding options, |            | outstanding options,    |  | future issuance under    
|Plan category                                                  |       | warrants and rights(1)  |            | warrants and rights (1) |  | equity compensation plans
|                                                               |       |                         |            |                         |  |                          
|Equity compensation plans approved by security
    holders     |       |                         | 41,567,555 |                         |  | $                         | 6.78 |      |  |  | 43,894,303 |           
|Equity compensation plans not approved by
    security holders |       |                         | 0          |                         |  |                           | N/ A |      |  |  | 0          |           
|                                                               |       |                         |            |                         |  |                           |      |      |  |  |            |           
|                                                               | Total |                         |            | 41,567,555              |  |                           | $    | 6.78 |  |  |            | 43,894,303 | 
|                                                               |       |                         |            |                         |  |                           |      |      |  |  |            |           



---

|    |                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes options to purchase 2,630,417 shares of
    our pre-petition class A common stock granted prior to our
    June 16, 2000 acquisition of Concentric Network Corporation
    pursuant to various stock option plans of Concentric, which
    options we assumed in connection with the Concentric acquisition
    and have a weighted average exercise price of $16.68 per share.

Our
2002 Stock Incentive Plan Under Our Plan of
Reorganization

In connection with the confirmation of our Plan
of Reorganization by the Bankruptcy Court, the Bankruptcy Court
approved the adoption of the XO Communications, Inc. 2002 Stock
Incentive Plan, or the 2002 Stock Incentive Plan, which became
effective as of January 16, 2003, the date that we
consummated our Plan of Reorganization. Under the 2002 Stock
Incentive Plan, we are authorized to issue, in the aggregate,
stock awards with respect of up to 17,590,020 of shares of New
Common Stock, in the form of options to purchase stock or
restricted stock. Of those shares, non-qualified options to
purchase 11,492,900 shares of New Common Stock have been granted
and are outstanding as of March 1, 2003 pursuant to the
2002 Stock Incentive Plan, each at a purchase price of $5.00 per
share. With respect to the underlying shares of these options,
25% are fully vested and the remainder vest over a period of
three years.

The primary purpose of the 2002 Stock Incentive
Plan is to provide a means through which we may continue to
attract, motivate and retain selected employees, officers and
independent contractors who can materially contribute to our
growth and success, and to encourage stock ownership in us
through granting incentive stock options or nonqualified stock
options, or both, to purchase our common stock or shares of
restricted stock.

The 2002 Stock Incentive Plan is administered by
the Compensation Committee of our Board of Directors, and as
such has the discretionary authority to determine all matters
relating to awards of stock options and restricted stock,
including the selection of eligible participants, the number of
shares of common stock to be subject to each option or
restricted stock award, the exercise price of each option,
vesting, and all other terms and conditions of awards.

Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i) ten
years after the date of grant, (ii) twelve months after
termination of employment with XO due to death or complete and
permanent disability, (iii) immediately upon termination of
employment by us for Cause (as defined in the Stock Incentive
Plan), or (iv) three months after termination of employment
by the employee or by us for other than Cause.

66



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##### 



The Compensation Committee may award shares of
restricted stock and may establish terms, conditions and
restrictions applicable thereto. Subject to the restrictions on
restricted stock, award recipients generally will have all the
rights and privileges of a stockholder, including the right to
vote such restricted stock. Restricted stock generally is
subject to restrictions related to transferability and
forfeiture until vested at the expiration of the restricted
period

Upon a merger, consolidation, acquisition of
property or stock, separation, reorganization or liquidation of
us as a result of which our stockholders receive cash, stock or
other property in exchange for or in connection with their
shares of common stock, any award granted under the 2002 Stock
Incentive Plan will terminate, and, in the case of options, the
recipients shall have the right immediately prior to any such
event to exercise their vested options. In the event that our
stockholders receive capital stock of another corporation in
exchange for their shares of common stock in any transaction
involving a merger, consolidation, acquisition of property or
stock, separation or reorganization, unless otherwise determined
by us, all awards granted under the 2002 Stock Incentive Plan
shall be converted into awards with respect to shares of such
exchange stock.

Unless otherwise expressly determined by a
resolution of our Board of Directors on the date of grant or
such later date when the Board of Directors may ratify the
award, (i) awards granted to non-affiliated directors will
vest in full immediately upon the occurrence of a change in
control, as defined in the 2002 Stock Incentive Plan, or
(ii) awards granted to employees whose employment is
terminated by us without Cause, and awards granted to certain
officers whose employment is terminated by us without Cause or
by the officer for Good Reason (as defined in the 2002 Stock
Incentive Plan), will vest in full if such termination occurs
within one year following such change in control. In all other
cases, in the event of a change in control, unless otherwise
determined by the Board prior to the occurrence of such change
in control, any unvested awards shall not become fully vested
merely by the occurrence of such change in control. Because the
Stock Incentive Plan took effect in connection with the
consummation of our Plan of Reorganization, the transactions
contemplated thereby were not deemed a change of control for
purposes of the Stock Incentive Plan.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Carl C. Icahn.In
February 2003, Dixon Properties, LLC, which is owned and
controlled by Mr. Icahn, acquired ownership of the building
in which our headquarters is located in a transaction that was
approved by the Bankruptcy Court in our Chapter 11
proceedings. We currently are leasing approximately 170,000
square feet of space in that building. In connection with the
purchase of the building by Dixon Properties, it assumed the
lease agreement under which we lease the space we occupy.
Pursuant to the lease agreement, we are obligated to pay Dixon
Properties lease payments of approximately $20.4 million in
the aggregate (excluding certain building-related expenses)
through the expiration of the initial term of the lease, which
runs through November 30, 2007.

We have entered into a Tax Allocation Agreement,
dated January 16, 2003, between XO Parent and Starfire
Holding Corporation, a company controlled by Mr. Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
our Chapter 11 proceedings, establishes the methodology for
the calculation and payment of income taxes in connection with
the consolidation of us with Starfire for income tax purposes.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes us, and we will make payments
to Starfire in an amount equal to the tax liability, if any,
that we would have if we were to file as a consolidated group
separate and apart from Starfire.

Mr. Icahn, through various entities that he
owns and controls, has the right to require us to register,
under the Securities Act of 1933, shares of New Common Stock
held by such entities and to include shares of New Common Stock
held by them in certain registration statements filed by us,
pursuant to a

67



---



##### 



Registration Rights Agreement approved by the
Bankruptcy Court in connection with our Chapter 11
proceedings.


Arnos Corp., which is owned and controlled by
Mr. Icahn, holds approximately 85% of the $500 million
in loans outstanding under the New Credit Agreement. Under the
New Credit Agreement, no cash interest payments are required to
be made by us until we achieve specified financial targets.

We provide communications services to affiliates
of Mr. Icahn. Billings through February 28, 2003 for
such services were less than $50,000.

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

Pre-Petition Stockholders.Prior to the Effective Date of our
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little & Co. had a significant equity
interest in us and had designated certain individuals to serve
as members of our board of directors. Such investment funds and
other entities affiliated with Forstmann Little & Co.
currently hold a significant equity interest in McLeodUSA
Incorporated. McLeod provides interconnection and facilities
based telecommunications services to us, for which we paid
McLeodUSA approximately $2.0 million in 2002. In 2002, we
provided limited telecommunications services to McLeodUSA, for
which we received approximately $373,000 in 2002.



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

The term disclosure controls and procedures is
defined in Rules 13a-14(c) and 15d-14(c) of the Securities
Exchange Act of 1934. These rules refer to the controls and
other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports
that it files under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Our
principal executive officer and our principal financial officer
have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of
this quarterly report which we refer to as the Evaluation Date,
and they have concluded that, as of the Evaluation Date, such
controls and procedures were effective at ensuring that required
information was disclosed on a timely basis in our reports filed
under the Exchange Act.

Changes in Internal Controls

We maintain a system of internal accounting
controls that are designed to provide reasonable assurance that
our books and records accurately reflect our transactions and
that our established policies and procedures are followed. For
the quarter ended December 31, 2002, there were no
significant changes to our internal controls or in other factors
that could significantly affect our internal controls.

68



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##### 



PART IV

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

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

|                                                                                                                                   |  |    
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---
|XO Communications, Inc.                                                                                                            |  |    
|Report of Ernst & Young LLP, Independent
    Auditors                                                                              |  | F-1
|Report of Independent Public Accountants                                                                                           |  | F-2
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001 and Pro Forma Unaudited Balance
    Sheet as of December 31, 2002 |  | F-3
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000                                     |  | F-4
|Consolidated Statement of Stockholders
    Equity (Deficit) for the Years Ended December 31, 2002,
    2001 and 2000              |  | F-5
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000                                     |  | F-6
|Notes to Consolidated Financial Statements                                                                                         |  | F-7
|Schedule II  Consolidated
    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
    October 15, 2002, reporting under Item 5 that, on
    October 14, 2002, XO Parent announced that it has agreed
    with Telefonos de Mexico, S.A. de C.V. and certain investment
    partnerships affiliated with Forstmann Little & Co. to
    mutually terminate the previously announced Investment Agreement
    among the parties and to settle any potential claims relating to
    the Investment Agreement or its termination.
|
| | (2) | Current Report on Form 8-K, filed on
    November 22, 2002, reporting under Item 3 that, on
    November 15, 2002, Judge Arthur J. Gonzalez of the United
    States Bankruptcy Court for the Southern District of New York
    entered an order confirming the Stand-Alone Plan
    contemplated by the Plan of Reorganization of XO Parent.                                                                                                                                
|
| | (3) | Current Report on Form 8-K/ A, filed on
    November 26, 2002, amending under Item 3 certain
    information included in the Current Report on Form 8-K,
    filed on November 22, 2002, discussed above.                                                                                                                                                                                                                                                                      

69



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##### 



SIGNATURES

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



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

Date: March 21, 2003

| |     |                       
| | --- | ----------------------
| | By: | /s/ NATHANIEL A. DAVIS

| |                                                                                      
| | -------------------------------------------------------------------------------------
| |                                                                                      
| | Nathaniel
    A. Davis 
                    President
    and Chief Operating Officer
| | (Principal
    Executive Officer)                                                    

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on
March 21, 2003 by the following persons on behalf of the
Registrant and in the capacities indicated:

|                                           |  |                                                                                                                  
|------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------
|Name                                       |  | Title                                                                                                            
|                                           |  |                                                                                                                  
|/s/ NATHANIEL A. DAVISNathaniel A. Davis   |  | President and Chief Operating Officer (Principal
    Executive Officer)                                          
|                                          
|/s/ WAYNE M. REHBERGERWayne M. Rehberger   |  | Senior Vice President, Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)
|                                          
|/s/ CARL C. ICAHNCarl C. Icahn             |  | Chairman of the Board of Directors                                                                               
|                                          
|/s/ ANDREW R. COHENAndrew R. Cohen         |  | Director                                                                                                         
|                                          
|/s/ ADAM DELLAdam Dell                     |  | Director                                                                                                         
|                                          
|/s/ VINCENT J. INTRIERIVincent J. Intrieri |  | Director                                                                                                         
|                                          
|/s/ KEITH MEISTERKeith Meister             |  | Director                                                                                                         

70



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##### 



CERTIFICATIONS

I, Nathaniel A. Davis, certify that:

1. I have reviewed this annual report on
Form 10-K of XO Communications, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weakness in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                  

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 21, 2003

| |                                                               
| | --------------------------------------------------------------
| | /s/ NATHANIEL A. DAVIS                                        
| |                                                               
| | Nathaniel A. Davis 
     President and Chief Operating Officer
| | (Principal Executive Officer)                                 

71



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##### 



CERTIFICATIONS

I, Wayne M. Rehberger, certify that:

1. I have reviewed this annual report on
Form 10-K of XO Communications, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make statements made, in
light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weakness in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                  

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: March 21, 2003

| |                                                   
| | --------------------------------------------------
| | /s/ WAYNE M. REHBERGER                            
| |                                                   
| | Wayne M. Rehberger 
     Senior Vice President and
| | Chief Financial Officer                           
| | (Principal Financial Officer)                     

72



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##### 



EXHIBIT INDEX

| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                       
| | ------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1    |  |  | Third Amended Plan of Reorganization of XO
    Communications, Inc., dated July 22, 2002 (Incorporated
    herein by reference to exhibit 2.1 filed with the Current Report
    on Form 8-K/ A of XO Communications, Inc., filed on
    November 26, 2002)                                                                                                                            
| | 2.2    |  |  | Plan Supplement, dated October 23, 3003, to
    the Third Amended Plan of Reorganization of XO Communications,
    Inc., dated July 22, 2002 (Incorporated herein by reference
    to exhibit 2.2 filed with the Current Report on Form 8-K/ A
    of XO Communications, Inc., filed on November 26, 2002)                                                                            
| | 2.3    |  |  | Order Confirming Third Amended Plan of
    Reorganization, dated November 15, 2002 (Incorporated
    herein by reference to exhibit 99.1 filed with the Current
    Report on Form 8-K/ A of XO Communications, Inc., filed on
    November 26, 2002)                                                                                                                                 
| | 3.1    |  |  | Amended and Restated Certificate of Incorporation
    of XO Communications, Inc. (Incorporated herein by reference to
    exhibit 3.1 filed with the Registration Statement on
    Form 8-A of XO Communications, Inc., filed on
    February 7, 2003, pursuant to the Securities and Exchange
    Act)                                                                               
| | 3.2    |  |  | Amended and Restated By-laws of XO
    Communications, Inc. (Incorporated herein by reference to
    exhibit 3.2 filed with the Registration Statement on
    Form 8-A of XO Communications, Inc., filed on
    February 7, 2003, pursuant to the Securities and Exchange
    Act)                                                                                                    
| | 4.1    |  |  | Form of stock certificate of New Common Stock                                                                                                                                                                                                                                                                                                                                         
| | 4.2.1  |  |  | Series A Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications, Inc.
    and American Stock Transfer & Trust Company (Incorporated
    herein by reference to exhibit 10.1 filed with the Current
    Report on Form 8-K of XO Communications, Inc., filed on
    January 30, 2003)                                                                   
| | 4.2.2  |  |  | Series B Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications, Inc.
    and American Stock Transfer & Trust Company (Incorporated
    herein by reference to exhibit 10.2 filed with the Current
    Report on Form 8-K of XO Communications, Inc., filed on
    January 30, 2003)                                                                   
| | 4.2.3  |  |  | Series C Warrant Agreement, dated as of
    January 16, 2003, by and between XO Communications, Inc.
    and American Stock Transfer & Trust Company (Incorporated
    herein by reference to exhibit 10.3 filed with the Current
    Report on Form 8-K of XO Communications, Inc., filed on
    January 30, 2003)                                                                   
| | 10.1.1 |  |  | XO Communications, Inc. 2002 Stock Incentive Plan                                                                                                                                                                                                                                                                                                                                     
| | 10.1.2 |  |  | XO Communications, Inc. Retention Bonus and
    Incentive Plan                                                                                                                                                                                                                                                                                                                        
| | 10.2.1 |  |  | Registration Rights Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and High
    River Limited Partnership and Meadow Walk Limited Partnership
    (Incorporated herein by reference to exhibit 10.4 filed with the
    Current Report on Form 8-K of XO Communications, Inc.,
    filed on January 30, 2003)                                            
| | 10.2.2 |  |  | Tax Allocation Agreement, dated as of
    January 16, 2003, between XO Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit 10.5 filed with the Current Report on Form 8-K
    of XO Communications, Inc., filed on January 30, 2003)                                                                                           
| | 10.3.1 |  |  | Employment Agreement, dated as of January 3,
    2000, by and between Nathaniel A. Davis and NEXTLINK
    Communications, Inc. (predecessor to XO Communications, Inc.)
    (Incorporated herein by reference to exhibit 10.11 filed with
    the Annual Report on Form 10-K for the year ended
    December 31, 1999 of NEXTLINK Communications, Inc. and
    NEXTLINK Capital, Inc.)
| | 10.3.2 |  |  | Letter agreement, dated December 17, 2002,
    by and among Communications Consultants, Inc., XO
    Communications, Inc., Eagle River Investments, L.L.C. and R.
    Gerard Salemme                                                                                                                                                                                                  

73



---



##### 



| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                          
| | ------ |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.3.3 |  |  | Employment Agreement, dated as of
    January 13, 2000, by and between Michael S. Ruley and XO
    Communications, Inc. (Incorporated herein by reference to
    exhibit 10.3.3 filed with the Annual Report on Form 10-K
    for the year ended December 31, 2001 of XO Communications,
    Inc.)                                                                                       
| | 10.4.1 |  |  | Cost Sharing and IRU Agreement, dated
    July 18, 1998, between Level 3 Communications, LLC and XO
    Intercity Holdings No. 2, LLC (f/k/a INTERNEXT LLC)
    (Incorporated herein by reference to exhibit 10.8 filed with the
    quarterly report on Form 10-Q for the quarterly period
    ended September 30, 1998 of NEXTLINK Communications, Inc.
    and NEXTLINK Capital, Inc.)
| | 10.4.2 |  |  | Master Agreement, dated August 8, 2002,
    between Level 3 Communications, Inc. and XO Communications, Inc.                                                                                                                                                                                                                                                                             
| | 10.5   |  |  | Amended and Restated Credit and Guaranty
    Agreement, dated as of January 16, 2003, among XO
    Communications, Inc., certain subsidiaries of XO Communications,
    Inc., the Lenders party thereto from time to time, and Mizuho
    Corporate Bank, as Administrative Agent                                                                                                        
| | 16     |  |  | Letter from Arthur Andersen LLP to the Securities
    and Exchange Commission, dated May 15, 2002 (Incorporated
    herein by reference to exhibit 16 filed with the Current Report
    on Form 8-K of XO Communications Inc. filed on May 16,
    2002)                                                                                                                                 
| | 21     |  |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                           
| | 23.1   |  |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                                                                                                                                             
| | 23.2   |  |  | Notice Regarding Lack of Consent of Arthur
    Andersen                                                                                                                                                                                                                                                                                                                                  
| | 99.1   |  |  | Certificate pursuant to 18 U.S.C.
    Section 1350 as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                              
| | 99.2   |  |  | Certificate pursuant to 18 U.S.C.
    Section 1350 as Adopted Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                              

74



---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

To the Board of Directors of XO Communications,
Inc.:

We have audited the accompanying consolidated
balance sheet of XO Communications, Inc. (the
Company) as of December 31, 2002, and the
related consolidated statements of operations,
stockholders equity (deficit) and cash flows for the year
then ended. Our audit also included the financial statement
schedule listed in the Index at item 15(a). These financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit. The consolidated financial statements and schedule of the
Company for each of the two years in the period ended
December 31, 2001, were audited by other auditors who have
ceased operations, and whose report dated February 6, 2002,
expressed an unqualified opinion on those consolidated financial
statements and schedules before the restatement adjustments
described in Note 5 and included an explanatory paragraph
that discussed the substantial doubt about the Companys
ability to continue as a going concern.

