##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C. 20549
  FORM 10-K
   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006ORTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   no. 0-30900
  XO Holdings, Inc.
 (Exact name of registrant as
    specified in its charter)
  Delaware(State or other jurisdiction
    of incorporation or organization)

54-1983517(I.R.S. employer
    identification no.)   11111
    Sunset Hills Road
    Reston, Virginia 20190(Address of principal executive
    offices, including zip code)
  (703) 547-2000(Registrants telephone
    number, including area code)
  Securities
    registered pursuant to Section 12(b) of the Act:
    None
  Securities
    registered pursuant to Section 12(g) of the Act:
    Common Stock, par value $0.01 per share(Title of class)
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K.  Yes þ o
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ
  Over-the-Counter




---



##### 



TABLE OF
    CONTENTS
  
  PagePART I1.


Business


11A.


Risk
    Factors


281B.


Unresolved Staff
    Comments


352.


Properties


353.


Legal
    Proceedings


364.


Submission of
    Matters to a Vote of Security Holders


39PART II5.


Market for
    Registrants Common Equity and Related Stockholder Matters
    and Issuer Purchases of Equity Securities


406.


Selected Financial
    Data


417.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


427A.


Quantitative and
    Qualitative Disclosures about Market Risk


598.


Financial
    Statements and Supplementary Data


609.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


609A.


Controls and
    Procedures


609B.


Other
    Information


62PART III10.


Directors and
    Executive Officers of the Registrant


6211.


Executive
    Compensation


6212.


Security Ownership
    of Certain Beneficial Owners and Management


6213.


Certain
    Relationships and Related Transactions


6214.


Principal
    Accounting Fees and Services


63PART IV15.


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


64Signatures


65EX-10.27EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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##### Table of Contents



PART I  Item 1.
    Business  Forward-looking
    and Cautionary Statements
    
    our services, including the development and deployment of data
    products and services based on Internet protocol
    (IP), Ethernet, broadband wireless and other
    technologies and strategies to expand our targeted customer base
    and broaden our sales channels;
    the transition from our current network infrastructure to an
    IP-based
    infrastructure;
    costs and growth associated with the migration of our customers
    to an IP communications environment;
    the development of our fixed wireless communications business,
    including the continued build-out of Nextlinks wireless
    network;
    the growth in demand of wireless telecommunications carriers for
    greater wireline and wireless bandwidth;
    growth in customers who can be served by Ethernet access;
    possible strategic alternatives, such as renegotiating or
    refinancing our existing credit facility, consummating one or
    more business combinations, divesting certain assets, businesses
    or lines of business, raising capital through one or more
    offerings of debt
    and/or
    equity securities or selling the Company;
    the operation of our network and back office systems, including
    with respect to the development of intellectual properties;
    liquidity and financial resources, including anticipated capital
    expenditures, funding of capital expenditures and anticipated
    levels of indebtedness;
    trends related to and expectations regarding the results of
    operations in future periods, including but not limited to those
    statements set forth in Managements Discussion and
    Analysis of Financial Condition and Results of Operations below;
    the impact of judicial decisions, legislation, and regulatory
    developments on our cost structure, services, and marketing
    initiatives;
    the anticipated increase in costs due to recent Federal
    Communication Commission (FCC) rulemaking that
    resulted in rate increases for UNEs; and
    our ability to maintain our FCC licenses.    
    the inherent uncertainties in projecting future results for any
    business;
    the inability to predict the outcome of future judicial
    decisions, telecommunications-related legislation or regulatory
    decisions, or the reaction by incumbent carriers to such
    developments; 1




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##### Table of Contents




    general economic conditions in the geographic areas that we are
    targeting for the sale of telecommunications services;
    the ability to achieve and maintain market penetration and
    revenue levels sufficient to provide financial viability to our
    business;
    the quality and price of similar or comparable
    telecommunications services offered, or to be offered, by our
    current or future competitors; and
    future telecommunications-related legislation or regulatory
    developments and the conduct of incumbent carriers in reaction
    to such developments.  Overview
        Company
    History
        Over-the-Counter
       2




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##### Table of Contents



(703) 547-2000. Form 10-K, Form 10-Q Form 8-K,
    2006
    Highlights
  
    Termination of Equity Purchase Agreement:The
    Companys predecessor, entered into an Equity Purchase
    Agreement, dated as of November 4, 2005, as amended on
    March 1, 2006, with Elk Associates LLC that provided for
    the sale of its national wireline telecommunications business,
    through the sale of all of the outstanding equity interests in
    XOC, for an aggregate purchase price of $700 million,
    consisting of $625 million in cash and the assumption of
    $75 million of the Companys outstanding senior
    secured debt. On March 27, 2006, Elk Associates notified
    the Special Committee of the Companys Board of Directors
    of its belief that pending litigation challenging the
    transaction would not end by July 3, 2006, the date on
    which Elk Associates would have the right to terminate the
    Equity Purchase Agreement. Elk Associates also indicated that it
    intended to exercise its termination right on that date if the
    litigation remained pending. In addition, Elk Associates
    expressed its willingness, in order to avoid unnecessary further
    distractions and costs to the Company, to mutually terminate the
    Equity Purchase Agreement without seeking any damages or any
    break-up
    fee. On March 30, 2006, on the recommendation of the
    Special Committee, the Companys Board of Directors
    determined to mutually terminate the Equity Purchase Agreement
    and the Equity Purchase Agreement was so terminated on such date.
    Nextlink Launched:  On April 24, 2006, the
    Company announced the launch of Nextlink, a new broadband
    wireless service provider targeting mobile and wireline
    carriers, businesses and government agencies. Utilizing licensed
    spectrum covering 75 metropolitan markets across the United
    States, Nextlink offers customers TDM and Ethernet connectivity
    at speeds from 1.544 Mbps (T-1) up to
    622 Mbps (OC-12) as an alternative to
    conventional broadband services delivered over copper wires.
    Nextlinks services are fixed wireless
    broadband offerings that rely primarily on licensed local
    multipoint distribution system (LMDS) wireless
    spectrum in the 28 GHz  31 GHz range, as well as
    39 GHz and other common carrier spectrum in the 6 GHz,
    11GHz and 18 GHz bands.
    Completion of Next Generation Nationwide Inter-City Fiber
    Optics Network:  In October 2006, the Company
    completed the lighting of 2 of the 18 strands of its new next
    generation nationwide inter-city fiber optics network. This
    network provides for increased capacity, which enables the
    Company to deliver 10 Gbps transport services to meet increased
    bandwidth needs of business and wholesale customers.
    Realignment of Business Operations:  On
    October 9, 2006, the Company announced the realignment of
    its XOC segment through the formation of two new business units,
    XO Business Services and XO Carrier Services. The formation of
    these new business units strengthens XOCs focus on
    specific customer markets and highlights XOCs unique
    competitive advantages in serving business and wholesale
    customers as the telecommunications industry consolidates. XO
    Business Services provides businesses and large enterprises with
    managed IP, data and
    end-to-end
    voice communications solutions. XO Carrier Services delivers a
    broad range of IP, data and wholesale voice services to cable
    companies, content and search companies, telecommunications
    companies, Voice over Internet Protocol (VoIP)
    providers, and wireless service providers. 3




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##### Table of Contents



The
    U.S. Telecommunications Market
      Federal Rulemaking.
  Emergence of New Technologies.
  IP Communications. IP-based IP-based IP-based
  Fixed Broadband Wireless. last-mile
  Mobile Wireless Technologies.
 4




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##### Table of Contents



Industry Consolidation.
  Growth of the Mobile Wireless
    Market.
  Entry of New Telecommunications
    Competitors.
  Industry Competition.
  Incumbent Local Exchange Carriers.
  Competitive Local Exchange Carriers.
  Long Distance and Internet Services
    Companies.
  VoIP Carriers.
 5




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##### Table of Contents



Cable-Based Service Providers.
  Fixed Wireless Carriers.
  Proprietary Deployment. point-to-point
  Business
    Segment Overview
  XO
    Communications
    XOC
    Business Strategy
    Focus on Business and Carrier
    Customers.
  Focus on IP and Managed
    Services. IP-based
    IP-based IP-based IP-PBX IP-VPN IP-VPN
 6




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##### Table of Contents



IP-based
  Exploit Its Unrivaled IP Network
    Assets.
  on-network
    Deliver an Outstanding Customer
    Experience.
  Leverage Our Network Investment and Control
    Costs.
  Leverage Nextlink Wireless Spectrum to Gain Customers and
    Reduce Network Costs.
  Evaluate Strategic Alternatives.
  XOC
    Operating Units
   7




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##### Table of Contents



XO
    Business Services
  end-to-end Small-to-Medium
  Business
    Services Market
    business-to-business
  business-to-business
    Small-to-Medium
    Business (SMB):
  Enterprise:
  market-by-market
 8




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##### Table of Contents



XO
    Business Services Distribution Channels
      XO
    Carrier Services
    Carrier
    Services Market
          Carrier
    Services Distribution Channels
     9




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##### Table of Contents



XOC
    Network Overview
    Metro
    Fiber Networks and Local Facilities
       10




---



##### Table of Contents



Metro Fiber





Metro FiberNetwork





NetworkState

Location

Service Market

State

Location

Service MarketAZ

Phoenix

Phoenix

MI

Detroit

DetroitCA

Los Angeles

Los Angeles

MN

Minneapolis

Greater Minneapolis/St. PaulCA

Orange County

Anaheim

MO

St Louis

St LouisCosta Mesa

NJ

New Jersey

Bergen/PassaicFullerton





Middlesex-Somerset-HunterdonGarden Grove





NewarkHuntington Beach





Jersey CityInglewood





Monmouth-OceanIrving





TrentonLong Beach

NV

Las Vegas

Las VegasOrange

NY

New York

ManhattanSanta Ana





Nassau-SuffolkCA

Sacramento

Sacramento

OH

Cleveland/Akron

Cleveland-Lorain-ElyriaCA

San Diego

San Diego





AkronCA

San Francisco

San Francisco





Canton-MassillonOakland

OH

Columbus

ColumbusFremont

OR

Portland

Portland-Vancouver, OR-WAMilpitas

PA/DE

Central PA

Allentown-Bethlehem-EastonMountain View





Harrisburg-Lebanon-CarlislePalo Alto





LancasterSanta Clara





ReadingSunnyvale





Scranton-Wilkes-Barre-HazletonCA

San Jose

San Jose





YorkCO

Denver

Denver





Wilmington-Newark, DE-MDBoulder-Longmont





DoverDC/VA

Washington DC/

Washington, DC-MD-VA-WV

PA

Philadelphia

Philadelphia, PA-NJNorthern VAFL

Ft Lauderdale

Ft Lauderdale

TN

Memphis

Memphis, TN-AR-MSFL

Miami

Miami

TN

Nashville

NashvilleWest Palm Beach-Boca Raton

TX

Austin

Austin-San MarcoFL

Orlando

Orlando

TX

Dallas / Ft Worth

DallasTampa-St.FL

Tampa

Petersburg-Clearwater





Fort Worth-ArlingtonGA

Atlanta

Atlanta

TX

Houston

HoustonMarietta

TX

San Antonio

San AntonioIL

Chicago

Chicago

UT

Salt Lake City

Salt Lake City-OgdenMA

Boston

Boston, MA-NH





Orem/ProvoBrockton

WA

Seattle

Seattle-Bellevue-EverettLawrence, MA-NH

WA

Spokane

SpokaneLowell, MA-NH





LewistonWorcester, MA-CT





ClarkstonMD

Baltimore

Baltimore





Coeur dAlene   Inter-city
    Network
     11




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##### Table of Contents



Form 10-K,
    end-to-end Point-of-Presence
      XOC
    Network Services Overview
    XOC
    Customer Care Overview
   12




