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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

Commission file number: 0-30900

XO Communications, Inc.
XO Capital, Inc.

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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware
Washington                                            |  | 54-1983517
91-1716062               
|                                                               |  |                                     
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
|11111 Sunset Hills Road, Reston, VA                            |  | 20190                               
|                                                               |  |                                     
|(Address of principal executive offices)                       |  | (Zip Code)                          

(703) 547-2000

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

As of November 8, 2001, the number of shares of Class A and Class B common
stock of XO Communications, Inc. issued and outstanding was 329,963,440 and
104,875,646, respectively, and there were 1,000 shares of common stock of XO
Capital, Inc. issued and outstanding, all of which 1,000 shares were held by XO
Communications, Inc.

XO Capital, Inc. meets the conditions set forth in General Instruction H (1)(a)
and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.





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##### 



XO Communications, Inc.

XO Capital, Inc.

Index to Form 10-Q

|                                                                                                                                     |  |     
|------------------------------------------------------------------------------------------------------------------------------------ |  | ----
|                                                                                                                                     |  | Page
|Part I.    Financial Information                                                                                                     |  |     
|Item 1(a).        XO Communications, Inc. Financial Statements                                                                       |  |     
|Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                                                 |  | 1   
|Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
                     September 30, 2001 and 2000 |  | 2   
|Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
                     September 30, 2001 and 2000           |  | 3   
|Notes to Interim Condensed Consolidated Financial Statements                                                                         |  | 5   
|Item 1(b).        XO Capital, Inc. Financial Statements                                                                              |  |     
|Balance Sheets as of September 30, 2001 and December 31, 2000                                                                        |  | 11  
|Notes to Balance Sheets                                                                                                              |  | 11  
|Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 12  
|Item 3.    Quantitative and Qualitative Disclosures about Market Risk                                                                |  | 21  
|Part II.    Other Information                                                                                                        |  |     
|Item 1.    Legal Proceedings                                                                                                         |  | 21  
|Item 2.    Changes in Securities and Use of Proceeds                                                                                 |  | 21  
|Item 3.    Defaults Upon Senior Securities                                                                                           |  | 21  
|Item 4.    Submission of Matters to a Vote of Security Holders                                                                       |  | 22  
|Item 5.    Other Information                                                                                                         |  | 22  
|Item 6.    Exhibits and Reports on Form 8-K                                                                                          |  | 22  
|Signatures                                                                                                                           |  | 23  
|Exhibit Index                                                                                                                        |  | 24  





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PART I. FINANCIAL INFORMATION

Item 1(a) Financial Statements

XO Communications, Inc.
Condensed Consolidated Balance Sheets
(Dollars in thousands, except for share data)

|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |            |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ------------- | --------- | ------------ | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           | September 30, |           | December 31,
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           | 2001          |           | 2000        
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |             
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           | (Unaudited)   |           |              |           |           
|ASSETS
Current assets:                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                     |                                            | $         | 454,114       |           |              | $         | 493,004    |          
|                                                                                                                                                                                                                                                                                                                               | Marketable securities                                                                                                                                                                                                                                                                                                                                                         |                                            |           | 576,726       |           |              |           | 1,367,959  |          
|                                                                                                                                                                                                                                                                                                                               | Accounts receivable, net of allowance for
doubtful accounts of $29,121 and $20,999,
respectively                                                                                                                                                                                                                                                                              |                                            |           | 221,603       |           |              |           | 181,309    |          
|                                                                                                                                                                                                                                                                                                                               | Other current assets                                                                                                                                                                                                                                                                                                                                                          |                                            |           | 143,356       |           |              |           | 71,536     |          
|                                                                                                                                                                                                                                                                                                                               | Pledged securities                                                                                                                                                                                                                                                                                                                                                            |                                            |           | 16,962        |           |              |           | 17,415     |          
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total current assets                       |           |               | 1,412,761 |              |           |            | 2,131,223 | 
|Property and equipment, net                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 3,734,740 |               |           |              | 2,794,105 |           
|Fixed wireless licenses, net                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 972,979   |               |           |              | 997,333   |           
|Goodwill and other intangibles, net                                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 2,460,145 |               |           |              | 2,914,876 |           
|Other assets, net                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 158,634   |               |           |              | 247,838   |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total assets                               |           | $             | 8,739,259 |              |           | $          | 9,085,375 | 
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               | Accounts payable                                                                                                                                                                                                                                                                                                                                                              |                                            | $         | 130,994       |           |              | $         | 357,451    |          
|                                                                                                                                                                                                                                                                                                                               | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                           |                                            |           | 380,414       |           |              |           | 279,534    |          
|                                                                                                                                                                                                                                                                                                                               | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                      |                                            |           | 99,145        |           |              |           | 46,018     |          
|                                                                                                                                                                                                                                                                                                                               | Current portion of capital lease obligations                                                                                                                                                                                                                                                                                                                                  |                                            |           | 22,712        |           |              |           | 24,820     |          
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total current liabilities                  |           |               | 633,265   |              |           |            | 707,823   | 
|Long-term debt                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 5,111,210 |               |           |              | 4,396,596 |           
|Other long-term liabilities                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 139,546   |               |           |              | 45,539    |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total liabilities                          |           |               | 5,884,021 |              |           |            | 5,149,958 | 
|Redeemable preferred stock, par value $0.01 per
share, 25,000,000 shares authorized: 8,048,068
and 13,189,227 shares issued and outstanding on
September 30, 2001 and December 31, 2000,
respectively; aggregate liquidation preference
of $1,700,338 and $2,100,093 on September 30,
2001 and December 31, 2000, respectively |                                                                                                                                                                                                                                                                                                                                                                               |                                            | 1,790,827 |               |           |              | 2,097,016 |           
|Commitments and contingencies
Stockholders equity:                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               | Common Stock, par value $0.02 per share,
stated at amounts paid in Class A,
1,000,000,000 shares authorized: 324,843,757
and 262,010,715 shares issued and outstanding
on September 30, 2001 and December 31, 2000,
respectively; Class B, 120,000,000 shares
authorized: 105,414,226 shares issued and
outstanding on September 30, 2001 and
December 31, 2000, respectively |                                            |           | 4,593,929     |           |              |           | 4,392,646  |          
|                                                                                                                                                                                                                                                                                                                               | Deferred compensation                                                                                                                                                                                                                                                                                                                                                         |                                            |           | (46,745       | )         |              |           | (72,050    | )        
|                                                                                                                                                                                                                                                                                                                               | Accumulated other comprehensive income (loss)                                                                                                                                                                                                                                                                                                                                 |                                            |           | 16,407        |           |              |           | (17,041    | )        
|                                                                                                                                                                                                                                                                                                                               | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                           |                                            |           | (3,499,180    | )         |              |           | (2,465,154 | )        
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total stockholders equity                 |           |               | 1,064,411 |              |           |            | 1,838,401 | 
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               | Total liabilities and stockholders equity |           | $             | 8,739,259 |              |           | $          | 9,085,375 | 
|                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                               |                                            |           |               |           |              |           |           

See accompanying notes to the unaudited interim condensed consolidated financial statements.

1



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XO Communications, Inc.
Condensed Consolidated Statements of Operations
(Dollars in thousands, except for share data)
(Unaudited)

|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |             |           | 
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------ | -------- | ------------------ | ------- | ----------------- | -------- | ----------- | ------- | ---- | ---------- | ----------- | --------- | - | -------- | ----------- | --------- | 
|                                                                                      |                                                                                       |                          |          | Three Months Ended |         | Nine Months Ended
|                                                                                      |                                                                                       |                          |          | September 30,      |         | September 30,    
|                                                                                      |                                                                                       |                          |          |                    |         |                  
|                                                                                      |                                                                                       |                          |          | 2001               |         | 2000              |          | 2001        |         | 2000
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |     
|Revenue                                                                               |                                                                                       | $                        | 331,478  |                    |         | $                 | 224,255  |             |         | $    | 915,564    |             |           | $ | 470,753  |            
|Costs and expenses:                                                                   |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|                                                                                      | Cost of service                                                                       |                          |          | 138,100            |         |                   |          | 92,356      |         |      |            | 375,936     |           |   |          | 198,722     |          
|                                                                                      | Selling, operating, and general (excludes
stock-based compensation)                   |                          |          | 246,864            |         |                   |          | 220,832     |         |      |            | 740,959     |           |   |          | 492,745     |          
|                                                                                      | Stock-based compensation                                                              |                          |          | 9,230              |         |                   |          | 13,396      |         |      |            | 27,857      |           |   |          | 39,609      |          
|                                                                                      | Depreciation                                                                          |                          |          | 116,489            |         |                   |          | 58,732      |         |      |            | 316,173     |           |   |          | 139,984     |          
|                                                                                      | Amortization                                                                          |                          |          | 178,943            |         |                   |          | 175,633     |         |      |            | 533,453     |           |   |          | 216,788     |          
|                                                                                      | Restructuring charge                                                                  |                          |          | 189,137            |         |                   |          |            |         |      |            | 189,137     |           |   |          |            |          
|                                                                                      | In-process research and development                                                   |                          |          |                   |         |                   |          |            |         |      |            |            |           |   |          | 36,166      |          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|                                                                                      |                                                                                       | Total costs and expenses |          |                    | 878,763 |                   |          |             | 560,949 |      |            |             | 2,183,515 |   |          |             | 1,124,014 | 
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Loss from operations                                                                  |                                                                                       |                          | (547,285 | )                  |         |                   | (336,694 | )           |         |      | (1,267,951 | )           |           |   | (653,261 | )          
|Interest income                                                                       |                                                                                       |                          | 15,041   |                    |         |                   | 50,667   |             |         |      | 71,920     |             |           |   | 141,347  |            
|Interest expense, net                                                                 |                                                                                       |                          | (115,804 | )                  |         |                   | (108,893 | )           |         |      | (350,236   | )           |           |   | (324,557 | )          
|Other income (loss), net                                                              |                                                                                       |                          | (86,607  | )                  |         |                   | 738      |             |         |      | (93,015    | )           |           |   | 226,735  |            
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Net loss before extraordinary item                                                    |                                                                                       | $                        | (734,655 | )                  |         | $                 | (394,182 | )           |         | $    | (1,639,282 | )           |           | $ | (609,736 | )          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Extraordinary gain on early extinguishments
of debt, net                              |                                                                                       |                          | 335,738  |                    |         |                   |         |             |         |      | 335,738    |             |           |   |         |            
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Net loss                                                                              |                                                                                       | $                        | (398,917 | )                  |         | $                 | (394,182 | )           |         | $    | (1,303,544 | )           |           | $ | (609,736 | )          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Gain on repurchases of preferred stock, net                                           |                                                                                       |                          | 376,879  |                    |         |                   |         |             |         |      | 376,879    |             |           |   |         |            
|Preferred stock dividends and accretion of
preferred stock redemption obligation, net |                                                                                       |                          | (28,714  | )                  |         |                   | (42,306  | )           |         |      | (107,361   | )           |           |   | (107,505 | )          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Net loss applicable to common shares                                                  |                                                                                       | $                        | (50,752  | )                  |         | $                 | (436,488 | )           |         | $    | (1,034,026 | )           |           | $ | (717,241 | )          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|Net loss per common share (basic and diluted):                                        |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|                                                                                      | Net loss before extraordinary item                                                    |                          | $        | (1.71              | )       |                   | $        | (1.09       | )       |      | $          | (4.17       | )         |   | $        | (1.98       | )        
|                                                                                      | Extraordinary gain on early extinguishments
of debt, net                              |                          |          | 0.78               |         |                   |          |            |         |      |            | 0.85        |           |   |          |            |          
|                                                                                      | Gain on repurchases of preferred stock, net                                           |                          |          | 0.88               |         |                   |          |            |         |      |            | 0.96        |           |   |          |            |          
|                                                                                      | Preferred stock dividends and accretion of
preferred stock redemption obligation, net |                          |          | (0.07              | )       |                   |          | (0.11       | )       |      |            | (0.27       | )         |   |          | (0.35       | )        
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|                                                                                      | Net loss per common share (basic and diluted)                                         |                          | $        | (0.12              | )       |                   | $        | (1.20       | )       |      | $          | (2.63       | )         |   | $        | (2.33       | )        
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            
|                                                                                      | Weighted average shares (basic and diluted)                                           |                          |          | 428,730,311        |         |                   |          | 362,802,391 |         |      |            | 392,916,237 |           |   |          | 307,774,101 |          
|                                                                                      |                                                                                       |                          |          |                    |         |                   |          |             |         |      |            |             |           |   |          |            

See accompanying notes to the unaudited interim condensed consolidated financial statements.