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

In our opinion, the 2002 financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of XO Communications, Inc. at
December 31, 2002, and the consolidated results of its
operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

As discussed in Note 5 to the consolidated
financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets.

As discussed in Note 1 to the consolidated
financial statements, effective January 16, 2003, the
Company was reorganized under a plan of reorganization confirmed
by the United States Bankruptcy Court for the Southern District
of New York. In connection with its reorganization, the Company
will apply fresh start accounting in the first quarter of 2003.

As discussed above, the financial statements of
XO Communications, Inc. for the years ended December 31,
2001 and 2000 were audited by other auditors who have ceased
operations. As described in Note 5, these financial statements
have been revised to include the transitional disclosures
required by Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of January 1, 2002. Our
audit procedures with respect to the disclosures in Note 5 with
respect to 2001 and 2000 included (a) agreeing the
previously reported net loss to the previously issued financial
statements and the adjustments to reported net loss representing
amortization expense recognized in those periods related to
goodwill and intangible assets that are no longer being
amortized to the Companys underlying records obtained from
management, and (b) testing the mathematical accuracy of
the reconciliation of adjusted net loss to reported net loss,
and the related loss-per-share amounts. In our opinion, the
disclosures for 2001 and 2000 in Note 5 are appropriate.
However, we were not engaged to audit, review, or apply any
procedures to the 2001 or 2000 financial statements of the
Company other than with respect to such disclosures and,
accordingly, we do not express an opinion or any form of
assurance on the 2001 or 2000 financial statements taken as a
whole.

/s/ ERNST & YOUNG LLP

Baltimore, Maryland 
 February 28, 2003

F-1



---



##### 



The following report is a copy of a report
previously issued by Arthur Andersen LLP (Andersen),
whose report has not been reissued by Andersen. Certain
financial information for each of the two years in the period
ended December 31, 2001, was not reviewed by Andersen and
includes additional disclosures to conform with new accounting
pronouncements and SEC rules and regulations issued during such
fiscal year, see Item 1, Business, for discussion of
risks.

REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Stockholders of XO Communications, Inc.:

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

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

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

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

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

/s/ ARTHUR ANDERSEN LLP

Vienna, VA

February 6, 2002

F-2



---



##### 



XO Communications, Inc.



Consolidated Balance Sheets


(Dollars in thousands, except for per share
data)


|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |            |           | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------- | ------------ | --------- | ---- | --------- | ---------- | ---------- | - | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Pro forma                                                |         |              |           |     
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Unaudited                                                |         |              |           |     
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Reorganized                                              |         |             
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Company                                                  |         | December 31,
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | December 31,                                             |         |             
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | 2002(a)                                                  |         | 2002         |           | 2001
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |     
|ASSETS                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|Current assets:                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                   |                                                          | $       | 314,038      |           |      | $         | 314,038    |            |   | $         | 246,189    |          
|                                                                                                                                                                                                                                                                                                                                                | Marketable securities                                                                                                                                                                                                                                                                                                                                                                       |                                                          |         | 246,945      |           |      |           | 246,945    |            |   |           | 508,978    |          
|                                                                                                                                                                                                                                                                                                                                                | Accounts receivable, net of allowance for
    doubtful accounts of $37,030 and $32,492, respectively                                                                                                                                                                                                                                                                                        |                                                          |         | 116,541      |           |      |           | 116,541    |            |   |           | 216,753    |          
|                                                                                                                                                                                                                                                                                                                                                | Other current assets                                                                                                                                                                                                                                                                                                                                                                        |                                                          |         | 32,654       |           |      |           | 83,480     |            |   |           | 101,760    |          
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total current assets                                     |         |              | 710,178   |      |           |            | 761,004    |   |           |            | 1,073,680 | 
|Property and equipment, net                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 502,176 |              |           |      | 2,780,589 |            |            |   | 3,742,577 |           
|Fixed wireless licenses, net                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 59,508  |              |           |      | 911,832   |            |            |   | 947,545   |           
|Goodwill, net                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |        |              |           |      |          |            |            |   | 1,876,626 |           
|Other intangibles, net                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 76,171  |              |           |      | 72,782    |            |            |   | 153,404   |           
|Other assets, net                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 23,108  |              |           |      | 59,289    |            |            |   | 136,633   |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total assets                                             |         | $            | 1,371,141 |      |           | $          | 4,585,496  |   |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|LIABILITIES AND STOCKHOLDERS
    (DEFICIT) EQUITY                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|Current liabilities not subject to compromise:                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                | Accounts payable                                                                                                                                                                                                                                                                                                                                                                            |                                                          | $       | 69,729       |           |      | $         | 63,729     |            |   | $         | 156,488    |          
|                                                                                                                                                                                                                                                                                                                                                | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                                         |                                                          |         | 246,048      |           |      |           | 265,889    |            |   |           | 341,094    |          
|                                                                                                                                                                                                                                                                                                                                                | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                                    |                                                          |         | 213          |           |      |           | 213        |            |   |           | 114,882    |          
|                                                                                                                                                                                                                                                                                                                                                | Long-term debt in default                                                                                                                                                                                                                                                                                                                                                                   |                                                          |         |             |           |      |           |           |            |   |           | 5,109,503  |          
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Current liabilities not subject to compromise            |         |              | 315,990   |      |           |            | 329,831    |   |           |            | 5,721,967 | 
|Current liabilities subject to compromise                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |        |              |           |      | 5,497,207 |            |            |   |          |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total current liabilities                                |         |              | 315,990   |      |           |            | 5,827,038  |   |           |            | 5,721,967 | 
|Long-term liabilities not subject to compromise                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |        |              |           |      | 75,242    |            |            |   | 129,092   |           
|Long-term liabilities subject to compromise                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |        |              |           |      | 7,182     |            |            |   |          |           
|Long-term debt                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 500,000 |              |           |      |          |            |            |   |          |           
|Other long-term liabilities                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          | 80,151  |              |           |      |          |            |            |   |          |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total liabilities                                        |         |              | 896,141   |      |           |            | 5,909,462  |   |           |            | 5,851,059 | 
|Redeemable preferred stock: par value $0.01 per
    share, 25,000,000 shares authorized: 7,856,918 and 7,857,612
    shares issued and outstanding on December 31, 2002 and
    December 31, 2001, respectively; aggregate liquidation
    preference of $1,693,293 and $1,693,328 on December 31,
    2002 and December 31, 2001, respectively |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                | Subject to compromise                                                                                                                                                                                                                                                                                                                                                                       |                                                          |         |             |           |      |           | 1,708,316  |            |   |           |           |          
|                                                                                                                                                                                                                                                                                                                                                | Not subject to compromise                                                                                                                                                                                                                                                                                                                                                                   |                                                          |         |             |           |      |           |           |            |   |           | 1,781,990  |          
|Commitments and contingencies                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|Stockholders (deficit) equity:                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                | Common stock, par value $0.02 per share, stated
    at amounts paid in Class A, 1,000,000,000 shares
    authorized: 331,033,219 and 337,774,204 shares issued and
    outstanding on December 31, 2002 and December 31,
    2001, respectively; Class B, 120,000,000 shares authorized:
    104,423,158 shares issued and outstanding on both
    December 31, 2002 and December 31, 2001. |                                                          |         | 475,000      |           |      |           | 4,628,139  |            |   |           | 4,628,509  |          
|                                                                                                                                                                                                                                                                                                                                                | Deferred compensation                                                                                                                                                                                                                                                                                                                                                                       |                                                          |         |             |           |      |           | (8,500     | )          |   |           | (37,428    | )        
|                                                                                                                                                                                                                                                                                                                                                | Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                                                      |                                                          |         |             |           |      |           | 2,512      |            |   |           | 10,406     |          
|                                                                                                                                                                                                                                                                                                                                                | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                                         |                                                          |         |             |           |      |           | (7,654,433 | )          |   |           | (4,304,071 | )        
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total stockholders (deficit) equity                     |         |              | 475,000   |      |           |            | (3,032,282 | ) |           |            | 297,416   | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             | Total liabilities and stockholders
    (deficit) equity |         | $            | 1,371,141 |      |           | $          | 4,585,496  |   |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                             |                                                          |         |              |           |      |           |            |            |   |           |           



---

|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As discussed in footnote 3, the Company emerged
    from bankruptcy on January 16, 2003 and will be required to
    adopt the fresh start accounting provisions of SOP 90-7 in the
    first quarter of 2003. The pro forma balances reflect what the
    December 31, 2002 balances would have been had the Company
    applied fresh start accounting as of December 31, 2002.

See accompanying notes to consolidated financial
statements.

F-3



---



##### 



XO Communications, Inc.



Consolidated Statements of
Operations


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


|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |         |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------ | ----------- | ------- | --------- | ---- | ----------- | --------- | --------- | - | ----------- | ------- | --------- | 
|                                                                                                                                                                      |                                                                        |                         
|                                                                                                                                                                      |                                                                        | Year Ended December 31, 
|                                                                                                                                                                      |                                                                        |                         
|                                                                                                                                                                      |                                                                        | 2002                     |             | 2001    |           | 2000
|                                                                                                                                                                      |                                                                        |                          |             |         |           |     
|Revenue                                                                                                                                                               |                                                                        | $                        | 1,259,853   |         |           | $    | 1,258,567   |           |           | $ | 723,826     |        
|Costs and expenses:                                                                                                                                                   |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|                                                                                                                                                                      | Cost of service                                                        |                          |             | 522,924 |           |      |             | 527,698   |           |   |             | 302,666 |          
|                                                                                                                                                                      | Selling, operating and general (excludes
    stock-based compensation) |                          |             | 736,925 |           |      |             | 971,714   |           |   |             | 730,604 |          
|                                                                                                                                                                      | Stock-based compensation                                               |                          |             | 28,928  |           |      |             | 37,173    |           |   |             | 48,328  |          
|                                                                                                                                                                      | Depreciation and amortization                                          |                          |             | 699,806 |           |      |             | 1,162,671 |           |   |             | 617,714 |          
|                                                                                                                                                                      | Restructuring and asset write-downs                                    |                          |             | 480,168 |           |      |             | 509,202   |           |   |             |        |          
|                                                                                                                                                                      | In-process research and development                                    |                          |             |        |           |      |             |          |           |   |             | 36,166  |          
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|                                                                                                                                                                      |                                                                        | Total costs and expenses |             |         | 2,468,751 |      |             |           | 3,208,458 |   |             |         | 1,735,478 | 
|Loss from operations                                                                                                                                                  |                                                                        |                          | (1,208,898  | )       |           |      | (1,949,891  | )         |           |   | (1,011,652  | )      
|Interest income                                                                                                                                                       |                                                                        |                          | 16,478      |         |           |      | 77,938      |           |           |   | 180,905     |        
|Interest expense, net (contractual interest was
    $501,118 for the year ended December 31, 2002)                                                                    |                                                                        |                          | (226,451    | )       |           |      | (465,401    | )         |           |   | (434,122    | )      
|Other income (loss), net                                                                                                                                              |                                                                        |                          | (200        | )       |           |      | (93,781     | )         |           |   | 163,570     |        
|Reorganization expense, net                                                                                                                                           |                                                                        |                          | (91,121     | )       |           |      |            |           |           |   |            |        
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss before extraordinary item and cumulative
    effect of accounting change                                                                                     |                                                                        |                          | (1,510,192  | )       |           |      | (2,431,135  | )         |           |   | (1,101,299  | )      
|Extraordinary gain on repurchases of debt, net                                                                                                                        |                                                                        |                          |            |         |           |      | 345,010     |           |           |   |            |        
|Cumulative effect of accounting change                                                                                                                                |                                                                        |                          | (1,876,626  | )       |           |      |            |           |           |   |            |        
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss                                                                                                                                                              |                                                                        |                          | (3,386,818  | )       |           |      | (2,086,125  | )         |           |   | (1,101,299  | )      
|Recognition of preferred stock modification fee,
    net - reorganization item                                                                                        |                                                                        |                          | 78,703      |         |           |      |            |           |           |   |            |        
|Gain on repurchases of preferred stock, net                                                                                                                           |                                                                        |                          |            |         |           |      | 376,879     |           |           |   |            |        
|Preferred stock dividends and accretion of
    preferred stock redemption obligation, net (contractual dividend
    was $98,768 for the year ended December 31, 2002) |                                                                        |                          | (42,247     | )       |           |      | (129,671    | )         |           |   | (146,356    | )      
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss applicable to common shares                                                                                                                                  |                                                                        | $                        | (3,350,362  | )       |           | $    | (1,838,917  | )         |           | $ | (1,247,655  | )      
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss per common share, basic and diluted:                                                                                                                         |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss before extraordinary item and cumulative
    effect of accounting change                                                                                     |                                                                        | $                        | (3.42       | )       |           | $    | (6.02       | )         |           | $ | (3.42       | )      
|Extraordinary gain on repurchases of debt, net                                                                                                                        |                                                                        |                          |            |         |           |      | 0.86        |           |           |   |            |        
|Cumulative effect of accounting change                                                                                                                                |                                                                        |                          | (4.24       | )       |           |      |            |           |           |   |            |        
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss                                                                                                                                                              |                                                                        |                          | (7.66       | )       |           |      | (5.16       | )         |           |   | (3.42       | )      
|Recognition of preferred stock modification fee,
    net  reorganization item                                                                                        |                                                                        |                          | 0.18        |         |           |      |            |           |           |   |            |        
|Gain on repurchases of preferred stock, net                                                                                                                           |                                                                        |                          |            |         |           |      | 0.93        |           |           |   |            |        
|Preferred stock dividends and accretion of
    preferred stock redemption obligation, net                                                                             |                                                                        |                          | (0.10       | )       |           |      | (0.32       | )         |           |   | (0.45       | )      
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Net loss per common share, basic and diluted                                                                                                                          |                                                                        | $                        | (7.58       | )       |           | $    | (4.55       | )         |           | $ | (3.87       | )      
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        
|Weighted average shares, basic and diluted                                                                                                                            |                                                                        |                          | 441,964,342 |         |           |      | 403,882,956 |           |           |   | 322,089,883 |        
|                                                                                                                                                                      |                                                                        |                          |             |         |           |      |             |           |           |   |             |        

See accompanying notes to consolidated financial
statements.