---



##### Table of Contents



XOC
    Service Offerings
    VoIP
    Services
    VoIP Origination &
    Termination. IP-originated
  XOptions Flex VoIP Bundle. VoIP-enabled IP-telephony
  Data and
    Internet Services
    Dedicated Internet Access.
    MPLS
    IP-VPN. IP-based IP-VPN
 13




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##### Table of Contents



IP-based business-to-business business-to-customer
  Ethernet Transport.
  Ethernet Access.
  Private Line. point-to-point back-up
  point-to-point
  Data/Telco Collocation.
  IP Aggregation.
  DSL.
 14




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##### Table of Contents



Voice
    Services
    XOptions Bundle.
  Local Service.
    Long Distance.
    Conferencing.
  Managed
    Voice Services
    XO One iPBX Services. IP-based IP-enabled
  XO One Hosted PBX.
  Network IVR.
 15




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##### Table of Contents



Hosting
    Websites and Application Hosting. e-mail, e-commerce
  Server Collocation.
  Online Business Applications. E-mail e-mail
  Professional Website Services. Set-Up, e-commerce pay-per-click
  Wireless
    Diversity and Redundancy
    Nextlink
    Wireless
      Nextlink
    Business Strategy
    Preserve the Spectrum.
  Leverage XO Communications.
 16




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##### Table of Contents



Penetrate the Mobile Backhaul
    Market. and/or
  Establish Retail Partner
    Programs.
  Nextlink
    Spectrum Licences
    License










B


39 GHz


LicenseNumber

City

State

Population


A Band

Band


Chanls


RenewalWPOL286

New York (PMSA of 5 boroughs &
    3 counties)

NY


8,546,846


A3 *










2/1/2016WPLM417

Atlanta

GA


3,197,171





B







6/17/2008WPLM412

Austin

TX


899,361





B







6/17/2008WPLM416

Baltimore

MD


2,430,563





B







6/17/2008WPLM430

Birmingham

AL


1,200,336


A










6/17/2008WPLM413

Boston

MA


4,133,895





B







6/17/2008WPLM418

Chattanooga

TN


510,860


A










6/17/2008WPLM405

Chicago

IL


8,182,076





B







6/17/2008WPLM424

Cincinnati

OH


1,990,451





B







6/17/2008WPLM422

Cleveland-Akron

OH


2,894,133





B







6/17/2008WPLM410

Columbia

SC


568,754


A










6/17/2008WPLM438

Columbus

OH


1,477,891





B







6/17/2008WPON926

Denver

CO


2,073,952


A1(part)










6/17/2008WPLM408

Detroit

MI


4,705,164





B







6/17/2008WPLM398

Hartford

CT


1,123,678





B







6/17/2008WPLM411

Hickory-Lenoir-Morganton

NC


292,409


A










6/17/2008WPLM431

Huntsville

AL


439,832


A










6/17/2008WPLM435

Indianapolis

IN


1,321,911





B







6/17/2008WPLM436

Kansas City

MO


1,839,569





B







6/17/2008WPLM434

Klamath Falls

OR


74,566





B







6/17/2008WPLM420

Lakeland-Winterhaven

FL


405,382





B







6/17/2008WPLM429

Lexington

KY


816,101


A










6/17/2008WPLM401

Los Angeles

CA


14,549,810


A










6/17/2008WPLM428

Louisville

KY


1,352,955


A










6/17/2008WPLM423

Mansfield

OH


221,514





B







6/17/2008WPLM433

Medford-Grants Pass

OR


209,038





B







6/17/2008WPOH970

Milwaukee

WI


1,751,525


A










6/17/2008WPLM419

Minneapolis-St. Paul

MN


2,840,561


A










6/17/2008WPOH945

New Haven-Waterbury-Meriden

CT


978,311





B







6/17/2008 17




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##### Table of Contents



License










B


39 GHz


LicenseNumber

City

State

Population


A Band

Band


Chanls


RenewalWPLM400

New London-Norwich

CT


357,482





B







6/17/2008WPLM397

New York (whole BTA)

NY


18,050,615





B







6/17/2008WPLM421

Ocala

FL


194,833





B







6/17/2008WPLM432

Portland

OR


1,690,930


A










6/17/2008WPOH956

Providence-Pawtucket, New Bedford-
    Fall River

RI,MA


1,509,789


A










6/17/2008WPLM437

Rochester

NY


1,118,963





B







6/17/2008WPLM407

Sacramento

CA


1,656,581


A










6/17/2008WPLM402

San Diego

CA


2,498,016





B







6/17/2008WPLM406

San Francisco-Oakland-San Jose

CA


6,420,984





B







6/17/2008WPLM404

San Luis Obispo

CA


217,162


A










6/17/2008WPLM403

Santa Barbara-Santa Maria

CA


369,608


A










6/17/2008WPLM427

Seattle-Tacoma

WA


2,708,949


A










6/17/2008WPLM425

St. Louis

MO


2,742,114





B







6/17/2008WPLM409

Toledo

OH


782,184





B







6/17/2008WPLM415

Washington

DC


4,118,628





B







6/17/2008WPOH677

Albuquerque

NM


688,612


A










9/1/2008WPOH679

El Paso

TX


649,860


A










9/1/2008WPOH676

Tucson

AZ


666,880


A










9/1/2008WPOH683

Lawton-Duncan

OK


177,830


A










9/1/2008WPOH682

Oklahoma City

OK


1,305,472


A










9/1/2008WPOH684

Omaha

NE


905,991


A










9/1/2008WPOH676

Tulsa

OK


836,559


A










9/1/2008WPOH944

Albany-Schenectady

NY


1,028,615


A










10/6/2008WPOH963

Atlanta

GA


3,197,171


A










10/6/2008WPOH954

Austin

TX


899,361


A










10/6/2008WPOH962

Baltimore

MD


2,430,563


A










10/6/2008WPOH955

Boston

MA


4,133,895


A










10/6/2008WPOH955

Buffalo-Niagara Falls

NY


1,231,795


A










10/6/2008WPOH950

Charlotte-Gastonia

NC


1,671,037


A










10/6/2008WPOH948

Chicago

IL


8,182,076


A










10/6/2008WPOH953

Dallas

TX


4,329,924


A










10/6/2008WPOH975

Des Moines

IA


728,830


A










10/6/2008WPOH949

Detroit

MI


4,705,164


A










10/6/2008WPOH952

Greenville-Spartanburg

NC


788,212


A










10/6/2008WPOH943

Hartford

CT


1,123,678


A










10/6/2008WPOH966

Houston

TX


4,054,253


A










10/6/2008WPOH974

Indianapolis

IN


1,321,911


A










10/6/2008WPOH979

Jacksonville

FL


1,114,847


A










10/6/2008WPOH981

Knoxville

TN


948,055


A










10/6/2008WPOH947

Los Angeles

CA


14,549,810





B







10/6/2008WPOH959

Manchester-Nashua-Concord

NH


540,704


A










10/6/2008WPOH973

Memphis

TN


1,396,390


A










10/6/2008WPOH967

Miami-Ft. Lauderdale

FL


3,270,606


A










10/6/2008WPLM426

Milwaukee

WI


1,751,525





B







10/6/2008WPOH964

Minneapolis-St. Paul

MN


2,840,561





B







10/6/2008WPOH980

Nashville

TN


1,429,309


A










10/6/2008WPLM399

New Haven-Waterbury-Meriden

CT


978,311


A










10/6/2008 18




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##### Table of Contents



License










B


39 GHz


LicenseNumber

City

State

Population


A Band

Band


Chanls


RenewalWPOH942

New York (unencumbered by PMSA)

NY


9,503,769


A










10/6/2008WPOH960

Philadelphia, Wilmington (DE),
    Trenton (NJ)

PA


5,899,345


A










10/6/2008WPOH971

Pittsburgh

PA


2,507,839


A










10/6/2008WPLM414

Providence-Pawtucket, New
    Bedford-Fall River

RI,MA


1,509,789





B







10/6/2008WPOH951

Raleigh-Durham

NC


1,089,423


A










10/6/2008WPOH972

Richmond-Petersburg

VA


1,090,869


A










10/6/2008WPOH978

Rochester

NY


1,118,963


A










10/6/2008WPOH976

San Antonio

TX


1,530,954


A










10/6/2008WPOH958

Springfield-Holyoke

MA


672,970


A










10/6/2008WPOH969

St. Louis

MO


2,742,114


A










10/6/2008WPOH946

Syracuse

NY


791,140


A










10/6/2008WPOH965

Tampa-St. Petersburg-Clearwater

FL


2,249,405


A










10/6/2008WPOH961

Washington

DC


4,118,628


A










10/6/2008WPOH968

West Palm Beach-Boca Raton

FL


893,145


A










10/6/2008WPOH957

Worcester-Fitchburg-Leominster

MA


709,705


A










10/6/2008WPQT938

Denver-Boulder-Greeley

CO


2,073,952









B



10/18/2010WPQT942

Las Vegas

NV


857,856









E



10/18/2010WPQT946

Las Vegas

NV


857,856









G



10/18/2010WPQT939

San Diego

CA


2,498,016









B



10/18/2010WPQT944

San Diego

CA


2,498,016









F



10/18/2010WPQT947

San Diego

CA


2,498,016









N



10/18/2010WPQT940

San Francisco

CA


6,420,984









D



10/18/2010WPQT945

San Francisco

CA


6,420,984









F



10/18/2010WPQT941

Toledo

OH


782,184









E



10/18/2010WPQT943

Toledo

OH


782,184









F



10/18/2010   LegendA

27,500 to 28,350 MHz, 29,100
    to 29,250 MHz, 31,075 to 31,225 MHz = 1,150 MHzA1

27,500 to 28,350 MHz =
    850 MHzA3

31,075 to 31,225 MHz =
    150 MHzB

31,000 to 31,075 MHz, 31,225
    to 31,300 MHz = 150 MHz39 GHz B

38,650 to 38,700 MHz, 39,350
    to 39,400 = 100 MHz39 GHz E

38,800 to 38,850 MHz, 39,500
    to 39,550 = 100 MHz39 GHz G

38,900 to 38,950 MHz, 39,600
    to 39,650 = 100 MHz39 GHz F

38,850 to 38,900 MHz, 39,550
    to 39,600 = 100 MHz39 GHz N

39,250 to 39,300 MHz, 39,950
    to 40,000 = 100 MHz39 GHz D

38,750 to 38,800 MHz, 39,450
    to 39,500 = 100 MHz     *
    
    Nextlinks A3 Band Licenses in
    New York City were renewed by the FCC during the first quarter
    of 2006 through February 2016. On August 21, 2006, the FCC
    granted a request by Nextlink to extend the deadline for
    construction of the facilities in the NY A3 Block until October
    2008 to conform to the construction deadline for its other LMDS
    licenses in the New York marketplace. 19




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##### Table of Contents



Nextlink
    Wireless Network Overview
  point-to-multipoint point-to-point
  Nextlink Network
    Architecture.
   20




---



##### Table of Contents



Fixed Wireless Spectrum
    Performance. middle-mile
  line-of-sight line-of-sight
   21




---



##### Table of Contents



Nextlink
    Licensed Spectrum Holdings
  
  Wireless Network Equipment.
 22




---



##### Table of Contents



Regulatory
    Overview
    rights-of-way,
      Federal
    Regulation
    Implementation
    of the Telecom Act
  The
    Telecom Acts Local Competition Framework
      
    interconnection with the networks of incumbents and other
    carriers, which permits our customers to exchange traffic with
    customers connected to other networks; 23