2



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XO Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

|                                                                            |                                                          |   |                   |          |      |   |            |          |  
|--------------------------------------------------------------------------- | -------------------------------------------------------- | - | ----------------- | -------- | ---- | - | ---------- | -------- | -
|                                                                            |                                                          |   | Nine Months Ended
|                                                                            |                                                          |   | September 30,    
|                                                                            |                                                          |   |                  
|                                                                            |                                                          |   | 2001              |          | 2000
|                                                                            |                                                          |   |                   |          |     
|OPERATING ACTIVITIES:                                                       |                                                          |   |                   |          |      |   |            |         
|Net loss                                                                    |                                                          | $ | (1,303,544        | )        |      | $ | (609,736   | )       
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                                          |   |                   |          |      |   |            |         
|                                                                            | Depreciation and amortization                            |   |                   | 849,626  |      |   |            | 356,772  |  
|                                                                            | Stock-based compensation                                 |   |                   | 27,857   |      |   |            | 39,609   |  
|                                                                            | Restructuring charge                                     |   |                   | 188,033  |      |   |            |         |  
|                                                                            | In-process research and development write-off            |   |                   |         |      |   |            | 36,166   |  
|                                                                            | Net losses (gains) on investments                        |   |                   | 90,197   |      |   |            | (226,539 | )
|                                                                            | Accretion of interest on senior notes                    |   |                   | 100,508  |      |   |            | 87,608   |  
|                                                                            | Extraordinary gain on early extinguishments of debt, net |   |                   | (335,738 | )    |   |            |         |  
|Changes in assets and liabilities:                                          |                                                          |   |                   |          |      |   |            |         
|                                                                            | Accounts receivable                                      |   |                   | (45,220  | )    |   |            | (47,540  | )
|                                                                            | Other assets                                             |   |                   | (79,873  | )    |   |            | (4,450   | )
|                                                                            | Accounts payable                                         |   |                   | (10,441  | )    |   |            | 37,621   |  
|                                                                            | Accrued liabilities                                      |   |                   | 70,021   |      |   |            | 99,311   |  
|                                                                            |                                                          |   |                   |          |      |   |            |         
|Net cash used in operating activities                                       |                                                          |   | (448,574          | )        |      |   | (231,178   | )       
|INVESTING ACTIVITIES:                                                       |                                                          |   |                   |          |      |   |            |         
|Purchases of property and equipment                                         |                                                          |   | (1,299,365        | )        |      |   | (853,710   | )       
|Prepayment for network assets                                               |                                                          |   | (120,800          | )        |      |   |           |         
|Payments to acquire fixed wireless licenses                                 |                                                          |   | (206              | )        |      |   | (34,038    | )       
|Net releases of pledged securities                                          |                                                          |   | 150               |          |      |   | 24,335     |         
|Net sales (purchases) of marketable securities                              |                                                          |   | 803,252           |          |      |   | (646,774   | )       
|Proceeds from sale of investments                                           |                                                          |   | 17,385            |          |      |   | 245,112    |         
|Cash (paid for) acquired in acquisitions                                    |                                                          |   | (25,203           | )        |      |   | 46,940     |         
|Investments in unconsolidated affiliates                                    |                                                          |   | (8,060            | )        |      |   | (53,913    | )       
|                                                                            |                                                          |   |                   |          |      |   |            |         
|Net cash used in investing activities                                       |                                                          |   | (632,847          | )        |      |   | (1,272,048 | )       
|FINANCING ACTIVITIES:                                                       |                                                          |   |                   |          |      |   |            |         
|Net proceeds from issuance of redeemable preferred stock                    |                                                          |   |                  |          |      |   | 1,248,901  |         
|Borrowings under credit facility                                            |                                                          |   | 625,000           |          |      |   | 375,000    |         
|Proceeds from issuance of subordinated convertible notes                    |                                                          |   | 517,500           |          |      |   |           |         
|Proceeds from equity investment, net                                        |                                                          |   | 248,657           |          |      |   |           |         
|Proceeds from issuance of common stock under employee
benefit plans         |                                                          |   | 27,209            |          |      |   | 65,967     |         
|Repurchase of senior notes                                                  |                                                          |   | (199,972          | )        |      |   |           |         
|Repurchase of redeemable preferred stock                                    |                                                          |   | (88,424           | )        |      |   |           |         
|Repayment of capital lease obligations                                      |                                                          |   | (34,916           | )        |      |   | (14,452    | )       
|Dividends paid on convertible preferred stock                               |                                                          |   | (40,334           | )        |      |   | (36,749    | )       
|Costs incurred in connection with financing activities                      |                                                          |   | (14,200           | )        |      |   | (17,100    | )       
|                                                                            |                                                          |   |                   |          |      |   |            |         
|Net cash provided by financing activities                                   |                                                          |   | 1,040,520         |          |      |   | 1,621,567  |         
|                                                                            |                                                          |   |                   |          |      |   |            |         
|Effect of exchange rate changes on cash                                     |                                                          |   | 2,011             |          |      |   | (1,277     | )       
|Net (decrease) increase in cash and cash equivalents                        |                                                          |   | (38,890           | )        |      |   | 117,064    |         
|Cash and cash equivalents, beginning of period                              |                                                          |   | 493,004           |          |      |   | 868,463    |         
|                                                                            |                                                          |   |                   |          |      |   |            |         
|Cash and cash equivalents, end of period                                    |                                                          | $ | 454,114           |          |      | $ | 985,527    |         
|                                                                            |                                                          |   |                   |          |      |   |            |         

 Continued 

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XO Communications, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(Unaudited)

|                                             |                                                                                               |  |                   |        |      |  |         |           | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ---- |  | ------- | --------- | 
|                                             |                                                                                               |  | Nine Months Ended
|                                             |                                                                                               |  | September 30,    
|                                             |                                                                                               |  |                  
|                                             |                                                                                               |  | 2001              |        | 2000
|                                             |                                                                                               |  |                   |        |     
|SUPPLEMENTAL DATA:                           |                                                                                               |  |                   |        |      |  |         |          
|Non-cash financing and investing activities: |                                                                                               |  |                   |        |      |  |         |          
|                                             | Redeemable preferred stock dividends, paid in
shares of redeemable preferred stock            |  | $                 | 50,830 |      |  | $       | 52,496    | 
|                                             | Accrued redeemable preferred stock dividends,
payable in shares of redeemable preferred stock |  |                   | 6,484  |      |  |         | 13,232    | 
|                                             | Common stock issued in acquisitions                                                           |  |                   | 14,100 |      |  |         | 3,032,849 | 
|                                             | Prepayment applied toward accepted network assets                                             |  |                   | 69,337 |      |  |         |          | 
|                                             | Assumption of liabilities in acquisitions                                                     |  |                   | 8,677  |      |  |         | 594,646   | 
|Cash paid for interest                       |                                                                                               |  | 232,356           |        |      |  | 186,014 |          

See accompanying notes to the unaudited interim condensed consolidated financial statements.

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XO Communications, Inc.
Notes to Interim Condensed Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION

The interim condensed consolidated financial statements of XO
Communications, Inc. and its wholly-owned and controlled subsidiaries (together
with its predecessors, collectively referred to as the Company or XO) are
unaudited and have been prepared in accordance with generally accepted
accounting principles in the United States for interim financial statements and
with the Securities and Exchange Commissions (the Commission) instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. These
interim condensed consolidated financial statements should be read in
conjunction with the Companys annual report on Form 10-K for the year ended
December 31, 2000 as filed with the Commission on April 2, 2001.

The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments, except as noted elsewhere in
the notes to the interim condensed consolidated financial statements) which, in
the opinion of management, are necessary for a fair presentation of the results
for interim periods. Operating results for the three month and nine month
periods ended September 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.

Reporting Format

Certain items related to prior periods have been reclassified to conform
to the 2001 reporting format.

Long-Lived Assets

Long-lived assets, including property and equipment, goodwill and
identifiable intangible assets to be held and used, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
should be addressed. Impairment is determined by comparing the carrying value
to the estimated undiscounted future cash flows expected to result from the use
of the assets and their eventual dispositions. The Company considers expected
cash flows and estimated future operating results, trends, and other available
information in assessing whether the carrying value of the assets is impaired.
In the event an impairment exists, a loss is recognized based on the amount by
which the carrying value exceeds the fair value of the asset, which is
generally determined using quoted market prices or valuation techniques such as
the discounted present value of expected future cash flows, appraisals, or
other pricing models as appropriate. The Company believes that no such
impairment existed as of September 30, 2001 or December 31, 2000.

In the event that the Companys expected future undiscounted cash flows
are reduced significantly due to reductions in demand for the Companys services, changes in its customers financial
positions, technology, or regulation, the lack of available financing or increased competition, the
Companys assessment of its ability to recover the carrying value of these
assets would change. The Companys assessment would also be affected by changes
in the planned use of such long-term assets and impacts from
any restructuring of the
Companys consolidated balance sheet discussed further in Note 10 to the condensed consolidated financial statements.

New Accounting Pronouncements

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

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142) which revises the accounting for purchased goodwill
and intangible assets and supercedes APB Opinion No. 17, Intangible Assets.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
and must be applied to all goodwill and other intangible assets recorded at
that date. However, goodwill and intangible assets acquired after June 30, 2001
will be subject immediately to the amortization provisions of this statement.
Under

5



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SFAS No. 142, goodwill and intangible assets with indefinite lives will no
longer be amortized but will be tested for impairment annually or more
frequently if an event indicates that the asset might be impaired. The
statement provides guidance on measuring goodwill and intangible asset
impairments to include a discounted cash flow methodology. The initial
impairment analysis of intangible assets recorded at December 15, 2001 (other
than those acquired after June 30, 2001) must be completed by March 31, 2002
and goodwill impairment testing must be completed by June 30, 2002. Management
is currently evaluating the impact of this statement on the Companys results
of operations and financial position. As of September 30, 2001, the net
carrying value of goodwill and other intangibles was $2,460.1 million.
Additionally, the Company has fixed wireless licenses with a net carrying value
of $973.0 million as of September 30, 2001. The Company is currently evaluating
whether these licenses have an indefinite useful life.