F-4



---



##### 



XO Communications, Inc.



Consolidated Statements of Stockholders
Equity (Deficit)


(Dollars in thousands)


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



---



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

See accompanying notes to consolidated financial
statements.

F-5



---



##### 



XO Communications, Inc.



Consolidated Statements of Cash
Flows


(Dollars in thousands)


|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |          |  
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------- | ---------- | --------- | - | ---- | ---------- | --------- | - | - | ----------- | -------- | -
|                                                                                              |                                                             |                        
|                                                                                              |                                                             | Year Ended December 31,
|                                                                                              |                                                             |                        
|                                                                                              |                                                             | 2002                    |            | 2001      |   | 2000
|                                                                                              |                                                             |                         |            |           |   |     
|OPERATING ACTIVITIES:                                                                         |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Net loss                                                                                      |                                                             | $                       | (3,386,818 | )         |   | $    | (2,086,125 | )         |   | $ | (1,101,299  | )       
|Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|                                                                                              | Depreciation and amortization                               |                         |            | 699,806   |   |      |            | 1,162,671 |   |   |             | 617,714  |  
|                                                                                              | Stock-based compensation                                    |                         |            | 28,928    |   |      |            | 37,173    |   |   |             | 48,328   |  
|                                                                                              | Non-cash restructuring charges and asset
    write-downs    |                         |            | 477,250   |   |      |            | 502,737   |   |   |             |         |  
|                                                                                              | Non-cash reorganization expense, net                        |                         |            | 89,448    |   |      |            |          |   |   |             |         |  
|                                                                                              | In-process research and development                         |                         |            |          |   |      |            |          |   |   |             | 36,166   |  
|                                                                                              | Net losses (gains) on impairment or sale of
    investments |                         |            |          |   |      |            | 95,804    |   |   |             | (162,429 | )
|                                                                                              | Extraordinary gain on repurchases of debt, net              |                         |            |          |   |      |            | (345,010  | ) |   |             |         |  
|                                                                                              | Cumulative effect of accounting change                      |                         |            | 1,876,626 |   |      |            |          |   |   |             |         |  
|Changes in assets and liabilities, net of effects
    from acquisitions:                      |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|                                                                                              | Accounts receivable                                         |                         |            | 85,514    |   |      |            | (43,254   | ) |   |             | (68,761  | )
|                                                                                              | Other assets                                                |                         |            | (21,572   | ) |      |            | (66,566   | ) |   |             | (42,167  | )
|                                                                                              | Other liabilities subject to compromise                     |                         |            | 195,904   |   |      |            |          |   |   |             |         |  
|                                                                                              | Other liabilities not subject to compromise                 |                         |            | (27,484   | ) |      |            | 181,693   |   |   |             | 113,034  |  
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Net cash provided by (used in) operating
    activities                                       |                                                             |                         | 17,602     |           |   |      | (560,877   | )         |   |   | (559,414    | )       
|INVESTING ACTIVITIES:                                                                         |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Purchases of property and equipment, net                                                      |                                                             |                         | (208,713   | )         |   |      | (1,433,746 | )         |   |   | (1,380,629  | )       
|Prepayment for network assets                                                                 |                                                             |                         |           |           |   |      | (120,800   | )         |   |   |            |         
|Payments to acquire fixed wireless licenses                                                   |                                                             |                         |           |           |   |      | (206       | )         |   |   | (49,502     | )       
|Net releases of pledged securities                                                            |                                                             |                         | 3,161      |           |   |      | 150        |           |   |   | 33,386      |         
|Sales of marketable securities and investments                                                |                                                             |                         | 364,069    |           |   |      | 2,912,454  |           |   |   | 19,337,905  |         
|Purchases of marketable securities                                                            |                                                             |                         | (103,935   | )         |   |      | (2,031,072 | )         |   |   | (19,381,106 | )       
|Cash received for (paid for) divestitures
    (acquisitions)                                  |                                                             |                         | 3,000      |           |   |      | (25,203    | )         |   |   | 46,940      |         
|Investments in unconsolidated entities                                                        |                                                             |                         |           |           |   |      | (10,175    | )         |   |   | (71,489     | )       
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Net cash provided by (used in) investing
    activities                                       |                                                             |                         | 57,582     |           |   |      | (708,598   | )         |   |   | (1,464,495  | )       
|FINANCING ACTIVITIES:                                                                         |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Net proceeds from issuance of redeemable
    preferred stock                                  |                                                             |                         |           |           |   |      |           |           |   |   | 1,248,901   |         
|Borrowings under senior secured credit facility                                               |                                                             |                         |           |           |   |      | 625,000    |           |   |   | 375,000     |         
|Proceeds from issuance of unsecured notes                                                     |                                                             |                         |           |           |   |      | 517,500    |           |   |   |            |         
|Net proceeds from sale of common stock and
    modification of preferred stock agreement      |                                                             |                         |           |           |   |      | 248,657    |           |   |   |            |         
|Proceeds from issuance of common stock under
    employee benefit plans                       |                                                             |                         |           |           |   |      | 30,899     |           |   |   | 98,655      |         
|Repurchases of senior notes                                                                   |                                                             |                         |           |           |   |      | (201,883   | )         |   |   |            |         
|Repurchases of redeemable preferred stock                                                     |                                                             |                         |           |           |   |      | (88,424    | )         |   |   |            |         
|Repayments of capital lease and other obligations                                             |                                                             |                         | (6,079     | )         |   |      | (44,124    | )         |   |   | (6,809      | )       
|Dividends paid on convertible preferred stock                                                 |                                                             |                         |           |           |   |      | (53,778    | )         |   |   | (49,984     | )       
|Costs incurred in connection with financing
    activities                                    |                                                             |                         |           |           |   |      | (14,200    | )         |   |   | (17,100     | )       
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Net cash (used in) provided by financing
    activities                                       |                                                             |                         | (6,079     | )         |   |      | 1,019,647  |           |   |   | 1,648,663   |         
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Effect of exchange rate changes on cash                                                       |                                                             |                         | (1,256     | )         |   |      | 3,013      |           |   |   | (213        | )       
|Net increase (decrease) in cash and cash
    equivalents                                      |                                                             |                         | 67,849     |           |   |      | (246,815   | )         |   |   | (375,459    | )       
|Cash and cash equivalents, beginning of year                                                  |                                                             |                         | 246,189    |           |   |      | 493,004    |           |   |   | 868,463     |         
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         
|Cash and cash equivalents, end of year                                                        |                                                             | $                       | 314,038    |           |   | $    | 246,189    |           |   | $ | 493,004     |         
|                                                                                              |                                                             |                         |            |           |   |      |            |           |   |   |             |         

See accompanying notes to consolidated financial
statements.

F-6



---



##### 



XO Communications, Inc.

Notes to Consolidated Financial
Statements

December 31, 2002, 2001 and
2000


1.  ORGANIZATION AND DESCRIPTION OF
BUSINESS

Overview

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

Organization

The consolidated financial statements include the
accounts and activities of XO Parent, and its subsidiaries
(collectively referred to as the Company or
XO). The consolidated financial statements also
include the results of Concentric Network Corporation
(Concentric) commencing June 16, 2000, the date
on which Concentric merged with XO. The Company, through
predecessor entities, was formed in September 1994. As of
December 31, 2002, the Company was majority controlled by
Craig O. McCaw through shares of Class A and Class B
common stock held by Eagle River Investments, LLC, an entity
controlled by Mr. McCaw, and other shares of the Companys
Class A and Class B common stock owned or controlled
by Mr. McCaw.

As further discussed in note 2, on June 17,
2002 (the Petition Date), XO Parent filed a
voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code (the Bankruptcy Code)
with the United States Bankruptcy Court for the Southern
District of New York (the Bankruptcy Court).
Accordingly, the accompanying consolidated financial statements
have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under
the Bankruptcy Code, (SOP 90-7) and on a going
concern basis which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the
ordinary course of business. In accordance with SOP 90-7, the
financial statements for the periods presented distinguish
transactions and events that are directly associated with the
reorganization from the ongoing operations of the Company. The
Company conducts its operations through direct and indirect
subsidiaries of XO Parent. None of these subsidiaries were
debtors in the Chapter 11 proceedings.

On January 16, 2003 (the Effective
Date), XO Parent emerged from the Bankruptcy Court
proceedings pursuant to the terms of its third amended plan of
reorganization (the Plan of Reorganization). As
discussed in note 3, the Company will implement fresh start
accounting under the provisions of SOP 90-7. Under the fresh
start accounting provisions of SOP 90-7, the fair value of the
reorganized Company will be allocated to its assets and
liabilities, and its accumulated deficit will be eliminated. As
discussed in the Pro Forma column on the accompanying balance
sheet and in note 3, the implementation of fresh start
accounting will result in a substantial reduction in the
carrying value of the Companys long-lived assets,
including property and equipment, fixed wireless licenses, other
intangible assets and other noncurrent assets. As a result, the
historical financial statements will not be comparable to
financial statements of the Company published for periods
following the implementation of fresh start accounting.

F-7



---



##### 



2.     REORGANIZATION

The
Chapter 11 Petition and Plan of Reorganization

On June 17, 2002, XO Parent filed for
protection under Chapter 11 of the Bankruptcy Code in the
Bankruptcy Court. On November 15, 2002, the Bankruptcy
Court confirmed XO Parents Plan of Reorganization, and, on
January 16, 2003, XO Parent consummated the Plan of
Reorganization and emerged from its Chapter 11 reorganization
proceedings with a significantly restructured balance sheet.

During the period immediately preceding and after
the filing of XO Parents Chapter 11 petition, the
Company met with a committee of lenders under the
$1.0 billion secured credit facility (the
Pre-Petition Credit Facility), an informal committee
of unsecured creditors that represented holders of our senior
unsecured notes (and following the filing of the Chapter 11
petition, the official committee of unsecured creditors
appointed in the Chapter 11 proceedings) and potential
investors to discuss potential restructuring transactions that
could be implemented to reorganize XO Parents capital
structure. These discussions led to an agreement with the
lenders under the Pre-Petition Credit Facility regarding the
terms of a Plan of Reorganization that envisioned two potential
reorganization structures the first of which was based on, among
other things, a proposed cash investment in XO Parent by third
parties, which was ultimately abandoned, and the second of which
contemplated a stand alone restructuring with no new cash
infusion committed in advance. The Plan of Reorganization was
filed on July 22, 2002 and distributed to creditors of XO
Parent eligible to vote in the reorganization.

On August 21, 2002, High River Limited
Partnership, a limited partnership controlled by Mr. Carl
Icahn (High River), commenced an offer to purchase
loans under the companys Pre-Petition Credit Facility at a
purchase price of $0.50 for each $1.00 in principal amount
thereof. Purchases made under this offer, together with the
loans under the Pre-Petition Credit Facility that High River
previously had acquired, resulted in High River holding
approximately 85% of the loans outstanding under the
Pre-Petition Credit Facility.

The consummation of the Plan of Reorganization
resulted in the $1.0 billion of loans under the Pre-Petition
Credit Facility being converted into the following:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 90.25 million shares of common stock, par
    value $0.01 per share, of reorganized XO Parent (New
    Common Stock); and                           
|
| |  | $500 million of outstanding principal amount
    of loans under a restructured secured credit and guaranty
    agreement (the New Credit Agreement).

The Plan of Reorganization also resulted in the
cancellation of all of XO Parents pre-bankruptcy senior
notes and pre-bankruptcy general unsecured claims in exchange
for the following:



| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4.75 million shares of New Common Stock;                                                                                                                                                                                                                                                                       
|
| |  | warrants to purchase shares up to an additional
    23.75 million shares of New Common Stock described below;                                                                                                                                                                                                  
|
| |  | rights to purchase shares of New Common Stock in
    the rights offering described below; and                                                                                                                                                                                                                  
|
| |  | a portion of the cash consideration received by
    XO Parent in connection with the settlement and termination of
    the proposed investment transaction that was the basis for the
    first restructuring alternative contemplated by the Plan of
    Reorganization (the Investment Termination Payment)

The warrants consist of:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | Series A Warrants to purchase
    9.5 million shares of New Common Stock at an exercise price
    of $6.25 per share;                  
|
| |  | Series B Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $7.50 per share; and

F-8



---



##### 





| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Series C Warrants to purchase approximately
    7.1 million shares of New Common Stock at an exercise price
    of $10.00 per share.

The warrants will expire 7 years after the
date of issuance. Each series of warrants is identical, except
as to the applicable exercise price. The exercise price
applicable to each respective series of warrants is subject to
adjustment in certain events.

Under the Plan of Reorganization and after the
filing and effectiveness of a registration statement with the
Securities and Exchange Commission, XO Parent will issue to
certain holders of claims of interests in XO Parent, who hold
such claims and/or interests as of the November 15, 2002
record date, rights to subscribe for up to 40,000,000 shares of
New Common Stock, at $5.00 per share, for an aggregate purchase
price of up to approximately $200.0 million through a
rights offering, (the Rights Offering). In addition,
pursuant to the stipulation relating to the settlement of a
claim made against XO Parent purportedly on behalf of its
stockholders (the Stockholder Stipulation), holders
of shares of pre-petition class A common stock of XO Parent will
receive additional nontransferable rights exercisable for a up
to 3,333,333 shares of New Common Stock to the extent that the
rights otherwise allocable to such holders in the Rights
Offering are exercisable for less than 3,333,333 shares of New
Common Stock. Accordingly, not less than 40,000,000 and not more
than 43,333,333 shares will be offered in the Rights Offering.

In addition, under the Plan of Reorganization:



| |   |                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of pre-petition subordinated notes of XO
    Parent had their securities cancelled, and received a cash
    payment from High River based upon the amount of the Investment
    Termination Payment that High River would have been entitled to
    receive as a holder of the loans under the New Credit Agreement
    and the right to participate in the Rights Offering; and
|
| |  | Holders of pre-petition class A common stock of
    XO Parent had their securities cancelled, and received the right
    to a portion of the cash consideration pursuant to the
    Stockholder Stipulation and have the right to participate in the
    Rights Offering; and                                                                                                           
|
| |  | Holders of pre-petition class B common stock and
    holders of all series of pre-petition preferred stock of XO
    Parent had their securities cancelled and received the right to
    participate in the Rights Offering.                                                                                                                                                            

Of the 95.0 million shares of New Common
Stock distributed on the Effective Date, more than 80% were
issued to High River. Immediately following this distribution,
High River transferred all interest in its New Common Stock to
Cardiff Holding LLC, a Delaware limited liability company also
controlled by Mr. Icahn (Cardiff). Of the
warrants to be distributed under the Plan of Reorganization, XO
estimates Cardiff will receive Series A Warrants to
purchase approximately 3.0 million shares of New Common
Stock, Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C
Warrants to purchase approximately 2.3 million shares of
New Common Stock. High River assigned its approximately 85%
interest in the loans outstanding under the New Credit Agreement
to Chelonian Corp. (Chelonian), which subsequently
assigned those loans to Arnos Corp. (Arnos). Both
Chelonian and Arnos are controlled by Mr. Icahn.

Accounting
Impact of Chapter 11 Filing

Liabilities subject to compromise reflected in
the accompanying consolidated financial statements and the XO
Parent stand-alone financial statements represent the
liabilities of XO Parent incurred prior to the Petition Date
that are with unrelated parties (other than those that are
payable to a subsidiary in the XO Parent Stand-Alone Balance
Sheet). In accordance with SOP 90-7, liabilities subject to
compromise were recorded at the amount allowed on pre-petition
claims in the Chapter 11 proceedings. Other obligations
that are not subject to compromise have retained their
historical balance sheet classifications and amounts.

F-9



---



##### 



Liabilities subject to compromise consisted of
the following as of December 31, 2002 (dollars in
thousands):


|                                                          |                                           |   |           |           | 
|--------------------------------------------------------- | ----------------------------------------- | - | --------- | --------- | 
|Long-term debt                                            |                                           | $ | 5,165,718 |          
|Accrued interest and preferred stock dividends            |                                           |   | 295,820   |          
|Pre-petition accounts payable and accrued
    liabilities |                                           |   | 33,640    |          
|Capital lease obligations                                 |                                           |   | 9,211     |          
|                                                          |                                           |   |           |          
|Total liabilities subject to compromise                   |                                           |   | 5,504,389 |          
|Less: long-term liabilities subject to compromise         |                                           |   | 7,182     |          
|                                                          |                                           |   |           |          
|                                                          | Current liabilities subject to compromise |   | $         | 5,497,207 | 
|                                                          |                                           |   |           |          

At December 31, 2002, there were
approximately $34 million of liabilities subject to
compromise that had not been settled by the Bankruptcy Court.
The Company expects to pay approximately $6 million to
settle these claims which will result in a reorganization
benefit of approximately $28 million.