---



##### Table of Contents




    requirements that the ILECs make available access to UNEs,
    including local loops and transport, at prices based upon their
    forward-looking economic costs, thereby enabling us to serve
    customers not directly connected to our networks;
    compensation obligations, which mandate reciprocal payment
    arrangements for local traffic exchange between us and both
    incumbent and other competitive carriers and compensation for
    terminating local traffic originating on other carriers
    networks;
    requirements concerning local number portability, which allows
    customers to change local carriers without changing telephone
    numbers, thereby removing a significant barrier for a potential
    customer to switch to our local voice services;
    access to assignment of telephone numbers, which enables us to
    provide telephone numbers to new customers on the same basis as
    incumbent carriers;
    requirements that ILECs permit CLECs to purchase their services
    for resale to the public at a wholesale rate that is less than
    the rate charged by the ILECs to their retail customers; and,
    collocation rights allowing us to place telecommunications
    equipment in ILEC central offices, which enables us to have
    direct access to local loops and other network elements.      Unbundling
    of Incumbent Network Elements.
    United States Telecom
    Association v. FCC No. 00-1012
   24




---



##### Table of Contents



FCC
    Regulation of Wireless Services
    FCC
    Regulation of LMDS and 39 GHz Services in
    Particular
  Generally. and/or line-of-sight
  Performance Requirements.
      Additional
    Federal Regulations
    FCC
  Verizon Petitions for Forbearance from Unbundling
    Requirements.
  VoIP. IP-enabled
 25




---



##### Table of Contents



IP-enabled
  AT&T Declaratory Ruling Re: VoIP.
  ILEC Provision of Broadband Telecommunications Services and
    Information Services. e.g
  Intercarrier Compensation Reform.
 26




---



##### Table of Contents



Cost-based TELRIC Pricing.
  VoIP 911 Regulation.
  CALEA Regulation. dial-up
  Georgia Public Service Commission Petition for Declaratory
    Ruling re: 271 Pricing.
  AT&T/BellSouth Consolidation.
  State and
    Local Regulation
   27




---



##### Table of Contents



rights-of-way, rights-of-way.
  Wireless
    Services Affected by State Regulations
    Item 1A.
    Risk
    Factors  Risks
    Related to Liquidity, Financial Resources, and
    Capitalization
  The
    covenants in the Credit Facility restrict the Companys
    financial and operational flexibility, which could have an
    adverse effect on its results of operations.
     28




---



##### Table of Contents




    they may impair its ability to obtain additional financing in
    the future;
    they may limit its flexibility in planning for or reacting to
    changes in market conditions; and
    they may cause it to be more vulnerable in the event of a
    downturn in business.  and/or and/or
  The
    Company may not prevail in its claims against the ATLT, and it
    may not be successful in defending against the ATLTs
    counterclaims.
    The
    Company continues to review its remaining strategic
    alternatives.
     29




---



##### Table of Contents



The
    Company incurred a net loss in the past and, in the near term,
    may not generate funds from operations sufficient to meet all of
    its cash requirements.
    Risks
    Related to the Companys Wireline Operations
  In the
    event of a substantial failure of the Companys operations
    support systems, including the systems for sales tracking, order
    entry and provisioning, and billing, the Companys Disaster
    Recovery System may not permit the recovery of its systems
    operations
    and/or
    perform critical aspects of its services for an extended period,
    which would adversely affect the Companys revenues
    and/or
    capital resources.
  and/or
  The
    Companys rights to the use of the unlit capacity that
    makes up its network may be affected by the financial health of
    the Companys fiber providers.
    The
    Company may not be able to continue to connect its network to
    ILEC networks or to maintain Internet peering arrangements on
    favorable terms, which would impair the Companys growth
    and performance.
     30




---



##### Table of Contents



The
    Company depends on a limited number of third party service
    providers for the performance of several of its business
    operations, including payroll and billing services.
    The
    Company may be unable to adequately protect its intellectual
    property or rights to licenses for use of third-party
    intellectual property, and may be subject to claims that the
    Company infringes the intellectual property of others, which
    could substantially harm the Companys business.
    The
    Company experiences turnover among its experienced and trained
    employee base, which could result in the Companys
    inability to continue performing certain functions and
    completing certain initiatives in accordance with its existing
    budgets and operating plans.
    Several
    customers, in the aggregate, account for a significant portion
    of the Companys revenue, and some of its customer
    agreements may not continue due to bankruptcies, acquisitions,
    non-renewal, or other factors.
   31




---



##### Table of Contents



Risks
    Related to the Companys Wireless Operations
  Nextlink
    is in the early stages of development and the Company may not be
    able to implement its business strategy or to obtain new
    customers.
    Two
    customers, one affiliated, account for nearly all of
    Nextlinks revenue.
    The
    Companys licenses may not be renewed upon
    expiration.
    point-to-multipoint point-to-point
  license-by-license
 32




---



##### Table of Contents



A key
    aspect of the Companys business strategy is to provide
    backhaul services for providers of cellular wireless mobile
    telecommunications, and its business will depend to a
    substantial degree on the widespread adoption of
    bandwidth-intensive applications, such as 3G and 4G
    applications.
    The
    Company may not be able to successfully execute the necessary
    real estate transactions, or to negotiate acceptable rates in
    those agreements for placing antennas and having access to
    necessary equipment.
    Additional
    spectrum may become available from the FCC, increasing the
    number of
    and/or
    viability of the Companys competitors or even allowing the
    Companys customers or potential customers to obtain their
    own spectrum outright, reducing their need to obtain spectrum or
    services from the Company.
      The
    Company is dependent on key personnel and its success depends on
    its ability to attract, train and retain additional qualified
    personnel.
   33




---



##### Table of Contents



FCC
    Regulation of radio frequency emissions and radio frequency
    environments may increase the Companys costs
    and/or limit
    its operations.
    Risks
    Related to Competition and the Companys
    Industry
  Technological
    advances and regulatory changes are eroding traditional barriers
    between formerly distinct telecommunications markets, which
    could increase the competition the Company faces and put
    downward pressure on prices, which could impair its
    results.
    The
    telecommunications industry is highly competitive, and has
    experienced the consolidation of many existing competitors and
    the introduction of significant new competitors.
    The
    Company is subject to comprehensive and continually evolving
    regulation.
   34




---



##### Table of Contents



04-290
  Risks
    Related to the Companys Common Stock
  An entity
    owned and controlled by our Chairman is the Companys
    majority stockholder.
    Future
    sales or issuances of the Companys common stock could
    adversely affect the Companys stock price
    and/or its
    ability to raise capital.
      and/or
    Item 1B.
    Unresolved
    Staff Comments   35




---



##### Table of Contents



Item 2.
    Properties          Item 3.
    Legal
    Proceedings    Allegiance
    Telecom Liquidating Trust Litigation
    true-up True-Up)
 36




---



##### Table of Contents



True-up
  Litigation
    Relating to the Sale of the Wireline Business
  R2 Investments v. Carl
    C. Icahn, et al. No. 1862-N).
  Allegiance
    Telecom Liquidating Trust, as successor in interest to the
    rights of Allegiance Telecom Inc., and its direct and indirect
    subsidiaries v. Carl C. Icahn, et al. No. 1877-N)) Donald J. Hillenmeyer, Jr. v. Carl C. Icahn,
    et al. No. 1880-N))
     37




---



##### Table of Contents



Houlihan
    Lokey Howard and Zukin Capital LLC
    Level 3
    Verizon
    Indemnification Notice
  Aerotel, LTD v Verizon Company et al
  Verizon
    Indemnification Notice II
  TGIP, Inc. v AT&T Corp, Verizon Communications
    et al
  XO
    Holdings, Inc et al. (XO) v. AT&T Corp.
    et al. (AT&T).
   38




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders   39




---



##### Table of Contents



Part II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities    2006


2005High


Low


High


LowFirst Quarter

$
3.95


$
1.84


$
3.37


$
2.30Second Quarter

$
5.40


$
3.71


$
3.09


$
1.75Third Quarter

$
4.90


$
3.80


$
3.01


$
2.22Fourth Quarter

$
4.95


$
3.50


$
2.63


$
1.76   over-the-counter mark-up,
 40




---



##### Table of Contents



Item 6.
    Selected
    Financial Data    Predecessor XOReorganized XO(f)


Year EndedYears Ended December 31,


December 31,2006


2005


2004(a)


2003


2002Statement of Operations
    Data:Revenue

$
1,411,616


$
1,433,622


$
1,300,420


$
1,110,483


$
1,259,853Loss from operations(b)


(112,151
)


(126,394
)


(370,292
)


(111,858
)


(1,208,898
)Net loss(c)


(130,344
)


(146,505
)


(405,543
)


(102,554
)


(3,386,818
)Net loss allocable to common share
    holders(d)


(143,830
)


(159,208
)


(410,453
)


(102,554
)


(3,350,362
)Net loss allocable to common
    shareholders per common share, basic and diluted

$
(0.79
)

$
(0.88
)

$
(2.57
)

$
(1.07
)

$
(7.58
)Statement of Cash Flow
    Data:Net cash provided by operating
    activities

$
100,362


$
108,980


$
150


$
6,301


$
17,602Net cash (used in) provided by
    investing activities


(106,160
)


(56,223
)


(444,837
)


153,036



57,582Net cash (used in) provided by
    financing activities

$
(2,477
)

$
(109,908
)

$
200,116


$
5,185


$
(6,079
)Balance Sheet Data:Cash, cash equivalents and
    marketable securities

$
170,983


$
183,988


$
251,289


$
520,612


$
560,983Property and equipment, net


678,233



717,627



820,536



485,984



2,780,589Broadband wireless licenses, net


35,782



40,527



46,854



53,181



911,832Other intangibles, net(c)


27,725



51,252



93,012



56,334



72,782Total assets(c)


1,116,111



1,202,725



1,459,385



1,265,165



4,585,496Total long-term debt and accrued
    interest payable(e)


336,650



301,113



366,247



536,791



5,165,718Class A convertible preferred
    stock


230,542



217,056



204,353







1,708,316Total stockholders equity
    (deficit)(e)

$
170,848


$
322,588


$
485,552


$
380,425


$
(3,032,282
)     (a)
    
    The selected consolidated financial
    data includes the accounts and activities of the businesses we
    acquired from Allegiance Telecom, Inc. from June 23, 2004,
    the acquisition date through December 31, 2004.(b)
    
    In 2004, loss from operations
    included a $212.5 million non-cash impairment charge of
    goodwill. In 2002, loss from operations included non-cash
    charges totaling $477.3 million in connection with the
    amendment to the terms of fiber acquisition and maintenance
    arrangements with Level 3 Communications, and the return of
    previously acquired inter-city fiber in connection therewith.(c)
    
    In 2004, net loss included a
    $212.5 million non-cash impairment charge of goodwill. In
    2003, net loss included a $33.5 million gain on investment
    sales. In 2002, net loss and total assets reflects a
    $1,876.6 million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting changes, pursuant
    to SFAS No. 142.(d)
    
    The comparability of net loss
    applicable to common shares is impacted by the transactions
    discussed in c above.(e)
    
    In January 2004, we completed a
    rights offering. An aggregate of 39.7 million shares were
    issued in the offering, yielding net proceeds of
    $197.6 million. These proceeds were used to pay down our
    long-term debt and accrued interest payable.(f)
    
    The reorganized selected
    consolidated financial data subsequent to December 31, 2002
    reflects the impact of adopting fresh start reporting as of
    January 1, 2003, and is not comparable to that of
    predecessor XO. Upon emergence from bankruptcy, the Company
    recognized a reorganization gain, net of $3,032.3 million
    which is not presented. The predecessor selected consolidated
    financial data as of and for the year ended December 31,
    2002 does not include the effects of the fresh start reporting
    provisions of the American Institute of Certified Public
    Accountants Statements of Position
    (SOP) No. 90-7.
    Fresh start required the Company to adjust the historical cost
    of its assets and liabilities to their fair values as determined
    by its reorganization value. 41




