##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C. 20549
  FORM 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005ORo

TRANSITION 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)

74-3163345(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


12.


Properties


363.


Legal
    Proceedings


364.


Submission of
    Matters to a Vote of Security Holders


38PART II5.


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


396.


Selected Financial
    Data


407.


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


417A.


Quantitative and
    Qualitative Disclosure about Market Risk


578.


Financial
    Statements and Supplementary Data


589.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


589A.


Controls and
    Procedures


58PART III10.


Directors and
    Executive Officers of the Registrant


5811.


Executive
    Compensation


5912.


Security Ownership
    of Certain Beneficial Owners and Management


5913.


Certain
    Relationships and Related Transactions


5914.


Principal
    Accounting Fees and Services


60PART IV15.


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


60Signatures


61EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  Item 1.
    Business      Business
    Overview
        Company
    History
    Over-the-Counter
 1




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##### Table of Contents



(703) 547-2000. Form 10-K, Form 10-Q Form 8-K,
  Wireline
    Sale
         2




---



##### Table of Contents



break-up
      The
    Restructuring
      2005
    Highlights
  
    Wireline Sale.  In November 2005, we determined
    to enter into the Wireline Sale in order to focus on the
    development of our Wireless Business. Following the consummation
    of the Wireline Sale, we will continue to hold between 1,100 and
    1,300 MHz of LMDS spectrum and other wireless spectrum in
    over 70 U.S. markets, will be debt-free, and will have over
    $300 million in capital to fund the construction of our
    fixed wireless communications networks, and the initial startup,
    growth, operation, and development of our Wireless Business.
    Initial Deployment of Wireless Communications
    Networks.  In 2005, we commenced the deployment of
    our wireless communications networks in Florida, and we are in
    the early stages of deploying our wireless communication
    networks in Georgia, Texas, and California. As network
    deployment continues 3




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##### Table of Contents



in those cities, we anticipate focusing on marketing and
    delivering additional telecommunications services to customers
    located in those areas based on our growing network footprint.  
    Expansion of VoIP Products.  On April 18,
    2005, we launched the Companys initial Voice over Internet
    Protocol, or VoIP, product, named XOptions Flex, in 45 major
    metropolitan markets. We later expanded the product offering to
    two additional markets. Our VoIP product enables small to medium
    sized business customers to utilize dynamic bandwidth
    allocation to maximize the utilization of their bandwidth
    by allocating it to data applications during periods when voice
    lines are idle. XOptions Flex bundles local and long distance
    calling, dedicated Internet access and web hosting services for
    a flat monthly price. We anticipate expanding our VoIP offering
    to larger customers in 2006.  The
    U.S. Telecommunications Market
      Federal Rulemaking.
  Emergence of New Technologies.
  
    IP Communications.  VoIP technology
    enables delivery of voice and data telecommunications services
    over a single Internet Protocol, or IP, network, rather than
    through the existing Public Switched Telephone Network, or PSTN.
    The proliferation of
    IP-based
    communications services will cause facilities-based
    communication carriers like us to transition from our current
    network infrastructure to an
    IP-based
    infrastructure over time. While an
    IP-based
    communications network is less costly to operate, the migration
    of our customers to an IP communications environment will occur
    gradually and will require us to incur augmented operations
    costs to complete the migration. In addition, the new IP
    technology has enabled the entrance of new competitors in the
    communications marketplace. We have deployed our own suite of
    VoIP products, including our initial VoIP implementation, named
    XOptions Flex, that enables customers to utilize dynamic
    bandwidth allocation to maximize the utilization of their
    bandwidth by allocating it for data applications during periods
    when voice lines are idle. We anticipate adding new IP products
    with more IP features in an attempt to target larger customers
    than those targeted with XOptions Flex. 4




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##### Table of Contents




    Fixed Broadband Wireless.  There has
    been ongoing development of technical equipment and data
    encryption and compression protocols that permit the use of high
    bandwidth wireless connections between physical locations that
    are located within a line of sight across relatively short
    distances, usually three to seven miles. In addition, new
    protocols are under development, such as WiMax, that are
    designed to allow wireless
    last-mile
    connectivity that is not limited by line of sight requirements.
    In each case, these wireless technologies will allow competitive
    carriers to bypass the ILEC and market their services to
    customers directly via high capacity, wireless connections. We
    are developing our fixed wireless communications business to
    take advantage of this market trend.
    Mobile Wireless Technologies.  Wireless
    carriers have engaged in rapid development of new high bandwidth
    applications to be delivered to their customers via wireless
    devices, commonly referred to as 3G broadband
    wireless networks. Such applications include the delivery of
    video and photos via wireless connection. The ongoing adoption
    of broadband networks and applications could mean that current
    wireless telecommunications carriers will require significantly
    greater wireline and wireless bandwidth for transport of their
    customers traffic, presenting an opportunity for us to
    offer both wireline and wireless transport, backhaul and
    termination services to those wireless carriers.  Industry Consolidation.
  Growth of the Mobile Wireless
    Market.
  Entry of New Telecommunications
    Competitors.
  Competitive
    Strategy
  Wireline Business Strategy.
  Leverage National Network
    Footprint.
   5




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##### Table of Contents



Focus on Business Customers.
  Improve Customer Experience.
  Reduce Costs of Operations and
    Assets.
  Strategic Acquisitions.
  Wireless Business Strategy.
  Initial Focus on Telecommunications
    Carriers.
  Demand-Driven Network Expansion.
  Offer Competitive Pricing. point-to-multipoint
  Synthesize New Technologies into Comprehensive
    Solutions.
 6




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##### Table of Contents



Wireline
    Business Services
      Integrated
    Voice and Data Services
  XOptions, XOptions Flex and Total
    Communications.
  Managed Services.
  Voice
    Services
    
    local standard dial tone, including touch-tone dialing, 911
    access and operator assisted calling;
    local multi-trunk dial tone services, including primary rate
    interface, or PRI, with direct inward dialing, and direct
    outward dialing;
    long distance services, including 1+, toll free, calling card
    and operator services;
    IP termination services;
    voice messaging with personalized greetings, send, transfer,
    reply and remote retrieval capabilities;
    conferencing services, including voice and web conferencing
    services;
    directory listings and assistance; and
    hosted interactive voice response services.    Data
    Services
  Internet
    Access. Our
    Internet access offerings include dedicated access services
    targeted at businesses that desire single or multipoint
    high-speed, dedicated connections to the Internet. Our dedicated
    Internet access service provides guaranteed internet speeds
    ranging from 56 kilobits per second, or kbps, to 1 Gigabit per
 7




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##### Table of Contents



Private
    Data
    Networking. We
    provide dedicated transmission capacity on our networks to
    customers that desire high-bandwidth data links between
    locations. We offer special access and
    point-to-point
    circuits to telecommunications carriers and other high volume
    customers, which they use as both primary and
    back-up
    circuits. In addition, fiber optic technology that enables
    signals to be transmitted at different wavelengths on a single
    fiber allows us to lease one or more dedicated wavelengths to
    customers that desire high-bandwidth links between locations. We
    currently offer these services with connections of up to 9.6
    gigabits per second, a transmission rate that is described in
    our industry as OC-192. This service supports a variety of
    transmission protocols, including Asynchronous Transfer Mode, or
    ATM, Frame Relay, and Synchronous Optical Network, or SONET.
  IP-based business-to-business business-to-customer
    Hosting
    Services. We
    offer a range of applications hosting services that can manage a
    customers web-based infrastructure and operational needs,
    allowing customers to focus on their web-based content. In
    addition, we provide server management tools and services to
    manage customers larger computers, which are known as
    servers, for them.
    