In order to record its debt instruments at the
amount allowed by the Bankruptcy Court in accordance with SOP
90-7, as of the Petition Date, XO Parent wrote off all of its
debt issuance costs and discounts related to debt (collectively
the Deferred Financing Fees) as a component of
reorganization expense. Reorganization expense also includes
professional fees incurred in connection with the
Chapter 11 proceedings, as well as gains or penalties from
the settlement or rejection of liabilities subject to compromise
and the net gains from the Investment Termination Payment.
Reorganization expenses for the year ended December 31,
2002 consisted of the following (dollars in thousands):

|                                                                                   |                                   |              |         |        | 
|---------------------------------------------------------------------------------- | --------------------------------- | ------------ | ------- | ------ | 
|                                                                                   |                                   | Year Ended  
|                                                                                   |                                   | December 31,
|                                                                                   |                                   | 2002        
|                                                                                   |                                   |             
|Net loss from the settlement or rejection of
    liabilities subject to compromise |                                   | $            | 14,916  |       
|Net gain from Investment Termination Payment                                       |                                   |              | (16,667 | )     
|Deferred Financing Fees                                                            |                                   |              | 56,270  |       
|Professional fees                                                                  |                                   |              | 36,602  |       
|                                                                                   |                                   |              |         |       
|                                                                                   | Total reorganization expense, net |              | $       | 91,121 | 
|                                                                                   |                                   |              |         |       

Under SOP 90-7, XO Parent was required to accrue
interest expense during the Chapter 11 proceedings only to
the extent that such interest was expected to be paid pursuant
to the proceedings. Under the Plan of Reorganization, there were
no cash payments of interest on the loans outstanding under the
Pre-Petition Credit Facility or XO Parents unsecured
notes. Therefore, XO Parent ceased accruing interest on the
Pre-Petition Credit Facility and on its unsecured notes as of
the Petition Date. The contractual interest amounts
parenthetically disclosed on the accompanying consolidated
statement of operations represent the additional interest
expense that would have been accrued under the relevant
financing agreements had the Company not ceased accruing
interest as described above.

In accordance with SOP 90-7, XO Parent recorded
its preferred stock at the amount allowed by the Bankruptcy
Court. Accordingly, as of the Petition Date, XO Parent
recognized a gain equal to the remaining $81.5 million
unamortized balance of a deferred modification fee and wrote off
all issuance costs and discounts related to its preferred stock,
which resulted in a charge of $2.8 million. In addition, the
Company stopped accruing preferred stock dividends subsequent to
the Petition Date. The dividend amounts parenthetically
disclosed on the accompanying consolidated statement of
operations represent the additional dividends that would have
been accrued under the terms of the relevant preferred stock had
the Company not ceased accruing such dividends as described
above.

F-10



---



##### 



XO Parent Stand-Alone Financial
Statements

In accordance with SOP 90-7, stand-alone
financial statements of XO Parent are presented below. Such
financial statements have been prepared using standards
consistent with the Companys consolidated financial
statements without eliminating intercompany transactions and
without consolidating controlled subsidiaries (dollars in
thousands).

XO Communications, Inc.

(XO Parent)


Debtor in Possession


Stand-Alone Balance Sheet


As of December 31, 2002


(Unaudited)


|                                                                                         |                       |                                            |           |            |           | 
|---------------------------------------------------------------------------------------- | --------------------- | ------------------------------------------ | --------- | ---------- | --------- | 
|ASSETS                                                                                   |                       |                                            |           |           
|Current assets:                                                                          |                       |                                            |           |           
|                                                                                         | Pledged securities    |                                            | $         | 1,100      |          
|                                                                                         | Other current assets  |                                            |           | 66,764     |          
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total current assets                       |           |            | 67,864    | 
|Property and equipment, net                                                              |                       |                                            | 65,654    |           
|Fixed wireless licenses, net                                                             |                       |                                            | 67,039    |           
|Other intangibles, net                                                                   |                       |                                            | 79,711    |           
|Investment in and notes receivable from
    subsidiaries, net                            |                       |                                            | 8,542,749 |           
|Other assets, net                                                                        |                       |                                            | 43,638    |           
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total assets                               |           | $          | 8,866,655 | 
|                                                                                         |                       |                                            |           |           
|                                                                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                 |                       |                                            |           |           
|Current liabilities not subject to compromise                                            |                       | $                                          | 50,422    |           
|Debt and accrued interest payable to subsidiary
    subject to compromise                |                       |                                            | 620,389   |           
|Current liabilities subject to compromise                                                |                       |                                            | 5,497,207 |           
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total current liabilities                  |           |            | 6,168,018 | 
|Long-term liabilities not subject to compromise                                          |                       |                                            | 62,633    |           
|Long-term liabilities subject to compromise                                              |                       |                                            | 7,182     |           
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total liabilities                          |           |            | 6,237,833 | 
|Redeemable preferred stock held by and payable to
    a subsidiary subject to compromise |                       |                                            | 514,640   |           
|Redeemable preferred stock subject to compromise                                         |                       |                                            | 1,708,316 |           
|Stockholders equity:                                                                    |                       |                                            |           |           
|                                                                                         | Common stock          |                                            |           | 4,628,139  |          
|                                                                                         | Deferred compensation |                                            |           | (8,149     | )        
|                                                                                         | Accumulated deficit   |                                            |           | (4,214,124 | )        
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total stockholders equity                 |           |            | 405,866   | 
|                                                                                         |                       |                                            |           |           
|                                                                                         |                       | Total liabilities and stockholders equity |           | $          | 8,866,655 | 
|                                                                                         |                       |                                            |           |           

F-11



---



##### 



XO Communications, Inc.

(XO Parent)


Debtor in Possession


Stand-Alone Statement of Operations


(Unaudited)


|                                                                               |                                                                         |                          |          |        |         | 
|------------------------------------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------ | -------- | ------ | ------- | 
|                                                                               |                                                                         | Period from the         
|                                                                               |                                                                         | Petition Date of        
|                                                                               |                                                                         | June 17, 2002           
|                                                                               |                                                                         | through                 
|                                                                               |                                                                         | December 31, 2002       
|                                                                               |                                                                         |                         
|Revenue                                                                        |                                                                         | $                        |         |       
|Costs and expenses:                                                            |                                                                         |                          |          |       
|                                                                               | Selling, operating, and general (excludes stock
    based compensation) |                          |          | 75,000 |        
|                                                                               | Stock-based compensation                                                |                          |          | 12,352 |        
|                                                                               | Depreciation and amortization                                           |                          |          | 47,584 |        
|                                                                               |                                                                         |                          |          |       
|                                                                               |                                                                         | Total costs and expenses |          |        | 134,936 | 
|Loss from operations                                                           |                                                                         |                          | (134,936 | )     
|Reorganization expense, net                                                    |                                                                         |                          | (91,121  | )     
|Interest income on notes receivable from
    subsidiaries                      |                                                                         |                          | 286,202  |       
|Interest expense                                                               |                                                                         |                          | (3,468   | )     
|                                                                               |                                                                         |                          |          |       
|Net income                                                                     |                                                                         |                          | 56,677   |       
|Recognition of preferred stock modification fee,
    net - reorganization item |                                                                         |                          | 78,703   |       
|                                                                               |                                                                         |                          |          |       
|Net income applicable to common shares                                         |                                                                         | $                        | 135,380  |       
|                                                                               |                                                                         |                          |          |       

XO Communications, Inc.

(XO Parent)


Debtor in Possession


Stand-Alone Statement of Cash Flows


(Unaudited)


|                                                         |                                                           |                   |        |          |  
|-------------------------------------------------------- | --------------------------------------------------------- | ----------------- | ------ | -------- | -
|                                                         |                                                           | Period From the  
|                                                         |                                                           | Petition Date of 
|                                                         |                                                           | June 17, 2002    
|                                                         |                                                           | through          
|                                                         |                                                           | December 31, 2002
|                                                         |                                                           |                  
|OPERATING ACTIVITIES:                                    |                                                           |                   |        |         
|Net income                                               |                                                           | $                 | 56,677 |         
|Adjustments for non-cash items:                          |                                                           |                   |        |         
|                                                         | Depreciation and amortization                             |                   |        | 47,584   |  
|                                                         | Reorganization expense                                    |                   |        | 91,121   |  
|                                                         | Stock-based compensation                                  |                   |        | 12,352   |  
|                                                         | Interest income on notes receivable from
    subsidiaries |                   |        | (286,202 | )
|                                                         | Interest expense                                          |                   |        | 3,468    |  
|Changes in assets and liabilities:                       |                                                           |                   |        |         
|                                                         | Notes receivable from subsidiaries, net                   |                   |        | 75,000   |  
|                                                         |                                                           |                   |        |         
|Net cash used in operating activities                    |                                                           |                   |       |         
|Net increase (decrease) in cash and cash
    equivalents |                                                           |                   |       |         
|Cash and cash equivalents, beginning of the period       |                                                           |                   |       |         
|                                                         |                                                           |                   |        |         
|Cash and cash equivalents, end of period                 |                                                           | $                 |       |         
|                                                         |                                                           |                   |        |         

F-12



---



##### 



3.     FRESH START
ACCOUNTING

The Company will adopt the fresh start accounting
provisions (fresh start) of SOP 90-7 during the
first quarter of 2003. Under SOP 90-7, the implementation of
fresh start reporting is triggered in part by the emergence of
XO Parent from its Chapter 11 proceedings. Although the
effective date of the Plan of Reorganization was
January 16, 2003, the Company plans to account for the
consummation of the Plan of Reorganization as if it had occurred
on January 1, 2003 and implement fresh start reporting as
of that date. Fresh start requires that the Company adjust the
historical cost of its assets and liabilities to their fair
value. The fair value of the reorganized Company, or the
reorganization value, of approximately $1.4 billion was
determined based on the sum of the reorganized Companys
$500.0 million of debt outstanding under the New Credit
Agreement, $475.0 million of New Common Stock as approved
by the Bankruptcy Court, and the $425.0 million of other
liabilities that were not eliminated or discharged under the
Plan of Reorganization.

Fresh start requires that the reorganization
value be allocated to the entitys net assets in conformity
with procedures specified by Accounting Principles Board Opinion
(APB) No. 16, Business
Combinations, (APB No. 16) as superseded
by Statement of Financial Accounting Standards
(SFAS) No. 141, Business
Combinations, (SFAS No. 141). The
Company engaged an independent appraiser to assist in the
allocation of the reorganization value to the reorganized
Companys assets and liabilities by determining the fair
market value of its property and equipment, intangible assets
and certain obligations related to its facility leases. The fair
value adjustments impacted current assets, property and
equipment, fixed wireless licenses, intangible assets and
accrued liabilities. A reconciliation of the adjustments to be
recorded in connection with the debt restructuring and the
adoption of fresh start accounting is presented below (in
thousands):

|                             |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |         |           | 
|---------------------------- | ------------------------- | -------------------- | --------- | ------------- | --------- | -------------- | - | -------------- | - |  | ---------- | ------- | ---------- | - | ------- | ------- | --------- | 
|                             |                           |                      |           |               |           |                |   | Reorganized XO
|                             |                           | Predecessor XO       |           |               |           |                |   | Pro forma     
|                             |                           | December 31,         |           | Debt          |           | Fresh Start    |   | December 31,  
|                             |                           | 2002                 |           | Restructuring |           | Adjustments(d) |   | 2002          
|                             |                           |                      |           |               |           |                |   |               
|                             |                           |                      |           |               |           |                |   | (Unaudited)   
|ASSETS                       |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |        
|Current assets:              |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |        
|                             | Cash and cash equivalents |                      | $         | 314,038       |           |                | $ |               |   |  | $          |        |            |   | $       | 314,038 |          
|                             | Marketable securities     |                      |           | 246,945       |           |                |   |               |   |  |            |        |            |   |         | 246,945 |          
|                             | Accounts receivable       |                      |           | 116,541       |           |                |   |               |   |  |            |        |            |   |         | 116,541 |          
|                             | Other current assets      |                      |           | 83,480        |           |                |   |               |   |  |            | (50,826 | )          |   |         | 32,654  |          
|                             |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |        
|                             |                           | Total current assets |           |               | 761,004   |                |   |                |  |  |            |         | (50,826    | ) |         |         | 710,178   | 
|Property and equipment, net  |                           |                      | 2,780,589 |               |           |                |  |                |   |  | (2,278,413 | )       |            |   | 502,176 |        
|Fixed wireless licenses, net |                           |                      | 911,832   |               |           |                |  |                |   |  | (852,324   | )       |            |   | 59,508  |        
|Other intangibles, net       |                           |                      | 72,782    |               |           |                |  |                |   |  | 3,389      |         |            |   | 76,171  |        
|Other assets, net            |                           |                      | 59,289    |               |           |                |  |                |   |  | (36,181    | )       |            |   | 23,108  |        
|                             |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |        
|                             |                           | Total assets         |           | $             | 4,585,496 |                |   | $              |  |  |            | $       | (3,214,355 | ) |         | $       | 1,371,141 | 
|                             |                           |                      |           |               |           |                |   |                |   |  |            |         |            |   |         |        

F-13



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##### 



|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |         |           | 
|--------------------------------------------------------------------- | ---------------------------------------- | -------------------------------------------------------- | --------- | ------------- | ---------- | -------------- | ---------- | -------------- | ---------- | - | ------- | ---------- | ---------- | - | ------- | ------- | --------- | 
|                                                                      |                                          |                                                          |           |               |            |                |            | Reorganized XO
|                                                                      |                                          | Predecessor XO                                           |           |               |            |                |            | Pro forma     
|                                                                      |                                          | December 31,                                             |           | Debt          |            | Fresh Start    |            | December 31,  
|                                                                      |                                          | 2002                                                     |           | Restructuring |            | Adjustments(d) |            | 2002          
|                                                                      |                                          |                                                          |           |               |            |                |            |               
|                                                                      |                                          |                                                          |           |               |            |                |            | (Unaudited)   
|LIABILITIES AND STOCKHOLDERS (DEFICIT)
    EQUITY                    |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|Current liabilities:                                                  |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|                                                                      | Accounts payable                         |                                                          | $         | 63,729        |            |                | $          |               |            |   | $       | 6,000      |            |   | $       | 69,729  |          
|                                                                      | Accrued liabilities                      |                                                          |           | 265,889       |            |                |            |               |            |   |         | (19,841    | )          |   |         | 246,048 |          
|                                                                      | Accrued interest payable                 |                                                          |           | 213           |            |                |            |               |            |   |         |           |            |   |         | 213     |          
|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|Total current liabilities                                             |                                          |                                                          | 329,831   |               |            |                |           |                |            |   | (13,841 | )          |            |   | 315,990 |        
|Current liabilities subject to compromise                             |                                          |                                                          | 5,497,207 |               |            |                | (5,461,433 | )(a)           |            |   | (35,774 | )          |            |   |        |        
|Long-term debt                                                        |                                          |                                                          |          |               |            |                | 500,000    | (b)            |            |   |        |            |            |   | 500,000 |        
|Other long-term liabilities                                           |                                          |                                                          | 75,242    |               |            |                |           |                |            |   | 4,909   |            |            |   | 80,151  |        
|Long-term liabilities subject to compromise                           |                                          |                                                          | 7,182     |               |            |                |           |                |            |   | (7,182  | )          |            |   |        |        
|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|                                                                      |                                          | Total liabilities                                        |           |               | 5,909,462  |                |            |                | (4,961,433 | ) |         |            | (51,888    | ) |         |         | 896,141   | 
|Predecessor XO Redeemable preferred
    stock  subject to compromise |                                          |                                                          | 1,708,316 |               |            |                | (1,708,316 | )(a)           |            |   |        |            |            |   |        |        
|Stockholders (deficit) equity:                                       |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|                                                                      | Predecessor XO Common stock              |                                                          |           | 4,628,139     |            |                |            |               |            |   |         | (4,628,139 | )          |   |         |        |          
|                                                                      | Reorganized XO Common stock and warrants |                                                          |           |              |            |                |            | 475,000        | (c)        |   |         |           |            |   |         | 475,000 |          
|                                                                      | Deferred compensation                    |                                                          |           | (8,500        | )          |                |            |               |            |   |         | 8,500      |            |   |         |        |          
|                                                                      | Accumulated other comprehensive income   |                                                          |           | 2,512         |            |                |            |               |            |   |         | (2,512     | )          |   |         |        |          
|                                                                      | Accumulated deficit                      |                                                          |           | (7,654,433    | )          |                |            | 6,194,749      |            |   |         | 1,459,684  |            |   |         |        |          
|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|                                                                      |                                          | Total stockholders (deficit) equity                     |           |               | (3,032,282 | )              |            |                | 6,669,749  |   |         |            | (3,162,467 | ) |         |         | 475,000   | 
|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        
|                                                                      |                                          | Total liabilities and stockholders
    (deficit) equity |           | $             | 4,585,496  |                |            | $              |           |   |         | $          | (3,214,355 | ) |         | $       | 1,371,141 | 
|                                                                      |                                          |                                                          |           |               |            |                |            |                |            |   |         |            |            |   |         |        



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | To record the discharge of indebtedness,
    including Pre-Petition Credit Facility ($1,000.0 million),
    pre-petition senior and convertible subordinated notes
    ($4,165.7 million), accrued interest ($245.2 million),
    and accrued dividends ($50.6 million) and the elimination
    of pre-petition Redeemable Preferred Stock
    ($1,708.3 million) in accordance with the Plan of
    Reorganization.
|   
|(b) | To record the outstanding principal under the New
    Credit Agreement, in accordance with the Plan of Reorganization.                                                                                                                                                                                                                                                                                              
|   
|(c) | To record the issuance of New Common Stock and
    Warrants.                                                                                                                                                                                                                                                                                                                                                        
|   
|(d) | To adjust the carrying value of assets,
    liabilities and stockholders equity to fair value, in
    accordance with fresh start accounting.                                                                                                                                                                                                                                                                      

F-14



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##### 



4.     SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Review
of Significant Accounting Policies

As discussed in note 3, the Company will adopt
fresh start accounting during the first quarter of 2003,
creating, in substance, per SOP 90-7 a new reporting entity. SOP
90-7 also requires that changes in accounting principles
required in the financial statements of the emerging entity
within twelve months of fresh start reporting should be adopted
at the time fresh start reporting is adopted.