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  INTRODUCTION
    
    Overview of the Business;
    Results of Operations;
    Liquidity and Capital Resources;
    Comparison of Segment Financial Results; and
    Critical Accounting Policies and Estimates.  OVERVIEW
    OF THE BUSINESS
    XO
    Communications
         42




---



##### Table of Contents



Nextlink
  line-of-sight
      Recent
    Events
     43




---



##### Table of Contents



RESULTS
    OF OPERATIONS
  Overview
    and Comparison of Consolidated Financial Results
    % of





% ofDecember 31,


Consolidated


December 31,


Consolidated2006


Revenue


2005


Revenue


Change


% ChangeRevenue

$
1,411,616



100.0
%

$
1,433,622



100.0
%

$
(22,006
)


(1.5
)%Cost and expensesCost of service (exclusive of
    depreciation and amortization)


597,027



42.3
%


587,904



41.0
%


9,123



1.6
%Selling, operating, and general


721,980



51.1
%


737,350



51.4
%


(15,370
)


(2.1
)%Depreciation and amortization


204,760



14.5
%


234,762



16.4
%


(30,002
)


(12.8
)%Total cost and expenses


1,523,767



107.9
%


1,560,016



108.8
%


(36,249
)


(2.3
)%Loss from operations


(112,151
)


(7.9
)%


(126,394
)


(8.8
)%


14,243



(11.3
)%Interest income


8,691



0.6
%


8,850



0.6
%


(159
)


(1.8
)%Investment income, net


5,193



0.4
%


1,950



0.1
%


3,243



166.3
%Interest expense, net


(32,077
)


(2.3
)%


(34,291
)


(2.4
)%


2,214



(6.5
)%Other non-operating gain






0.0
%


3,380



0.2
%


(3,380
)


(100.0
)%Net loss


(130,344
)


(9.2
)%


(146,505
)


(10.2
)%


16,161



(11.0
)%Preferred stock accretion


(13,486
)


(1.0
)%


(12,703
)


(0.9
)%


(783
)


6.2
%Net loss allocable to common
    shareholders

$
(143,830
)


(10.2
)%

$
(159,208
)


(11.1
)%

$
15,378



(9.7
)%Net loss per common share, basic
    and diluted

$
(0.79
)





$
(0.88
)Weighted average shares, basic and
    diluted


181,970,946







181,933,035Gross margin(1)

$
814,589



57.7
%

$
845,718



59.0
%

$
(31,129
)


(3.7
)%   44




---



##### Table of Contents



% of





% ofDecember 31,


Consolidated


December 31,


Consolidated2005


Revenue


2004


Revenue


Change


% ChangeRevenue

$
1,433,622



100.0
%

$
1,300,420



100.0
%

$
133,202



10.2
%Cost and expensesCost of service (exclusive of
    depreciation and amortization)


587,904



41.0
%


552,735



42.5
%


35,169



6.4
%Selling, operating, and general


737,350



51.4
%


727,666



56.0
%


9,684



1.3
%Depreciation and amortization


234,762



16.4
%


177,781



13.7
%


56,981



32.1
%Goodwill impairment charge






0.0
%


212,530



16.3
%


(212,530
)


(100.0
)%Total cost and expenses


1,560,016



108.8
%


1,670,712



128.5
%


(110,696
)


(6.6
)%Loss from operations


(126,394
)


(8.8
)%


(370,292
)


(28.5
)%


243,898



(65.9
)%Interest income


8,850



0.6
%


3,682



0.3
%


5,168



140.4
%Investment income (loss), net


1,950



0.1
%


(12,719
)


(1.0
)%


14,669



(115.3
)%Interest expense, net


(34,291
)


(2.4
)%


(26,214
)


(2.0
)%


(8,077
)


30.8
%Other non-operating gain


3,380



0.2
%






0.0
%


3,380



N/MNet loss


(146,505
)


(10.2
)%


(405,543
)


(31.2
)%


259,038



(63.9
)%Preferred stock accretion


(12,703
)


(0.9
)%


(4,910
)


(0.4
)%


(7,793
)


158.7
%Net loss allocable to common
    shareholders

$
(159,208
)


(11.1
)%

$
(410,453
)


(31.6
)%

$
251,245



(61.2
)%Net loss per common share, basic
    and diluted

$
(0.88
)





$
(2.57
)Weighted average shares, basic and
    diluted


181,933,035







159,883,403Gross margin(1)

$
845,718



59.0
%

$
747,685



57.5
%

$
98,033



13.1
%     (1)
    
    Gross margin is a non-GAAP
    financial measure, which we define as revenue less cost of
    service, and excludes depreciation and amortization expenses.
    Gross margin is not intended to replace operating income (loss),
    net income (loss), cash flow or other measures of financial
    performance reported in accordance with generally accepted
    accounting principles in the United States. Rather, we consider
    gross margin to be an important financial measure of our
    operating performance related solely to providing
    telecommunications services to our customers without taking into
    account expenditures that are not directly related to providing
    such services. We believe that gross margin allows management to
    further assess (i) our operating performance,
    (ii) profitability across our customer base and
    (iii) trends in our competitive and regulatory
    environments. Additionally, we believe that gross margin is a
    standard measure of operating performance that is commonly
    reported and widely used by analysts, investors, and other
    interested parties in the telecommunications industry. We
    believe gross margin provides investors with an alternative
    means to evaluate the results of our operations. Gross margin as
    used in this document may not be comparable to similarly titled
    measures reported by other companies due to differences in
    accounting policies and differences in definition of gross
    margin. Therefore, we provide additional information on the
    components of gross margin throughout this report and provide
    the reconciliations to the most comparable GAAP financial
    measure. The following tables reconcile reported net loss to
    gross margin, as defined above, for the respective periods
    presented (dollars in thousands):  Years Ended December 31,2006


2005


2004Net loss

$
(130,344
)

$
(146,505
)

$
(405,543
)Selling, operating and general


721,980



737,350



727,666Interest income


(8,691
)


(8,850
)


(3,682
)Investment (income) loss, net


(5,193
)


(1,950
)


12,719Interest expense, net


32,077



34,291



26,214Depreciation and amortization


204,760



234,762



177,781Other non-operating gain






(3,380
)


Goodwill impairment charge










212,530Gross margin

$
814,589


$
845,718


$
747,685  45




---



##### Table of Contents



Revenue:
  Revenue 
    2006 Compared to 2005
      % of





% ofDecember 31,


Consolidated


December 31,


Consolidated2006


Revenue


2005


Revenue


Change


% ChangeCarrier VoIP

$
25,811



1.9
%

$
3,403



0.2
%

$
22,409



658.5
%Traditional voice services


696,518



49.3
%


731,009



51.0
%


(34,492
)


(4.7
)%Data services


424,054



30.0
%


432,358



30.2
%


(8,304
)


(1.9
)%XOptions Flex IP


35,768



2.5
%


4,854



0.3
%


30,914



636.9
%Integrated voice and data services


229,465



16.3
%


261,998



18.3
%


(32,533
)


(12.4
)%Total revenue

$
1,411,616



100.0
%

$
1,433,622



100.0
%

$
(22,006
)


(1.5
)%   Carrier VoIP.
  Traditional Voice.
  Data Services. IP-based
  XOptions Flex.
  Integrated Voice and Data Services.
  Revenue 
    2005 Compared to 2004
   46




---



##### Table of Contents



% of





% ofDecember 31,


Consolidated


December 31,


Consolidated2005


Revenue


2004


Revenue


Change


% ChangeCarrier VoIP

$
3,403



0.2
%

$







$
3,403



N/MTraditional voice services


731,009



51.0
%


673,318



51.8
%


57,691



8.6
%Data services


432,358



30.2
%


414,782



31.9
%


17,576



4.2
%XOptions Flex IP


4,854



0.3
%










4,854



N/MIntegrated voice and data services


261,998



18.3
%


212,320



16.3
%


49,678



23.4
%Total revenue

$
1,433,622



100.0
%

$
1,300,420



100.0
%

$
133,202



10.2
%N/M= not meaningful   Carrier VoIP.
  Traditional Voice.
  Data Services. dial-up
  XOptions Flex.
  Integrated Voice and Data Services.
  Cost of service (excluding depreciation and
    amortization)
    COS 
    2006 Compared to 2005
   47




---



##### Table of Contents



COS  2005 Compared to 2004
    Gross margin.
    Selling, operating and
    general.
     48




---



##### Table of Contents



Depreciation and
    amortization.
      Interest income.
    Investment income (loss),
    net. other-than-temporary
    Interest expense, net.
   49




---



##### Table of Contents



LIQUIDITY
    AND CAPITAL RESOURCES
    Cash
    Flow
          Credit
    Facility and Borrowing Capacity
   50




---



##### Table of Contents



Credit
    Risk
    Contractual
    Obligations
     51




---



##### Table of Contents



OtherLong-Term





CapitalCredit


Contractual


Operating Lease


Lease


TotalFacility


Obligations


Obligations


Obligations


Obligations2007

$



$
105,486


$
67,803


$
3,854


$
177,1432008






94,201



57,630



2,398



154,2292009


336,650



68,492



49,717



1,770



456,6292010






45,994



43,015



1,419



90,4282011






39,571



33,649



1,419



74,639Thereafter






106,401



99,103



11,071



216,575Total future minimum payment
    obligations

$
336,650


$
460,145


$
350,917


$
21,931


$
1,169,643   Indemnification    COMPARISON
    OF SEGMENT FINANCIAL RESULTS
  Overview
      GoodwillCost of


SO&G


Depreciation and


Impairment


Loss fromYear Ended December 31, 2006

Revenue


Service


Expenses


Amortization


Charge


OperationsXOC

$
1,410,874


$
597,409


$
708,818


$
199,732


$



$
(95,085
)Nextlink


1,261



137



13,162



5,028







(17,066
)Intercompany eliminations


(519
)


(519
)














Total consolidated

$
1,411,616


$
597,027


$
721,980


$
204,760


$



$
(112,151
)Interest income






















8,691Interest expense, net






















(32,077
)Investment income, net






















5,193Consolidated net loss





















$
(130,344
)   52




---



##### Table of Contents



GoodwillCost of


SO&G


Depreciation and


Impairment


Loss fromYear Ended December 31, 2005

Revenue


Service


Expenses


Amortization


Charge


OperationsXOC

$
1,433,416


$
587,904


$
734,089


$
228,435


$



$
(117,012
)Nextlink


206







3,261



6,327







(9,382
)Total consolidated

$
1,433,622


$
587,904


$
737,350


$
234,762


$



$
(126,394
)Interest income






















8,850Interest expense, net






















(34,291
)Investment income, net






















1,950Other non-operating gain






















3,380Consolidated net loss





















$
(146,505
)   GoodwillCost of


SO&G


Depreciation and


Impairment


Loss fromYear Ended December 31, 2004

Revenue


Service


Expenses


Amortization


Charge


OperationsXOC

$
1,300,420


$
552,735


$
726,865


$
171,454


$
212,530


$
(363,164
)Nextlink










801



6,327







(7,128
)Total consolidated

$
1,300,420


$
552,735


$
727,666


$
177,781


$
212,530


$
(370,292
)Interest income






















3,682Interest expense, net






















(26,214
)Investment loss, net






















(12,719
)Consolidated net loss





















$
(405,543
)   XOC
    Segment
    Nextlink
    Segment
    % of Nextlink





% of NextlinkDecember 31, 2006


Revenue


December 31, 2005


Revenue


Change


% ChangeRevenue

$
1,261



100.0
%

$
206



100.0
%

$
1,055



512.1
%Costs and expensesCost of service (exclusive of
    depreciation and amortization)