    Web Hosting:  support for
    customers websites, including design, maintenance and
    telecommunications services; and
    Server Collocation:  collocation of
    customers servers in our data centers.    Our
    Network
   8




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##### Table of Contents



Metro
    Fiber Networks and Local Facilities
       9




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##### 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/
    Northern VA

Washington, DC-MD-VA-WV

PA

Philadelphia

Philadelphia, PA-NJFL

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  10




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##### Table of Contents



Intercity
    Network
    Form 10-K,
    end-to-end
      Sales
    Overview
    Direct Sales.
 11




---



##### Table of Contents



Indirect Sales Representatives.
  Network
    Services
    Customer
    Care
    Competition
    ILECs.
  Competitive Local Exchange Carriers.
 12




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##### Table of Contents



Long Distance and Internet Services
    Companies.
  VoIP Carriers.
  Cable-Based Service Providers.
  Wireless
    Business Services
  IP-based
      Network Deployment Speed.
  Network Reach.
  Service Installation and
    Upgrades.
 13




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##### Table of Contents



Price.
  Familiar Technology.
  Wireless
    Spectrum Assets
    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










2/1/2016
*WPLM417

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










6/17/2008 14




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##### Table of Contents



License










B


39 GHz


LicenseNumber

City

State

Population


A Band

Band


Chanls


RenewalWPLM419

Minneapolis-St. Paul

MN


2,840,561


A










6/17/2008WPOH945

New Haven-Waterbury-Meriden

CT


978,311





B







6/17/2008WPLM400

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







10/6/2008 15




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##### Table of Contents



License










B


39 GHz


LicenseNumber

City

State

Population


A Band

Band


Chanls


RenewalWPOH964

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










10/6/2008WPOH942

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   Legend
  A
    
    27,500 to 28,350 MHz, 29,100 to 29,250 GHz, 31,075 to
    31,225 GHz = 1,150 MHzA1
    
    27,500 to 28,350 MHz = 850 MHzA3
    
    31,075 to 31,225 GHz = 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   16




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##### Table of Contents



*
    Our A3 Band Licenses in New York City was renewed by the FCC
    during the first quarter of 2006 through February 2016, however,
    the FCC did not extend the deadline for completing the
    facilities construction requirements for that license, which
    remains March 2007. Consequently, we may relinquish our rights
    in the our New York City A3 band license if we do not meet the
    March 2007 construction deadlines, notwithstanding the
    FCCs extension of our license term through February 2016.    Wireless
    Network Overview
  Overview. point-to-multipoint point-to-point
  Network Architecture.
  point-to-multipoint
 17




---



##### Table of Contents



Fixed Wireless Spectrum
    Performance. middle-mile
  line-of-sight line-of-sight
 18




---



##### Table of Contents



Wireless Network Equipment.
  Network Services.
  Wireless Sales.
 19




---



##### Table of Contents



Competition
    ILECs.
  Competitive Carriers. point-to-point
  out-of-region,
  Fixed Wireless Carriers. point-to-multipoint end-to-end end-to-end
  point-to-point point-to-point
  Proprietary Deployment. point-to-point
 20




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##### Table of Contents



Deployment
    of Other Wireless Technologies
    Regulatory
    Overview
    rights-of-way,
      Federal
    Regulation
   21




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##### Table of Contents



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;
    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
     22




---



##### Table of Contents



No. 00-1012
    UNE
    Loops
  DS0 loops.
  DS1 loops.
  DS3 loops.
    fiber-to-the-premise, fiber-to-the
  UNE
    Transport
  DS1 transport. route-by-route
  DS3 transport.
  Dark fiber transport.
 23




---



##### Table of Contents



Transitional availability where elements are no longer
    available as UNEs.
    FCC
    Regulation of Wireless Services
      rights-of-way.
    FCC
    Regulation of LMDS and 39 GHz Services in
    Particular
  Generally.
 24




---



##### Table of Contents



line-of-sight
  Performance Requirements. case-by-case
  point-to-multipoint point-to-point point-to-point
    Assignment, Transfer and Leasing of
    Spectrum.
 25




---



##### Table of Contents



Auctions.
  Other Issues Affecting the Companys Spectrum
    Licenses.
  Additional
    Federal Regulations
    VoIP. IP-enabled IP-enabled
  AT&T Declaratory Ruling Re: VoIP.
 26




---



##### Table of Contents



ILEC Provision of Broadband Telecommunications Services and
    Information Services.
  Intercarrier Compensation Reform.
  Cost-based TELRIC Pricing.
  VoIP 911 Regulation.
  CALEA Regulation. dial-up
 27




---



##### Table of Contents



State and
    Local Regulation
      rights-of-way, rights-of-way.
  Wireless
    Services Affected by State Regulations
    Access to 911 Emergency
    Services.
  Entry Regulation, Resale, Number Portability, and
    Interconnection.
  Billing and Collection.
  Regulatory Assessments, Reporting Requirements and
    Taxes.
 28




---



##### Table of Contents



Other State and Local Issues. truth-in-billing
  Item 1A.
    Risk
    Factors  Risks
    Related to Liquidity, Financial Resources, and
    Capitalization
  The
    covenants in our Credit Agreement restrict our financial and
    operational flexibility, which could have an adverse affect on
    our results of operations.
          
    they may impair our ability to obtain additional financing in
    the future;
    they may limit our flexibility in planning for or reacting to
    changes in market conditions; and
    they may cause us to be more vulnerable in the event of a
    downturn in our business. 29




---



##### Table of Contents



We may
    not prevail in our $50 million claim against the Allegiance
    Telecom Liquidating Trust, and we may not be successful in
    defending ourselves from the Allegiance Telecom Liquidating
    Trusts counterclaim against us.
    The
    Wireline Sale may not close, which would require us to
    reevaluate our strategic alternatives.
    We
    incurred a net loss in the past and, in the near term, may not
    generate funds from operations sufficient to meet all of our
    cash requirements.
    Risks
    Related to Our Wireline Operations
  In the
    event of a substantial failure of our operations support
    systems, including the systems for sales tracking, order entry
    and provisioning, and billing, our Disaster Recovery System may
    not permit us to recover our systems operations and perform
    critical aspects of our services for an extended period, which
    would adversely affect our revenues or capital
    resources.
    Our
    rights to the use of the unlit capacity that make up our network
    may be affected by the financial health of our fiber
    providers.
   30




---



##### Table of Contents



We may
    not be able to continue to connect our network to the
    ILECs network or maintain Internet peering arrangements on
    favorable terms, which would impair our growth and
    performance.
      We depend
    on a limited number of third party service providers for the
    performance of several our business operations, including
    payroll and billing services.
    We may be
    unable to adequately protect our intellectual property or rights
    to licenses for use of third-party intellectual property, and
    may be subject to claims that we infringe the intellectual
    property of others, which could substantially harm our
    business.
   31




---



##### Table of Contents



We
    experience turnover among our experienced and trained employee
    base, which could result in our inability to continue performing
    certain functions and completing certain initiatives in
    accordance with our existing budgets and operating
    plans.
    Several
    customers account for a significant portion of our revenue, and
    some of our customer agreements may not continue due to
    bankruptcies, acquisitions, nonrenewal, or other
    factors.
    Risks
    Related to Our Wireless Operations
  Our
    Wireless Business is in the early stages of development and we
    may not be able to implement its business strategy or obtain new
    customers.
    One
    customer accounts for nearly all of our wireless services
    revenue.
    Our
    licenses may not be renewed upon expiration.
   32




---



##### Table of Contents



point-to-multipoint point-to-point point-to-point
  license-by-license
  If we do
    not secure a waiver of the substantial performance obligations
    for our A3 Block in New York, we may lose that LMDS
    license.
    A key
    aspect of our business strategy is to provide backhaul services
    for providers of cellular wireless mobile telecommunications,
    and our business will depend to a substantial degree on the
    widespread adoption of bandwidth-intensive applications, such as
    3G applications.
    We 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.
   33




---



##### Table of Contents



Additional
    spectrum may become available from the FCC, increasing the
    number of
    and/or
    viability of our competitors or even allowing our customers or
    potential customers to obtain their own spectrum outright,
    reducing their need to obtain spectrum or services from
    us.
      We are
    dependent on key personnel and our success depends on our
    ability to attract, train and retain additional qualified
    personnel.
    FCC
    Regulation of RF emissions and RF environments may increase our
    costs and/or
    limit our operations.
    Risks
    Related to Competition and Our Industry
  Technological
    advances and regulatory changes are eroding traditional barriers
    between formerly distinct telecommunications markets, which
    could increase the competition we face and put downward pressure
    on prices, which could impair our results.
   34