Principles
of Consolidation

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

Preparation
of Consolidated Financial Statements

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

Cash
and Cash Equivalents

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

Marketable
Securities

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

Long-Lived
Assets

Long-lived assets, including property and
equipment, fixed wireless licenses, and intangible assets with
definite useful lives to be held and used, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount should be addressed pursuant to SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, (SFAS No. 144). SFAS
No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, (SFAS No. 121). In
accordance with implementation requirements, the Company
implemented the provisions of SFAS No. 144 on
January 1, 2002. The criteria for determining impairment
for long-lived assets to be held and used are generally
consistent with SFAS No. 121. Pursuant to SFAS
No. 144, impairment is determined by comparing the carrying
value of these long-lived assets to managements best
estimate of future undiscounted cash flows expected to result
from the use of the assets. The Company believes that no
impairment existed under SFAS No. 144 as of
December 31, 2002. In the event that there are changes in
the planned use of the Companys long-lived assets or its
expected future undiscounted cash flows are reduced
significantly, the Companys assessment of its ability to
recover the carrying value of these assets under SFAS
No. 144 could change. As discussed in note 3,

F-15



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##### 



the Company will apply fresh start accounting
during the first quarter of 2003, which will result in a
significant write-down of the Companys long-lived assets.


Property
and Equipment

Property and equipment is stated at historical
cost net of accumulated depreciation. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the
assets beginning in the month telecommunications networks and
acquired bandwidth are substantially complete and available for
use and in the month equipment and furniture are acquired. The
estimated useful lives of property and equipment are determined
based on historical usage with consideration given to
technological changes and trends in the industry that could
impact the network architecture and asset utilization.
Telecommunications networks and bandwidth include the deployment
of fiber optic cable and telecommunications hardware and
software for the expressed purpose of delivering
telecommunications services. Costs of additions and improvements
are capitalized, and repairs and maintenance are charged to
expense as incurred. Direct costs of constructing property and
equipment are capitalized including interest costs related to
construction. As discussed in note 3, the Company will
apply fresh start accounting during the first quarter of 2003,
which will result in a significant write down of property and
equipment.

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

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

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

These useful lives are determined based on
historical usage with consideration given to technological
changes and trends in the industry that could impact the network
architecture and asset utilization. This latter assessment is
significant because XO operates within an industry in which new
technological changes could render some or all of its network
related equipment obsolete requiring application of a shorter
useful life or, in a worst case, a write off of the entire value
of the asset. Accordingly, in making this assessment, the
Company considers the views of experts within the Company and
outside sources regarding the impact of technological advances
and trend in the industry on the value and useful lives of its
network assets.

Fixed
Wireless Licenses

Fixed wireless licenses consist of direct costs
to acquire fixed wireless licenses. The estimated useful life is
20 years, which represents the original ten year license
term with one ten year renewal. Amortization commences when
commercial service using fixed wireless technology is deployed
in the licenses geographic area. Renewal is conditioned
upon the satisfaction of certain utilization requirements
established by the Federal Communications Commission
(FCC). The Companys current utilization may
not be sufficient to satisfy this FCC condition on certain
licenses which could impact the FCCs decision to renew. As
discussed in note 3, the Company will apply fresh start
accounting during the first quarter of 2003 which will result in
a significant write down of fixed wireless licenses.

Goodwill

Goodwill consisted primarily of goodwill from the
Concentric merger. Effective January 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS No. 142), in which goodwill
and intangible assets with indefinite lives are no longer
amortized but must be tested for

F-16



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##### 



impairment annually or more frequently if an
event indicates that the asset might be impaired. The Company
performed the required transitional impairment tests of goodwill
as of January 1, 2002, and determined that the goodwill was
totally impaired. Accordingly, in the first quarter of 2002 the
Company recognized a $1,876.6 million charge as a
cumulative effect of accounting change to write off all of its
goodwill.


Other
Intangibles

Other intangibles consist primarily of
intangibles from the Concentric merger. Such costs are amortized
using the straight line method of accounting over a period of up
to five years. As discussed in note 3, the Company will apply
fresh start accounting during the first quarter of 2003 which
will result in a net increase to other intangibles.

Other
Assets

Other assets consist primarily of deferred costs
associated with the installation of customer services,
investments in both publicly traded and privately held companies
and pledged securities. The Company defers direct labor costs
related to customer installations, which are amortized ratably
over the estimated customer service period.

The Company has investments in entities in which
XO has no significant influence. These investments are accounted
for under the cost method. The Company regularly reviews its
investment portfolio to determine if any declines in value are
other than temporary. During 2000 and 2001, the slowing economy
had a negative impact on the equity value of companies in the
telecommunications sector. In light of these circumstances and
based on the Companys review of its investment portfolio
in this sector, the Company recorded other than temporary
impairment charges in other income (loss) of
$89.0 million in 2001 and $57.7 million in 2000 with
respect to its public and private equity investments.

As of December 31, 2002 and 2001, the
Company had pledged $1.4 million and $16.6 million,
respectively, in certificates of deposit as collateral for
outstanding letters of credit. The pledged securities are stated
at cost, adjusted for accrued interest. The fair value of the
pledged securities approximates their carrying value.

As disclosed in note 3, the Company will apply
fresh start accounting during the first quarter of 2003 which
will result in a reduction of other assets.

Income
Taxes

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

Revenue
Recognition

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

F-17



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##### 



approximately 1.5% of XOs total revenue was
attributed to sales of unlit network capacity. There were no
sales of unlit network capacity during 2002 or 2000.


The Company establishes valuation allowances for
collection of doubtful accounts and other sales credit
adjustments. Valuation allowances for sales credits are
established through a charge to revenue, while valuation
allowances for doubtful accounts are established through a
charge to selling, operating and general expense. The Company
assesses the adequacy of these reserves monthly evaluating
general factors, such as the length of time individual
receivables are past due, historical collection experience, the
economic and competitive environment, and changes in the credit
worthiness of its customers. As considered necessary, the
Company also assesses the ability of specific customers to meet
their financial obligations to XO and establishes specific
valuation allowances based on the amount XO expects to collect
from its customers. The Company believes that the established
valuation allowances were adequate as of December 31, 2002
and 2001. If circumstances relating to specific customers change
or economic conditions worsen such that the Companys past
collection experience and assessment of the economic environment
are no longer relevant, XOs estimate of the recoverability
of its trade receivables could be further reduced.

In-Process
Research and Development

In conjunction with the Concentric merger, the
Company allocated $36.2 million of the purchase price to
in-process research and development which represented the
estimated fair value of incomplete projects based on
risk-adjusted future cash flows. At the date of the Concentric
merger, the development of these projects had not yet reached
technological feasibility and the technology had no alternative
future uses. Accordingly, the entire $36.2 million of
acquired in-process research and development was expensed as of
the acquisition date.

Net
Loss Per Share

Net loss per common share, basic and diluted, is
computed by dividing loss applicable to common shares by the
weighted average number of common shares outstanding for the
period. In periods of net loss, the assumed common share
equivalents for options, warrants and convertible securities are
anti-dilutive. Assuming exercise or conversion of outstanding
stock options, warrants and convertible securities, calculated
under the treasury method, diluted shares would have been
549.8 million for 2002, 512.6 million for 2001 and
398.5 million for 2000.

As discussed in note 2, the Company emerged
from bankruptcy on January 16, 2003 and has a reorganized
equity structure. In particular, implementation of the
Companys Plan of Reorganization resulted in the
cancellation of all of the shares of all classes of the
Companys common and preferred stock that were outstanding
prior to the Petition Date.

Stock-Based
Compensation

As allowed by SFAS No. 123, Accounting
for Stock-Based Compensation, (SFAS
No. 123) the Company has chosen to account for
compensation cost associated with its employee stock plans in
accordance with the intrinsic value method prescribed by APB
No. 25, Accounting for Stock Issued to
Employees, (APB No. 25) adopting the
disclosure-only provisions of SFAS No. 123. See note 16 for
additional information regarding the Companys stock
compensation arrangements.

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

F-18



---



##### 



per common share for the years ended
December 31, 2002, 2001 and 2000 would have been as follows
(dollars in thousands, except for per share data):


|                                                     |  |                         |            |      |  |      |            |   |  |   |            |  
|---------------------------------------------------- |  | ----------------------- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                     |  |                        
|                                                     |  | Year Ended December 31,
|                                                     |  |                        
|                                                     |  | 2002                    |            | 2001 |  | 2000
|                                                     |  |                         |            |      |  |     
|Net loss applicable to common shares -
    pro forma |  | $                       | (3,351,824 | )    |  | $    | (1,845,882 | ) |  | $ | (1,435,253 | )
|Net loss per common share - pro forma                |  | $                       | (7.58      | )    |  | $    | (4.57      | ) |  | $ | (4.46      | )

Comprehensive
Loss

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

Concentration
of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily
of trade receivables. Although the Companys trade
receivables are geographically dispersed and include customers
in many different industries, a portion of the Companys
revenue is generated from services provided to other
telecommunications service providers. Several of these companies
have recently filed for protection under Chapter 11 of the
Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of
December 31, 2002 to cover these risks.

Fair
Value of Financial Instruments

SFAS No. 107, Disclosure about Fair
Value of Financial Instruments, (SFAS
No. 107) requires disclosure of fair value
information about financial instruments, for which it is
practicable to estimate the value. The carrying amounts for the
Companys financial instruments classified as current
assets and liabilities approximate their fair value due to their
short maturities as a result of the Companys emergence
from bankruptcy, the holders of the Companys debt and
equity instruments received certain rights and securities as
described further in note 2.

New
Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations,
(SFAS No. 143) which requires an entity to
recognize the fair value of a liability for an asset retirement
obligation in the period in which a legal or contractual removal
obligation is incurred if a reasonable estimate of fair value
can be made. If a reasonable estimate of fair value cannot be
made in the period the asset retirement obligation is incurred,
SFAS No. 143 requires the liability to be recognized when a
reasonable estimate of the fair value can be made. The
provisions of SFAS No. 143 are effective for financial
statements issued for fiscal years beginning after June 15,
2002. As required by SOP 90-7, the Company will implement SFAS
No. 143 during the first quarter of 2003 in conjunction
with the implementation of fresh start accounting. The
accompanying pro forma balance sheet and note 3 includes an
estimated asset retirement obligation of $21.4 million.

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002, (SFAS
No. 145) which eliminates the requirement to report
material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in
an entitys statement of operations. SFAS No. 145
instead requires that a gain or loss recognized from a debt
extinguishment be classified as an extraordinary item only when
the extinguishment meets the criteria of both unusual in
nature and infrequent in occurrence as
prescribed under APB No. 30, Reporting

F-19



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##### 



the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions (APB No. 30). The provisions
of SFAS No. 145 are effective for fiscal years beginning
after May 15, 2002 with respect to the rescission of SFAS
No. 4 and for transactions occurring after May 15,
2002, with respect to provisions related to SFAS No. 13. The
Company has recognized extraordinary gains from debt repurchases
in 2001 and has determined that the classification of such gains
as extraordinary items will change under SFAS No. 145 when
XO implements fresh start accounting in accordance with SOP 90-7.


In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, (SFAS No. 146) which requires
that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a
liability has been incurred. Under previous guidance, certain
exit costs, including severance costs, were accrued upon
managements commitment to an exit plan, which is generally
before an actual liability has been incurred. The Company will
apply the provisions of SFAS No. 146 to any exit or
disposal activities initiated after December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, (SFAS
No. 148) which amends SFAS No. 123, to provide
alternative methods of transition to SFAS No. 123s
fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and APB No. 28,
Interim Financial Reporting, (APB
No. 28) to require disclosure in the summary of
significant accounting policies of the effects of an
entitys accounting policy with respect to stock-based
employee compensation on reported net income and earnings per
share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to
account for employee stock options using the fair value method,
the disclosure provisions of SFAS No. 148 are applicable to
all companies with stock-based employee compensation, regardless
of whether they account for that compensation using the fair
value method of SFAS No. 123 or the intrinsic value method
of APB No. 28. The provisions of SFAS No. 148 are
effective for fiscal years beginning after December 15,
2002 with respect to the amendments of SFAS No. 123 and
effective for financial reports containing condensed financial
statements for interim periods beginning after December 15,
2002 with respect to the amendments of APB No. 28. The
Company will implement SFAS No. 148 effective
January 1, 2003 regarding disclosure requirements for
condensed financial statements for interim periods. Management
is currently evaluating the impact of the fair value method of
accounting for stock-based compensation on the Companys
results of operations and financial position.

5.     CUMULATIVE
EFFECT OF ACCOUNTING CHANGE

In July 2001, the FASB issued SFAS No. 142,
which revises the accounting for purchased goodwill and
intangible assets and supersedes APB Opinion No. 17,
Intangible Assets (APB No. 17).
Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer amortized but must be tested for
impairment annually or more frequently if an event indicates
that the asset might be impaired. This impairment test under
SFAS No. 142 is based on fair values determined by using
market prices, current prices for similar assets and
liabilities, or a discounted cash flow methodology. Intangible
assets with definite useful lives continue to be amortized over
their useful lives.