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

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

2. ACQUISITIONS

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

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

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

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

3. INVESTMENTS

The Company regularly reviews its investment portfolio, which consists of
both publicly traded and privately held companies, to determine if any declines
in value of those investments are other than temporary. With respect to
investments in privately held companies, the Company reviews historical and
forecasted financial information as well as the market performance of
comparable publicly traded companies. The Company assesses whether declines in
the value of its investments in publicly traded companies, measured by
comparison of the current market price of the securities to the historical cost
of the Companys investment, are considered to be other than temporary based on
(1) the length of time historical cost exceeds fair market value, (2) the
Companys assessment of the financial

6



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condition and the near term prospects of the investee companies, and (3)
the Companys intent with respect to the investments.

During the year, the slowing economy has had a negative impact on the
equity value of companies in the telecommunications sector. In light of these
circumstances and based on the results of the reviews described above, the
Company recorded an $87.0 million other than temporary impairment charge in
other income (loss) for the three and nine months ended September 30, 2001 with
respect to its investments in public and private equity investments that had a
carrying value of $91.8 million.

4. LONG TERM OBLIGATIONS

During the third
quarter of 2001, in a series of transactions, a subsidiary of the
Company paid
$200.0 million to repurchase $547.3 million
of the outstanding principal of certain series of Senior Notes at a substantial discount
to their respective face values. As a result of these transactions, the Company
recognized an extraordinary gain of $335.7 million, net of unamortized
financing costs. The table below summarizes the impact on the affected Senior
Notes as a result of these transactions (dollars in thousands):

|                                                 |  |                 |           |                   |  |                |         |  |  |   |           | 
|------------------------------------------------ |  | --------------- | --------- | ----------------- |  | -------------- | ------- |  |  | - | --------- | 
|                                                 |  | Face Value at   |           | Principal Amounts |  | Sept. 30, 2001
|                                                 |  | Stated Maturity |           | Repurchased       |  | Carrying Value
|                                                 |  |                 |           |                   |  |               
|Senior Notes, 10 1/2%, due December 1, 2009      |  | $               | 400,000   |                   |  | $              | 100,170 |  |  | $ | 299,830   | 
|Senior Notes, 10 3/4%, due June 1, 2009          |  |                 | 675,000   |                   |  |                | 72,927  |  |  |   | 602,073   | 
|Senior Notes, 10 3/4%, due November 15, 2008     |  |                 | 500,000   |                   |  |                | 105,850 |  |  |   | 394,150   | 
|Senior Notes, 9%, due March 15, 2008 (1)         |  |                 | 335,000   |                   |  |                | 111,393 |  |  |   | 223,171   | 
|Senior Notes, 12 3/4%, due December 15,
2007 (1) |  |                 | 149,400   |                   |  |                | 43,500  |  |  |   | 121,157   | 
|Senior Notes, 9 5/8%, due October 1, 2007        |  |                 | 400,000   |                   |  |                | 89,627  |  |  |   | 310,373   | 
|Senior Notes, 12 1/2%, due April 15, 2006        |  |                 | 350,000   |                   |  |                | 23,835  |  |  |   | 326,165   | 
|                                                 |  |                 |           |                   |  |                |         |  |  |   |           | 
|                                                 |  | $               | 2,809,400 |                   |  | $              | 547,302 |  |  | $ | 2,276,919 | 
|                                                 |  |                 |           |                   |  |                |         |  |  |   |           | 



|(1) |  | These senior notes were issued at a discount or premium.
|--- |  | --------------------------------------------------------

The Company and certain of its subsidiaries, as guarantors, entered into a
$1.0 billion senior secured credit facility (the Facility) with various
lenders in February 2000, all of which is outstanding as of September 30, 2001.
Amounts drawn under the Facility bear interest, at the Companys option, at the
alternate base rate, as defined, or reserve-adjusted London Interbank Offered
Rate (LIBOR) plus, in each case, applicable margins. As of September 30, 2001,
the annualized weighted average interest rate applicable to outstanding
borrowings under the Facility was 6.5%. The Facility limits additional
indebtedness, dividend payments and certain investments and transactions and
contains certain covenants with respect to minimum revenue requirements and
fixed charges and leverage ratios. As of September 30, 2001, the Company was
in compliance with all covenants under the Facility and the indentures under
which its senior notes, senior discount notes and convertible subordinated
notes were issued.

In January 2001, the Company completed the issuance and sale of $517.5
million of 5 3/4% convertible subordinated notes due 2009 for proceeds, net of
underwriting and other fees, totaling $503.3 million. Interest on the notes is
payable on January 15 and July 15 of each year, beginning on July 15, 2001. The
notes are unsecured obligations of the Company and are subordinated in right of
payment to all other senior indebtedness of the Company. The notes are
convertible at the option of the holders at any time prior to maturity into
shares of Class A common stock at a conversion rate of 39.1484 shares per
$1,000 principal amount of notes, subject to adjustment upon the occurrence of
certain events. The Company may terminate such conversion rights on or after
January 18, 2003 if the current market price of its Class A common stock equals
or exceeds 150%, on or prior to January 18, 2004, or 135% thereafter, of the
$25.5438 implied conversion price for 20 days in a 30 consecutive day trading
period. The notes are not redeemable prior to their maturity date of January 15, 2009.

5. EQUITY

Redeemable Preferred Stock

During the third
quarter of 2001, in a series of transactions,  a subsidiary of the Company
paid $88.4 million to repurchase $301.6 million in
liquidation preference of its 14% Series A Senior Exchangeable

7



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Redeemable Preferred Shares and $171.0 million in liquidation preference
of its 13 1/2% Series E Senior Redeemable Exchangeable Preferred Stock at a
substantial discount to their respective carrying amounts. As a result of these
transactions, the Company recognized a gain of $376.9 million, net of
unamortized financing costs. The table below summarizes the impact on the
affected redeemable preferred stock as a result of these transactions (dollars
in thousands):

|                                   |  |                      |         |                     |  |                   |         |               |  |                |           |                       |  |  |           |  |  |   |         |  |  |   |         | 
|---------------------------------- |  | -------------------- | ------- | ------------------- |  | ----------------- | ------- | ------------- |  | -------------- | --------- | --------------------- |  |  | --------- |  |  | - | ------- |  |  | - | ------- | 
|                                   |  |                      |         |                     |  |                   |         |               |  | Shares Issued  |           | Aggregate Liquidation
|                                   |  | Carrying Value as of |         | & Outstanding as of |  | Preferences as of
|                                   |  |                      |         |                     |  |                  
|                                   |  | Sept. 30, 2001       |         | Dec. 31, 2000       |  | Sept. 30, 2001    |         | Dec. 31, 2000 |  | Sept. 30, 2001 |           | Dec. 31, 2000        
|                                   |  |                      |         |                     |  |                   |         |               |  |                |           |                      
|14% Series A Senior Exchangeable  
|Redeemable Preferred Shares        |  | $                    | 231,011 |                     |  | $                 | 481,375 |               |  |                | 4,559,026 |                       |  |  | 9,552,785 |  |  | $ | 227,951 |  |  | $ | 477,639 | 
|13 1/2% Series E Senior Redeemable
|Exchangeable Preferred Stock       |  |                      | 57,477  |                     |  |                   | 206,220 |               |  |                | 58,121    |                       |  |  | 208,469   |  |  |   | 58,121  |  |  |   | 210,815 | 
|                                   |  |                      |         |                     |  |                   |         |               |  |                |           |                       |  |  |           |  |  |   |         |  |  |   |         | 
|                                   |  | $                    | 288,488 |                     |  | $                 | 687,595 |               |  |                | 4,617,147 |                       |  |  | 9,761,254 |  |  | $ | 286,072 |  |  | $ | 688,454 | 
|                                   |  |                      |         |                     |  |                   |         |               |  |                |           |                       |  |  |           |  |  |   |         |  |  |   |         | 

Private Equity Investment

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

6. RESTRUCTURING CHARGE

During the third quarter of 2001, the Company implemented plans to
restructure certain of its business operations. This restructuring plan
includes reducing the Companys discretionary spending, capital expenditures
and workforce based on its assessment of current and future market conditions.
As a result of the formalized plan, the Company recorded $189.1 million of
estimated restructuring charges during the three and nine months ended
September 30, 2001.

The consolidation and exiting of facility leases resulted in $134.4
million of the restructuring charge. Due to the Companys reduced expansion
plans, it is selling or abandoning certain fixed assets. Consequently, the
restructuring charge includes a $53.1 million write down for the excess of the
carrying value of those assets over their fair value. As part of its plan to
restructure its business operations, during the 2001 fourth quarter, management notified employees that the Company would reduce its workforce by approximately 700
employees. Accordingly, the resulting severance expense, estimated to be
approximately $6.5 million, will be recorded in the fourth quarter of 2001. The
employment of the majority of the notified employees will terminate by the end of 2001.

7. OPERATING SEGMENTS

Reportable Segments

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

8



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Products and Services

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

|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |  |   |         |         | 
|---------------------------------- | ------------- | - | -------------------------------- | ------- | ------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                   |               |   | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                   |               |   |                                  |         |                                
|                                   |               |   | 2001                             |         | 2000                            |   | 2001    |         | 2000
|                                   |               |   |                                  |         |                                 |   |         |         |     
|Data Services                      |               | $ | 152,679                          |         |                                 | $ | 117,940 |         |      | $ | 443,866 |         |  | $ | 194,114 |        
|Voice services                     |               |   | 161,546                          |         |                                 |   | 103,943 |         |      |   | 440,387 |         |  |   | 273,888 |        
|Integrated voice
and data services |               |   | 16,386                           |         |                                 |   | 713     |         |      |   | 28,514  |         |  |   | 942     |        
|Other services                     |               |   | 867                              |         |                                 |   | 1,659   |         |      |   | 2,797   |         |  |   | 1,809   |        
|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |  |   |         |        
|                                   | Total revenue |   | $                                | 331,478 |                                 |   | $       | 224,255 |      |   | $       | 915,564 |  |   | $       | 470,753 | 
|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |  |   |         |        