---



##### Table of Contents



The
    telecommunications industry is highly competitive, and has
    experienced the consolidation of many existing competitors and
    the introduction of significant new competitors.
    We are
    subject to comprehensive and continually evolving
    regulation.
    Risks
    Related to Our Common Stock
  An entity
    owned and controlled by Mr. Icahn is our majority
    stockholder.
    Future
    sales or issuances of our common stock could adversely affect
    our stock price
    and/or our
    ability to raise capital.
     35




---



##### Table of Contents



Item 2.  Properties            Item 3.
    Legal
    Proceedings    Allegiance
    Telecom Liquidating Trust Litigation
   36




---



##### Table of Contents



Litigation
    Relating to the Wireline Sale
  R2
    Investments v. Carl C. Icahn, et al. No. 1862-N),
  Allegiance Telecom Liquidating
    Trust v. Carl C. Icahn, et al. 1877-N),
  Donald J.
    Hillenmeyer, Jr. v. XO Communications, Inc., et
    al. No. 1880-N),
   37




---



##### Table of Contents



Houlihan
    Lokey Howard and Zukin Capital LLC
    Cox
    Communications Las Vegas, Indefeasible Right of Use (IRU)
    Agreement
      Level 3
  10-K,
  Verizon
    Indemnification Notice
    Item 4.
    Submission
    of Matters to a Vote of Security Holders   38




---



##### Table of Contents



Part II  Item 5.
    Market
    for Registrants Common Equity and Related Stockholder
    Matters and Issuer Purchases of Equity Securities    2005


2004High


Low


High


LowFirst Quarter

$
3.37


$
2.30


$
7.90


$
4.98Second Quarter


3.09



1.75



5.70



3.33Third Quarter


3.01



2.22



4.00



3.16Fourth Quarter

$
2.63


$
1.76


$
3.62


$
2.67   over-the-counter
 39




---



##### Table of Contents



Item 6.
    Selected
    Financial Data    Reorganized XO (f)


Predecessor XOYear Ended
    December 31,


Year Ended
    December 31,2005


2004 (a)


2003


2002


2001Statement of Operations
    Data:Revenue

$
1,433,622


$
1,300,420


$
1,110,483


$
1,259,853


$
1,258,567Loss from operations(b)


(126,394
)


(370,292
)


(111,858
)


(1,208,898
)


(1,949,891
)Net loss(c)


(146,505
)


(405,543
)


(102,554
)


(3,386,818
)


(2,086,125
)Net loss applicable to common
    shares(d)


(159,208
)


(410,453
)


(102,554
)


(3,350,362
)


(1,838,917
)Net loss per common share, basic
    and diluted


(0.88
)


(2.57
)


(1.07
)


(7.58
)


(4.55
)Statement of Cash Flow
    Data:Net cash (used in) provided by
    operating activities


108,980



150



6,301



17,602



(560,877
)Net cash (used in) provided by
    investing activities


(56,223
)


(444,837
)


153,036



57,582



(708,598
)Net cash (used in) provided by
    financing activities


(109,908
)


200,116



5,185



(6,079
)


(1,019,647
)Balance Sheet Data:Cash, cash equivalents and
    marketable securities


183,988



251,289



520,612



560,983



755,167Property and equipment, net


717,627



820,536



485,984



2,780,589



3,742,577Broadband wireless licenses


40,527



46,854



53,181



911,832



947,545Other intangibles, net(c)


51,252



93,012



56,334



72,782



2,030,030Total assets(c)


1,202,725



1,459,385



1,265,165



4,585,496



7,930,465Total long-term debt and accrued
    interest payable(e)


301,113



366,247



536,791



5,165,718



5,109,503Redeemable preferred stock, net of
    issuance costs


217,056



204,353







1,708,316



1,781,990Total stockholders equity
    (deficit)(e)

$
322,588


$
485,552


$
380,425


$
(3,032,282
)

$
297,416     (a)
    
    The selected consolidated financial
    data includes the accounts and activities of the businesses we
    acquired from Allegiance Telecom, Inc. from June 23, 2004,
    the acquisition date through December 31, 2004.(b)
    
    In 2004, loss from operations
    included a $212.5 million non-cash impairment charge of
    goodwill. In 2002, loss from operations included non-cash
    charges totaling $477.3 million in connection with the
    amendment to the terms of fiber acquisition and maintenance
    arrangements with Level 3 Communications, and the return of
    previously acquired intercity fiber in connection therewith. In
    2001, loss from operations included restructuring charges
    totaling $509.2 million associated with the restructuring
    of certain aspects of our business operations.(c)
    
    In 2004, net loss included a
    $212.5 million non-cash impairment charge of goodwill. In
    2003, net loss included a $33.5 million gain on investment
    sales. In 2002, net loss and total assets reflects a
    $1,876.6 million impairment charge to write-off all of our
    goodwill as a cumulative effect of accounting change, pursuant
    to SFAS No. 142. In 2001, net loss included a gain of
    $345.0 million resulting from the repurchase of certain of
    our senior notes.(d)
    
    The comparability of net loss
    applicable to common shares is impacted by the transactions
    discussed in c. above. In addition, in 2001, net loss applicable
    to common shares includes a gain of $376.9 million
    resulting from the repurchase of certain of our preferred stock.(e)
    
    In January 2004, we completed a
    rights offering. An aggregate of 39.7 million shares were
    issued in the offering, yielding net proceeds of
    $197.6 million. These proceeds were used to pay down our
    long-term debt and accrued interest payable.(f)
    
    The reorganized selected
    consolidated financial data as of and for the years ended
    December 31, 2005, 2004 and 2003 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, we recognized a reorganization gain, net of
    $3,032.3 million which is not presented. The predecessor
    selected consolidated financial data below as of and for the
    years ended December 31, 2002 and 2001 does not include the
    effects of the 40




---



##### Table of Contents



fresh start accounting provisions
    of
    SOP 90-7.
    Fresh start required that XOC adjust the historical cost of its
    assets and liabilities to their fair values as determined by its
    reorganization value.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  OVERVIEW
    OF OUR BUSINESS
        
    the costs of purchasing and deploying wireless communications
    equipment have declined significantly over the last several
    years, and we are now positioned to deploy our fixed wireless
    equipment in a more cost-effective manner than our traditional
    wireline services;
    There is a greater recognition of the need for redundancy in the
    technologies included in communications networks;
    the increased costs of fiber and copper network facilities due
    to FCC rulemaking permitting the ILECs to increase prices for
    such facilities is expected to increase the cost of providing
    traditional wireline services  Key
    Performance Indicators
    
    Gross Margin
    Sales, Operating and General Expenses as a Percentage of Revenue
    EBITDA 41




---



##### Table of Contents



Year Ended
    December 31,2005


2004Gross margin


59.0
%


57.5
%EBITDA


7.9
%


(15.8
)%Sales, operating &
    general expenses


51.4
%


56.0
%       LIQUIDITY
    AND CAPITAL RESOURCES
    2005


2004Operating activities

$
108,980


$
150Investing activities


(56,223
)


(444,837
)Financing activities


(109,908
)


200,116Total

$
(57,151
)

$
(244,571
)   Cash
    Flows from Operating Activities
    Cash
    Flows from Investing Activities
    Cash
    Flows from Financing Activities
    Our Credit Facility matures on July 15,
    2009.
 42