SFAS No. 142 required that the initial
impairment analysis of goodwill be completed by June 30,
2002. If however, events or changes in circumstances indicate
that goodwill of a reporting unit might be impaired before
June 30, 2002, goodwill was required to be tested for
impairment when this indication of possible impairment arises.
The Company performed the required transitional impairment tests
of goodwill as of January 1, 2002, and determined that the
value of its goodwill was totally impaired. Accordingly, in the
first quarter of 2002, the Company recorded a
$1,876.6 million charge as a cumulative effect of
accounting change to write-off all of its goodwill. The pro
forma impact on net loss before cumulative

F-20



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##### 



effect of accounting change for the year ended
December 31, 2002, 2001, and 2000 compared to the actual
results for the same period is as follows (dollars in thousands,
except for per share data):


|                                                                                                                                   |  |      |            |      |  |      |            |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                                                                                   |  | 2002 |            | 2001 |  | 2000
|                                                                                                                                   |  |      |            |      |  |     
|Net loss before extraordinary item and cumulative
    effect of accounting change                                                  |  | $    | (1,510,192 | )    |  | $    | (2,431,135 | ) |  | $ | (1,101,299 | )
|Goodwill amortization                                                                                                              |  |      |           |      |  |      | 595,601    |   |  |   | 323,109    |  
|                                                                                                                                   |  |      |            |      |  |      |            |   |  |   |            |  
|Adjusted net loss before extraordinary item and
    cumulative effect of accounting change                                         |  | $    | (1,510,192 | )    |  | $    | (1,835,534 | ) |  | $ | (778,190   | )
|                                                                                                                                   |  |      |            |      |  |      |            |   |  |   |            |  
|Net loss per common share before extraordinary
    item and cumulative effect of accounting change, basic and
    diluted:         |  |      |            |      |  |      |            |   |  |   |            |  
|Reported net loss before extraordinary item and
    cumulative effect of accounting change                                         |  | $    | (3.42      | )    |  | $    | (6.02      | ) |  | $ | (3.42      | )
|Goodwill amortization                                                                                                              |  |      |           |      |  |      | 1.47       |   |  |   | 1.00       |  
|                                                                                                                                   |  |      |            |      |  |      |            |   |  |   |            |  
|Adjusted net loss per common share before
    extraordinary item and cumulative effect of accounting change,
    basic and diluted |  | $    | (3.42      | )    |  | $    | (4.55      | ) |  | $ | (2.42      | )
|                                                                                                                                   |  |      |            |      |  |      |            |   |  |   |            |  

6.     RESTRUCTURING
CHARGES AND ASSET WRITE-DOWNS

On August 8, 2002, the Company entered into
a Master Agreement with Level 3 Communications, Inc.
(Level 3), which amends various agreements related
to XOs acquisition of fiber networks in the United States
from Level 3 and the recurring maintenance thereon (the
Master Agreement). Beginning on January 1, 2003
and continuing over the remaining term of the initial agreement,
the Companys operating and maintenance fees as well as
fiber relocation charges will be reduced from approximately
$17.0 million annually to a fixed rate of $5.0 million
annually. In exchange for this reduction and certain other
concessions, effective as of February 11, 2003, the closing
date for the transaction, the Company surrendered its
indefeasible right to use an empty conduit and six of the 24
fibers previously acquired from Level 3. Because the
Company had committed to this plan of disposal and believed at
the time that XO entered into the Master Agreement that
consummation of the contemplated transaction was probable, the
Company recorded a $477.3 million non-cash write-down of
these assets during the third quarter of 2002. Pursuant to
applicable accounting principles, the write-down is based on the
book value of the surrendered facilities and does not reflect
the future benefits to be received by the Company under the
Master Agreement.

During the second half of 2001, the Company
implemented a plan to restructure certain of its business
operations. The restructuring plan included reducing the
Companys discretionary spending, capital expenditures and
workforce based on its assessment of current and future market
conditions and the divestiture of its European operations. As a
result of the restructuring plan, the Company recorded
$509.2 million of estimated restructuring charges during
the year ended December 31, 2001. The Company continued to
restructure its operations, reducing its workforce by
approximately 350 additional employees, the majority of which
were employed in network operations, sales and marketing and
information technology, and recorded a $2.9 million
restructuring charge related to involuntary termination
severance liabilities in the second quarter of 2002. These
employees were notified of their termination of employment in
the second quarter of 2002 and the employment of the majority of
the notified employees was terminated by June 30, 2002. As
of December 31, 2002, the remaining restructuring accrual
was $79.0 million, which relates primarily to payments due
to landlords on exited leased facilities. The restructuring
accrual has decreased from $125.8 million as of
December 31, 2001 primarily due to payments associated with
exited leased facilities.

F-21



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##### 



7.     MARKETABLE
SECURITIES

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

|                                           |  |              |         |      |  |   |         | 
|------------------------------------------ |  | ------------ | ------- | ---- |  | - | ------- | 
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2002         |         | 2001
|                                           |  |              |         |     
|U.S. Government and agency notes and bonds |  | $            | 246,945 |      |  | $ | 242,048 | 
|Corporate notes and bonds                  |  |              |        |      |  |   | 266,930 | 
|                                           |  |              |         |      |  |   |         | 
|                                           |  | $            | 246,945 |      |  | $ | 508,978 | 
|                                           |  |              |         |      |  |   |         | 

8.     PROPERTY AND
EQUIPMENT

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

|                                                   |  |              |           |      |  |   |           | 
|-------------------------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                                   |  |             
|                                                   |  | December 31,
|                                                   |  |             
|                                                   |  | 2002         |           | 2001
|                                                   |  |              |           |     
|Telecommunications networks and acquired bandwidth |  | $            | 2,920,819 |      |  | $ | 2,832,878 | 
|Furniture, fixtures, equipment, and other          |  |              | 656,994   |      |  |   | 758,022   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  |              | 3,577,813 |      |  |   | 3,590,900 | 
|Less accumulated depreciation                      |  |              | 1,165,216 |      |  |   | 795,739   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  |              | 2,412,597 |      |  |   | 2,795,161 | 
|Network construction-in-progress                   |  |              | 367,992   |      |  |   | 947,416   | 
|                                                   |  |              |           |      |  |   |           | 
|                                                   |  | $            | 2,780,589 |      |  | $ | 3,742,577 | 
|                                                   |  |              |           |      |  |   |           | 

As discussed in note 3, the Company will apply
fresh start accounting during the first quarter of 2003, which
will result in a significant write down of property and
equipment and the associated depreciation expense in future
periods. During 2002, 2001 and 2000, depreciation expense was
$598.5 million, $447.0 million and
$223.8 million, respectively. During 2002, 2001 and 2000,
the Company capitalized interest on construction costs of
$11.1 million, $51.6 million, and $31.0 million,
respectively.

As of December 31, 2002, the Company owned a
North American inter-city network with a carrying value of
$260.5 million. The inter-city network requires the
purchase and installation of optical networking equipment in
order for the fiber to be lit and operationally
ready for its intended use. The Company has postponed lighting
this network and in the interim has purchased Level 3 wavelength
capacity to provide inter-city transport. As a result, the
inter-city network has not been placed into service, is not
being depreciated and is included in network
construction-in-progress as of December 31, 2002.

9.     OTHER
INTANGIBLES

Intangible assets with definite useful lives
consisted of the following (dollars in thousands):

|                        |  |                   |         |                   |  |            |          |          |  |              |         |            |  |   |         |  |  |   |          |   |  |   |         | 
|----------------------- |  | ----------------- | ------- | ----------------- |  | ---------- | -------- | -------- |  | ------------ | ------- | ---------- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                        |  |                   |         |                  
|                        |  | December 31, 2002 |         | December 31, 2001
|                        |  |                   |         |                  
|                        |  | Gross             |         |                   |  | Gross      |          |         
|                        |  | Carrying          |         | Accumulated       |  | Net        |          | Carrying |  | Accumulated  |         | Net       
|                        |  | Amount            |         | Amortization      |  | Book Value |          | Amount   |  | Amortization |         | Book Value
|                        |  |                   |         |                   |  |            |          |          |  |              |         |           
|Acquired technology     |  | $                 | 130,515 |                   |  | $          | (84,336  | )        |  | $            | 46,179  |            |  | $ | 141,541 |  |  | $ | (56,027  | ) |  | $ | 85,514  | 
|Customer lists          |  |                   | 123,745 |                   |  |            | (105,635 | )        |  |              | 18,110  |            |  |   | 124,873 |  |  |   | (80,845  | ) |  |   | 44,028  | 
|Other                   |  |                   | 35,413  |                   |  |            | (26,920  | )        |  |              | 8,493   |            |  |   | 48,731  |  |  |   | (24,869  | ) |  |   | 23,862  | 
|                        |  |                   |         |                   |  |            |          |          |  |              |         |            |  |   |         |  |  |   |          |   |  |   |         | 
|Total intangible assets |  | $                 | 289,673 |                   |  | $          | (216,891 | )        |  | $            | 72,782  |            |  | $ | 315,145 |  |  | $ | (161,741 | ) |  | $ | 153,404 | 
|                        |  |                   |         |                   |  |            |          |          |  |              |         |            |  |   |         |  |  |   |          |   |  |   |         | 
|Fixed wireless licenses |  | $                 | 997,942 |                   |  | $          | (86,110  | )        |  | $            | 911,832 |            |  | $ | 997,942 |  |  | $ | (50,397  | ) |  | $ | 947,545 | 
|                        |  |                   |         |                   |  |            |          |          |  |              |         |            |  |   |         |  |  |   |          |   |  |   |         | 

F-22



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##### 



As discussed in note 3, the Company will apply
fresh start accounting during the first quarter of 2003, which
will result in a significant write down of other intangibles and
the associated amortization expense. Amortization expense for
the years ended December 31, 2002, 2001 and 2000 was
$101.3 million, $715.7 million and
$393.9 million, respectively. Fixed wireless licenses are
amortized when commercial service using the wireless technology
is deployed in the licenses geographic area. At
December 31, 2002, $635.3 million of the fixed
wireless licenses are being amortized.

10.     ACCRUED
LIABILITIES

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

|                                 |  |              |         |      |  |   |         | 
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | 
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2002         |         | 2001
|                                 |  |              |         |     
|Accrued compensation             |  | $            | 58,551  |      |  | $ | 73,807  | 
|Accrued telecommunications costs |  |              | 52,803  |      |  |   | 40,955  | 
|Accrued construction             |  |              | 1,123   |      |  |   | 27,552  | 
|Other accrued liabilities        |  |              | 153,412 |      |  |   | 198,780 | 
|                                 |  |              |         |      |  |   |         | 
|                                 |  | $            | 265,889 |      |  | $ | 341,094 | 
|                                 |  |              |         |      |  |   |         | 

11.     LONG-TERM
DEBT

As of December 31, 2002, the carrying value
of the Companys long-term debt was $5.2 billion
including $3.7 billion in pre-petition senior notes,
$0.5 billion in pre-petition convertible subordinated
notes, and $1.0 billion outstanding under the Pre-Petition
Credit Facility, all of which are classified as current
liabilities subject to compromise. The Company ceased making all
scheduled interest payments due under the terms of its senior
unsecured notes effective December 1, 2001, and its
subordinated unsecured notes in February 2002. Consequently, as
of December 31, 2001, the Company was in default on certain
unsecured notes and had triggered cross-default provisions under
the Pre-Petition Credit Facility and the indentures under which
all other senior notes were issued, so the entire
$5.2 billion of pre-petition debt was classified as current.

As discussed further in note 2, upon the
Companys consummation of the Plan of Reorganization, all
of XO Parents pre-petition senior notes and
pre-petition general unsecured claims were cancelled in exchange
for (i) 4,750,000 shares of New Common Stock,
(ii) warrants to purchase shares up to an additional
23,750,000 shares of New Common Stock (iii) rights to
purchase shares of New Common Stock in the Rights Offering and
(iv) a portion of the cash consideration received by
XO Parent from the Investment Termination Payment. Any
holders of pre-petition subordinated notes of XO Parent had
their securities cancelled, and received a cash payment from
High River based upon the amount of the Investment Termination
Payment that High River would have been entitled to receive as
holder of the loans under the New Credit Agreement and the right
to participate in the Rights Offering. The pre-petition senior
notes had interest rates ranging from 9.0% to 12.75% and the
interest rate on the pre-petition convertible subordinated notes
was 5.75%.

The Pre-Petition Credit Facility bore interest at
the Companys option, at an alternative base rate, as
defined, or at the reserve-adjusted London Interbank Offered
Rate (LIBOR), plus in each case, applicable margins.
As discussed further in note 2, upon the Companys
consummation of the Plan of Reorganization, the
$1.0 billion of loans under the Pre-Petition Credit
Facility were converted into 90.25 million shares of New
Common Stock and the $500.0 million of outstanding
principal amount of loans under the New Credit Agreement. The
maturity date of the outstanding principal under the New Credit
Agreement is July 15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on
October 15, 2007. The security for the New Credit Agreement
consists of the all assets of XO Parent, including stock of
its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement
limits additional indebtedness, liens, dividend payments and
certain investments and transactions, and contains

F-23



---



##### 



certain covenants with respect to minimum cash
balance and EBITDA (earnings before interest, taxes,
depreciation and amortization) requirements and maximum capital
expenditures.


The Company is not required to pay interest
accrued on the principal amount under the New Credit Agreement
until it meets certain financial ratios. The Company can elect
to begin paying interest in cash prior to the required date.
Loans under the New Credit Agreement bear interest, at the
Companys option, at an alternate base rate, as defined, or
LIBOR, plus in each case, applicable margins. Once the Company
begins to pay accrued interest in cash, the applicable margins
are reduced. Under certain circumstances, the New Credit
Agreement permits the Company to obtain a senior secured
facility of up to $200.0 million, subject to reduction in
an amount equal to any proceeds received from the exercise of
rights in the Rights Offering.

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

12.     REDEEMABLE
PREFERRED STOCK

As of December 31, 2002 and 2001, the
carrying values of the Companys pre-petition preferred
stock were $1.7 billion and $1.8 billion,
respectively. As discussed in note 2, as a result of the
Companys emergence from bankruptcy and consummation of the
Plan of Reorganization, the Companys pre-petition
redeemable preferred stock has been cancelled and discharged and
the holders of such securities will receive no distribution
under the Plan of Reorganization.

In conjunction with the implementation of the
transactions that ultimately led to the reorganization of the
Companys capital structure pursuant to the Plan of
Reorganization, the Company ceased making all scheduled dividend
payments effective December 31, 2001 and stopped accruing
preferred stock dividends subsequent to the Petition Date. In
accordance with SOP 90-7, during the Chapter 11
proceedings, the Company was required to record its preferred
stock at the amount allowed by the Bankruptcy Court.
Accordingly, during the second half of 2002, the Company
recognized a gain equal to the remaining unamortized balance of
a deferred modification fee and wrote off all issuance costs and
discounts related to its preferred stock which resulted in a net
gain of $78.7 million.

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

13.     STOCKHOLDERS
EQUITY

In December 2001, the Company voluntarily
delisted its pre-petition Class A common stock from the
Nasdaq National Market and began trading on the Nasdaq
Over-the-Counter Bulletin Board (OTCBB) on
December 17, 2001 under the symbol XOXO. The
Companys pre-petition Class A common stock stopped
trading on the OTCBB as of the Effective Date and the New Common
Stock began trading on the OTCBB under the symbol
XOCM shortly thereafter. As discussed in
note 2, pursuant to the Plan of Reorganization, all
interests in the Companys pre-petition Class A and
Class B common stock were terminated as of the Effective
Date.

On June 7, 2001, an investment fund
affiliated with Forstmann Little invested $250.0 million of
cash in the Company to provide additional funding for general
corporate purposes. In exchange for the investment, the Company
issued 50.0 million shares of its pre-petition Class A
common stock to the Forstmann Little fund and amended the terms
of outstanding pre-petition convertible preferred stock held

F-24



---



##### 



by various funds affiliated with Forstmann Little
to reduce the share conversion price from $31.625 to $17.00 per
share. The value of the pre-petition Class A common stock
issued at the date the investment closed was
$157.5 million. The remaining $92.5 million,
attributed to the pre-petition convertible preferred stock
amendment, was recorded as a credit to the preferred stock
balance and was being amortized against the accretion of the
preferred stock redemption obligation. As discussed in
note 12, during the second half of 2002, the Company
recognized a gain equal to the remaining unamortized balance of
this deferred modification fee.


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

14.     INCOME
TAXES

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

|                               |                                                          |              |            |           |   |   |            |           |  
|------------------------------ | -------------------------------------------------------- | ------------ | ---------- | --------- | - | - | ---------- | --------- | -
|                               |                                                          |             
|                               |                                                          | December 31,
|                               |                                                          |             
|                               |                                                          | 2002         |            | 2001     
|                               |                                                          |              |            |          
|Deferred tax assets:           |                                                          |              |            |           |   |   |            |          
|                               | Provisions not currently deductible                      |              | $          | 123,280   |   |   | $          | 41,954    |  
|                               | Property, equipment and other long-term assets
    (net) |              |            | 367,208   |   |   |            | 348,582   |  
|                               | Net operating loss and capital loss carryforwards        |              |            | 1,863,336 |   |   |            | 1,313,477 |  
|                               |                                                          |              |            |           |   |   |            |          
|Total deferred tax assets      |                                                          |              | 2,353,824  |           |   |   | 1,704,013  |          
|Valuation allowance            |                                                          |              | (2,028,331 | )         |   |   | (1,390,017 | )        
|                               |                                                          |              |            |           |   |   |            |          
|Net deferred tax assets        |                                                          |              | 325,493    |           |   |   | 313,996    |          
|Deferred tax liabilities:      |                                                          |              |            |           |   |   |            |          
|                               | Property, equipment and other long-term assets
    (net) |              |            | (101,402  | ) |   |            | (72,108   | )
|                               | Other identifiable intangibles                           |              |            | (222,537  | ) |   |            | (238,465  | )
|                               | Other                                                    |              |            | (1,554    | ) |   |            | (3,423    | )
|                               |                                                          |              |            |           |   |   |            |          
|Total deferred tax liabilities |                                                          |              | (325,493   | )         |   |   | (313,996   | )        
|                               |                                                          |              |            |           |   |   |            |          
|Net deferred taxes             |                                                          | $            |           |           |   | $ |           |          
|                               |                                                          |              |            |           |   |   |            |          

The net change in valuation allowance for the
year ended December 31, 2002 was an increase of
$638.3 million. The net change in the valuation allowance
for years ended December 31, 2001 and 2000 was an increase
of $591.2 million and $521.2 million, respectively.