137



10.9
%






0.0
%


137



N/MSelling, operating, and general


13,162



1,043.8
%


3,261



1,583.0
%


9,901



303.6
%Depreciation and amortization


5,028



398.7
%


6,327



3,071.4
%


(1,299
)


(20.5
)%Total costs and expenses


18,327



1,453.4
%


9,588



4,654.4
%


8,739



91.1
%Segment loss

$
(17,066
)


(1,353.4
)%

$
(9,382
)


(4,554.4
)%

$
(7,684
)


81.9
%   53




---



##### Table of Contents



% of Nextlink





% of NextlinkDecember 31, 2005


Revenue


December 31, 2004


Revenue


Change


% ChangeRevenue

$
206



100.0
%

$




N/M


$
206



N/MCosts and expensesCost of service(exclusive ofdepreciation andamortization)






0.0
%






N/M







N/MSelling, operating, andgeneral


3,261



1,583.0
%


801



N/M



2,460



307.1
%Depreciation and amortization


6,327



3,071.4
%


6,327



N/M







0.0
%Total costs and expenses


9,588



4,654.4
%


7,128



N/M



2,460



34.5
%Segment loss

$
(9,382
)


(4,554.4
)%

$
(7,128
)


N/M


$
(2,254
)


31.6
%     N/M
  Revenue.
    Cost of service (exclusive of depreciation and
    amortization).
  Selling, operating and
    general.
    Depreciation and
    amortization.
   54




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
    Form 10-K.
  Property
    and Equipment
        Telecommunications networks and
    acquired bandwidth

3-20 yearsFurniture, fixtures, equipment,
    and other

5-7 yearsLeasehold improvements

the shorter of the estimated
    useful lives or the terms of the leases     Broadband
    Wireless Licenses
   55




---



##### Table of Contents




    the broadband wireless licenses are non-depleting assets;
    the broadband wireless licenses have become integral to the
    business and we expects them to contribute to cash flow
    indefinitely;
    license renewal applications are generally authorized by the FCC
    subject to certain conditions, without substantial cost under a
    stable regulatory, legislative and legal environment;
    maintenance expenditures required to obtain future cash flows
    are not significant; and
    we intend to use its broadband wireless licenses for the
    foreseeable future.      Other
    Intangible Assets
      Revenue
    Recognition
       56




---



##### Table of Contents



Allowance
    for Uncollectible Accounts
    Cost of
    Service
      Allegiance
    Bankruptcy Claim
  debtors-in-possession
 57




---



##### Table of Contents



Accounting
    for Stock-Based Compensation
        Accounting
    Affected by Regulatory Matters
  IP-enabled IP-enabled
  Recently
    Issued Accounting Pronouncements
  Accounting for Uncertainty in Income Taxes an
    interpretation of SFAS No. 109
 58




---



##### Table of Contents



Fair Value Measurements
  Considering the Effects of Prior
    Year Misstatements when Quantifying Misstatements in Current
    Year Financial Statements
  No. 06-3, 06-3). 06-3,
  Off-Balance
    Sheet Arrangements
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Annual Interest Expense Given





Annual Interest Expense Givenan Interest Rate Decrease


No Change in


an Interest Rate Increaseof 150, 100 and 50 Basis Points


Interest Rates


of 150, 100 and 50 Basis PointsInterest Rate Risk

(150 BPS)


(100 BPS)


(50 BPS)


Fair Value


50 BPS


100 BPS


150 BPSCredit Facility

$
34.0


$
35.7


$
37.4


$
39.1


$
40.8


$
42.4


$
44.1  59




---



##### Table of Contents



Fair Value Assuming theFollowing Percentage


No ChangeDecrease in Market Price


in Fair Value


Fair Value assuming the Following Percentage Increase in
    Market PriceMarket Risk

15%


10%


5%


0%


5%


10%


15%Market price

$
2.1


$
2.2


$
2.3


$
2.4


$
2.5


$
2.7


$
2.8     Item 8.
    Financial
    Statements and Supplementary Data  page F-1
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    Item 9A.
    Controls
    and Procedures  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Changes
    in Internal Controls over Financial Reporting
    Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f). 33-8238 34-47986 Internal
    Control  Integrated Framework
  Form 10-K,
 60




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    Internal Control  Integrated
    Framework
        Internal
    Control  Integrated Framework Internal Control  Integrated Framework
    
    61




---



##### Table of Contents



Item 9B.
    Other
    Information  None
 PART III  Item 10.
    Directors
    and Executive Officers of the Registrant    Audit
    Committee Financial Expert
  Regulation S-K.
  Code of
    Ethics
  Regulation S-K. Form 8-K
    Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management   62




---



##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions    Outstanding


Series A, B and CCommon Stock


Warrants


Credit Facility


Preferred StockAt December 31, 2005


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%At December 31, 2006(1)


Greater than 50
%


Greater than 40
%


Greater than 90
%


52
%     (1)
    
    According to Amendment No. 8 to the Schedule 13D of
    Cardiff Holding LLC (Cardiff), filed with the
    Securities and Exchange Commission on May 1, 2006, on
    April 28, 2006, Cardiff, an entity affiliated with the
    Companys Chairman, sold in a private sale to qualified
    institutional buyers an aggregate of 1,725,000 shares of
    the Companys 6% Class A Convertible Preferred Stock
    (the Preferred Stock).            Item 14.
    Principal
    Accounting Fees and Services   63




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##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules    XO Holdings, Inc.Report of
    Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets as of December 31, 2006 and 2005


F-2Consolidated
    Statements of Operations for the Years Ended December 31,
    2006, 2005, and 2004


F-3Consolidated
    Statements of Stockholders Equity for the Years Ended
    December 31, 2006, 2005, and 2004


F-4Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2006, 2005, and 2004


F-5Notes to
    Consolidated Financial Statements


F-6Schedule II 
    Consolidated Valuation and Qualifying Accounts


S-1    64




---



##### Table of Contents



SIGNATURES      By:
    /s/  Carl
    J. Grivner          Name

Title/s/  Carl
    J. GrivnerCarl
    J. Grivner

President and Chief Executive
    Officer, Director
    (Principal Executive Officer)/s/  Gregory
    W. FreibergGregory
    W. Freiberg

Senior Vice President and Chief
    Financial Officer
    (Principal Financial Officer)Carl
    C. Icahn

Chairman of the Board of Directors/s/  Keith
    MeisterKeith
    Meister

Director/s/  Adam
    DellAdam
    Dell

Director/s/  Fredrik
    GradinFredrik
    Gradin

Director/s/  Vincent
    J. IntrieriVincent
    J. Intrieri

Director/s/  Robert
    L. KnaussRobert
    L. Knauss

Director/s/  Peter
    K. SheaPeter
    K. Shea

Director  65




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##### Table of Contents



EXHIBIT INDEX
  2
.1

Third Amended Plan of
    Reorganization of XO Communications, Inc., dated July 22,
    2002, (Incorporated herein by reference to exhibit 2.1
    filed with the Current Report on
    Form 8-K/A
    of XO Communications, Inc., filed on November 26, 2002).2
.2

Plan Supplement, dated
    October 23, 2003, to the Third Amended Plan of
    Reorganization of XO Communications, Inc., dated July 22,
    2002 (Incorporated herein by reference to exhibit 2.2 filed
    with the Current Report on
    Form 8-K/A
    of XO Communications, Inc., filed on November 26, 2002).2
.3

Order Confirming Third Amended
    Plan of Reorganization, dated November 15, 2002
    (Incorporated herein by reference to exhibit 99.1 filed
    with the Current Report on
    Form 8-K/A
    of XO Communications, Inc., filed on November 26, 2002).2
.4

Asset Purchase Agreement, dated as
    of February 18, 2004, by and among XO Communications, Inc.,
    Allegiance Telecom, Inc., and Allegiance Telecom Company
    Worldwide (Incorporated herein by reference to exhibit 10.1
    filed with the Current Report on
    Form 8-K
    of XO Communications, Inc. filed on February 24, 2004).2
.5

Equity Purchase Agreement, dated
    as of November 4, 2005, by and among the XO Holdings, Inc.,
    XO Communications, Inc. and Elk Associates LLC. (Incorporated
    herein by reference to exhibit 2.1 filed with the Current
    Report on
    Form 8-K
    of XO Communications, Inc., filed on November 9, 2005).2
.6

Agreement and Plan of Merger,
    dated as of February 28, 2006, by and among XO
    Communications, Inc., XO Holdings, Inc. and XO Communications,
    LLC. (Incorporated herein by reference to exhibit 2.1 filed
    with the Current Report on
    Form 8-K
    of XO Holdings, Inc. filed on March 06, 2006).2
.7

Amendment No. 1 to Equity
    Purchase Agreement, dated as of March 1, 2006, by and among
    XO Holdings, Inc., XO Communications, LLC (as successor by
    merger to XO Communications, Inc.) and Elk Associates LLC.
    (Incorporated herein by reference to exhibit 2.2 filed with
    the Current Report on
    Form 8-K
    of XO Holdings, Inc. filed on March 06, 2006).3
.1

Certificate of Incorporation of XO
    Holdings, Inc., as filed with the Secretary of State of the
    State of Delaware on October 25, 2005. (Incorporated herein
    by reference to exhibit 3.1 filed with the Current Report
    on
    Form 8-K
    of XO Holdings, Inc. filed on March 06, 2006).3
.2

Certificate of Designation of the
    Powers, Preferences and Relative, Participating, Optional and
    other Special Rights of the 6% Class A Convertible
    Preferred Stock and Qualifications, Limitations and Restrictions
    thereof, as filed with the Secretary of State of the State of
    Delaware on February 28, 2006. (Incorporated herein by
    reference to exhibit 3.2 filed with Current Report on
    Form 8-K
    of XO Holdings, Inc. filed on March 06, 2006).3
.3

Bylaws of XO Holdings, Inc.
    (Incorporated herein by reference to exhibit 3.3 filed with
    Current Report,
    Form 8-K
    filed on March 06, 2006).4
.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

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
.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

XO Communications, Inc. 2002 Stock
    Incentive Plan (Incorporated herein by reference to
    exhibit 10.1.1 to the Annual Report on
    Form 10-K
    of XO Communications, Inc. for the year ended December 31,
    2002, filed on March 21, 2003).10
.2

XO Communications, Inc. Retention
    Bonus and Incentive Plan (Incorporated herein by reference to
    exhibit 10.1.2 to the Annual Report on
    Form 10-K
    of XO Communications, Inc. for the year ended December 31,
    2002, filed on March 21, 2003).10
.3

Registration Rights Agreement,
    dated as of January 16, 2003, between XO Communications,
    Inc. and High River Limited Partnership and Meadow Walk Limited
    Partnership (Incorporated herein by reference to
    exhibit 10.4 filed with the Current Report on
    Form 8-k
    of XO Communications, Inc., filed on January 30, 2003). 66




---



##### Table of Contents



10
.4

Registration Rights Agreement,
    dated as of August 6, 2004, by and among XO Communications,
    Inc., Tramore LLC, Cardiff Holdings, LLC and Amalgamated Gadget,
    L.P. (Incorporated herein by reference to exhibit 10.1
    filed with the Quarterly Report on
    Form 10-Q
    filed by XO Communications, Inc. for the quarterly period ended
    June 30, 2004, filed on August 9, 2004).10
.5