8. COMPREHENSIVE LOSS

Comprehensive net loss applicable to common shares includes the Companys
net loss applicable to common shares, as well as changes in equity from other
sources. The following table reflects the Companys calculation of
comprehensive loss applicable to common shares for the three and nine months
ended September 30, 2001 and 2000 (dollars in thousands):

|                                                   |                                                                                                              |   |                    |        |                   |   |          |         |      |   |            |        |  |   |          |          |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | - | ------------------ | ------ | ----------------- | - | -------- | ------- | ---- | - | ---------- | ------ |  | - | -------- | -------- | -
|                                                   |                                                                                                              |   | Three Months Ended |        | Nine Months Ended
|                                                   |                                                                                                              |   | September 30,      |        | September 30,    
|                                                   |                                                                                                              |   |                    |        |                  
|                                                   |                                                                                                              |   | 2001               |        | 2000              |   | 2001     |         | 2000
|                                                   |                                                                                                              |   |                    |        |                   |   |          |         |     
|Net loss applicable to common shares               |                                                                                                              | $ | (50,752            | )      |                   | $ | (436,488 | )       |      | $ | (1,034,026 | )      |  | $ | (717,241 | )       
|Other comprehensive income (loss):                 |                                                                                                              |   |                    |        |                   |   |          |         |      |   |            |        |  |   |          |         
|                                                   | Unrealized net holding gains
(losses) and foreign currency
translation adjustments arising
during the period |   |                    | 14,078 |                   |   |          | (50,325 | )    |   |            | 28,557 |  |   |          | 51,724   |  
|                                                   | Less: Net realized gains
(losses) transferred to current
period earnings                                     |   |                    | 4,891  |                   |   |          |        |      |   |            | 4,891  |  |   |          | (258,023 | )
|                                                   |                                                                                                              |   |                    |        |                   |   |          |         |      |   |            |        |  |   |          |         
|Comprehensive net loss applicable
to common shares |                                                                                                              | $ | (31,783            | )      |                   | $ | (486,813 | )       |      | $ | (1,000,578 | )      |  | $ | (923,540 | )       
|                                                   |                                                                                                              |   |                    |        |                   |   |          |         |      |   |            |        |  |   |          |         

The Companys change in other comprehensive loss includes unrealized gains
and losses on available-for-sale investments and foreign currency translation
adjustments relating to the Companys foreign operations. Net realized gains
transferred to current period earnings in the nine months ended September 30,
2000 include the sale of an equity investment, which resulted in a net realized
gain of $225.1 million. Net realized gains and losses are recorded in other
income (loss) on the accompanying interim condensed consolidated statement of
operations when transferred to current period earnings.

9. RELATED PARTY TRANSACTIONS

In July 2001, the Company executed a multi-year agreement with
Nextel Communications, Inc. (Nextel) pursuant to which XO will provide Nextel
telecommunications services with an estimated value of $100 million.
Members of the Companys board of directors also serve on the board of
directors of Nextel. One of these members,
Craig O. McCaw, along with his affiliates, hold a controlling voting interest
in the Company and hold certain management rights related to their investment
in Nextel. Prior to entering the agreement with Nextel, the Company participated in a competitive proposal
process initiated by Nextel which included numerous national telecommunications
providers. Therefore, in managements opinion, the agreement with Nextel was
consummated in the normal course of operations with terms that were negotiated
as part of an arms-length transaction. The revenue recognized for services
performed under the Nextel Agreement is not material for the three and nine
month periods ended September 30, 2001.

9



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10. COMMITMENTS AND CONTINGENCIES

Inter-City Network Agreements

In April 2001, the Company and Level 3 Communications, Inc. (Level 3)
restructured agreements pertaining to the Companys purchase of fiber networks
from Level 3 that are being constructed in North America and Europe. The
Company and Level 3 agreed to cancel commitments relating to the previously
announced purchase of the European metro and inter-city fiber networks from
Level 3. Under the agreement (i) approximately $128 million in payments that
were previously made to Level 3 for the European networks (the European
Credit) has been applied as a credit to reduce the remaining amounts payable
by the Company to Level 3 under the North American inter-city fiber network
agreement, (ii) the Company prepaid $120.8 million (the Prepayment Credit) to
be applied against future amounts due to Level 3 for the North American
inter-city network, (iii) the Company transferred to Level 3 $51.4 million of
inter-city transmission equipment (the Equipment Credit) to be applied toward
the purchase of wavelength capacity on Level 3s inter-city network in North
America and Europe. As of September 30, 2001, the Company had (i) fully
utilized the European Credit, (ii) utilized $69.3 million of the Prepayment
Credit, and (iii) utilized $50.3 million of the Equipment Credit for wavelength
capacity.

Contingencies

Beginning in the second half of 2000 and continuing into 2001, the market
value of debt and equity securities issued by technology and telecommunications
companies has declined sharply. A general economic downturn in 2001, pricing
pressures in the long-distance market resulting from oversupply of capacity in
certain routes and the September 11th terrorist attacks in New York and
Washington D.C. have resulted in a continuation of this trend, making it
extremely difficult for companies like XO to raise additional funds in the
public markets. In light of these market conditions and its funding needs, the
Company has taken steps to conserve cash-on-hand and to evaluate strategic
alternatives that may be implemented to attract potential investors and
position the Company to obtain additional funding. During 2001, the Company has
restructured certain operations to reduce its operating expenses,
repurchased certain senior notes
and preferred shares to reduce its interest and dividend payments and reduced its capital
expansion plan by amending agreements with Level 3 to decrease its capital expenditures.

These cost savings and capital expenditure reductions are partially offset
by the $288.4 million in cash expended in the third quarter of 2001 to
repurchase certain senior notes and preferred stock. Taking the net impact of these
initiatives into account, management estimates that the Companys cash and
marketable securities on hand as of September 30, 2001 will be sufficient to
fund scheduled debt service and preferred dividend payments on its
currently outstanding debt and securities, operating expenses
and capital expenditures into the second half of 2002.

Consequently, the Company needs to raise substantial additional capital in
order to fund its operations until the time when it expects to
generate cash from operations sufficient to satisfy debt service, operating
expenses and other capital requirements. The Company has engaged Houlihan Lokey
Howard & Zukin Capital as financial advisors to assist the Company in
developing and implementing a strategy to restructure its balance sheet to
enable it to attract such additional capital. Based on current market
conditions, the Company anticipates that any balance sheet restructuring
implemented to attract additional capital may entail a significant conversion
of the Companys indebtedness and preferred stock into common equity. Given the current trading
prices of the Companys securities, it is likely that any such conversion and
any new equity investment would result in a substantial dilution to XOs
current equity holders interest in the Company, which could substantially
impair the value of that interest. There can be no assurance that the Company
will be successful in restructuring its balance sheet, or that such
additional capital will be available, or, if available, will be on acceptable terms.

The Company is subject to legal proceedings, claims, and litigation
arising in the ordinary course of business. While the outcome of these matters
is currently not determinable, management does not expect that the ultimate
costs to resolve these matters will have a material adverse effect on the
Companys consolidated financial position, results of operations, or cash
flows.

10



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##### 



PART I.   FINANCIAL INFORMATION

Item 1(b)   Financial Statements

XO Capital, Inc.
Balance Sheets

|                                                                                                 |  |               |     |              |  |   |     | 
|------------------------------------------------------------------------------------------------ |  | ------------- | --- | ------------ |  | - | --- | 
|                                                                                                 |  | September 30, |     | December 31,
|                                                                                                 |  | 2001          |     | 2000        
|                                                                                                 |  |               |     |             
|                                                                                                 |  | (Unaudited)   |     |              |  |  
|Assets
Receivable from XO Communications, Inc.                                                   |  | $             | 100 |              |  | $ | 100 | 
|                                                                                                 |  |               |     |              |  |   |     | 
|Shareholders Equity
Common stock, no par value, 1,000
shares authorized, issued and
outstanding |  | $             | 100 |              |  | $ | 100 | 
|                                                                                                 |  |               |     |              |  |   |     | 

XO Capital, Inc.
Notes to Balance Sheets
(Unaudited)

1. Organization and Description of Business

XO Capital, Inc. (XO Capital) is a Washington corporation and a wholly
owned subsidiary of XO Communications, Inc. (XO). XO Capital was formed for
the sole purpose of obtaining financing from external sources and is a joint
obligor on XOs 12 1/2% Senior Notes due April 15, 2006. XO Capital was
initially funded with a $100 contribution from XO and has had no operations to
date. XO Capitals sole source and repayment for the 12 1/2% Senior Notes will
be from the operations of XO.

2. Basis of Presentation

The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The financial information included herein
reflects all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of management, are necessary for a fair presentation of
the results for interim periods. These financial statements should be read in
conjunction with the annual report on Form 10-K for the year ended December 31,
2000 of XO and XO Capital as filed with the Securities and Exchange Commission
on April 2, 2001.

11



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##### 



PART I.   FINANCIAL INFORMATION

Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations

Overview

Since 1996, we have provided high-quality bundled local and long distance,
as well as dedicated telecommunications services to the growing business
market. We expanded our services through our acquisition of Concentric Network
Corporation on June 16, 2000 to offer a complete, single source of
communications services to our customers by combining our data and voice
services. The data services we offer include Internet access, virtual private
networks, high-capacity data network services including dedicated wavelength
and Ethernet services, and hosting services.

We believe that the increasing usage of both telephone service and new
data application and information services will continue to increase demand for
telecommunications capacity and new communications services and
applications. To serve our customers broad and expanding telecommunications
needs, we have assembled a collection of metro and inter-city network assets in
the United States that incorporate state-of-the-art fiber optic cable and
transmission equipment and fixed wireless spectrum and related equipment, each
of which is capable of carrying high volumes of data, voice, video and Internet
traffic.

We intend to integrate our network assets with advanced communications
technologies to enable us to provide a comprehensive array of communications
services entirely over our network, from point of initiation of the voice or
data transmission to the point of termination, which we refer to as end-to-end
service. To accomplish this, we are creating a North American fiber optic
network, which will consist of a series of rings of fiber optic cables that
encircle the central business districts of numerous metropolitan areas, which
we refer to as metro networks, that are connected by a network of fiber optic
cables, which we refer to as an inter-city network. Our combination of metro
and inter-city networks will enable us to provide high-speed, high-capacity
communications services between customers connected to our network and among
customers with multiple locations entirely over our network.

Recent Transactions and Developments

Restructuring Charge

During the third quarter of 2001, we implemented plans to restructure
certain of our business operations. This restructuring plan includes reducing
our discretionary spending, capital expenditures and workforce based on our
assessment of current and future market conditions. As a result of the
formalized plan, we recorded $189.1 million of estimated restructuring charges
during the three and nine months ended September 30, 2001.

The consolidation and exiting of facility leases resulted in $134.4
million of the restructuring charge. Due to our reduced expansion plans, we are
selling or abandoning certain excess fixed assets. Consequently, the
restructuring charge includes a $53.1 million write down for the excess of the
carrying value of those assets over their fair value. As part of our plan to
restructure our business operations, during the 2001 fourth quarter, management notified employees that we would reduce our workforce by approximately 700 employees.
Accordingly, the resulting severance expense, estimated to be approximately
$6.5 million, will be recorded in the fourth quarter of 2001. The employment of the majority of
the notified employees will terminate by the end of 2001.

Repurchase of Senior Notes and Redeemable Preferred Stock

During the third quarter of 2001, in a series of transactions, we paid
$200.0 million to repurchase $547.3 million of various series of our Senior
Notes. As a result of these transactions, we recognized an extraordinary gain
of $335.7 million, net of unamortized financing costs.
Also, during the third quarter of 2001, in a series of transactions, we
paid $88.4 million to repurchase $301.6 million in liquidation preference of
our 14% Series A Senior Exchangeable Redeemable Preferred Shares and $171.0
million in liquidation preference of our 13 1/2% Series E Senior Redeemable
Exchangeable Preferred Stock. As a result of these transactions, we recognized
a gain of $376.9 million net of unamortized financing costs.