---



##### Table of Contents



43




---



##### Table of Contents



Contractual
    Obligations
          Otherlong-term


OperatingCredit


contractual


lease


Capital lease


TotalYear Ending
    December 31,

Facility


obligations


obligations


obligations


obligations2006

$



$
82,800


$
69,932


$
4,537


$
157,2692007






79,535



64,965



3,854



148,3542008






68,513



54,327



2,398



125,2382009


301,113



44,573



46,432



1,770



393,8882010






15,688



39,838



1,419



56,945Thereafter






87,322



125,873



12,491



225,686Total minimum commitments

$
301,113


$
378,431


$
401,367


$
26,469


$
1,107,380       RESULTS
    OF OPERATIONS
  Overview
     44




---



##### Table of Contents



2005


2004


2003Revenue

$
1,433,622



100.0
%

$
1,300,420



100.0
%

$
1,110,483



100.0
%Costs and expenses:Cost of service (exclusive of
    depreciation and amortization)


587,904



41.0
%


552,735



42.5
%


422,129



38.0
%Selling, operating and general


737,350



51.4
%


727,666



56.0
%


679,286



61.2
%Depreciation and amortization


234,762



16.4
%


177,781



13.7
%


109,308



9.8
%Goodwill impairment charge






0.0
%


212,530



16.3
%


Restructuring






0.0
%






0.0
%


11,618



1.1
%Total costs and expenses


1,560,016



108.8
%


1,670,712



128.5
%


1,222,341



110.1
%Loss from operations


(126,394
)


(8.8
)%


(370,292
)


(28.5
)%


(111,858
)


(10.1
)%Interest income, net


8,850



0.6
%


3,682



0.3
%


10,365



0.9
%Investment income (loss), net


1,950



0.1
%


(12,719
)


(1.0
)%


35,787



3.2
%Interest expense, net


(34,291
)


(2.4
)%


(26,214
)


(2.0
)%


(36,848
)


(3.3
)%Other non-operating gain


3,380



0.6
%






0.0
%






0.0
%Net loss


(146,505
)


(10.2
)%


(405,543
)


(31.2
)%


(102,554
)


(9.2
)%Preferred stock accretion


(12,703
)


(0.9
)%


(4,910
)


(0.4
)%






0.0
%Net loss applicable to common
    shares


(159,208
)


(11.1
)%


(410,453
)


(31.6
)%


(102,554
)


(9.2
)%Net loss per common share, basic
    and diluted


(0.88
)






(2.57
)






(1.07
)Weighted average shares
    outstanding, basic and diluted


181,933,035







159,883,403







95,632,859Gross margin (1)


845,718



59.0
%


747,685



57.5
%


688,354



62.0
%EBITDA (2)

$
113,698



7.9
%

$
(205,230
)


(15.8
)%

$
33,237



3.0
%     (1)
    
    Gross margin is defined as revenue
    less cost of service, and excludes depreciation and
    amortization. Gross margin is not intended to replace operating
    income (loss), net income (loss), cash flow and other measures
    of financial performance reported in accordance with generally
    accepted accounting principles in the United States. Rather,
    gross margin is an important measure used by management to
    assess operating performance of the Company. 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 45




---



##### Table of Contents



telecommunications industry. 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. A reconciliation between
    gross margin and net loss is as follows:  Year Ended December
    31,2005


2004


2003Net loss

$
(146,505
)

$
(405,543
)

$
(102,554
)Selling, operating and general


737,350



727,666



679,286Depreciation and amortization


234,762



177,781



109,308Goodwill impairment charge






212,530



Restructuring










11,618Interest income


(8,850
)


(3,682
)


(10,365
)Investment (income) loss, net


(1,950
)


12,719



(35,787
)Interest expense, net


34,291



26,214



36,848Other non-operating gain


(3,380
)






Gross margin

$
845,718


$
747,685


$
688,354     (2)
    
    EBITDA is defined as net income or
    loss before depreciation, amortization, interest expense, and
    interest income. EBITDA is not intended to replace operating
    income (loss), net income (loss), cash flow and other measures
    of financial performance reported in accordance with generally
    accepted accounting principles in the United States. Rather,
    EBITDA is an important measure used by management to assess
    operating performance of the company. EBITDA as used in this
    document may not be comparable to similarly titled measures
    reported by other companies due to differences in accounting
    policies. Additionally, EBITDA as defined here does not have the
    same meaning as EBITDA as defined in our Credit Facility
    agreement. EBITDA in 2004 includes a non-cash goodwill
    impairment charge of $212.5 million. When evaluating our
    financial performance we exclude this charge, and generally
    exclude other charges and income that are not directly
    attributable to the provision of service to our customers. A
    reconciliation between EBITDA and net loss is as follows:  Year Ended December
    31,2005


2004


2003Net loss

$
(146,505
)

$
(405,543
)

$
(102,554
)Interest income


(8,850
)


(3,682
)


(10,365
)Interest expense, net


34,291



26,214



36,848Depreciation and amortization


234,762



177,781



109,308EBITDA

$
113,698


$
(205,230
)

$
33,237   Comparison
    of Consolidated Financial Results
    Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenue.
 46




---



##### Table of Contents



Year Ended


Year EndedDecember 31,


December 31,% of 2005





% of 20042005


Revenue


2004


Revenue


% ChangeVoice services

$
734,412



51.2
%

$
673,318



51.8
%


9.1
%Data services


432,358



30.2
%


414,782



31.9
%


4.2
%Integrated voice and data services


266,852



18.6
%


212,320



16.3
%


25.7
%Total revenue

$
1,433,622



100.0
%

$
1,300,420



100.0
%


10.2
%     dial-up
    Costs and expenses.
  Year Ended


Year EndedDecember 31,


December 31,% of 2005





% of 20042005


Revenue


2004


Revenue


% ChangeCosts and expenses:Cost of service

$
587,904



41.0
%

$
552,735



42.5
%


6.4
%Selling, operating and general


737,350



51.4
%


727,666



56.0
%


1.3
%Depreciation and amortization


234,762



16.4
%


177,781



13.7
%


32.1
%Goodwill impairment charge






0.0
%


212,530



16.3
%


(100.0
%)Total

$
1,560,016



108.8
%

$
1,670,712



128.5
%


(6.6
%)   Cost of service (exclusive of depreciation and
    amortization).
 47




---



##### Table of Contents



Selling, operating and
    general.
    Depreciation and
    amortization.
    Goodwill impairment charge.
 48




---



##### Table of Contents



Interest income, net.
  Investment income (loss),
    net.
  Interest expense, net.
    Year
    Ended December 31, 2004 Compared to Year Ended
    December 31, 2003
  Revenue. Dial-up
    Year Ended


Year EndedDecember 31,


December 31,% of 2004





% of 20032004


Revenue


2003


Revenue


% ChangeVoice services

$
673,318



51.8
%

$
572,774



51.6
%


17.6
%Data services


414,782



31.9
%


392,742



35.4
%


5.6
%Integrated voice and data services


212,320



16.3
%


144,967



13.0
%


46.5
%Total revenue

$
1,300,420



100.0
%

$
1,110,483



100.0
%


17.1
%      49




---



##### Table of Contents



Costs and expenses.
  Year Ended


Year EndedDecember 31,


December 31,% of 2004





% of 20032004


Revenue


2003


Revenue


% ChangeCosts and expenses:Cost of service

$
552,735



42.5
%

$
422,129



38.0
%


30.9
%Selling, operating and general


727,666



56.0
%


679,286



61.2
%


7.1
%Depreciation and amortization


177,781



13.7
%


109,308



9.8
%


62.6
%Goodwill impairment charge


212,530



16.3
%






0.0
%


100.0
%Restructuring and asset write-downs






0.0
%


11,618



1.1
%


(100.0
%)Total

$
1,670,712



128.5
%

$
1,222,341



110.1
%


36.7
%   Cost of service.
  Selling, operating and
    general.
  Depreciation and
    amortization.
  Goodwill impairment charge.
  Restructuring and asset
    write-downs.
 50




---



##### Table of Contents



Interest income, net.
  Investment income (loss),
    net.
  Interest expense, net.
  Comparison
    of Business Unit Financial Results
  Overview
        Wireline
    Business
  Overview
   51




---



##### Table of Contents



Year Ended
    December 31,


Percentage2005


2004


ChangeBusiness unit revenue

$
1,433,416


$
1,300,420



10.2
%Business unit costs and expenses:Cost of service (exclusive of
    depreciation and amortization)