Registration Rights Agreement,
    dated as of June 23, 2004, by and among Allegiance Telecom,
    Inc., Allegiance Telecom Company Worldwide, the Allegiance
    Telecom Liquidating Trust, and XO Communications, Inc.
    (Incorporated herein by reference to exhibit 10.5 filed
    with the Annual Report on
    Form 10-K
    of XO Communications, Inc. for the year ended December 31,
    2004, filed on March 18, 2005).10
.6

Tax Allocation Agreement, dated as
    of January 16, 2003, between XO Communications, Inc. and
    Starfire Holding Corporation (Incorporated herein by reference
    to exhibit 10.5 filed with the Current Report on
    Form 8-k
    of XO Communications, Inc., filed on January 30, 2003).10
.7

Employment Term Sheet, dated as of
    April 30, 2003, delivered by XO Communications, Inc. to
    Carl J. Grivner, President and Chief Executive Officer of XO
    Communications, Inc. (Incorporated herein by reference to
    exhibit 10.1 filed with the Quarterly Report on
    Form 10-Q
    of XO Communications, Inc. for the three months ended
    March 31, 2003, filed on May 15, 2003).10
.8

Change in Control Agreement by and
    between XO Communications, Inc. and Carl J. Grivner, President
    and Chief Executive Officer of XO Communications, Inc.
    (Incorporated herein by reference to exhibit 10.2 filed
    with the Quarterly Report on
    Form 10-Q
    of XO Communications, Inc. for the three months ended
    March 31, 2003, filed on May 15, 2003).10
.9

Employment Agreement, effective as
    of September 25, 2000, by and between Wayne M. Rehberger
    and XO Communications, Inc. (Incorporated by reference herein to
    exhibit 10.10 filed with the Annual Report on
    Form 10-K
    of XO Communications, Inc. filed on March 15, 2004).10
.10

Indemnification Agreement by and
    between Robert Knauss and XO Communications, Inc., dated as of
    November 2, 2004. (Incorporated herein by reference to
    exhibit 10.2 filed with the Quarterly Report on
    Form 10-Q
    filed by XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).10
.11

Indemnification Agreement by and
    between Adam Dell and XO Communications, Inc., dated as of
    November 2, 2004. (Incorporated herein by reference to
    exhibit 10.1 filed with the Quarterly Report on
    Form 10-Q
    filed by XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).10
.12

Indemnification Agreement by and
    between Fredrik Gradin and XO Communications, Inc., dated as of
    November 2, 2004. (Incorporated herein by reference to
    exhibit 10.3 filed with the Quarterly Report on
    Form 10-Q
    filed by XO Communications, Inc. for the quarterly period ended
    September 30, 2004, filed on November 9, 2004).10
.13

Cost Sharing and IRU Agreement,
    dated July 18, 1998, between Level 3 Communications,
    LLC and XO Intercity Holdings No. 2, LLC (f/k/a INTERNEXT
    LLC) (Incorporated herein by reference to exhibit 10.8
    filed with the quarterly report on
    Form 10-Q
    for the quarterly period ended September 30, 1998 of
    NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc., filed
    on November 16, 1998).10
.14

Master Agreement, dated
    August 8, 2002, between Level 3 Communications, Inc.
    and XO Communications, Inc. (Incorporated herein by reference to
    exhibit 10.4.2 filed with the Annual Report on
    Form 10-K
    of XO Communications, Inc. for the year ended December 31,
    2002, filed on March 21, 2003).10
.15

Amended and Restated Credit and
    Guaranty Agreement, dated as of January 16, 2003, among XO
    Communications, Inc., certain subsidiaries of XO Communications,
    Inc., the Lenders party thereto from time to time, and Mizuho
    Corporate Bank, as Administrative Agent (Incorporated herein by
    reference to exhibit 10.5 filed with the Annual Report on
    Form 10-K
    of XO Communications, Inc. for the year ended December 31,
    2002, filed on March 21, 2003).10
.16

Agreement, dated as of May 9,
    2005, by and between XO Communications, Inc., Arnos Corp., High
    River Limited Partnership, and Cardiff Holding LLC.
    (Incorporated herein by reference to exhibit 10.1 filed
    with the Quarterly Report filed on
    Form 10-Q
    of XO Communications, Inc. for the quarter ended March 31,
    2005, filed on May 09, 2005). 67




---



##### Table of Contents



10
.17

Stockholder Agreement, dated as of
    November 4, 2005, by and between XO Communications, Inc.
    and Cardiff Holdings LLC. (Incorporated herein by reference to
    exhibit 10.1 filed with the Current Report on
    Form 8-K
    of XO Communications, Inc., filed on November 9, 2005).10
.18

Guaranty, dated as of
    November 4, 2005, by and between Thornwood Associates
    Limited Partnership and XO Communications, Inc. (Incorporated
    herein by reference to exhibit 10.2 filed with the Current
    Report on
    Form 8-K
    of XO Communications, Inc. filed on November 9, 2005).10
.19

Ratification and Amendment
    Agreement, dated as of March 1, 2006, by and among XO
    Communications, LLC (as successor by merger to XO
    Communications, Inc.), certain subsidiaries of XO
    Communications, LLC, as guarantors, XO Holdings, Inc., as
    guarantor, LMDS Holdings, Inc., as guarantor, V&K Holdings,
    Inc., as guarantor, Arnos Corp., as Requisite Lenders, and
    Mizuho Corporate Bank, Ltd., as administrative agent.
    (Incorporated herein by reference to exhibit 10.2 filed
    with the Current Report on
    Form 8-K
    of XO Holdings, Inc., filed on March 06, 2006).10
.20

Assignment and Assumption
    Agreement, dated as of February 28, 2006, by and among XO
    Communications, Inc. and XO Holdings, Inc. (Incorporated herein
    by reference to exhibit 10.1 filed with the Current Report
    on
    Form 8-K
    of XO Holdings, Inc. filed on March 06, 2006).10
.21

Change in Control Severance Plan
    for Certain Covered Executives (Director and Above) of XO
    Communications, Inc., dated as of June 2, 2005.
    (Incorporated herein by reference to exhibit 10.1 filed
    with the Current Report on
    Form 8-K
    of XO Communications, Inc. filed on June 8, 2005).10
.22

Waiver Agreement, dated as of
    April 28, 2006, between the Company, it subsidiaries and
    Arnos Corp., as Requisite Lender (incorporated by reference
    herein to exhibit 10.1 filed with the Current Report on
    Form 8-K
    of XO Holdings, Inc. filed on May 2, 2006.10
.23

Amendment No. 1 to
    Registration Rights Agreement made and enacted by the Company as
    of April 28, 2006 (incorporated by reference herein to
    exhibit 10.1 filed with the Current Report on Form 8-K
    of XO Holdings, Inc. filed on May 2, 2006.10
.24

Waiver Agreement, dated
    March 30, 2006, between the Company, its subsidiaries and
    Arnos Corp., as Requisite Lender (incorporated by reference
    herein to exhibit 10.1 filed with Current Report on
    Form 8-K of XO Holdings, Inc. filed on March 31, 2006.10
.25

Waiver Agreement, dated as of
    November 3, 2006, between the Company, its subsidiaries and
    Arnos Corp., as Requisite Lenders (incorporated by reference
    herein to exhibit 10.6 filed with the Quarterly Report on
    Form 10-Q of XO Holdings, Inc. filed on November 9,
    2006.10
.26

Waiver with Respect to Amended and
    Restated Credit and Guarantee Agreement, dated as of
    March 6, 2007, between the Company, its subsidiaries and
    Arnos Corp., as Requisite Lenders (incorporated by reference
    herein to exhibit 10.1 filed with Current Report on
    Form 8-K of XO Holdings, Inc. filed March 9, 2007.10
.27

Lease Agreement dated
    February 28, 2007, between the Company and Presidents
    Park II, LLC.**14
.1

XO Communications, Inc. Code of
    Ethics (Incorporated by reference herein to exhibit 14.1
    filed with the Current Report on
    Form 8-K
    of XO Holdings, Inc. filed on May 2, 2006).21
.1

Subsidiaries of XO Holdings, Inc.23
.1

Consent of KPMG LLP.31
.1

Certification of Chief Executive
    Officer pursuant to
    Rule 13a-14(a) and
    Rule 15d-14(a)
    of the Securities Exchange Act, as amended.31
.2

Certification of Chief Financial
    Officer pursuant to
    Rule 13a-14(a) and
    Rule 15d-14(a)
    of the Securities Exchange Act, as amended.32
.1

Certifications of Chief Executive
    Officer and Chief Financial Officer pursuant to 18 U.S.C.
    1350, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.     **
    
    Portions of this exhibit have been omitted and were filed
    separately with the Securities and Exchange Commission pursuant
    to the Registrants application requesting confidential
    treatment under Rule 406 of the Securities Act. 68




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM          Considering the
    Effects of Prior Year Misstatements in Current Year Financial
    Statements. Share-Based
    Payment.
  Internal Control 
    Integrated Framework
  
    F-1




---



##### Table of Contents



XO
    Holdings, Inc.
  Consolidated
    Balance Sheets
 (Amounts in thousands, except for share and per share
    data)
  December 31,


December 31,2006


2005ASSETSCurrent assets:Cash and cash equivalents

$
168,563


$
176,838Marketable securities and other
    investments


2,420



7,150Accounts receivable, net of
    allowance for doubtful accounts of $16,754 and $36,061, at
    December 31, 2006 and 2005, respectively


131,168



137,564Prepaid expenses and other current
    assets


30,859



34,106Total current assets


333,010



355,658Property and equipment, net


678,233



717,627Broadband wireless licenses, net


35,782



40,527Other intangibles, net


27,725



51,252Other assets


41,361



37,661Total assets

$
1,116,111


$
1,202,725LIABILITIES, CONVERTIBLE
    PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
98,860


$
79,935Accrued liabilities


220,781



216,278Total current liabilities


319,641



296,213Long-term debt and accrued
    interest payable


336,650



301,113Other long-term liabilities


58,430



65,755Total liabilities


714,721



663,081Class A convertible preferred
    stock


230,542



217,056Commitments and contingencies






Stockholders equity:Preferred stock: par value
    $0.01 per share, 200,000,000 shares authorized:
    4,000,000 shares of Class A convertible preferred
    stock issued and outstanding on December 31, 2006






Warrants, common stock and
    additional paid in capital: par value $0.01 per share,
    1,000,000,000 shares authorized: 182,001,285 shares
    issued and outstanding on December 31, 2006 and
    181,933,035 shares issued and outstanding on
    December 31, 2005


965,394



976,447Deferred compensation






(77
)Accumulated other comprehensive
    income


880



820Accumulated deficit


(795,426
)


(654,602
)Total stockholders equity


170,848



322,588Total liabilities, convertible
    preferred stock and stockholders equity

$
1,116,111


$
1,202,725    F-2




---



##### Table of Contents



XO
    Holdings, Inc.
  Consolidated
    Statements of Operations
 (Amounts in thousands, except for share and per share
    data)
  Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,2006


2005


2004Revenue

$
1,411,616


$
1,433,622


$
1,300,420Costs and expenses:Cost of service (exclusive of
    depreciation and amortization)


597,027



587,904



552,735Selling, operating and general


721,980



737,350



727,666Depreciation and amortization


204,760



234,762



177,781Goodwill impairment charge










212,530Total costs and expenses


1,523,767



1,560,016



1,670,712Loss from operations


(112,151
)


(126,394
)


(370,292
)Interest income


8,691



8,850



3,682Investment income (loss), net


5,193



1,950



(12,719
)Interest expense, net


(32,077
)


(34,291
)


(26,214
)Other non-operating gain






3,380



Net loss


(130,344
)


(146,505
)