As of December 31, 2002, the Company has
capital loss carryforwards of approximately $0.5 billion
and net operating loss carryforwards of approximately
$4.0 billion. As discussed in notes 2 and 3, upon
consummation of the Plan of Reorganization during the first
quarter of 2003, the Company will recognize a substantial amount
of cancellation of indebtedness income. Accordingly, a
substantial portion of the Companys $4.5 billion of
capital and net operating loss carryforwards are expected to be
eliminated. Other tax attributes, including property bases,
could also be reduced. Any surviving capital or net operating
loss carryforwards will be subject to limitations imposed under
the ownership change rules in the U.S. Internal Revenue Code.

The Company will join with the affiliated group
of corporations controlled by Mr. Icahn in filing a
consolidated federal income tax return. As such, the Company
entered into a Tax Allocation Agreement with Starfire Holding
Corporation (Starfire), the Parent entity of the
affiliated group of corporations controlled by Mr. Icahn.
Generally, the Tax Allocation Agreement provides that Starfire
will pay all consolidated federal income taxes on behalf of the
consolidated group that includes XO, and XO will make payments
to Starfire in an amount equal to the tax liability, if any,
that it would have if it were to file as a consolidated group
separate and apart from Starfire.

F-25



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##### 



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

|                                            |  |      |       |      |  |  |       |   
|------------------------------------------- |  | ---- | ----- | ---- |  |  | ----- | --
|                                            |  | 2002 |       | 2001
|                                            |  |      |       |     
|Statutory U.S. federal rate                 |  |      | 35.0  | %    |  |  | 35.0  | % 
|State income taxes, net of federal benefit  |  |      | 6.0   | %    |  |  | 6.0   | % 
|Valuation allowance for deferred tax assets |  |      | (18.3 | )%   |  |  | (29.4 | )%
|Other identifiable intangibles              |  |      | (22.7 | )%   |  |  | (11.6 | )%
|                                            |  |      |       |      |  |  |       |   
|Effective income tax rate                   |  |      |      | %    |  |  |      | % 
|                                            |  |      |       |      |  |  |       |   

15.     COMPREHENSIVE
LOSS

Comprehensive loss includes the Companys
net loss applicable to common shares, as well as net unrealized
gains and losses on available-for-sale investments and foreign
currency translation adjustments from the Companys former
European operations, which were sold in February 2002. The
following table reflects the Companys calculation of
comprehensive loss for the years ended December 31, 2002,
2001 and 2000 (dollars in thousands):

|                                     |                                                                                                                               |                         |            |        |   |      |            |        |  |   |            |          |  
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ---------- | ------ | - | ---- | ---------- | ------ |  | - | ---------- | -------- | -
|                                     |                                                                                                                               |                        
|                                     |                                                                                                                               | Year Ended December 31,
|                                     |                                                                                                                               |                        
|                                     |                                                                                                                               | 2002                    |            | 2001   |   | 2000
|                                     |                                                                                                                               |                         |            |        |   |     
|Net loss applicable to common shares |                                                                                                                               | $                       | (3,350,362 | )      |   | $    | (1,838,917 | )      |  | $ | (1,247,655 | )       
|Other comprehensive (gains) loss:    |                                                                                                                               |                         |            |        |   |      |            |        |  |   |            |         
|                                     | Net unrealized holding (gains) losses and foreign
    currency translation adjustments                                        |                         |            |       |   |      |            | 22,556 |  |   |            | 38,870   |  
|                                     | Less: Net realized (gains) losses and foreign
    currency translation adjustments transferred to current period
    earnings |                         |            | (7,894 | ) |      |            | 4,891  |  |   |            | (206,545 | )
|                                     |                                                                                                                               |                         |            |        |   |      |            |        |  |   |            |         
|Comprehensive loss                   |                                                                                                                               | $                       | (3,358,256 | )      |   | $    | (1,811,470 | )      |  | $ | (1,415,330 | )       
|                                     |                                                                                                                               |                         |            |        |   |      |            |        |  |   |            |         

16.     STOCK
COMPENSATION ARRANGEMENTS

The Company had an Employee Stock Purchase Plan,
(the Purchase Plan), under which 12.0 million
shares of Class A common stock were authorized for
issuance. The Purchase Plan was suspended in 2001 in connection
with the commencement of XO Parents balance sheet
reorganization, and then was subsequently cancelled. As
discussed in note 2, pursuant to the Plan of
Reorganization, all interests in the Companys pre-petition
Class A common stock were terminated as of the Effective
Date. Prior to the suspension of the Purchase Plan, eligible
employees could purchase the Companys pre-petition
Class A common shares at 85% of the lower of the average
market value of the Class A common stock on the first and
the last trading day of each calendar quarter. Employees who
owned 5% or more of the voting rights of the Companys
outstanding common shares could not participate in the Purchase
Plan. During the years ended December 31, 2001 and 2000,
employees purchased 6.3 million and 0.4 million shares
of pre-petition Class A common stock, respectively, under
the Purchase Plan.

Prior to the Effective Date, the Company also
maintained the XO Communications, Inc. Stock Option Plan
(the Stock Option Plan) and certain other equity
compensation plans that had been assumed in connection with the
acquisition of Concentric Network (collectively, the Old
Stock Option Plans) to provide a performance incentive for
certain officers, employees and individuals or companies who
provide services to the Company. The Old Stock Option Plans
provided for the granting of qualified and non-qualified stock
options. The options became exercisable over vesting periods of
up to four years and expired no later than 10 years after
the date of grant.

The Company had authorized 113.0 million
shares of pre-petition Class A common stock for issuance
under the Old Stock Option Plans. In May 2001, the Company
offered its employees the opportunity to exchange certain
options outstanding under the Old Stock Option Plans for new
options equal to 85% of

F-26



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##### 



the number of shares tendered. The Company
granted the new options on January 17, 2002, the first
business day that was six months and one day following the
closing of this exchange offer. The exercise price of the new
options was the last reported sale price of the pre-petition
Class A common stock on the date of that grant, which was
$0.14 per share. The new options were 30% vested on the date of
grant and the remaining 70% vest monthly in equal installments
over the following 36-month period until fully vested. As of
December 31, 2002, 44.0 million shares were available for
issuance under the Old Stock Option Plans. However, as discussed
in note 2 under the Plan of Reorganization, all interests
in the Companys pre-petition Class A common stock
including any options or awards granted under the Old Stock
Option Plans, were terminated and cancelled as of the Effective
Date, and holders of such options under such plans were entitled
to no distribution pursuant to the Plan of Reorganization.


The Company recorded approximately
$28.9 million, $37.2 million, and $48.3 million of
stock-based compensation expense related to the Old Stock Option
Plan for the years ended December 31, 2002, 2001, and 2000,
respectively.

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

|                                  |                        |           |            |                  |   |   |       |       | 
|--------------------------------- | ---------------------- | --------- | ---------- | ---------------- | - | - | ----- | ----- | 
|                                  |                        | Number of |            | Weighted Average
|                                  |                        | Shares    |            | Exercise Price  
|                                  |                        |           |            |                 
|Outstanding at December 31, 1999  |                        |           | 55,203,534 |                  |   | $ | 9.86  |      
|                                  | Assumed in acquisition |           |            | 13,086,985       |   |   | $     | 20.51 | 
|                                  | Granted                |           |            | 36,850,732       |   |   | $     | 35.17 | 
|                                  | Canceled               |           |            | (12,590,334      | ) |   | $     | 19.52 | 
|                                  | Exercised              |           |            | (11,310,416      | ) |   | $     | 6.63  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 2000  |                        |           | 81,240,501 |                  |   | $ | 22.77 |      
|                                  | Granted                |           |            | 5,909,809        |   |   | $     | 7.72  | 
|                                  | Canceled               |           |            | (49,163,452      | ) |   | $     | 28.32 | 
|                                  | Exercised              |           |            | (3,677,562       | ) |   | $     | 5.36  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 2001  |                        |           | 34,309,296 |                  |   | $ | 13.91 |      
|                                  | Granted                |           |            | 24,978,119       |   |   | $     | 0.14  | 
|                                  | Canceled               |           |            | (15,053,582      | ) |   | $     | 9.97  | 
|                                  | Exercised              |           |            | (35,860          | ) |   | $     | 0.01  | 
|                                  |                        |           |            |                  |   |   |       |      
|Outstanding at December 31, 2002  |                        |           | 44,197,973 |                  |   | $ | 7.37  |      
|                                  |                        |           |            |                  |   |   |       |      
|Exercisable, at December 31, 2000 |                        |           | 16,369,892 |                  |   | $ | 11.30 |      
|Exercisable, at December 31, 2001 |                        |           | 18,902,125 |                  |   | $ | 12.38 |      
|Exercisable, at December 31, 2002 |                        |           | 30,350,882 |                  |   | $ | 8.00  |      

|                         |                |                     |  |                     |            |          |  |                |     |          |  |   |       |  |  |  |            |  |  |   |       | 
|------------------------ | -------------- | ------------------- |  | ------------------- | ---------- | -------- |  | -------------- | --- | -------- |  | - | ----- |  |  |  | ---------- |  |  | - | ----- | 
|                         |                |                     |  |                    
|                         |                | Options Outstanding |  | Options Exercisable
|                         |                |                     |  |                    
|                         |                |                     |  | Weighted            |            |          |  |               
|                         |                | Options             |  | Average             |            | Weighted |  | Options        |     | Weighted
|                         |                | Outstanding at      |  | Remaining           |            | Average  |  | Exercisable at |     | Average 
|                         |                | December 31,        |  | Contractual         |            | Exercise |  | December 31,   |     | Exercise
|Range of Exercise Prices |                | 2002                |  | Life                |            | Price    |  | 2002           |     | Price   
|                         |                |                     |  |                     |            |          |  |                |     |         
|$                        | 0.01  $ 0.16  |                     |  |                     | 22,929,528 |          |  |                | 8.6 |          |  | $ | 0.12  |  |  |  | 13,097,978 |  |  | $ | 0.11  | 
|$                        | 0.25  $ 6.25  |                     |  |                     | 5,892,586  |          |  |                | 6.1 |          |  | $ | 4.26  |  |  |  | 4,818,112  |  |  | $ | 4.68  | 
|$                        | 6.28  $14.06  |                     |  |                     | 8,416,102  |          |  |                | 6.5 |          |  | $ | 9.61  |  |  |  | 7,521,309  |  |  | $ | 9.39  | 
|$                        | 14.25  $66.00 |                     |  |                     | 6,959,757  |          |  |                | 6.9 |          |  | $ | 31.16 |  |  |  | 4,913,483  |  |  | $ | 30.16 | 
|                         |                |                     |  |                     |            |          |  |                |     |          |  |   |       |  |  |  |            |  |  |   |       | 
|                         |                |                     |  |                     | 44,197,973 |          |  |                | 7.6 |          |  | $ | 7.37  |  |  |  | 30,350,882 |  |  | $ | 8.00  | 
|                         |                |                     |  |                     |            |          |  |                |     |          |  |   |       |  |  |  |            |  |  |   |       | 

The Company uses the Black-Scholes option-pricing
model to determine the pro forma effect of using the intrinsic
value method rather than the fair value method of accounting for
employee stock options. The model uses certain information, such
as the interest rate on a risk-free security maturing generally
at the same time as the option being valued, and requires
certain assumptions, such as the expected amount of

F-27



---



##### 



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 2002, 2001, and 2000 are summarized
below:


|                                                        |  |      |       |      |  |      |       |   |  |  |        |  
|------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ------ | -
|                                                        |  | 2002 |       | 2001 |  | 2000
|                                                        |  |      |       |      |  |     
|Expected volatility                                     |  |      | 125.0 | %    |  |      | 125.0 | % |  |  | 77.2   | %
|Risk free interest rate                                 |  |      | 4.0   | %    |  |      | 4.3   | % |  |  | 6.2    | %
|Dividend yield                                          |  |      | 0.0   | %    |  |      | 0.0   | % |  |  | 0.0    | %
|Expected life (range in years)                          |  |      | 4.0   |      |  |      | 4.0   |   |  |  | 4.0    |  
|Weighted average fair value per share at grant
    date |  |      | $0.11 |      |  |      | $5.10 |   |  |  | $19.14 |  

In connection with the confirmation of the
Companys Plan of Reorganization, the Bankruptcy Court
approved the adoption of the XO Communications, Inc. 2002 Stock
Incentive Plan (the 2002 Stock Incentive Plan), as
of the Effective Date. Under the 2002 Stock Incentive Plan, the
Company is authorized to issue, in the aggregate, stock awards
of up to 17.6 million of shares of New Common Stock, in the
form of options to purchase stock or restricted stock.
Non-qualified options to purchase 11.5 million shares of
the New Common Stock have been granted and are outstanding as of
March 1, 2003, each at a purchase price of $5.00 per share.
Of these options, 25% are vested and the remainder vest over
three years.

The 2002 Stock Incentive Plan is administered by
the Compensation Committee of the Companys Board of
Directors, which has the discretionary authority to determine
all matters relating to awards of stock options and restricted
stock, including the selection of eligible participants, the
number of shares of common stock to be subject to each option or
restricted stock award, the exercise price of each option,
vesting, and all other terms and conditions of awards.

Unless the Compensation Committee designates
otherwise, all options expire on the earlier of (i) ten
years after the date of grant, (ii) twelve months after
termination of employment with XO due to death or complete and
permanent disability, (iii) immediately upon termination of
employment by XO for cause, or (iv) three months after
termination of employment by the employee or by XO for other
than cause.

17.     SUPPLEMENTAL
DISCLOSURE OF CASH FLOW DATA

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

|                                                                 |                                                                                                    |                         |        |      |  |      |         |        |  |   |         |           | 
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ----------------------- | ------ | ---- |  | ---- | ------- | ------ |  | - | ------- | --------- | 
|                                                                 |                                                                                                    |                        
|                                                                 |                                                                                                    | Year Ended December 31,
|                                                                 |                                                                                                    |                        
|                                                                 |                                                                                                    | 2002                    |        | 2001 |  | 2000
|                                                                 |                                                                                                    |                         |        |      |  |     
|Non-cash financing and investing activities were
    as follows: |                                                                                                    |                         |        |      |  |      |         |        |  |   |         |          
|                                                                 | Class A common stock, warrants and options
    issued in acquisitions and under lease arrangements |                         | $      |     |  |      | $       | 29,055 |  |   | $       | 3,002,309 | 
|                                                                 | Redeemable preferred stock dividends, paid in
    shares of redeemable preferred stock             |                         |        |     |  |      |         | 86,237 |  |   |         | 76,671    | 
|                                                                 | Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock  |                         |        |     |  |      |         | 6,524  |  |   |         | 17,090    | 
|                                                                 | Assumption of preferred stock and liabilities in
    acquisitions                                  |                         |        |     |  |      |         | 8,816  |  |   |         | 614,027   | 
|                                                                 | Conversion of 6 1/2% redeemable cumulative
    preferred stock to Class A common stock             |                         |        | 35   |  |      |         | 17,700 |  |   |         | 93,860    | 
|                                                                 | Other obligations assumed                                                                          |                         |        |     |  |      |         |       |  |   |         | 11,119    | 
|Cash paid for interest                                           |                                                                                                    | $                       | 11,681 |      |  | $    | 313,178 |        |  | $ | 331,892 |          

As discussed in note 2, the Company ceased
paying dividends and interest on its redeemable preferred stock
and its senior unsecured notes during 2001 and its subordinated
unsecured notes in February 2002.

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##### 



Employee
Savings and Retirement Plan

At December 31, 2002, the Company had a
defined contribution plan, generally covering all full time
employees in the United States. The Company provides a company
match to all eligible employees based on certain plan provisions
and the discretion of the Board of Directors. Beginning
November 30, 2001, the Companys pre-petition
Class A common stock was no longer available as an
investment option due to the Companys pending
reorganization. Effective April 1, 2002, the Company
changed its employer matching contribution from a 100% matching
contribution up to 5% of the participants compensation to
a 50% matching contribution up to 5% of the participants
compensation. Company contributions were $7.0 million,
$12.5 million and $8.3 million during 2002, 2001 and
2000, respectively.