587,904



552,735



6.4
%Selling, operating and general
    (excluding general corporate overhead)


548,705



574,312



(4.5
%)Depreciation and amortization


228,435



171,454



33.2
%Goodwill impairment charge






212,530



(100.0
%)Total business unit costs and
    expenses


1,365,044



1,511,031



(9.7
%)Business unit income (loss)

$
68,372


$
(210,611
)


*     *
    Not meaningful    Wireless
    Business
  Overview
        Year Ended
    December 31,


Percentage2005


2004


ChangeBusiness unit revenue

$
206


$
Business unit costs and expenses:Selling, operating and general
    (excluding general corporate overhead)


3,261



801



307.1
%Depreciation and amortization


6,327



6,327



0.0
%Total business unit costs and
    expenses


9,588



7,128



34.5
%Business unit loss

$
(9,382
)

$
(7,128
)


31.6
%  52




---



##### Table of Contents



Year
    Ended December 31, 2005 Compared to Year Ended
    December 31, 2004
  Revenue.
    Costs and expenses.
  Year Ended
    December 31,2005


2004


% ChangeBusiness unit costs and expenses:Selling, operating and general

$
3,261


$
801



307.1
%Depreciation and amortization


6,327



6,327



0.0
%Total business unit costs and
    expenses

$
9,588


$
7,128



34.5
%   Selling, operating and
    general.
      Depreciation and
    amortization.
     53




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
  Form 10-K
  form 10-K.
  Property
    and Equipment
     54




---



##### Table of Contents



Broadband
    Wireless Licenses
      Other
    Intangible Assets
      Revenue
    Recognition
     55




---



##### Table of Contents



Allowance
    for Uncollectible Accounts
    Cost of
    Service
      Allegiance
    Bankruptcy Claim
  debtors-in-possession
  Off-Balance
    Sheet Arrangements
   56




---



##### Table of Contents



Recent
    Accounting Pronouncements
    Accounting Changes and Error
    Corrections    a replacement of APB
    Opinion No. 20 and FASB Statement No. 3
  Item 7A.
    Quantitative
    and Qualitative Disclosure About Market Risk    Annual Interest Expense Given





Annual Interest Expense Givenan Interest Rate decrease


No Change in


an Interest Rate increaseof X Basis Points


Interest Rates


of X Basis PointsInterest Rate Risk

(150 BPS)


(100 BPS)


(50 BPS)


Fair Value


50 BPS


100 BPS


150 BPSCredit

$
23.8


$
25.3


$
26.8


$
28.3


$
29.8


$
31.4


$
32.9       Fair valueassuming theFair value assuming the





followingfollowing percentage





percentagedecrease in market


No Change


increase inprice


in Fair Value


market priceMarket Risk

15%


10%


5%


0%


5%


10%


15%Market price

$
6.1


$
6.4


$
6.8


$
7.2


$
7.5


$
7.9


$
8.2   Item 8.
    Financial
    Statements and Supplementary Data  page F-1
 57




---



##### Table of Contents



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
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f). 33-8238 Internal
    Control    Integrated Framework
  Form 10-K,
  Item 10.
    Directors
    and Executive Officers of the Registrant  Regulation S-K
  Audit
    Committee Financial Expert
  Regulation S-K.
  Code of
    Ethics
  Regulation S-K.
 58




---



##### Table of Contents



Form 8-K
  Item 11.
    Executive
    Compensation    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management    Item 13.
    Certain
    Relationships and Related Transactions    Outstanding


Series A, B and CCommon Stock


Warrants


Credit Facility


Preferred StockAt December 31, 2004


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%At December 31, 2005


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%              59




---



##### Table of Contents



Item 14.
    Principal
    Accounting Fees and Services    Item 15.
    Exhibits,
    Financial Statement Schedules    XO Communications, Inc.,
    predecessor of XO Holdings, Inc.Reports of KPMG
    LLP, Independent Registered Public Accounting Firm


F-1Consolidated
    Balance Sheets as of December 31, 2005 and 2004


F-3Consolidated
    Statements of Operations for the Years Ended December 31,
    2005, 2004, and 2003


F-4Consolidated
    Statements of Stockholders Equity (Deficit) for the Years
    Ended December 31, 2005, 2004, and 2003


F-5Consolidated
    Statements of Cash Flows for the Years Ended December 31,
    2005, 2004, and 2003


F-6Notes to
    Consolidated Financial Statements


F-7Schedule II    Consolidated
    Valuation and Qualifying Accounts


S-1    60




---



##### 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/  William
    GarrahanWilliam
    Garrahan

Senior Vice President and Acting
    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/  Jon
    WeberJon
    Weber

Director  61




---



##### 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). 62




---



##### 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). 63




---



##### 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 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).14
.1

XO Communications, Inc. Code of
    Ethics (Incorporated by reference herein to exhibit 14.1
    filed with the Annual Report on Form 10-K of XO
    Communications, Inc. filed on March 15, 2004).21
.1

Subsidiaries of XO Holdings, Inc.23
.1

Consent of KPMG LLP31
.1

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

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

Certification of Chief Executive
    Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.32
.2

Certification of Chief Financial
    Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.  64




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                   F-1




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  The Board of
    Directors and Stockholders of
    XO Holdings, Inc.
               KPMG
    LLP
    F-2




---



##### Table of Contents



XO
    Communications, Inc., predecessor to XO Holdings, Inc.
  Consolidated Balance Sheets
  December 31,


December 31,2005


2004ASSETSCurrent assets:Cash and cash equivalents

$
176,838


$
233,989Marketable securities and other
    investments


7,150



17,300Accounts receivable, net of
    allowance for doubtful accounts of $36,061 and $38,981, at
    December 31, 2005 and 2004, respectively


137,564



150,101Other current assets


34,106



50,864Total current assets


355,658



452,254Property and equipment, net


717,627



820,536Broadband wireless licenses


40,527



46,854Other intangibles, net


51,252



93,012Other assets


37,661



46,729Total assets

$
1,202,725


$
1,459,385LIABILITIES, CONVERTIBLE
    PREFERRED STOCK AND 
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable

$
79,935


$
88,010Accrued liabilities


216,278



241,532Total current liabilities


296,213



329,542Long-term debt and accrued
    interest payable


301,113



366,247Other long-term liabilities


65,755



73,691Total liabilities


663,081



769,480Class A convertible preferred
    stock


217,056



204,353Commitments and contingenciesStockholders 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 2005






Warrants, common stock and
    additional paid in capital, par value $0.01 per share,
    1,000,000,000 shares authorized: 181,933,035 shares
    issued and outstanding on December 31 2005 and
    December 31, 2004


976,447



989,511Deferred compensation


(77
)


(574
)Accumulated other comprehensive
    income


820



4,712Accumulated deficit


(654,602
)


(508,097
)Total stockholders equity


322,588



485,552Total liabilities, convertible
    preferred stock and stockholders equity

$
1,202,725


$
1,459,385    F-3




---



##### Table of Contents



XO
    Communications, Inc., predecessor to XO Holdings, Inc.
  Consolidated Statements of Operations
  Year Ended


Year Ended


Year Ended



Predecessor XODecember 31,


December 31


December 31,



January 1,2005


2004


2003



2003Revenue

$
1,433,622


$
1,300,420


$
1,110,483



$
Costs and expenses:Cost of service (exclusive of
    depreciation and amortization)


587,904



552,735



422,129




Selling, operating and general


737,350



727,666



679,286




Depreciation and amortization


234,762



177,781



109,308




Goodwill impairment charge






212,530








Restructuring










11,618




Total costs and expenses


1,560,016



1,670,712



1,222,341




Loss from operations


(126,394
)


(370,292
)


(111,858
)



Interest income


8,850



3,682



10,365




Investment income (loss), net


1,950



(12,719
)


35,787




Interest expense, net


(34,291
)


(26,214
)


(36,848
)



Other non-operating gain


3,380












Reorganization gain, net















3,032,282Net (loss) income


(146,505
)


(405,543
)


(102,554
)



