##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2007
 or
 o
    
    TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-30900
 XO HOLDINGS, INC.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    54-1983517
(I.R.S. Employer Identification No.)
 
 
 þ o
  o þ o
 o þ




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##### 



XO Holdings, Inc.
Index to Form 10-Q
 PagePART I  FINANCIAL INFORMATIONITEM 1. Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2007
(Unaudited)
and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the Three and
Six
Months Ended June 30, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2007 and 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31ITEM 4. Controls and Procedures
    
    
    31PART II  OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    32ITEM 1A. Risk Factors
    
    
    35ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    37ITEM 3. Defaults Upon Senior Securities
    
    
    38ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    38ITEM 5. Other Information
    
    
    38ITEM 6. Exhibits
    
    
    38SIGNATURES
    
    
    38EX-10.2Exhibit 31.1Exhibit 31.2Exhibit 32.1
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PART I  FINANCIAL INFORMATION
 
  XO Holdings, Inc.
 
 Condensed Consolidated Balance Sheets
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent AssetsCash and cash
equivalents
    
    $
    111,900
    
    
    $
    168,563Marketable
securities
    
    
    1,580
    
    
    
    2,420Accounts receivable, net
of allowance for doubtful
accounts of $12,624 at
June 30, 2007 and $16,754
at December 31, 2006
    
    
    119,888
    
    
    
    131,168Prepaid expenses and other
current
assets
    
    
    33,856
    
    
    
    30,859Total current
assets
    
    
    267,224
    
    
    
    333,010Property and equipment, net
    
    
    700,927
    
    
    
    678,233Broadband wireless licenses and other intangibles, net
    
    
    53,515
    
    
    
    63,507Other
assets
    
    
    45,707
    
    
    
    41,361Total
Assets
    
    $
    1,067,373
    
    
    $
    1,116,111LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS
EQUITYCurrent LiabilitiesAccounts
payable
    
    $
    98,643
    
    
    $
    98,860Accrued
liabilities
    
    
    203,683
    
    
    
    220,781Total current
liabilities
    
    
    302,326
    
    
    
    319,641Long-term debt and accrued interest payable to related
parties
    
    
    356,156
    
    
    
    336,650Other long-term liabilities
    
    
    64,005
    
    
    
    58,430Total Liabilities
    
    
    722,487
    
    
    
    714,721Class A convertible preferred stock
    
    
    237,571
    
    
    
    230,542Commitments and contingencies
    
    
    
    
    
    
    Stockholders EquityPreferred stock: par value
$0.01 per share,
200,000,000 shares
authorized; 4,000,000
shares of Class A
convertible preferred
stock issued and
outstanding on June 30,
2007 and December 31, 2006
    
    
    
    
    
    
    Warrants, common stock and
additional paid in
capital: par value $0.01
per share, 1,000,000,000
shares authorized;
182,075,035 shares issued
and outstanding on June
30, 2007 and 182,001,285
shares issued and
outstanding on December 31, 2006
    
    
    959,705
    
    
    
    965,394Accumulated other comprehensive income
    
    
    40
    
    
    
    880Accumulated deficit
    
    
    (852,430
    )
    
    
    (795,426
    )Total Stockholders
Equity
    
    
    107,315
    
    
    
    170,848Total Liabilities,
Convertible Preferred
stock and Stockholders
Equity
    
    $
    1,067,373
    
    
    $
    1,116,111
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XO
Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30, 2007
    
    
    June 30, 2006
    
    
    June 30, 2007
    
    
    June 30, 2006Revenue
    
    $
    352,893
    
    
    $
    354,282
    
    
    $
    701,406
    
    
    $
    703,973Cost and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    150,192
    
    
    
    153,089
    
    
    
    286,434
    
    
    
    307,470Selling, operating and general
    
    
    181,402
    
    
    
    181,354
    
    
    
    356,933
    
    
    
    360,217Depreciation and amortization
    
    
    52,523
    
    
    
    50,297
    
    
    