Private Equity Investment

On June 7, 2001, an investment fund controlled by Forstmann Little & Co.
(Forstmann Little) invested $250.0 million of cash in XO to provide
additional funding for general corporate purposes. In exchange for the

12



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##### 



investment, we issued 50.0 million shares of our Class A common stock to
the Forstmann Little fund and amended the terms of our outstanding convertible
preferred stock held by various Forstmann Little investment funds to reduce the
share conversion price from $31.625 to $17.00 per share. The value of the Class
A common stock issued at the date the investment closed was $157.5 million. The
remaining $92.5 million, attributed to the convertible preferred stock
amendment, was recorded as a credit to the preferred stock balance and is being
amortized against the accretion of the preferred stock redemption obligation.

Inter-City Network Agreements

In April 2001, XO and Level 3 Communications, Inc. restructured agreements
pertaining to our purchase of fiber networks from Level 3 that are being
constructed in North America and Europe. XO and Level 3 agreed to cancel
commitments relating to the previously announced purchase of the European metro
and inter-city fiber networks from Level 3. Under the agreement (i)
approximately $128 million in payments that were previously made to Level 3 for
the European networks have been applied as a credit to reduce the remaining
amounts payable by us to Level 3 under the North American inter-city fiber
network agreement, (ii) we prepaid $120.8 million for future amounts due to
Level 3 for the North American inter-city network, and (iii) we transferred to
Level 3 $51.4 million of inter-city transmission equipment to be applied toward
the purchase of wavelength capacity on Level 3s inter-city network in North
America and Europe. As of September 30, 2001, we had (i) fully utilized the
$128 million credit attributable to the European networks, (ii) utilized $69.3
million of the $120.8 million credit attributable to the prepayment, and (iii)
utilized $50.3 million of the $51.4 million equipment credit.

Results of Operations

Operating results for any period are not necessarily indicative of results
for any future period. In June 2000, we completed the acquisition of Concentric
which was accounted for using the purchase method of accounting. Accordingly,
the operating results of Concentric are included from the date of acquisition.

Operating Data

The table below provides a summary of the key operating metrics we use to
assess our operational performance:

|                                           |  |                     |           |              |  |                |         |            |  |          |       |   |  |   |         |  |  |  |      |   
|------------------------------------------ |  | ------------------- | --------- | ------------ |  | -------------- | ------- | ---------- |  | -------- | ----- | - |  | - | ------- |  |  |  | ---- | --
|                                           |  | As of September 30, |           |              |  |                |         |            |  |          |       |   |  |  
|                                           |  |                     |           | Year to Year |  | As of Dec. 31, |         | Nine month
|                                           |  | 2001                |           | 2000         |  | % Change       |         | 2000       |  | % Change
|                                           |  |                     |           |              |  |                |         |            |  |         
|Operating data (a):                        |  |                     |           |              |  |                |         |            |  |          |       |   |  |   |         |  |  |  |      |   
|Route miles (b)                            |  |                     | 22,186    |              |  |                | 8,677   |            |  |          | 155.7 | % |  |   | 13,493  |  |  |  | 64.4 | % 
|Fiber miles (c)                            |  |                     | 1,118,520 |              |  |                | 572,674 |            |  |          | 95.3  | % |  |   | 748,604 |  |  |  | 49.4 | % 
|On-net buildings connected (d)             |  |                     | 2,346     |              |  |                | 1,761   |            |  |          | 33.2  | % |  |   | 1,947   |  |  |  | 20.5 | % 
|Voice grade equivalents (in
thousands) (e) |  |                     | 18,650    |              |  |                | 8,916   |            |  |          | 109.2 | % |  |   | 11,211  |  |  |  | 66.4 | % 
|Customers (f)                              |  |                     | 99,423    |              |  |                | 79,178  |            |  |          | 25.6  | % |  |   | 87,755  |  |  |  | 13.3 | % 
|Average monthly revenue per
customer (g)   |  | $                   | 1,055     |              |  | $              | 880     |            |  |          | 19.9  | % |  | $ | 916     |  |  |  | 15.2 | % 
|Data centers operational                   |  |                     | 9         |              |  |                | 8       |            |  |          | 12.5  | % |  |   | 8       |  |  |  | 12.5 | % 
|Employees                                  |  |                     | 7,194     |              |  |                | 6,757   |            |  |          | 6.5   | % |  |   | 7,400   |  |  |  | (2.8 | )%

We define certain business metrics used above as follows:



|(a) |  | Operating data Except as noted below, the operating data for all periods
presented include the statistics of the Las Vegas network of which we
obtained control in June 2001 and held a 90% ownership interest as of
September 30, 2001.                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Route miles  The number of operational miles of the telecommunications
path in which XO-owned or controlled fiber optic cables are installed.
These include metro and inter-city miles, and exclude wavelength capacity.
The 2001 metrics give effect to the Level 3 transactions announced on
April 26, 2001.
|   
|(c) |  | Fiber miles  The number of route miles, per (b) above, multiplied by our
estimate of the number of fibers along that path.                                                                                                                                                                                    
|   
|(d) |  | On-net buildings connected  Buildings connected to our networks either
by XO-owned or controlled cable or LMDS antenna.                                                                                                                                                                                       
|   
|(e) |  | Voice grade equivalents  Voice grade equivalents, or VGEs, is a digital
broadband equivalent of 64 kilobits per second, known as DS-0 level, the
standard capacity of a voice grade line, and measures the network
utilization of both our voice and data services.                                           
|   
|(f) |  | Customers  The number of revenue-generating invoices as of the current
period. This statistic excludes Europe as well as consumer dial up and
shared hosting accounts.                                                                                                                                        

13



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|(g) |  | Average monthly revenue per customer  Represents average monthly revenue
for the quarter divided by the average monthly customers for the quarter.
This calculation excludes both the associated revenue and customer counts
for Europe as well as consumer dial up and shared hosting accounts.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of Financial Results

Three and Nine months Ended September 30, 2001 versus Three and Nine Months
Ended September 30, 2000

Revenue. Total revenue in the third quarter of 2001 increased to $331.5
million from $224.3 million in the third quarter of 2000, and revenue for the
nine months ended September 30, 2001 increased to $915.6 million from $470.8
million in the same period of 2000. These increases were primarily due to the
increase in the number of our customers and growth in network traffic and
average monthly revenue per customer. The growth in our customer base was
largely due to our expansion into existing and new markets and our June 2000
Concentric acquisition. The growth in network traffic and average monthly
revenue per customer was due to the expansion of our service offerings and our
emphasis on selling to larger business customers. Based on current estimates,
we believe that the trend of increasing revenue per customer will continue in
future periods as we add new features and functionality to existing products
and as we continue targeting larger business customers and strategic partners.
Our rate of growth may be slower than historical trends due to the impact of the weakened
economy.

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

|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |    |       |      |  
|------------------------- | ------------- | - | ------- | ------- | ------------ |  | -------------------------------- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - | -- | ----- | ---- | -
|                          |               |   |         |         |              |  | Three Months Ended September 30, |       |              |   |         
|                          |               |  
|                          |               |   | 2001    |         | % of Revenue |  | 2000                             |       | % of Revenue |   | % Change
|                          |               |   |         |         |              |  |                                  |       |              |   |         
|Data services             |               | $ | 152,679 |         |              |  | 46.1                             | %     |              | $ | 117,940  |         |  |  | 52.6 | %     |   |    | 29.5  | %   
|Voice services            |               |   | 161,546 |         |              |  | 48.7                             | %     |              |   | 103,943  |         |  |  | 46.4 | %     |   |    | 55.4  | %   
|Integrated voice and data |               |   | 16,386  |         |              |  | 4.9                              | %     |              |   | 713      |         |  |  | 0.3  | %     |   | NM
|Other services            |               |   | 867     |         |              |  | 0.3                              | %     |              |   | 1,659    |         |  |  | 0.7  | %     |   |    | (47.7 | )%  
|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |    |       |     
|                          | Total revenue |   | $       | 331,478 |              |  |                                  | 100.0 | %            |   | $        | 224,255 |  |  |      | 100.0 | % |    |       | 47.8 | %
|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |    |       |     

|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |    |       |      |  
|------------------------- | ------------- | - | ------- | ------- | ------------ |  | ------------------------------- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - | -- | ----- | ---- | -
|                          |               |   |         |         |              |  | Nine Months Ended September 30, |       |              |   |         
|                          |               |  
|                          |               |   | 2001    |         | % of Revenue |  | 2000                            |       | % of Revenue |   | % Change
|                          |               |   |         |         |              |  |                                 |       |              |   |         
|Data services             |               | $ | 443,866 |         |              |  | 48.5                            | %     |              | $ | 194,114  |         |  |  | 41.2 | %     |   |    | 128.7 | %   
|Voice services            |               |   | 440,387 |         |              |  | 48.1                            | %     |              |   | 273,888  |         |  |  | 58.2 | %     |   |    | 60.8  | %   
|Integrated voice and data |               |   | 28,514  |         |              |  | 3.1                             | %     |              |   | 942      |         |  |  | 0.2  | %     |   | NM
|Other services            |               |   | 2,797   |         |              |  | 0.3                             | %     |              |   | 1,809    |         |  |  | 0.4  | %     |   |    | 54.6  | %   
|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |    |       |     
|                          | Total revenue |   | $       | 915,564 |              |  |                                 | 100.0 | %            |   | $        | 470,753 |  |  |      | 100.0 | % |    |       | 94.5 | %
|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |    |       |     

*NM  Not Meaningful

Data services revenue includes revenue from Internet access, network
access and applications hosting services. Data services revenue in the third
quarter of 2001 increased to $152.7 million from $117.9 million in the third
quarter of 2000, and for the nine months ended September 30, 2001, it increased
to $443.9 million from $194.1 million in the same period of 2000. A primary
contributor to this growth was our migration from voice-centric service
offerings to a more balanced portfolio of voice and data services, facilitated
in large part by our June 2000 acquisition of Concentric and the integration of
its data products with our pre-existing services and by our development of new
and enhanced data services. Data services revenue declined slightly as a
percentage of total revenue for the third quarter of 2001 compared to the third
quarter of 2000 due to higher growth in our voice services and integrated
voice and data services and increased customer bankruptcies. We expect data
services revenue to continue to grow in absolute dollars, but at a slower rate,
as we continue to target larger enterprise customers and to enhance our
available data service offerings, but to remain relatively stable as a percentage of
total revenue.

Voice services revenue includes revenue from bundled local and long
distance voice services, prepaid calling card processing, and other voice
communications based services, including shared tenant services, interactive
voice response services and stand-alone long distance services. Voice services
revenue in the third quarter of 2001 increased to $161.5 million from $103.9
million in the third quarter of 2000, and for the nine months ended September
30, 2001, it increased to $440.4 million from $273.9 million in the same period
of 2000. These increases were primarily due to the growth in the number of our
bundled local and long distance service customers and our

14



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targeting of larger business customers and strategic partners. We expect
voice services revenue to continue to increase in absolute dollars in future
periods, but at a slower rate, as a result of continued penetration of existing
markets and expansion and enhancements of our existing voice service
offerings, but to remain relatively stable as a percentage of total revenue.