(405,543
)Preferred stock accretion


(13,486
)


(12,703
)


(4,910
)Net loss allocable to common
    shareholders

$
(143,830
)

$
(159,208
)

$
(410,453
)Net loss allocable to common
    shareholders per common share, basic and diluted

$
(0.79
)

$
(0.88
)

$
(2.57
)Weighted average shares, basic and
    diluted


181,970,946



181,933,035



159,883,403    F-3




---



##### Table of Contents



XO
    Holdings, Inc.
  Consolidated
    Statements of Stockholders Equity
 (Dollars in thousands)
  Common Stock and


Subscription Rights














Accumulated OtherAdditional Paid-In-Capital


Exercised


Subscription Receivable


Deferred


Accumulated


ComprehensiveShares


Amount


Shares


Amount


Shares


Amount


Compensation


Deficit


Income


TotalBalance at January 1, 2004


96,274,140


$
482,440



32,503,234


$
162,516



(32,503,234
)

$
(162,516
)

$
(839
)

$
(102,554
)

$
1,378


$
380,425Issuance of common stock for
    acquisition


45,380,000



311,306































311,306Issuance of common stock under
    rights offering


39,722,466



197,612































197,612Issuance of common stock through
    employee benefit plans, net


556,429



3,063



(32,503,234
)


(162,516
)


32,503,234



162,516



265











3,328Preferred stock accretion






(4,910
)






























(4,910
)Comprehensive loss:Net loss






























(405,543
)






(405,543
)Other comprehensive
    income  unrealized holding gains arising during the
    year , net


































3,334



3,334Total comprehensive loss






































(402,209
)Balance at December 31, 2004


181,933,035


$
989,511






$







$



$
(574
)

$
(508,097
)

$
4,712


$
485,552Amortization of deferred
    compensation, net of forfeitures





$
(361
)





$







$



$
497


$



$



$
136Preferred stock accretion






(12,703
)






























(12,703
)Comprehensive loss:Net loss






























(146,505
)






(146,505
)Other comprehensive
    loss  unrealized holding losses arising during the
    year , net


































(3,892
)


(3,892
)Total comprehensive loss






































(150,397
)Balance at December 31, 2005


181,933,035


$
976,447






$







$



$
(77
)

$
(654,602
)

$
820


$
322,588Cumulative effect of the
    application of SAB 108 as of January 1, 2006






























(10,480
)






(10,480
)Adjusted Balance at January 1,
    2006


181,933,035


$
976,447






$







$



$
(77
)

$
(665,082
)

$
820


$
312,108Issuance of common stock through
    employee benefit plans, net


68,250


$
2,510






$







$



$



$



$



$
2,510Amortization of deferred
    compensation, net of forfeitures






(77
)


















77











Preferred stock accretion






(13,486
)






























(13,486
)Comprehensive loss:






































Net loss






























(130,344
)






(130,344
)Other comprehensive
    income  unrealized holding gains arising during
    the year , net


































60



60Total comprehensive loss






































(130,284
)Balance at December 31, 2006


182,001,285


$
965,394






$







$



$



$
(795,426
)

$
880


$
170,848    F-4




---



##### Table of Contents



XO
    Holdings, Inc.
  Consolidated
    Statements of Cash Flows
 (Dollars in thousands)
  Years Ended December 31,2006


2005


2004OPERATING ACTIVITIES:Net loss

$
(130,344
)

$
(146,505
)

$
(405,543
)Adjustments to reconcile net loss
    to net cash provided by operating activities:Goodwill impairment charge










212,530Depreciation and amortization


204,760



234,762



177,781Accrual of interest


35,537



34,866



27,068Stock-based compensation


2,169



147



406Realized (gain) loss on investments


(5,156
)


(7,449
)


5,238Non-cash restructuring charges and
    asset write-downs






5,500



10,360Changes in assets and liabilities,
    net of effects from acquisitions:Accounts receivable


6,396



12,537



(8,084
)Other assets


(3,225
)


2,459



(9,952
)Accounts payable


(9,771
)


(4,043
)


8,503Accrued liabilities


(4
)


(23,294
)


(18,157
)Net cash provided by operating
    activities


100,362



108,980



150INVESTING ACTIVITIES:Capital expenditures, net


(118,878
)


(86,727
)


(106,023
)Release of escrow account






25,430



Purchases of marketable securities
    and investments










(36,413
)Proceeds from sale of marketable
    securities and investments


12,718



6,145



22,848Cash paid for acquisitions






(1,071
)


(325,249
)Net cash used in investing
    activities


(106,160
)


(56,223
)


(444,837
)FINANCING ACTIVITIES:Proceeds from issuance of common
    stock, net










200,326Proceeds from employee stock
    option exercises


341







Proceeds from issuance of
    preferred stock, net










199,443Repayments of long term debt and
    capital leases


(2,818
)


(109,908
)


(199,653
)Net cash (used in) provided by
    financing activities


(2,477
)


(109,908
)


200,116Net decrease in cash and cash
    equivalents


(8,275
)


(57,151
)


(244,571
)Cash and cash equivalents,
    beginning of year


176,838



233,989



478,560Cash and cash equivalents, end of
    year

$
168,563


$
176,838


$
233,989    F-5




---



##### Table of Contents



XO
    Holdings, Inc.
  Notes
    to Consolidated Financial Statements
 December 31, 2006, 2005 and 2004
  1.
    ORGANIZATION
    AND DESCRIPTION OF BUSINESS    XOC
      Nextlink
  28-31 GHz
   F-6




---



##### Table of Contents



2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  (a) Basis
    of Presentation and Principle of Consolidation
    (b) Use
    of Estimates and Assumptions
      (c) Cash
    and Cash Equivalents
    (d) Marketable
    Securities and Other Investments
  available-for-sale available-for-sale available-for-sale
  (e) Impairment
    of Long-Lived Assets
    (f) Property
    and Equipment
   F-7




---



##### Table of Contents



Telecommunications networks and
    acquired bandwidth

3-20 yearsFurniture, fixtures, equipment,
    and other

5-7 yearsLeasehold improvements

the shorter of the estimated
    useful lives or the terms of the leases     (g) Broadband
    Wireless Licenses
        
    the broadband wireless licenses are non-depleting assets;
    the broadband wireless licenses have become integral to the
    business and the Company expects them to contribute to cash flow
    indefinitely;
    license renewal applications are generally authorized by the FCC
    subject to certain conditions, without substantial cost under a
    stable regulatory, legislative and legal environment;
    maintenance expenditures required to obtain future cash flows
    are not significant; and
    the Company intends to use its broadband wireless licenses for
    the foreseeable future.   F-8




---



##### Table of Contents



(h) Impairment
    of Goodwill and Indefinite Lived Intangible Assets
      (i) Other
    Assets
  debtors-in-possession
  other-than-temporary
  (j) Income
    Taxes
    (k) Class A
    Convertible Preferred Stock
   F-9




---



##### Table of Contents



(l) Revenue
    Recognition
        (m) Allowance
    for Uncollectible Accounts
    (n) Cost
    of Service
      (o) Net
    Income (Loss) Per Common Share
   F-10




---



##### Table of Contents



(p) Share-Based
    Payments
    (q) Comprehensive
    Income (Loss)
  available-for-sale
  (r) Concentration
    of Credit Risk
      (s) Fair
    Value of Financial Instruments
    (t) Accounting
    for Leases
    (u) USF,
    Gross Receipts Taxes and other Surcharges
  No. 06-03, 06-03) 06-03 No. 99-19, 06-03. EITF 99-19,
 F-11




---



##### Table of Contents



(v) Advertising
    Costs
    (w) Recently
    Issued Accounting Pronouncements
  FIN 48:
  SFAS No. 157:
  SAB 108:
       F-12




---



##### Table of Contents



Period in Which the Misstatement Originated


AdjustmentYear Ended December 31,


Recorded as of2004


2005


January 1, 2006Accumulated depreciation(1)

$
4,301


$
6,179


$
10,480Impact on net income(2)

$
4,301


$
6,179Retained earnings(3)









$
10,480     (1)
    The Company applied incorrect useful life estimates to certain
    leasehold improvement and transport assets acquired from
    Allegiance Telecom in June 2004. As a result of this error,
    depreciation expense for 2004 and 2005 was understated by
    $4.3 million and $6.2 million, respectively. This
    misstatement was not considered material to the Companys
    financial statements for either of the affected years.(2)
    Represents the understatement of net loss for the indicated
    periods resulting from these misstatements.(3)
    Represents the net reduction to retained earnings recorded as of
    January 1, 2006 to record the initial application of
    SAB 108.  3.
    SEGMENT
    INFORMATION  Overview
      XO
    Communications
     F-13




---



##### Table of Contents



Nextlink
  28-31 GHz line-of-sight
      Year Ended December 31, 2006IntercompanyXOC


Nextlink


Elimination


ConsolidatedRevenue

$
1,410,874


$
1,261


$
(519
)

$
1,411,616Depreciation and amortization


199,732



5,028







204,760Loss from operations


(95,085
)


(17,066
)






(112,151
)Interest income














8,691Investment gain, net














5,193Interest expense, net














(32,077
)Net loss














(130,344
)Capital expenditures

$
114,634


$
4,244


$



$
118,878   Year Ended December 31, 2005IntercompanyXOC


Nextlink


Elimination


ConsolidatedRevenue

$
1,433,416


$
206


$



$
1,433,622Depreciation and amortization


228,435



6,327







234,762Loss from operations


(117,012
)


(9,382
)






(126,394
)Interest income














8,850Investment gain, net














1,950Interest expense, net














(34,291
)Other non-operating gain














3,380Net loss














(146,505
)Capital expenditures

$
86,254


$
473


$



$
86,727   F-14




---



##### Table of Contents



Year Ended December 31, 2004IntercompanyXOC


Nextlink


Elimination


ConsolidatedRevenue

$
1,300,420


$



$



$
1,300,420Depreciation and amortization


171,454



6,327







177,781Loss from operations


(363,164
)


(7,128
)






(370,292
)Interest income














3,682Investment gain, net














(12,719
)Interest expense, net














(26,214
)Net loss














(405,543
)Capital expenditures

$
106,023


$



$



$
106,023     Total Assets

XOC


Nextlink


ConsolidatedDecember 31,
    2006

$
1,073,590


$
42,521


$
1,116,111December 31,
    2005

$
1,159,256


$
43,469


$
1,202,725   4.
    BUSINESS
    COMBINATIONS  debtors-in-possession dial-up
      Year EndedDecember 31,2004Revenue

$
1,529,753Net loss applicable to common
    shares


(471,690
)Net loss per common
    share  basic and diluted

$
(2.60
)Weighted average
    shares  basic and diluted


181,457,087  F-15




---



##### Table of Contents



5.
    MARKETABLE
    SECURITIES AND OTHER INVESTMENTS    Gross UnrealizedFair Value


Cost Basis


Holding GainsAs of December 31, 2006Equity securities

$
2,420


$
1,540


$
880Total marketable securities

$
2,420


$
1,540


$
880As of December 31, 2005Equity securities

$
2,360


$
1,540


$
820Other securities


4,790



4,790



Total marketable securities

$
7,150


$
6,330


$
820     6.
    PROPERTY
    AND EQUIPMENT    December 31,2006


2005Telecommunications networks and
    acquired bandwidth

$
856,093


$
751,487Furniture, fixtures, equipment and
    other


299,851



258,0341,155,944



1,009,521Less accumulated depreciation


(564,833
)


(387,334
)591,111



622,187Construction-in-progress
    and undeployed assets


87,122



95,440$
678,233


$
717,627   construction-in-progress
  7.
    BROADBAND
    WIRELESS LICENSES    December 31,2006