    103,160
    
    
    
    104,734Total costs and expenses
    
    
    384,117
    
    
    
    384,740
    
    
    
    746,527
    
    
    
    772,421Loss from operations
    
    
    (31,224
    )
    
    
    (30,458
    )
    
    
    (45,121
    )
    
    
    (68,448
    )Other income, net
    
    
    4,245
    
    
    
    2,122
    
    
    
    6,443
    
    
    
    4,096Interest expense, net
    
    
    (9,191
    )
    
    
    (7,745
    )
    
    
    (17,826
    )
    
    
    (15,388
    )Net loss before income taxes
    
    
    (36,170
    )
    
    
    (36,081
    )
    
    
    (56,504
    )
    
    
    (79,740
    )Income tax expense
    
    
    (200
    )
    
    
    
    
    
    
    (500
    )
    
    
    Net loss
    
    
    (36,370
    )
    
    
    (36,081
    )
    
    
    (57,004
    )
    
    
    (79,740
    )Preferred stock accretion
    
    
    (3,540
    )
    
    
    (3,374
    )
    
    
    (7,029
    )
    
    
    (6,661
    )Net loss allocable to common
shareholders
    
    $
    (39,910
    )
    
    $
    (39,455
    )
    
    $
    (64,033
    )
    
    $
    (86,401
    )Net loss allocable to common
shareholders per common share,
basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.22
    )
    
    $
    (0.35
    )
    
    $
    (0.47
    )Weighted average shares, basic
and diluted
    
    
    182,040,420
    
    
    
    181,947,095
    
    
    
    182,021,292
    
    
    
    181,940,104
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XO Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Six Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2007
    
    
    June 30, 2006OPERATING ACTIVITIES:Net loss
    
    $
    (57,004
    )
    
    $
    (79,740
    )Adjustments to reconcile net loss to net cash provided by
operating activitiesDepreciation and amortization
    
    
    103,160
    
    
    
    104,734Accrual of interest
    
    
    19,506
    
    
    
    16,546Stock-based compensation
    
    
    971
    
    
    
    1,428Changes in assets and liabilitiesAccounts receivable
    
    
    11,280
    
    
    
    6,427Other assets
    
    
    (7,343
    )
    
    
    (10,104
    )Accounts payable
    
    
    (4,443
    )
    
    
    (1,930
    )Accrued liabilities
    
    
    (10,409
    )
    
    
    (4,784
    )Net cash provided by operating activities
    
    
    55,718
    
    
    
    32,577INVESTING ACTIVITIES:Capital expenditures
    
    
    (109,429
    )
    
    
    (49,559
    )Proceeds from sales of marketable securities, investments and
other assets
    
    
    
    
    
    
    7,562Net cash used in investing activities
    
    
    (109,429
    )
    
    
    (41,997
    )FINANCING ACTIVITIES:Repayments of capital leases
    
    
    (3,320
    )
    
    
    (1,307
    )Proceeds from employee stock option exercises
    
    
    368
    
    
    
    341Net cash used in financing activities
    
    
    (2,952
    )
    
    
    (966
    )Net decrease in cash and cash equivalents
    
    
    (56,663
    )
    
    
    (10,386
    )Cash and cash equivalents, beginning of period
    
    
    168,563
    
    
    
    176,838Cash and cash equivalents, end of period
    
    $
    111,900
    
    
    $
    166,452SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    561
    
    
    $
    800Accrued interest converted to long-term debt
    
    $
    19,506
    
    
    $
    16,546
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##### Table of Contents



XO Holdings, Inc.
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION
   Basis of Presentation
  Significant Accounting Policies
  Principles of Consolidation
  5




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Use of Estimates
   Transaction Based Taxes and Other Surcharges
  New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 6




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2. COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (36,370
    )
    
    $
    (36,081
    )
    
    $
    (57,004
    )
    
    $
    (79,740
    )Other comprehensive (loss) income:Net unrealized (losses)
gains on investment
    