Integrated voice and data services revenue consists of bundled data and
voice service offerings. Integrated voice and data services revenue in the
third quarter of 2001 increased to $16.4 million from $0.7 million in the third
quarter of 2000, and for the nine months ended September 30, 2001, it increased
to $28.5 million from $0.9 million in the same period of 2000. The increase is
attributable to the addition of bundled data and voice service packages to our
product portfolio beginning in the second quarter of 2000. We anticipate that
revenue from bundled data and voice services will increase in future periods
both in absolute dollars and as a percentage of our total revenue as we add
product enhancements, introduce new XOptions voice and data service bundles and
continue to penetrate existing markets.

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

|                    |                                     |   |         |         |              |  |                                  |      |              |   |          |         |  |  |  |      |   |  |      |       |   
|------------------- | ----------------------------------- | - | ------- | ------- | ------------ |  | -------------------------------- | ---- | ------------ | - | -------- | ------- |  |  |  | ---- | - |  | ---- | ----- | --
|                    |                                     |   |         |         |              |  | Three Months Ended September 30, |      |              |   |         
|                    |                                     |  
|                    |                                     |   | 2001    |         | % of Revenue |  | 2000                             |      | % of Revenue |   | % Change
|                    |                                     |   |         |         |              |  |                                  |      |              |   |         
|Costs and expenses: |                                     |   |         |         |              |  |                                  |      |              |   |          |         |  |  |  |      |   |  |      |      
|                    | Cost of service                     |   | $       | 138,100 |              |  |                                  | 41.7 | %            |   | $        | 92,356  |  |  |  | 41.2 | % |  |      | 49.5  | % 
|                    | Selling, operating and general      |   |         | 246,864 |              |  |                                  | 74.5 | %            |   |          | 220,832 |  |  |  | 98.5 | % |  |      | 11.8  | % 
|                    | Stock-based compensation            |   |         | 9,230   |              |  |                                  | 2.8  | %            |   |          | 13,396  |  |  |  | 6.0  | % |  |      | (31.1 | )%
|                    | Depreciation                        |   |         | 116,489 |              |  |                                  | 35.1 | %            |   |          | 58,732  |  |  |  | 26.2 | % |  |      | 98.3  | % 
|                    | Amortization                        |   |         | 178,943 |              |  |                                  | 54.0 | %            |   |          | 175,633 |  |  |  | 78.3 | % |  |      | 1.9   | % 
|                    | Restructuring charge                |   |         | 189,137 |              |  |                                  | 57.1 | %            |   |          |        |  |  |  | 0.0  | % |  | NM  
|                    | In-process research and
development |   |         |        |              |  |                                  | 0.0  | %            |   |          |        |  |  |  | 0.0  | % |  | NM  
|                    |                                     |   |         |         |              |  |                                  |      |              |   |          |         |  |  |  |      |   |  |      |      
|Total               |                                     | $ | 878,763 |         |              |  |                                  |      |              | $ | 560,949  |         |  |  |  |      |   |  | 56.7 | %    
|                    |                                     |   |         |         |              |  |                                  |      |              |   |          |         |  |  |  |      |   |  |      |      

|                    |                                     |   |           |         |              |  |                                 |      |              |   |           |         |  |  |  |       |   |  |      |       |   
|------------------- | ----------------------------------- | - | --------- | ------- | ------------ |  | ------------------------------- | ---- | ------------ | - | --------- | ------- |  |  |  | ----- | - |  | ---- | ----- | --
|                    |                                     |   |           |         |              |  | Nine Months Ended September 30, |      |              |   |          
|                    |                                     |  
|                    |                                     |   | 2001      |         | % of Revenue |  | 2000                            |      | % of Revenue |   | % Change 
|                    |                                     |   |           |         |              |  |                                 |      |              |   |          
|Costs and expenses: |                                     |   |           |         |              |  |                                 |      |              |   |           |         |  |  |  |       |   |  |      |      
|                    | Cost of service                     |   | $         | 375,936 |              |  |                                 | 41.1 | %            |   | $         | 198,722 |  |  |  | 42.2  | % |  |      | 89.2  | % 
|                    | Selling, operating and general      |   |           | 740,959 |              |  |                                 | 80.9 | %            |   |           | 492,745 |  |  |  | 104.7 | % |  |      | 50.4  | % 
|                    | Stock-based compensation            |   |           | 27,857  |              |  |                                 | 3.0  | %            |   |           | 39,609  |  |  |  | 8.4   | % |  |      | (29.7 | )%
|                    | Depreciation                        |   |           | 316,173 |              |  |                                 | 34.5 | %            |   |           | 139,984 |  |  |  | 29.7  | % |  |      | 125.9 | % 
|                    | Amortization                        |   |           | 533,453 |              |  |                                 | 58.3 | %            |   |           | 216,788 |  |  |  | 46.1  | % |  |      | 146.1 | % 
|                    | Restructuring charge                |   |           | 189,137 |              |  |                                 | 20.7 | %            |   |           |        |  |  |  | 0.0   | % |  | NM  
|                    | In-process research and
development |   |           |        |              |  |                                 | 0.0  | %            |   |           | 36,166  |  |  |  | 7.7   | % |  | NM  
|                    |                                     |   |           |         |              |  |                                 |      |              |   |           |         |  |  |  |       |   |  |      |      
|Total               |                                     | $ | 2,183,515 |         |              |  |                                 |      |              | $ | 1,124,014 |         |  |  |  |       |   |  | 94.3 | %    
|                    |                                     |   |           |         |              |  |                                 |      |              |   |           |         |  |  |  |       |   |  |      |      

*NM  Not Meaningful

Cost of service. Cost of service includes expenses for third party
provided interconnect access and transport services. Cost of service in the
third quarter of 2001 was $138.1 million compared to $92.4 million in the third
quarter of 2000. For the nine months ended September 30, 2001, cost of service
was $375.9 million compared to $198.7 million in the same period of 2000. Cost
of service for the third quarter of 2001 and the nine months ended September
30, 2001, was consistent as a percentage of revenue as compared to the same
periods in 2000, but increased in absolute dollars on a period-over-period
comparison due to the corresponding increase in revenue. Over the long term, we
expect cost of service as a percentage of revenue to decrease as our revenue
shifts to a higher mix of data products and on-net customers and services,
which generally yield higher margins.

Selling, operating and general. Selling, operating and general expense
includes expenses related to sales and marketing, network operations and
engineering, information systems, and general corporate office functions.
Selling, operating and general expense in the third quarter of 2001 was
$246.9 million compared to $220.8 million in the third quarter of 2000. For the
nine months ended September 30, 2001, selling, operating, and general expense
was $741.0 million compared to $492.7 million for the same period in 2000. The
majority of both of the period-over-period increases are due to an increase in
sales, network operations and customer support headcount associated with the
expansion of our business and the June 2000 Concentric acquisition. Selling,
operating and

15



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general expense decreased as a percentage of revenue for the three and
nine month periods in 2001 compared to the same periods in 2000 due to
continued efficiencies generated by the centralization of many functions. We
expect minimal growth in our selling, operating and general expense in the
near term due to our restructuring efforts and other ongoing efforts to control
these costs. Over the long term, we expect selling, operating, and general
expense to increase in absolute dollars in connection with our revenue growth, but to decrease as
a percentage of revenue.

Stock-based compensation. Stock-based compensation expense represents
non-cash charges recorded in connection with the grant of compensatory stock
options and restricted stock grants to employees whose compensation is included
in selling, operating, and general expense. Compensation expense is recognized
over the vesting periods of compensatory stock options based on the excess of
the fair value of the common stock at the date of grant (determined by
reference to the market price on that date) over the exercise price of the
option. Stock-based compensation in the third quarter of 2001 decreased to $9.2
million from $13.4 million in the third quarter of 2000. For the first nine
months of 2001, stock-based compensation expense decreased to $27.9 million
from $39.6 million for the first nine months of 2000. The decrease in
stock-based compensation expense, which is predominately associated with the vesting of
a fixed number of shares of restricted stock issued in conjunction with the
Concentric acquisition, is due to the decline in XOs stock price over the
related periods.

Depreciation. We are constructing integrated end-to-end facilities-based
networks in the United States, consisting of metro fiber networks and fixed
wireless connections. Our net property and equipment, which also reflects
assets acquired from Concentric in June 2000, increased to $3,734.7 million as
of September 30, 2001 versus $2,088.8 million as of September 30, 2000. As we
launched and expanded services in new and existing markets, more assets were
placed into service, which caused depreciation expense to increase to $116.5
million for the third quarter of 2001 from $58.7 million for the third quarter
of 2000 and to $316.2 million for the first nine months of 2001 from $140.0
million in the first nine months of 2000. We expect depreciation expense to
continue to increase as we place additional network assets into service.

Amortization. Amortization expense includes amortization of goodwill,
licenses and other intangibles. Amortization increased to $178.9 million for
the third quarter of 2001 from $175.6 million in the third quarter of 2000, and
it increased to $533.5 million for the first nine months of 2001 from $216.8
million for the first nine months of 2000. The significant increase in the nine
month period comparable balances is primarily due to the amortization of
additional goodwill and intangible assets recorded as a result of the June 2000
Concentric acquisition.

Restructuring charge. As further explained in Recent Transactions and
Developments, the restructuring charge is primarily related to the
consolidation and exiting of facilities, as well as a write down for excess
telecommunications assets.

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

Interest income. Interest income in the third quarter of 2001 decreased to
$15.0 million from $50.7 million in the third quarter of 2000. For the nine
months ended September 30, 2001, interest income decreased to $71.9 million
from $141.3 million in the first nine months of 2000. The decrease in interest
income corresponds to the decrease in our average cash and marketable
securities balances and a reduction in interest rates.

Interest expense. Interest expense in the third quarter of 2001 increased
to $115.8 million from $108.9 million in the third quarter of 2000. For the
nine months ended September 30, 2001, interest expense increased to $350.2
million from $324.6 million in the first nine months of 2000. The increase in
interest expense was primarily due to an increase in our average outstanding
indebtedness over the respective periods resulting from our borrowings under
our senior secured credit facility during 2000 and 2001, the issuance of $517.5
million of 5 3/4% convertible subordinated notes in January 2001, and the
assumption of $150.0 million of debt in connection with our June 2000
acquisition of Concentric. Future interest charges will be reduced as a result
of our repurchase of certain senior notes as discussed in Recent Transactions
and Developments.

Other income (loss).Other income (loss) for the three and nine months
ended September 30, 2001 relates primarily to a $87.0 million write down for an
other than temporary decline in the value of certain available-for-sale and
equity method investments. Other income (loss) for the nine months ended
September 30, 2000 relates primarily to a $225.1 million gain on the sale of an
equity investment.

16



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Extraordinary gain on early extinguishments of debt, net.As further
explained in Recent Transactions and Developments and Note 4 to the condensed
consolidated financial statements, the extraordinary gain is related to the
repurchase of certain Senior Notes.