3,032,282Preferred stock accretion


(12,703
)


(4,910
)







Net (loss) income applicable to
    common shares


(159,208
)

$
(410,453
)

$
(102,554
)


$
3,032,282Net (loss) income per common
    share, basic and diluted:Net (loss) income


(0.81
)


(2.54
)


(1.07
)



6.86Preferred stock accretion


(0.07
)


(0.03
)







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


(0.88
)

$
(2.57
)

$
(1.07
)


$
6.86Weighted average shares, basic and
    diluted


181,933,035



159,883,403



95,632,859




441,964,342    F-4




---



##### Table of Contents



XO
    Communications, Inc., predecessor to XO Holdings, Inc.
  Consolidated Statements of Stockholders
    Equity
  Common Stock and




















Accumulated OtherAdditional
    Pain-In-Capital


Subscription Rights
    Exercised


Subscription
    Receivable


Deferred


Accumulated


ComprehensiveShares


Amount


Shares


Amount


Shares


Amount


Compensation


Deficit


Income


TotalBalance at January 1, 2003





$







$







$



$



$



$



$
Issuance of common stock


95,000,001



475,000



32,503,234



162,516



(32,503,234
)


(162,516
)














475,000Issuance of common stock through
    employee benefit plans, net


1,274,139



7,440



















(839
)










6,601Comprehensive loss:Net loss






























(102,554
)






(102,554
)Other comprehensive
    income    unrealized holding gains
    arising during the year


































1,378



1,378Total comprehensive loss






































(101,176
)Balance at December 31, 2003


96,274,140



482,440



32,503,234



162,516



(32,503,234
)


(162,516
)


(839
)


(102,554
)


1,378



380,425Issuance of common stock for
    acquisition


45,380,000



311,306































311,306Issuance of common stock under
    rights offering


39,722,466



197,612



(32,503,234
)


(162,516
)


32,503,234



162,516















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


556,429



3,063



















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


$
322,588    F-5




---



##### Table of Contents



XO
    Communications, Inc., predecessor to XO Holdings, Inc.
  Consolidated Statements of Cash Flows
  Predecessor XOYear Ended
    December 31,



January 1,2005


2004


2003



2003OPERATING ACTIVITIES:Net (loss) income


(146,505
)


(405,543
)


(102,554
)



3,032,282Adjustments to reconcile net
    (loss) income to net cash (used in) provided by operating
    activities:Goodwill impairment charge






212,530








Depreciation and amortization


234,762



177,781



109,308




Accrual of interest


34,866



27,068



36,791




Stock-based compensation


147



406



708




Realized (gain) loss on investments


(7,449
)


5,238



(27,224
)



Non-cash restructuring charges and
    asset write-downs


5,500



10,360



6,765




Non-cash reorganization gain, net















(3,032,282
)Changes in assets and liabilities,
    net of effects from acquisitions:Accounts receivable


12,537



(8,084
)


22,583




Other assets


2,459



(9,952
)


1,317




Accounts payable


(4,043
)


8,503



(7,568
)



Accrued liabilities


(23,294
)


(18,157
)


(33,825
)



Net cash provided by operating
    activities


108,980



150



6,301




INVESTING ACTIVITIES:Capital expenditures, net


(86,727
)


(106,023
)


(82,346
)



Release of escrow account


25,430












Purchases of marketable securities
    and investments






(36,413
)


(238,041
)



Sale of marketable securities and
    investments


6,145



22,848



473,423Cash paid for acquisitions


(1,071
)


(325,249
)







Net cash (used in) provided by
    investing activities


(56,223
)


(444,837
)


153,036




FINANCING ACTIVITIES:Proceeds from issuance of common
    stock, net






200,326



6,452




Proceeds from issuance of
    preferred stock, net






199,443








Repayments of long term debt and
    capital leases


(109,908
)


(199,653
)


(1,267
)



Net cash (used in) provided by
    financing activities


(109,908
)


200,116



5,185




Net (decrease) increase in cash
    and cash equivalents


(57,151
)


(244,571
)


164,522




Cash and cash equivalents,
    beginning of year


233,989



478,560



314,038




314,038Cash and cash equivalents, end of
    year


176,838



233,989



478,560




314,038    F-6




---



##### Table of Contents



XO
    Communications, Inc., predecessor to XO Holdings, Inc.
  Notes to Consolidated Financial Statements
  1.
    ORGANIZATION
    AND DESCRIPTION OF BUSINESS    Wireline
    Business Overview
    Wireless
    Business Overview
  line-of-sight
  Wireline
    Sale
     F-7




---



##### Table of Contents



break-up
    The
    Restructuring
   F-8




---



##### Table of Contents



2.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  (a) Basis
    of Presentation
    (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-9




---



##### Table of Contents



(f) 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     (g) Broadband
    Wireless Licenses
      (h) Impairment
    of Goodwill and Indefinite Lived Intangible Assets
     F-10




---



##### Table of Contents



(i) Other
    Assets
  debtors-in-possession
    (j) Income
    Taxes
    (k) Class A
    Convertible Preferred Stock
    (l) Revenue
    Recognition
        (m) Allowance
    for uncollectible accounts
   F-11




---



##### Table of Contents



(n) Cost
    of Service
    (o) Net
    Income (Loss) Per Share
    (p) Stock-Based
    Compensation
    2005


2004


2003Expected volatility


61.0
%


61.0
%


75.0
%Risk free interest rate


3.8
%


3.1
%


2.6
%Dividend yield


0.0
%


0.0
%


0.0
%Expected life (range in years)


4.0



4.0



4.0Fair value per share at grant date

$
0.90


$
2.19


$
2.95  F-12




---



##### Table of Contents



Year Ended
    December 31,2005


2004


2003Net loss applicable to common
    shares, as reported

$
(159,208
)

$
(410,453
)

$
(102,554
)Add: Stock-based employee
    compensation expense included in net loss applicable to common
    shares, as reported


147



406



708Deduct: Total stock-based employee
    compensation expense determined under fair value based methods
    for all stock awards


(5,973
)


(7,966
)


(16,189
)Pro forma net loss applicable to
    common shares

$
(165,034
)

$
(418,013
)

$
(118,035
)Net loss per common share, basic
    and diluted:Net loss per common share, basic
    and diluted   as reported

$
(0.88
)

$
(2.57
)

$
(1.07
)Net loss per common share, basic
    and diluted   pro forma

$
(0.91
)

$
(2.30
)

$
(1.23
)   (q) Comprehensive
    Loss
  available-for-sale
  (r) Concentration
    of Credit Risk
      (s) Fair
    Value of Financial Instruments
    (t) Recent
    Accounting Pronouncements
   F-13




---



##### Table of Contents



Accounting Changes and Error
    Corrections    a replacement of APB
    Opinion No. 20 and FASB Statement No. 3
    (u) Accounting
    for Leases    (v) Adjustments
    3.
    OPERATING
    SEGMENTS  Reportable
    Segments
   F-14




---



##### Table of Contents



Supplementary
    Business Unit Reporting
        Year Ended December 31,
    2005Wireline


Wireless


Corporate


ConsolidatedBusiness unit revenue

$
1,433,416


$
206


$



$
1,433,622Business unit costs and expenses:Cost of service (exclusive of
    depreciation and amortization)


587,904











587,904Selling, operating, and general


548,705



3,261



185,384



737,350Depreciation and amortization


228,435



6,327







234,762Total business unit costs and
    expenses


1,365,044



9,588



185,384



1,560,016Business unit income (loss)

$
68,372


$
(9,382
)

$
(185,384
)

$
(126,394
)Total business unit assets

$
975,268


$
43,469


$
183,988


$
1,202,725   Year Ended December 31,
    2004Wireline


Wireless


Corporate


ConsolidatedBusiness unit revenue

$
1,300,420


$



$



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


552,735











552,735Selling, operating, and general


574,312



801



152,553



727,666Depreciation and amortization


171,454



6,327







177,781Goodwill impairment charge


212,530











212,530Total business unit costs and
    expenses


1,511,031



7,128



152,553



1,670,712Business unit loss

$
(210,611
)