2005Broadband wireless licenses

$
59,508


$
59,508Less accumulated amortization


(23,726
)


(18,981
)$
35,782


$
40,527  F-16




---



##### Table of Contents



8.
    OTHER
    INTANGIBLES    December 31,2006


2005Customer relationships

$
112,366


$
112,366Internally developed technology


9,521



9,521Acquired trade names


5,673



5,673127,560



127,560Less accumulated amortization


(117,568
)


(94,041
)9,992



33,519Goodwill  indefinite
    life asset


1,071



1,071XO Trade name 
    indefinite life asset


16,662



16,662$
27,725


$
51,252         9.
    OTHER
    ASSETS    December 31,2006


2005ATLT debt claim

$
20,553


$
20,553Equity Investment in McLeod


4,790



Security deposits


8,440



9,116Pledged securities


6,144



6,426Other long term assets


1,434



1,566$
41,361


$
37,661    F-17




---



##### Table of Contents



10.
    ACCRUED
    LIABILITIES    2006


2005Accrued compensation

$
48,184


$
48,608Deferred revenue


42,556



45,145Accrued operating taxes


45,590



46,485Accrued operating expenses


40,749



35,679Accrued telecommunications costs


29,537



24,379Accrued restructuring charges and
    asset retirement obligations


11,095



12,404Other accrued liabilities


3,070



3,578$
220,781


$
216,278   11.
    ACCOUNTING
    FOR ASSET RETIREMENT OBLIGATIONS    Balance as of January 1, 2004

$
12,855Estimate revisions


(7,738
)Accretion


776Usage


Balance as of December 31,
    2004

$
5,893Estimate revisions


(631
)Accretion


405Usage


(671
)Balance as of December 31,
    2005

$
4,996Estimate revisions


(261
)Accretion


394Usage


Balance as of December 31,
    2006

$
5,129    F-18




---



##### Table of Contents



12.
    LONG-TERM
    DEBT         F-19




---



##### Table of Contents



13.
    CONVERTIBLE
    PREFERRED STOCK        14.
    STOCKHOLDERS
    EQUITY      
    Series A Warrants to purchase 9.5 million shares of
    the Companys common stock at an exercise price of
    $6.25 per share;
    Series B Warrants to purchase approximately
    7.1 million shares of the Companys common stock at an
    exercise price of $7.50 per share; and
    Series C Warrants to purchase approximately
    7.1 million shares of the Companys common stock at an
    exercise price of $10.00 per share.   F-20




---



##### Table of Contents



15.
    INCOME
    TAXES    December 31,2006


2005Deferred tax assets:Provisions not currently deductible

$
103,938


$
118,989Property, equipment and other
    long-term assets (net)


498,253



477,369Net operating loss and capital
    loss carry forwards


518,376



510,328Total deferred tax assets


1,120,567



1,106,686Valuation allowance


(1,120,567
)


(1,106,686
)Net deferred tax assets






Deferred tax liabilities:Other identifiable intangibles


(6,831
)


(6,831
)Net deferred tax liability

$
(6,831
)

$
(6,831
)     2006


2005


2004Statutory U.S. federal rate


35.0
%


35.0
%


35.0
%State income taxes, net of federal
    benefit


5.0
%


6.0
%


6.0
%Valuation allowance for deferred
    tax assets


(40.0
)%


(41.0
)%


(22.6
)%Impairment


0.0
%


0.0
%


(18.4
)%Effective income tax rate


0.0
%


0.0
%


0.0
%    F-21




---



##### Table of Contents



16.
    SHARE-BASED
    PAYMENTS  Share-based
    payment arrangements
  XO
    Holdings, Inc. 2002 Stock Incentive Plan
        Adoption
    of SFAS 123(R)
  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 F-22




---



##### Table of Contents



Stock-Based
    Compensation Expense
    Stock-Based
    Compensation Activity
    Weighted AverageNumber of


Weighted Average


Remaining


AggregateShares


Exercise Price


Contractual Term


Intrinsic ValueOutstanding at December 31,
    2005


9,296,457


$
5.06Granted


1,817,500



5.10Forfeited


(723,227
)


5.44Expired


(534,276
)


5.18Exercised


(68,250
)


5.38Outstanding at December 31,
    2006


9,788,204



5.06



7.0 years


$
Exercisable at December 31,
    2006


6,988,598



5.03



6.4 years


$
Expected to vest at
    December 31, 2006


2,466,453


$
5.12



8.6 years


$
   in-the-money
      Fair
    Value Determination
   F-23




---



##### Table of Contents



Years Ended December 31,2006


2005


2004Weighted average grant date price
    per share of Company stock

$
4.56


$
2.74


$
5.44Weighted average exercise price

$
5.10


$
5.00


$
4.78Range of expected volatility


63.89-65.26
%


61.00
%


61.00
%Range of risk free interest rate


4.48-5.04
%


3.80
%


3.14
%Dividend yield


0.00
%


0.00
%


0.00
%Expected term (in years)


6.25



4.00



4.00   Prior
    Period Pro Forma Disclosures
    Years Ended December 31,2005


2004Net loss applicable to common
    shares, as reported

$
(159,208
)

$
(410,453
)Add: Stock-based employee
    compensation expense included in net loss applicable to common
    shares, as reported


147



406Deduct: Total stock-based employee
    compensation expense determined under fair value based methods
    for all stock awards


(5,973
)


(7,966
)Pro forma net loss applicable to
    common shares

$
(165,034
)

$
(418,013
)Net loss per common share, basic
    and diluted:Net loss per common share, basic
    and diluted   as reported

$
(0.88
)

$
(2.57
)Net loss per common share, basic
    and diluted   pro forma

$
(0.91
)

$
(2.61
)  F-24




---



##### Table of Contents



17.
    SUPPLEMENTAL
    DISCLOSURE  Cash
    flows
    December 31,2006


2005


2004Non-cash financing and investing
    activities were as follows:Stock issued for acquired
    businesses

$



$



$
311,306Assets and obligations acquired
    through capital leases










3,932Accrued capital expenditures


28,696



4,030



1,080Conversion of accrued interest to
    long-term debt


35,450



39,730



28,746Cash paid for interest

$
1,754


$
4,104


$
2,481   18.
    SELECTED
    QUARTERLY DATA (Unaudited)  Quarters Ended 2006March 31,


June 30,


September 30,


December 31,Revenue

$
349,690


$
354,282


$
352,334


$
355,310Cost of service (exclusive of
    depreciation and amortization)


154,380



153,089



141,840



147,718Loss from operations


(37,989
)


(30,458
)


(16,570
)


(27,134
)Net loss


(43,658
)


(36,081
)


(22,972
)


(27,633
)Net loss applicable to common
    shares


(46,946
)


(39,455
)


(26,359
)


(31,070
)Net loss per common share, basic
    and diluted

$
(0.26
)

$
(0.22
)

$
(0.14
)

$
(0.17
)   Quarters Ended 2005March 31,


June 30,


September 30,


December 31,Revenue

$
361,504


$
362,164


$
358,672


$
351,282Cost of service (exclusive of
    depreciation and amortization)


147,922



138,024



147,009



154,949Loss from operations


(36,477
)


(24,729
)


(23,318
)


(41,870
)Net loss


(42,859
)


(29,507
)


(30,634
)


(43,505
)Net loss applicable to common
    shares


(45,956
)


(32,652
)


(33,855
)


(46,745
)Net loss per common share, basic
    and diluted

$
(0.25
)

$
(0.18
)

$
(0.19
)

$
(0.26
)   19.
    RELATED
    PARTY TRANSACTIONS    Outstanding


Series A, B and CCommon Stock


Warrants


Credit Facility


Preferred StockAt December 31, 2005


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%At December 31, 2006(1)


Greater than 50
%


Greater than 40
%


Greater than 90
%


52
%     (1)
    
    According to Amendment No. 8 to the Schedule 13D of
    Cardiff Holding LLC (Cardiff), filed with the
    Securities and Exchange Commission on May 1, 2006, on
    April 28, 2006, Cardiff, an entity affiliated with the
    Companys Chairman, sold in a private sale to qualified
    institutional buyers an aggregate of 1,725,000 shares of
    the Companys 6% Class A Convertible Preferred Stock
    (the Preferred Stock). F-25




---



##### Table of Contents



20.
    COMMITMENTS
    AND CONTINGENCIES  Operating
    Commitments
      Other Long-TermOperating Lease


ContractualYears Ending December 31,

Obligations


Obligations2007

$
67,803


$
105,4862008


57,630



94,2012009


49,717



68,4922010


43,015



45,9942011


33,649



39,571Thereafter


99,103



106,401Total minimum commitments

$
350,917


$
460,145    F-26




---



##### Table of Contents



Capital
    Leases
    Capital LeaseYears Ending December 31,

Obligations2007

$
3,8542008


2,3982009


1,7702010


1,4192011


1,419Thereafter


11,071Total minimum capital lease
    payments

$
21,931Less: imputed interest


7,426Less: current portion of capital
    lease obligations


2,695Long-term portion of capital lease
    obligation

$
11,810   Other
    Commitments
    Employee
    Savings and Retirement Plan
    Indemnification
    Legal
    Proceedings
   F-27




---



##### Table of Contents



Allegiance
    Telecom Liquidating Trust Litigation
    true-up True-Up) True-up
  Litigation
    Relating to the Wireline Sale
  R2 Investments v. Carl
    C. Icahn, et al. No. 1862-N).
 F-28




---



##### Table of Contents



Allegiance
    Telecom Liquidating Trust, as successor in interest to the
    rights of Allegiance Telecom Inc., and its direct and indirect
    subsidiaries v. Carl C. Icahn, et al. No. 1877-N)) Donald J. Hillenmeyer, Jr. v. Carl C. Icahn,
    et al. No. 1880-N))
      Houlihan
    Lokey Howard and Zukin Capital LLC
    Level 3
  10-K
  Verizon
    Indemnification Notice
   F-29




---



##### Table of Contents



Aerotel, LTD v Verizon Company
    et al
  Verizon
    Indemnification Notice II
  TGIP, Inc. v AT&T Corp, Verizon Communications
    et al
  XO
    Holdings, Inc et al. (XO) v. AT&T Corp.
    et al. (AT&T).
    21.
    RESTRUCTURING
    CHARGE     F-30




---



##### Table of Contents



Balance as of January 1, 2004

$
59,976Estimate revisions


(3,442
)Accretion


4,078Usage


(16,956
)Balance as of December 31,
    2004

$
43,656Estimate revisions


2,883Accretion


3,978Usage


(13,178
)Balance as of December 31,
    2005

$
37,339Estimate revisions


2,295Accretion


4,084Usage


(12,678
)Balance as of December 31,
    2006

$
31,040   22.
    SUBSEQUENT
    EVENT   F-31




---



##### Table of Contents



XO
    Holdings, Inc.
  Schedule II 
    Consolidated Valuation and Qualifying Accounts
 For The Years Ended December 31, 2006, 2005 and
    2004
  Reorganization


Additions/Adjustments/


ReductionsBeginning


Purchase


charged





Ending(Dollars in thousands)

Balance


Accounting


to expense


Reductions


BalanceAllowance for doubtful accounts2004

$
32,986


$



$
34,898


$
(28,903
)

$
38,9812005


38,981







33,502



(36,422
)


36,0612006

$
36,061


$



$
32,608


$
(51,915
)

$
16,754Deferred tax asset valuation
    allowance2004

$
976,960


$
199,630


$
158,304


$
(77,073
)

$
1,257,8212005


1,257,821







46,267



(197,402
)


1,106,6862006

$
1,106,686


$



$
52,690


$
(38,809
)


1,120,567  S-1