Net loss. Net loss in the third quarter of 2001 increased to $398.9
million from a net loss of $394.2 million in the third quarter of 2000, and
increased to $1,303.5 million for the first nine months of 2001 from $609.7 million in
the first nine months of 2000 due to the foregoing factors.

Gain on repurchases of preferred stock, net.As further explained in
Recent Transactions and Developments and Note 5 to the condensed consolidated
financial statements, the gain is related to the repurchase of certain preferred stock.

Preferred stock dividends and the accretion of the preferred stock
redemption, net.Preferred stock dividends and the accretion of the preferred stock redemption decreased to $28.7 million in the third quarter of 2001 from $42.3
million in the third quarter of 2000 due to our repurchase of certain preferred
stock  as further explained in Recent Transaction and Developments. Preferred stock dividends and the accretion of the preferred stock
redemption was consistent for the nine months ended September 30, 2001 and 2000
totaling $107.4 million and $107.5 million, respectively, as the impact of the
repurchase of the preferred stock on dividends, was offset by the increase in our average outstanding preferred stock balance during 2001.

Net loss applicable to common shares.Net loss applicable to common shares
in the third quarter of 2001 decreased to $50.8 million from $436.5 million in
the third quarter of 2000, and increased to $1,034.0 million for the nine
months ended September 30, 2001 from $717.2 million for the nine months ended
September 30, 2000 due to the foregoing factors.

EBITDA. EBITDA is not a generally accepted accounting principle measure
but rather a measure employed by management to view operating results adjusted
for major non-cash items. EBITDA, as defined by XO, represents operating loss
adjusted for stock-based compensation, depreciation, amortization,
restructuring charge, and in-process research and development write-offs. The
table below summarizes EBITDA, both in amount and as a percentage of revenue
(dollars in thousands):

|       |  |                                  |         |                                 |  |        |       |              |  |        |         |              |  |        |       |              |  |   |          |   |  |  |       |    |  |   |          |   |  |  |       |   
|------ |  | -------------------------------- | ------- | ------------------------------- |  | ------ | ----- | ------------ |  | ------ | ------- | ------------ |  | ------ | ----- | ------------ |  | - | -------- | - |  |  | ----- | -- |  | - | -------- | - |  |  | ----- | --
|       |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|       |  |                                  |         |                                
|       |  | 2001                             |         | 2000                            |  | 2001   |       | 2000        
|       |  |                                  |         |                                 |  |        |       |             
|       |  | Amount                           |         | % of Revenue                    |  | Amount |       | % of Revenue |  | Amount |         | % of Revenue |  | Amount |       | % of Revenue
|       |  |                                  |         |                                 |  |        |       |              |  |        |         |              |  |        |       |             
|EBITDA |  | $                                | (53,486 | )                               |  |        | (16.1 | )%           |  | $      | (88,933 | )            |  |        | (39.7 | )%           |  | $ | (201,331 | ) |  |  | (22.0 | )% |  | $ | (220,714 | ) |  |  | (46.9 | )%

EBITDA has improved as a percentage of revenue, and in
absolute dollars for the three and nine months ending September 30, 2001, due
to revenue growth and the decrease in selling, operating and general expenses
as a percentage of revenue as discussed above.

Liquidity and Capital Resources

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

During the first nine months of 2001, our net financing activities
provided cash of $1,040.5 million. Total capital raised during this period, net
of transaction costs, was $1,404.2 million. In January 2001, we completed the
issuance and sale of $517.5 million of 5 3/4% convertible subordinated notes
due 2009 for proceeds, net of underwriting and other fees, totaling $503.3
million. In June 2001, an investment fund controlled by Forstmann Little
invested $250.0 million in XO to provide additional funding for general
corporate purposes. We also borrowed $625.0 million against our $1.0 billion
senior secured credit facility during the first nine months of 2001. As a
result, we are fully borrowed against the facility at an annualized weighted
average interest rate of 6.5%, as of September 30, 2001. The facility limits
additional indebtedness, dividend payments and certain investments and
transactions and contains certain covenants with respect to revenue, fixed
charge ratios and leverage ratios. The

17



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failure to achieve our expected future operating results, due to the
impact of the weakened economy, could result in our failure to satisfy certain of
these covenants. As of September 30, 2001, we were in compliance with all
covenants under our credit facility and the indentures under which our senior
notes, senior discount notes and convertible subordinated notes were issued.

Total cash used in financing activities during the first nine months of
2001 was $363.7 million. We recently repurchased $547.3 million of our senior
notes for $200.0 million and $472.6 million of our preferred stock for $88.4
million. (See also Recent Transactions and Developments and Notes 4 and 5 to
the condensed consolidated financial statements). For the nine months ended
September 30, 2001, we also paid $40.3 million of preferred stock dividends and
repaid $34.9 million of capital lease obligations.

During the first nine months of 2001, net cash used in investing
activities was $632.8 million. Net proceeds from the sale of marketable
securities and other investments were $820.6 million for the first nine months
of 2001. We invested $1,299.4 million in property and equipment and prepaid
$120.8 million for inter-city fiber networks. We also acquired additional
equity interest in our controlled subsidiary operating in the Las Vegas market.
As partial consideration of these interests, we paid $25.2 million in cash.

We continue to generate operating losses as we incur operating expenses
while we expand and execute our business strategy. Our net operating activities
used $448.6 million of cash during the first nine months of 2001. Cash and
marketable securities were $1,030.8 million at September 30, 2001.

Liquidity Assessment

We expect that our business will continue to require substantial amounts
of cash to fund operations and capital expenditures relating to our existing
and planned network development. These funds are expected to relate to:



| |  |  | the purchase and installation of fiber optic cable, switches,
routers, servers or other data-related equipment and related
electronics, for expansion of existing networks and for construction of new networks;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the development of our comprehensive information technology
platform;                                                                                                                                           
|
| |  |  | the purchase and installation of equipment associated with the
deployment of fixed wireless spectrum and fiber to connect buildings to
our network;                                                             
|
| |  |  | the funding of operating losses and working capital;                                                                                                                                                            
|
| |  |  | the potential repurchase of long-term obligations or other restructuring transactions; and                                                                                                                      
|
| |  |  | possible expenditures associated with market expansions and
potential acquisitions of businesses or assets.                                                                                                     

In addition, we have substantial funding needs for debt service and
dividend payments relating to our outstanding indebtedness and preferred stock.
Our interest and dividend payments have increased over time as we made
additional borrowings and issued additional preferred stock. Our interest and
dividend payments will continue to increase as we are required to make interest
payments in cash beginning in 2003
for certain series of our outstanding senior discount notes, and we are required to make
dividend payments in cash for our outstanding preferred stock that currently permit us to
pay dividends in additional shares of preferred stock, beginning in 2002 for
certain series of these preferred stock. Our bank credit facility also provides for
principal repayments with respect to a portion of the loans beginning in March
2004.

Beginning in the second half of 2000 and continuing into 2001, the market
value of debt and equity securities issued by technology and telecommunications
companies has declined sharply. This decline has been particularly severe with
respect to competitive telecommunications providers like XO that have
substantial outstanding indebtedness. For example, the market price of XO class
A common stock has declined from a closing price of $37.938 on June 30, 2000 to
$0.41 on September 28, 2001 and, during the first nine months of 2001, the
Merrill Lynch CLEC composite has lost more than 70% in market value. A general
economic downturn in 2001, pricing pressures in the long-distance market
resulting from oversupply of capacity in certain routes and the September 11
terrorist attacks in New York and Washington D.C. have resulted in a
continuation of this trend, making it extremely difficult for companies like XO
to raise additional funds in the public markets.

18



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In light of these market conditions and our funding needs, we have taken
steps to conserve cash-on-hand and to evaluate strategic alternatives that may
be implemented to attract potential investors and position XO to obtain
additional funding. As further discussed in Recent Transactions and
Developments, during 2001, we implemented the following strategic initiatives
designed to reduce our operating expenses, capital expenditures and debt
service and preferred security dividend payments:



| |  |  | Restructuring of Certain Operations. We implemented a plan to
restructure certain operations to terminate or sublease certain excess
or underutilized administrative and warehouse facility leases, abandon
certain capital initiatives, and reduce our workforce, which we estimate
will reduce operating expenses by approximately $80 million annually;                                                                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Repurchase of Senior Notes and Preferred Shares. We repurchased
$547.3 million of our senior notes for $200.0 million and $472.6
million of our preferred stock for $88.4 million, which we estimate will
reduce our interest and dividend payments by approximately $123 million
annually; and                                                                                                                                                                                               
|
| |  |  | Reduced Capital Expansion Plan. We amended our agreements with
Level 3 to reflect reduced capital expansion plans including amendments
that allowed us to suspend our European expansion, postpone the
lighting of much of our domestic inter-city network, and reduce
expansion in certain metro networks, which contributed significantly to
the reduction of our original estimated capital expenditures for 2001
from a range of $1,900 to $2,100 million to approximately $1,500
million.

These cost savings and capital expenditure reductions are partially offset
by the $288.4 million in cash expended in the third quarter of 2001 to
repurchase senior notes and preferred stock. Taking the net impact of these
initiatives into account, we estimate that our cash and marketable securities
on hand as of September 30, 2001 will be sufficient to fund scheduled debt
service and preferred dividend payments on our currently outstanding debt and securities, operating expenses and capital
expenditures into the second half of 2002.

Consequently, we need to raise substantial additional capital in order to
fund our operations until the time when we expect to generate cash from
operations sufficient to satisfy debt service, operating expenses and other
capital requirements. We have engaged Houlihan Lokey Howard & Zukin Capital as
financial advisors to assist us in developing and implementing a strategy to
restructure our balance sheet to enable us to attract such additional capital.
Based on current market conditions, we anticipate that any balance sheet
restructuring implemented to attract additional capital may entail a
significant conversion of our indebtedness and preferred stock into common equity. Given the
current trading prices of our securities, it is likely that any such conversion
and any new equity investment would result in a substantial dilution to our
current equity holders interest in the company, which could substantially
impair the value of that interest. There can be no assurance that we will be
successful in restructuring our balance sheet, or that such additional capital
will be available, or, if available, will be on acceptable terms.

Assessment of Asset Impairment

As discussed in our Liquidity Assessment, we have taken steps directed at
restructuring our balance sheet to reduce our financing obligations which
impacts our current and long term cash flow assumptions. Consequently, in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of, as of September 30, 2001, we have reviewed our expected
future undiscounted cash flows excluding debt service and currently believe
that we will recover the carrying value of our long-lived assets to be held and
used, including property and equipment of $3,734.7 million, fixed wireless
licenses of $973.0 million, and goodwill and identifiable intangible assets of
$2,460.1 million as of September 30, 2001. In the event that our expected
future undiscounted cash flows are reduced significantly due to reductions in demand for our services,
changes in our customers financial positions, technology or regulation, the lack of available
financing or increased competition, our assessment of our ability to recover the carrying
value of these assets would change. Our assessment would also be affected by
changes in the planned use of such long-term assets and impacts from
restructuring our consolidated balance sheet.