$
(7,128
)

$
(152,553
)

$
(370,292
)Total business unit assets

$
1,161,242


$
46,854


$
251,289


$
1,459,385  F-15




---



##### Table of Contents



Products
    and Services
    Year Ended


Year Ended


Year EndedDecember 31,


December 31,


December 31,2005


2004


2003Voice services

$
734,412


$
673,318


$
572,774Data services


432,358



414,782



392,742Integrated voice and data services


266,852



212,320



144,967Total revenue

$
1,433,622


$
1,300,420


$
1,110,483     4.
    BUSINESS
    COMBINATIONS  debtors-in-possession dial-up
      Current assets

$
51,618Property and equipment


372,405Goodwill


212,530Other intangible assets


68,052Other long-term assets


2,933Total assets acquired


707,538Current liabilities


(58,193
)Long-term liabilities


(12,790
)Total liabilities acquired


(70,983
)Purchase price

$
636,555    F-16




---



##### Table of Contents



Year Ended


Year EndedDecember 31, 2004


December 31, 2003Revenue


1,529,753



1,630,042Net loss applicable to common
    shares


(471,690
)


(336,580
)Net loss per common
    share    basic and diluted


(2.60
)


(2.39
)Weighted average
    shares    basic and diluted


181,457,087



141,012,858   5.
    MARKETABLE
    SECURITIES AND OTHER INVESTMENTS  available-for-sale
  GrossGross


UnrealizedUnrealized


HoldingFair Value


Cost Basis


Holding Gains


LossesAs of December 31,
    2005Equity securities

$
2,360


$
1,540


$
820


$
Other securities


4,790



4,790







Total marketable securities

$
7,150


$
6,330


$
820


$
As of December 31,
    2004Equity securities

$
6,417


$
1,705


$
4,712


$
Debt securities


10,883



10,883







Total marketable securities

$
17,300


$
12,588


$
4,712


$
    F-17




---



##### Table of Contents



6.
    PROPERTY
    AND EQUIPMENT    December 31,


December 31,2005


2004Telecommunications networks and
    acquired bandwidth

$
751,487


$
675,844Furniture, fixtures, equipment,
    and other


258,034



236,7881,009,521



912,632Less accumulated depreciation


(387,334
)


(208,032
)622,187



704,600Construction-in-progress
    and undeployed assets


95,440



115,936$
717,627


$
820,536   construction-in-progress
  7.
    BROADBAND
    WIRELESS LICENSES    December 31,


December 31,2005


2004Broadband wireless licenses

$
59,508


$
59,508Less accumulated amortization


(18,981
)


(12,654
)$
40,527


$
46,854      F-18




---



##### Table of Contents



8.
    OTHER
    INTANGIBLES    December 31,


December 31,2005


2004Customer relationships

$
112,366


$
112,366Internally developed technology


9,521



9,521Acquired tradenames


5,673



5,673127,560



127,560Less accumulated amortization


(94,041
)


(51,210
)33,519



76,350Goodwill    indefinite
    life asset


1,071



XO Trade
    name    indefinite life asset


16,662



16,662$
51,252


$
93,012         9.
    OTHER
    ASSETS    December 31,


December 31,2005


2004ATLT Debt Claim

$
20,553


$
26,053Security deposits


9,116



11,665Pledged securities


6,426



6,665Other long term assets


1,566



2,346$
37,661


$
46,729      F-19




---



##### Table of Contents



10.
    ACCRUED
    LIABILITIES    December 31,


December 31,2005


2004Accrued compensation

$
48,608


$
54,405Deferred revenue


45,145



53,556Accrued operating taxes


46,485



50,277Accrued operating expenses


35,679



31,937Accrued telecommunications costs


24,379



24,881Accrued restructuring charges and
    asset retirement obligations


12,404



13,776Other accrued liabilities


3,578



12,700$
216,278


$
241,532   11.
    ACCOUNTING
    FOR ASSET RETIREMENT OBLIGATIONS    Balance as of January 1, 2004

$
12,855Accretion


776Usage


Revisions


(7,738
)Balance as of December 31,
    2004

$
5,893Balance as of January 1, 2005

$
5,893Accretion


405Usage


(671
)Revisions


(631
)Balance as of December 31,
    2005

$
4,996     12.
    LONG-TERM
    DEBT   F-20




---



##### Table of Contents



13.
    CONVERTIBLE
    PREFERRED STOCK     F-21




---



##### Table of Contents



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-22




---



##### Table of Contents



15.
    INCOME
    TAXES       F-23




---



##### Table of Contents



December 31,2005


2004Deferred tax assets:Provisions not currently deductible

$
118,988


$
108,959Property, equipment and other
    long-term assets (net)


692,772



820,885Net operating loss and capital
    loss carryforwards


1,058,208



1,109,575Total deferred tax assets


1,869,968



2,039,419Valuation allowance


(1,869,968
)


(2,021,103
)Net deferred tax assets






18,316Deferred tax liabilities:Other identifiable intangibles


(6,831
)


(25,147
)Total deferred tax liabilities


(6,831
)


(25,147
)Net deferred tax liability

$
(6,831
)

$
(6,831
)     2005


2004


2003Statutory U.S. federal rate


35.0
%


35.0
%


35.0
%State income taxes, net of federal
    benefit


6.0
%


6.0
%


6.0
%Valuation allowance for deferred
    tax assets


(41.0
)%


(22.6
)%


(41.0
)%Impairment



%


(18.4
)%



%Effective income tax rate



%



%



%     16.
    STOCK
    COMPENSATION ARRANGEMENTS     F-24




---



##### Table of Contents



Number of


Weighted AverageShares


Exercise PriceOutstanding at January 1, 2003






Granted


15,394,162



$5.09Cancelled


(3,697,068
)


$5.02Exercised


(1,274,139
)


$5.01Outstanding at December 31,
    2003


10,422,955



$5.12Exercisable at December 31,
    2003


2,424,903



$5.10Outstanding at January 1, 2004


10,422,955



$5.12Granted


3,577,382



5.26Canceled


(2,184,093
)


5.55Exercised


(556,429
)


5.01Outstanding at December 31,
    2004


11,259,815



5.09Exercisable at December 31,
    2004


3,726,298



5.02Outstanding at December 31,
    2004


11,259,815



5.09Granted


436,000



5.00Canceled


(2,399,358
)


5.25Exercised






Outstanding at December 31,
    2005


9,296,457



5.06Exercisable at December 31,
    2005


5,332,787



5.03   Options OutstandingWeighted





Options ExercisableAverage


Weighted





WeightedOptions


Remaining


Average


Options


AverageRange of Exercise


Outstanding


Contractual


Exercise


Exercisable


ExercisePrices


at December 31,


Life


Price


at December 31,


Price2003

$
4.80  $7.05



10,422,955



9.1


$
5.12



2,424,903


$
5.102004

$
4.80  $7.05



11,259,815



8.6


$
5.09



3,726,298


$
5.022005

$
4.80  $7.05



9,296,457



7.6


$
5.06



5,332,787


$
5.03   17.
    SUPPLEMENTAL
    DISCLOSURE  Cash
    flows
    Year Ended
    December 31,2005


2004


2003Non-cash financing and investing
    activities were as follows:Stock issued for acquired
    businesses

$



$
311,306


$
Assets and obligations acquired
    through capital leases






3,932



Conversion of accrued interest to
    long-term debt


39,730



28,746



29,901Cash paid for interest

$
4,104


$
2,481


$
2,315  F-25




---



##### Table of Contents



Employee
    Savings and Retirement Plan
    18.
    SELECTED
    QUARTERLY DATA (Unaudited)    Quarter ended 2005(a)March 31,


June 30,


September 30,


December 31,Revenue

$
361,504


$
362,164


$
358,672


$
351,282Cost of service


147,922



138,024



147,009



154,949Loss from operations(b)


(36,477
)


(24,729
)


(23,318
)


(41,870
)Net loss(b)


(42,859
)


(29,507
)


(30,634
)