18.     OPERATING
SEGMENTS

Reportable
Segments

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

Products
and Services

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

|                                   |  |                         |           |      |  |      |           |  |  |   |         | 
|---------------------------------- |  | ----------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                                   |  |                        
|                                   |  | Year Ended December 31,
|                                   |  |                        
|                                   |  | 2002                    |           | 2001 |  | 2000
|                                   |  |                         |           |      |  |     
|Voice services                     |  | $                       | 658,453   |      |  | $    | 606,848   |  |  | $ | 386,796 | 
|Data services                      |  |                         | 472,247   |      |  |      | 596,664   |  |  |   | 331,892 | 
|Integrated voice and data services |  |                         | 128,048   |      |  |      | 52,018    |  |  |   | 2,693   | 
|Other services                     |  |                         | 1,105     |      |  |      | 3,037     |  |  |   | 2,445   | 
|                                   |  |                         |           |      |  |      |           |  |  |   |         | 
|Total revenue                      |  | $                       | 1,259,853 |      |  | $    | 1,258,567 |  |  | $ | 723,826 | 
|                                   |  |                         |           |      |  |      |           |  |  |   |         | 

19.     SELECTED
QUARTERLY DATA (Unaudited)

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

|                                                                                  |  |                    |            |          |  |               |          |              |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------ | ---------- | -------- |  | ------------- | -------- | ------------ |  | - | -------- | - |  | - | -------- | -
|                                                                                  |  |                   
|                                                                                  |  | Quarter ended 2002
|                                                                                  |  |                   
|                                                                                  |  | March 31,          |            | June 30, |  | September 30, |          | December 31,
|                                                                                  |  |                    |            |          |  |               |          |             
|Revenue                                                                           |  | $                  | 333,405    |          |  | $             | 325,480  |              |  | $ | 301,526  |   |  | $ | 299,442  |  
|Cost of service                                                                   |  |                    | 140,367    |          |  |               | 134,346  |              |  |   | 126,215  |   |  |   | 121,996  |  
|Loss from operations (a)(b)                                                       |  |                    | (182,663   | )        |  |               | (176,771 | )            |  |   | (673,001 | ) |  |   | (176,463 | )
|Net loss before extraordinary item and
    cumulative effect of accounting change |  |                    | (299,028   | )        |  |               | (346,133 | )            |  |   | (695,209 | ) |  |   | (169,822 | )
|Net loss (c)                                                                      |  |                    | (2,175,654 | )        |  |               | (346,133 | )            |  |   | (695,209 | ) |  |   | (169,822 | )
|Net loss applicable to common shares (d)                                          |  |                    | (2,198,480 | )        |  |               | (286,851 | )            |  |   | (695,209 | ) |  |   | (169,822 | )
|Net loss per common share (basic and
    diluted) (e)                             |  |                    | (4.97      | )        |  |               | (0.65    | )            |  |   | (1.57    | ) |  |   | (0.39    | )

F-29



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##### 



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



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | In the third quarter of 2002, loss from
    operations includes a non-cash asset write down totaling
    $477.3 million resulting from an agreement with Level 3 to
    amend various agreements relating to the Companys Level 3
    inter-city fiber network facilities. In the second quarter of
    2001, loss from operations includes restructuring charges
    totaling $509.2 million associated with plans to
    restructure certain aspects of the Companys business
    operations.                                                                                     
|   
|(b) | Loss from operations in the quarters ended
    March 31, June 30, and September 30, 2002,
    respectively, reflects the reclassification of reorganization
    expense, net to below loss from operations.                                                                                                                                                                                                                                                                                                                                                                           
|   
|(c) | In the first quarter of 2002, net loss includes a
    $1,876.6 million impairment charge to write-off all of
    XOs goodwill as a cumulative effect of accounting change,
    pursuant to SFAS No. 142. In the third quarter of 2001, net
    loss includes an extraordinary gain of $345.0 million
    resulting from the repurchase of certain of XOs senior
    notes and a write-down of $87.0 million for an other than
    temporary decline in the value of certain investments.                                                                                            
|   
|(d) | In the second quarter of 2002, net loss
    applicable to common shares includes a net gain of
    $78.7 million as XOs preferred stock was deemed
    subject to compromise under SOP 90-7 as of the Petition Date,
    requiring the Company to recognize the remaining
    $81.5 million unamortized balance of its deferred
    modification fee and write-off certain issuance costs and
    discounts.                                                                                                                                                                         
|   
|(e) | The net loss per share data has been calculated
    based on the shares outstanding of the Companys
    pre-petition class A and class B common stock prior to
    the consummation of its Plan of Reorganization. On the Effective
    Date of the Companys Plan of Reorganization, all interests
    in XOs pre-petition class A and class B common stock were
    terminated and all outstanding shares were cancelled. See
    note 2 for further discussion. The net loss per share data
    has been adjusted for the stock splits effected in 2000 and in
    prior periods.

20.     RELATED PARTY
TRANSACTIONS

In February 2003, Dixon Properties, LLC
(Dixon), which is controlled by Mr. Icahn,
acquired ownership of the building in which XO headquarters is
located in a transaction that was approved by the Bankruptcy
Court. XO currently leases approximately 170,000 square feet of
space in that building. In connection with the purchase of the
building by Dixon, it assumed the existing lease agreement.
Pursuant to the assumed lease agreement, XO is obligated to pay
$20.4 million in the aggregate to Dixon through the
expiration of the initial term of the lease, which is
November 30, 2007.

XO Parent has entered into a Tax Allocation
Agreement, dated January 16, 2003, between XO Parent
and Starfire, a company controlled by Mr. Icahn, which in
turn indirectly controls Cardiff, in connection with the fact
that it is contemplated that these entities will be filing
consolidated federal income tax returns, and possibly combined
returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with
XO Parents Chapter 11 proceedings, establishes
the methodology for the calculation and payment of income taxes
in connection with the consolidation of the Company with
Starfire for income tax purposes. Generally, the Tax Allocation
Agreement provides that Starfire will pay all consolidated
federal income taxes on behalf of the consolidated group that
includes the Company, and the Company will make payments to
Starfire in an amount equal to the tax liability, if any, that
it would have if it were to file as a consolidated group
separate and apart from Starfire.

Arnos, which is owned and controlled by
Mr. Icahn, holds approximately 85% of the $500 million
in loans outstanding under the New Credit Agreement. Under the
New Credit Agreement, no cash interest payments are required to
be made by the Company until it achieves specified financial
targets.

In July 2001, the Company executed a multi-year
agreement with Nextel Communications, Inc. (Nextel)
pursuant to which XO will provide Nextel telecommunications
services. Individuals who served as members of the
Companys board of directors prior to the Effective Date of
the Companys Plan of Reorganization also serve on the
board of directors of Nextel. One of these members, Craig O.
McCaw,

F-30



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##### 



along with his affiliates, held a controlling
voting interest in the Company prior to the Effective Date of
the Plan of Reorganization and holds certain management rights
related to his investment in Nextel. Prior to entering into the
agreement with Nextel, the Company participated in a competitive
proposal process initiated by Nextel, which included numerous
national telecommunications providers. Therefore, in
managements opinion, the agreement with Nextel was
consummated in the normal course of operations with prices and
terms equivalent to those available to, and transacted with,
unrelated parties.


Prior to the Effective Date of the Companys
Plan of Reorganization, certain investment funds affiliated with
Forstmann Little & Co. had a significant equity
interest in the Company and had designated certain individuals
to serve as members of the Companys board of directors.
Such investment funds and other entities affiliated with
Forstmann Little & Co. also hold a significant equity
interest in McLeodUSA (McLeod). McLeod provides
interconnection and facilities based telecommunications services
to the Company, and the Company provides, on an limited basis,
telecommunications service to McLeod. In addition, during 2001,
XO acquired certain unlit metro network capacity from McLeod to
support infrastructure requirements in a specific XO market.

The following table summarizes the Companys
transactions with Nextel and McLeod (dollars in thousands):

|       |  |                           |        |                           |  |      |        |      |  |   |       |  |  |   |       | 
|------ |  | ------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ----- |  |  | - | ----- | 
|       |  |                           |        |                           |  |     
|       |  |                           |        | Payments made for        
|       |  | Revenue recognized from   |        | services received for the
|       |  | services provided for the |        | year ended               
|       |  | year ended December 31,   |        | December 31,             
|       |  |                           |        |                          
|       |  | 2002                      |        | 2001                      |  | 2002 |        | 2001
|       |  |                           |        |                           |  |      |        |     
|McLeod |  | $                         | 373    |                           |  | $    | 7,112  |      |  | $ | 1,953 |  |  | $ | 8,410 | 
|Nextel |  | $                         | 66,852 |                           |  | $    | 27,599 |      |  | $ | 2,745 |  |  | $ | 6,206 | 

The following amounts are outstanding as a result
of the Companys transactions (dollars in thousands):

|       |  |                     |        |                    |  |      |       |      |  |   |    |  |  |   |    | 
|------ |  | ------------------- | ------ | ------------------ |  | ---- | ----- | ---- |  | - | -- |  |  | - | -- | 
|       |  |                     |        |                   
|       |  | Accounts receivable |        | Accounts payable  
|       |  | as of December 31,  |        | as of December 31,
|       |  |                     |        |                   
|       |  | 2002                |        | 2001               |  | 2002 |       | 2001
|       |  |                     |        |                    |  |      |       |     
|McLeod |  | $                   | 16     |                    |  | $    | 57    |      |  | $ | 20 |  |  | $ |   | 
|Nextel |  | $                   | 11,219 |                    |  | $    | 9,732 |      |  | $ |   |  |  | $ | 10 | 

21.     COMMITMENTS
AND CONTINGENCIES

Operating
Commitments

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

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##### 



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

|                          |  |             |         |                 |  |   |         | 
|------------------------- |  | ----------- | ------- | --------------- |  | - | ------- | 
|                          |  | Operating   |         | Other long-term
|                          |  | lease       |         | contractual    
|Year Ending December 31,  |  | obligations |         | obligations    
|                          |  |             |         |                
|2003                      |  | $           | 62,733  |                 |  | $ | 74,126  | 
|2004                      |  |             | 59,045  |                 |  |   | 57,612  | 
|2005                      |  |             | 55,600  |                 |  |   | 17,574  | 
|2006                      |  |             | 51,458  |                 |  |   | 14,577  | 
|2007                      |  |             | 47,334  |                 |  |   | 11,780  | 
|Thereafter                |  |             | 232,550 |                 |  |   | 107,277 | 
|                          |  |             |         |                 |  |   |         | 
|Total minimum commitments |  | $           | 508,720 |                 |  | $ | 282,946 | 
|                          |  |             |         |                 |  |   |         | 

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##### 



Rent expense for cancelable and noncancelable
leases totaled approximately $76.4 million,
$100.1 million, and $54.6 million for the years ended
December 31, 2002, 2001, and 2000, respectively.

Capital
Leases

Network assets under capital leases totaled
approximately $16.3 million and $27.2 million as of
December 31, 2002 and 2001, respectively, and are included
in telecommunications networks in property and equipment.
Depreciation on leased assets of $2.0 million for the year
ended December 31, 2002 is included in depreciation
expense. Future minimum lease payments under capital lease
obligations as of December 31, 2002 are as follows (dollars
in thousands):

|                                                   |                                               |   |        |       | 
|-------------------------------------------------- | --------------------------------------------- | - | ------ | ----- | 
|Year Ending December 31,                           |                                               |  
|                                                   |                                               |  
|2003                                               |                                               | $ | 10,031 |      
|2004                                               |                                               |   | 2,809  |      
|2005                                               |                                               |   | 2,668  |      
|2006                                               |                                               |   | 2,416  |      
|2007                                               |                                               |   | 1,733  |      
|Thereafter                                         |                                               |   | 277    |      
|                                                   |                                               |   |        |      
|Total minimum capital lease payments               |                                               |   | 19,934 |      
|Less: imputed interest                             |                                               |   | 4,123  |      
|Less: current portion of capital lease obligations |                                               |   | 8,629  |      
|                                                   |                                               |   |        |      
|                                                   | Long-term portion of capital lease obligation |   | $      | 7,182 | 
|                                                   |                                               |   |        |      

As of December 31, 2002 both the current
portion and long-term portions of the capital lease obligation
are classified as subject to compromise, in accordance with SOP
90-7.

Legal
Proceedings

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

Prepaid
Calling Card Tax Matter

On July 26, 2002, the Company was advised by
the staff of the Securities and Exchange Commission that it was
conducting an informal inquiry primarily relating to obligations
with respect to, and XOs accrual of liabilities for,
specified federal excise and state sales tax and similar tax
obligations arising in connection with prepaid calling card
services and relating to certain other matters. Sales from
prepaid calling card services that are potentially subject to
these taxes accounted for approximately $56 million of
total revenues for 1999, when the Company began providing these
services, through June 30, 2002. The Company believes that
its accounting for these potential obligations is appropriate
and that its accruals of liabilities relating to these
obligations are adequate.

Unfunded
Affiliate Pension Obligation

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

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##### 



As a result of the more than 80% ownership
interest in XO Parent by Mr. Icahns affiliates,
XO Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr. Icahn has
a direct or indirect ownership interest of at least 80%, which
includes ACF Industries, Inc. (ACF), which is the
sponsor of certain pension plans. As most recently determined by
the ACF plans actuaries, pension plans maintained by ACF
are underfunded in the aggregate by approximately
$14 million on an ongoing actuarial basis and by
approximately $102 million if those plans were terminated.
As a member of the same controlled group, XO Parent and
each of its subsidiaries would be liable for any failure of ACF
to make ongoing pension contributions or to pay the unfunded
liabilities upon a termination of the ACF pension plans.

The current underfunded status of the ACF pension
plans requires ACF to notify the PBGC if XO Parent or its
subsidiaries cease to be a member of the ACF controlled group.
In addition, so long as the Company remains a member of the ACF
controlled group, certain other reportable events,
including certain extraordinary dividends and stock redemptions,
must be reported to the PBGC.

22.     SUBSEQUENT
EVENT

Effectiveness
of Bankruptcy Plan

The Plan of Reorganization that was confirmed by
order of the Bankruptcy Court on November 15, 2002 became
effective January 16, 2003, and is discussed in more detail
in note 2.

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##### 



XO Communications, Inc.

Schedule II  Consolidated
Valuation and Qualifying Accounts

For The Years Ended December 31, 2002,
2001 and 2000


|                                |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |         | 
|------------------------------- | -------- | --------- | - | ----------------- |  | ---------- | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                                |          | Beginning |   | Additions charged |  |            |   | Ending 
|(in thousands)                  |          | Balance   |   | to expense        |  | Reductions |   | Balance
|                                |          |           |   |                   |  |            |   |        
|Allowance for doubtful accounts |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |        
|                                | 2000     |           | $ | 7,215             |  |            | $ | 21,999  |  |  | $ | (8,215   | ) |  | $ | 20,999  | 
|                                | 2001     |           | $ | 20,999            |  |            | $ | 45,757  |  |  | $ | (34,264  | ) |  | $ | 32,492  | 
|                                | 2002     |           | $ | 32,492            |  |            | $ | 53,631  |  |  | $ | (49,093  | ) |  | $ | 37,030  | 
|Restructuring accrual           |          |           |   |                   |  |            |   |         |  |  |   |          |   |  |   |        
|                                | 2000     |           | $ | 30,935            |  |            | $ |        |  |  | $ | (30,935  | ) |  | $ |        | 
|                                | 2001 (a) |           | $ |                  |  |            | $ | 509,202 |  |  | $ | (383,429 | ) |  | $ | 125,773 | 
|                                | 2002 (b) |           | $ | 125,773           |  |            | $ | 480,168 |  |  | $ | (526,951 | ) |  | $ | 78,990  | 



---

|    |                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Only $16.6 million of the reduction in the
    2001 restructuring accrual was for cash payments. The balance
    was associated with the write down for the excess of carrying
    value of assets to be sold or abandoned and was applied to those
    assets.                                          
|   
|   
|(b) | Only $49.7 million of the reduction in 2002
    restructuring accrual was for cash payments. The balance was
    associated with the non-cash asset write down resulting from an
    agreement with Level 3 to amend various agreements relating
    to XOs Level 3 inter-city fiber network facilities.

S-1