Forward-looking and Cautionary Statements

Some statements and information contained in this report are not
historical facts, but are forward-looking statements, as defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements can be identified by the use of forward-looking terminology such as
believes, expects, plans, may, will, would, could, should, or
anticipates or the negative of these words or other variations of these words
or

19



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other comparable words, or by discussions of strategy that involve risks
and uncertainties. Such forward-looking statements include, but are not limited
to, statements regarding:



| |  |  | product and service development, including the development and
deployment of data products and services based on IP, Ethernet and
other technologies and strategies to expand our targeted customer base
and broaden our sales channels;                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | market development, including the number and location of markets we
expect to serve;                                                                                                                                                                                                                                              
|
| |  |  | network development, including those with respect to IP network and
facilities development and deployment, switches using next generation
switching technology, broadband fixed wireless technology, testing and
installation, high speed technologies such as DSL, and matters relevant
to our metro and inter-city networks; and
|
| |  |  | liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures anticipated levels of
indebtedness, and steps being taken to reduce costs and attract
capital.                                                                                                                     

All such forward-looking statements are qualified by the inherent risks
and uncertainties surrounding expectations generally, and also may materially
differ from our actual experience involving any one or more of these matters
and subject areas. The operation and results of our business also may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified above in the Liquidity Assessment
discussion and the Risk Factors section of our Annual Report on Form 10-K for
the year ended December 31, 2000 filed with the Securities and Exchange
Commission on April 2, 2001, including, but not limited to:



| |  |  | general economic conditions in the geographic areas that we are
targeting for communications services;                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ability to achieve and maintain market penetration and average
per customer revenue levels sufficient to provide financial viability
to our business;
|
| |  |  | access to sufficient debt or equity capital to meet our operating
and financing needs and actions required to be taken in order to obtain
such capital;  
|
| |  |  | the quality and price of similar or comparable communications
services offered or to be offered by our competitors;                                      
|
| |  |  | future telecommunications-related legislation or regulatory actions;                                                                                     
|
| |  |  | results of the terrorist attacks on September 11, 2001 in New York City and Washington, D.C; and                                                         
|
| |  |  | the financial condition of our customers.                                                                                                                

New Accounting Pronouncements

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

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets, which revises the accounting for purchased goodwill
and intangible assets and supercedes APB Opinion No. 17, Intangible Assets.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001
and must be applied to all goodwill and other intangible assets recorded at
that date. However, goodwill and intangible assets acquired after June 30, 2001
will be subject immediately to the amortization provisions of this statement.
Under SFAS No. 142, goodwill and intangible assets with indefinite lives will
no longer be amortized but will be tested for impairment annually or more
frequently if an event indicates that the asset might be impaired. The
statement provides guidance on measuring goodwill and intangible asset
impairments to include a discounted cash flow methodology. The initial
impairment analysis of intangible assets recorded at December 15, 2001 (other
than those acquired after June 30, 2001) must be completed by March 31, 2002
and goodwill impairment testing must be

20



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completed by June 30, 2002. Management is currently evaluating the impact
of this statement on our results of operations and financial position. As of
September 30, 2001, the net carrying value of goodwill and other intangibles
was $2,460.1 million. Additionally, we have fixed wireless licenses with a
carrying value of $973.0 million as of September 30, 2001. We are currently
evaluating whether these licenses have an indefinite useful life.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which requires an entity to recognize the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred if a reasonable estimate of fair value can be made. If a reasonable
estimate of fair value cannot be made in the period the asset retirement
obligation is incurred, SFAS No. 143 requires the liability to
be recognized when a reasonable estimate of fair value can be made. This new standard is
effective in the first quarter of 2003. We do not believe that the
adoption of SFAS No. 143
will have a material effect on our results of operations and financial position.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. SFAS No. 144 is effective in the first quarter of 2002. We
do not believe that the adoption of SFAS No. 144 will have a material effect on our
results of operations and financial position statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have financial obligations outstanding which expose us to interest rate
risk including our redeemable preferred stock, senior and subordinated notes,
and bank credit facilities. We do not have significant cash flow exposure to
changing interest rates on the majority of our long-term debt and redeemable
preferred stock because the interest and dividend rates of those securities are
fixed. However, the estimated fair values of the fixed-rate debt and redeemable
preferred stock are subject to market risk. We had $4,111.2 million in fixed
rate debt, $1.0 billion in variable rate debt and $1,790.8 million in fixed
rate redeemable preferred stock as of September 30, 2001. We are not currently
engaged in the use of off-balance sheet derivative financial instruments,
including interest rate swap and collar agreements, to hedge or partially hedge
interest rate exposure arising from changes in interest rates.

We also maintain an investment portfolio consisting of U.S. government and
other securities with an average maturity of less than one year. These
securities are classified as available for sale. If interest rates were to
increase or decrease immediately, it would not likely have a material impact on
the fair value of these financial instruments or on the interest we would earn
on our investment portfolio. We currently mitigate our interest rate exposure
on these investments by maintaining shorter maturity periods, and cycling the
maturity dates for each investment over different periods throughout the year.

There have been no material changes in our exposure to market risk since December 31, 2000.

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes in Securities and Use of Proceeds

On July 16, 2001, we completed the acquisition of various interests of Cox
Communications in Telecommunications of Nevada, L.L.C, the entity that owns our
Las Vegas operations. As partial consideration of these interests, we issued
5.5 million shares of our Class A common stock to Cox. The offer and sale of
the shares of Class A Common stock were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section
4(2) of the Act as transactions not involving any public offering.

The initial public offering (IPO) of our Class A common stock was
completed in October 1997, pursuant to a registration statement on Form S-1
(File No. 333-32001) filed with the Securities and Exchange Commission that
become effective on September 26, 1997. The net proceeds we received from the
offering totaled approximately $226.8 million. As of September 30, 2001,
proceeds from the IPO remain available for future network build out and working
capital requirements.

Item 3.  Defaults Upon Senior Securities
         None.

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Item 4.  Submission of Matters to a Vote of Security Holders
             None

Item 5.  Other Information

Item 6.  Exhibits and Reports on Form 8-K

|             |  |                                                                                                                                                                                                                                                                                                                                                                  
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Exhibits |  |                                                                                                                                                                                                                                                                                                                                                                  
|            
|10.1         |  | Concentric Network Corporation 1995 Stock Incentive Plan for Employees
and Consultants (Amended and Restated as of May 30, 2001) (Incorporated
here by reference to exhibit (d)(2) filed with Schedule TO (Rule 13e.4)
Tender Offer Statement under Section 14(d)(1) or 13(e)(1) of the
Securities Exchange Act of 1934 (Amendment No.2), filed on June 14, 2001)
|            
|10.2         |  | Concentric Network Corporation 1996 Stock Plan (Amended and Restated as
of May 30, 2001) (Incorporated here by reference to exhibit (d)(3) filed
with Schedule TO (Rule 13e.4) Tender Offer Statement under Section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 (Amendment
No.2), filed on June 14, 2001)                                        
|            
|10.3         |  | Delta Internet Services, Inc. 1996 Stock Option Plan (Amended and
Restated as of May 30, 2001) (Incorporated here by reference to exhibit
(d)(4) filed with Schedule TO (Rule 13e.4) Tender Offer Statement under
Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934
(Amendment No.2), filed on June 14, 2001)                                  
|            
|10.4         |  | Concentric Network Corporation 1997 Stock Plan (Amended and Restated as
of May 30, 2001) (Incorporated here by reference to exhibit (d)(5) filed
with Schedule TO (Rule 13e.4) Tender Offer Statement under Section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 (Amendment
No.2), filed on June 14, 2001)                                        
|            
|10.5         |  | Concentric Network Corporation 1999 Nonstatutory Stock Option Plan
(Amended and Restated as of May 30, 2001) (Incorporated here by reference
to exhibit (d)(6) filed with Schedule TO (Rule 13e.4) Tender Offer
Statement under Section 14(d)(1) or 13(e)(1) of the Securities Exchange
Act of 1934 (Amendment No.2), filed on June 14, 2001)                    

(b) Reports on Form 8-K

|    |  |                                                                                                                                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Current Report on Form 8-K dated July 6, 2001, reporting
under Item 5 that the Company may purchase its outstanding Senior
Notes, Subordinated Notes and Preferred Stock.                                                                                                          
|   
|(2) |  | Current Report on Form 8-K dated July 19, 2001, reporting
under Item 2 an updated unaudited pro forma condensed combined
statement of operations for the year ended December 31, 2000 giving
effect to the Concentric Network Corporation merger as if it
occurred January 1, 2000.

22



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.

|                        |  |                                                                                                                                            
|----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                        |  | XO Communications, Inc.                                                                                                                    
|                       
|Date: November 14, 2001 |  | By: /s/ Wayne M. RehbergerWayne M. Rehberger
Senior Vice President and Chief Financial Officer
(Principal financial and accounting officer)
|                       
|                        |  | XO Capital, Inc.                                                                                                                           
|                       
|Date: November 14, 2001 |  | By: /s/ Wayne M. RehbergerWayne M. Rehberger
Senior Vice President and Chief Financial Officer
(Principal financial and accounting officer)

23





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EXHIBIT INDEX

|           |  |                                                                                                                                                                                                                                                                                                                                                                  
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                           
|          
|10.1       |  | Concentric Network Corporation 1995 Stock Incentive Plan for Employees
and Consultants (Amended and Restated as of May 30, 2001) (Incorporated
here by reference to exhibit (d)(2) filed with Schedule TO (Rule 13e.4)
Tender Offer Statement under Section 14(d)(1) or 13(e)(1) of the
Securities Exchange Act of 1934 (Amendment No.2), filed on June 14, 2001)
|          
|10.2       |  | Concentric Network Corporation 1996 Stock Plan (Amended and Restated as
of May 30, 2001) (Incorporated here by reference to exhibit (d)(3) filed
with Schedule TO (Rule 13e.4) Tender Offer Statement under Section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 (Amendment
No.2), filed on June 14, 2001)                                        
|          
|10.3       |  | Delta Internet Services, Inc. 1996 Stock Option Plan (Amended and
Restated as of May 30, 2001) (Incorporated here by reference to exhibit
(d)(4) filed with Schedule TO (Rule 13e.4) Tender Offer Statement under
Section 14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934
(Amendment No.2), filed on June 14, 2001)                                  
|          
|10.4       |  | Concentric Network Corporation 1997 Stock Plan (Amended and Restated as
of May 30, 2001) (Incorporated here by reference to exhibit (d)(5) filed
with Schedule TO (Rule 13e.4) Tender Offer Statement under Section
14(d)(1) or 13(e)(1) of the Securities Exchange Act of 1934 (Amendment
No.2), filed on June 14, 2001)                                        
|          
|10.5       |  | Concentric Network Corporation 1999 Nonstatutory Stock Option Plan
(Amended and Restated as of May 30, 2001) (Incorporated here by reference
to exhibit (d)(6) filed with Schedule TO (Rule 13e.4) Tender Offer
Statement under Section 14(d)(1) or 13(e)(1) of the Securities Exchange
Act of 1934 (Amendment No.2), filed on June 14, 2001)                    

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