(43,505
)Net loss applicable to common
    shares(b)


(45,956
)


(32,652
)


(33,855
)


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


(0.25
)


(0.18
)


(0.19
)


(0.26
)   Quarter ended 2004 (a)March 31,


June 30,


September 30,


December 31,Revenue

$
260,945


$
278,183


$
391,885


$
369,407Cost of service


109,961



118,822



161,946



162,006Loss from operations(c)


(43,266
)


(34,853
)


(36,227
)


(255,946
)Net loss(c)


(48,494
)


(43,820
)


(41,779
)


(271,450
)Net loss applicable to common
    shares(c)


(48,494
)


(43,820
)


(43,619
)


(274,520
)Net loss per common share (basic
    and diluted)


(0.37
)


(0.31
)


(0.24
)


(1.51
)     (a)
    
    The results include the results of the Acquired Businesses from
    June  23, 2004 through December 31, 2005.(b)
    
    Second quarter of 2005 includes lease and depreciation
    adjustments described in Note 2.(c)
    
    Fourth quarter of 2004 includes a $212.5 million non-cash
    goodwill impairment charge.  19.
    RELATED
    PARTY TRANSACTIONS    Outstanding


Series A, B and CCommon Stock


Warrants


Credit Facility


Preferred StockAt December 31, 2004


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%At December 31, 2005


Greater than 50
%


Greater than 40
%


Greater than 90
%


95
%    F-26




---



##### Table of Contents



F-27




---



##### Table of Contents



20.
    COMMITMENTS
    AND CONTINGENCIES  Operating
    Commitments
      Operating


Other long-termlease


contractualYear Ending
    December 31,

obligations


obligations2006

$
69,932


$
82,8002007


64,965



79,5352008


54,327



68,5132009


46,432



44,5732010


39,838



15,688Thereafter


125,873



87,322Total minimum commitments

$
401,367


$
378,431     Capital
    Leases
    Capital leaseYear Ending
    December 31,

obligations2006

$
4,5372007


3,8542008


2,3982009


1,7702010


1,419Thereafter


12,491Total minimum capital lease
    payments


26,469Less: imputed interest


9,008Less: current portion of capital
    lease obligations


2,956Long-term portion of capital lease
    obligation

$
14,505  F-28




---



##### Table of Contents



Legal
    Proceedings
    Allegiance
    Telecom Liquidating Trust Litigation
        Litigation
    Relating to the Wireline Sale
  R2 Investments Carl C.
    Icahn, et al. No. 1862-N),
 F-29




---



##### Table of Contents



Allegiance Telecom
    Liquidating Trust v. Carl C. Icahn,
    et al. 1877-N),
  Donald
    J. Hillenmeyer, Jr. v. XO Communications, Inc.,
    et al. No. 1880-N),
    Houlihan
    Lokey Howard and Zukin Capital LLC
    Cox
    Communications Las Vegas, Indefeasible Right of Use (IRU)
    Agreement
     F-30




---



##### Table of Contents



Level 3
    Verizon
    Indemnification Notice
    21.
    RESTRUCTURING
    CHARGE        Balance as of January 1, 2003

$
38,725Additions


11,618Reorganization adjustments


26,809Usage


(17,176
)Balance as of December 31,
    2003

$
59,976Balance as of January 1, 2004

$
59,976Estimate revisions


(2,971
)Usage


(13,349
)Balance as of December 31,
    2004

$
43,656Balance as of January 1, 2005

$
43,656Estimate revisions


1,655Usage


(7,972
)Balance as of December 31,
    2005

$
37,339  F-31




---



##### Table of Contents



22.
    REORGANIZATION    
    The conversion of $1.0 billion of loans under its
    pre-petition secured credit facility into $500.0 million of
    outstanding principal amount under an amended and restated
    credit agreement;
    The extinguishment of all amounts due under its pre-petition
    unsecured senior and subordinated notes and certain general
    unsecured obligations;
    The cancellation of all outstanding shares and interests in its
    pre-petition preferred stock and pre-petition common
    stock; and
    The issuance of approximately 95.0 million shares of common
    stock of the reorganized Company and warrants to purchase up to
    an additional 23.75 million shares of the common stock of
    the reorganized Company.  SOP 90-7 (SOP 90-7)
   F-32




---



##### Table of Contents



Predecessor XO





Fresh Start


Reorganized XODecember 31, 2002


Reorganization


Adjustments(d)


January 1, 2003ASSETSCurrent assets:Cash and cash equivalents

$
314,038


$



$



$
314,038Marketable securities


246,945











246,945Accounts receivable, net


116,541











116,541Other current assets


83,480







(48,288
)


35,192Total current assets


761,004







(48,288
)


712,716Property and equipment, net


2,780,589







(2,304,001
)


476,588Broadband wireless licenses and
    other intangibles, net


984,614







(848,936
)


135,678Other assets, net


59,289







(36,181
)


23,108Total assets

$
4,585,496


$



$
(3,237,406
)

$
1,348,090LIABILITIES AND
    STOCKHOLDERS (DEFICIT) EQUITYCurrent liabilities:Accounts payable

$
63,729


$



$
3,539


$
67,268Accrued liabilities


266,102







(30,910
)


235,192Current liabilities subject to
    compromise


5,497,207



(5,466,667
)(a)


(30,540
)


Total current liabilities


5,827,038



(5,466,667
)


(57,911
)


302,460Long-term debt






500,000
(b)






500,000Other long-term liabilities


75,242







(4,612
)


70,630Long-term liabilities subject to
    compromise


7,182







(7,182
)


Total liabilities


5,909,462



(4,966,667
)


(69,705
)


873,090Predecessor XO redeemable
    preferred stock    subject to
    compromise


1,708,316



(1,708,316
)(a)






Stockholders (deficit)
    equity:Predecessor XO common stock


4,628,139







(4,628,139
)


Reorganized XO common stock and
    warrants






475,000
(c)






475,000Deferred compensation


(8,500
)






8,500



Accumulated other comprehensive
    income


2,512







(2,512
)


Accumulated deficit


(7,654,433
)


6,199,983
(e)


1,454,450



Total stockholders (deficit)
    equity


(3,032,282
)


6,674,983



(3,167,701
)(e)


475,000Total liabilities and
    stockholders (deficit) equity

$
4,585,496


$



$
(3,237,406
)

$
1,348,090     (a)
    
    To record the discharge of pre-petition indebtedness, including
    a $1.0 billion credit facility, $4.2 billion of senior
    and convertible subordinated notes, $245.2 million of
    accrued interest, and the elimination of $1.7 billion of
    pre-petition redeemable preferred stock and $50.6 million
    of accrued dividends, all in accordance with the Plan of
    Reorganization. F-33




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##### Table of Contents



(b)
    
    To record the outstanding principal under the Credit Agreement,
    in accordance with the Plan of Reorganization.(c)
    
    To record the issuance of 95.0 million shares of New Common
    Stock and warrants in accordance with the Plan of
    Reorganization. Participation in the Rights Offering was
    recorded in the first quarter of 2004.(d)
    
    To adjust the carrying value of assets, liabilities and
    stockholders equity to fair value, in accordance with
    fresh start.(e)
    
    Net reorganization gain on January 1, 2003 consisted of the
    following (dollars in thousands):  Net gain resulting from
    reorganization of debt, preferred stock and equity

$
6,199,983Net loss resulting from fresh
    start fair value adjustments to assets and liabilities


(3,167,701
)Total reorganization gain, net

$
3,032,282  F-34




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##### Table of Contents



XO
    Communications, Inc.
  Schedule II    Consolidated
    Valuation and Qualifying Accounts
  Additions/ReductionsBeginning


Reorganization


charged to





Ending(dollars in thousands)

Balance


Adjustments


expense


Reductions


BalanceAllowance for doubtful accounts2003

$
37,030


$



$
29,998


$
(34,042
)

$
32,9862004

$
32,986


$



$
34,898


$
(28,903
)

$
38,9812005

$
38,981


$



$
33,502


$
(36,422
)

$
36,061  S-1