    
    (880
    )
    
    
    40
    
    
    
    (840
    )
    
    
    280Comprehensive loss
    
    $
    (37,250
    )
    
    $
    (36,041
    )
    
    $
    (57,844
    )
    
    $
    (79,460
    )
 3. MARKETABLE SECURITIES
  Gross
    
    GrossUnrealized
    
    UnrealizedHolding
    
    HoldingEquity Securities
    
    Fair Value
    
    Cost Basis
    
    Gains
    
    (Losses)as of June 30, 2007
    
    $
    1,580
    
    
    $
    1,540
    
    
    $
    40
    
    
    $as of December 31, 2006
    
    $
    2,420
    
    
    $
    1,540
    
    
    $
    880
    
    
    $
 4. LONG-LIVED ASSETS
  Property and Equipment
  June 30,
    
    
    December 31,2007
    
    
    2006Telecommunications networks and acquired bandwidth
    
    $
    956,136
    
    
    $
    856,093Furniture, fixtures, equipment and other
    
    
    317,255
    
    
    
    299,8511,273,391
    
    
    
    1,155,944Less: accumulated depreciation
    
    
    (655,781
    )
    
    
    (564,833
    )617,610
    
    
    
    591,111Construction-in-progress and undeployed assets
    
    
    83,317
    
    
    
    87,122Property and equipment, net
    
    $
    700,927
    
    
    $
    678,233
  7




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Broadband Wireless Licenses and Other Intangibles
 Goodwill and Other Intangible Assets
  June 30, 2007
    
    
    December 31, 2006Customer relationships
    
    $
    112,366
    
    
    $
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired trade names
    
    
    5,673
    
    
    
    5,673127,560
    
    
    
    127,560Less accumulated amortization
    
    
    (127,560
    )
    
    
    (117,568
    )
    
    
    
    9,992Broadband wireless licenses  indefinite life asset
    
    
    35,782
    
    
    
    35,782Goodwill  indefinite life asset
    
    
    1,071
    
    
    
    1,071XO Trade name  indefinite life asset
    
    
    16,662
    
    
    
    16,662$
    53,515
    
    
    $
    63,507
  5. LONG-TERM DEBT TO RELATED PARTIES
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6. RESTRUCTURING
   9




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Balance as of January 1, 2007
    
    $
    31,040Estimate revisions
    
    
    680Accretion
    
    
    1,838Usage, net
    
    
    (5,316
    )Balance as of June 30, 2007
    
    $
    28,242
 7. INCOME TAXES
 Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109
 Definition of Settlement in FASB
Interpretation No. 48
  Reconciliation of Unrecognized Tax Benefits
 Gross unrecognized tax benefits at January 1, 2007
    
    $
    504,912Gross amount of increases and decreases from tax positionsprior period
    
    
    Gross amount of increases and decreases from tax positionscurrent period
    
    
    Decreases resulting from settlements with taxing authorities
    
    
    Decreases resulting from expiration of statutes of limitation
    
    
    Gross unrecognized tax benefits at June 30, 2007
    
    $
    504,912
  Interest and Penalties
  10




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Accrued interest recognized as of January 1, 2007
    
    $
    1,054Interest recognized
    
    
    188Accrued interest recognized as of June 30, 2007
    
    $
    1,242
  Possible Changes in Unrecognized Tax Benefits
  Open Tax Years
  8. EARNINGS PER SHARE
   9. RELATED PARTY TRANSACTIONS
  Outstanding
    
    
    Series A, B and C
    
    
    
    
    
    
    PreferredCommon Stock
    
    
    Warrants
    
    
    Credit Facility
    
    
    StockAt December 31, 2006
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %At June 30, 2007 (1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %
 
 (1)
    
    As reported in the July 2, 2007 Form 4 for the Chairman, and the July 2, 2007 Amendment No.
9 to Schedule 13D filed by Cardiff Holding, LLC (Cardiff) and other parties to such joint
filings. 11




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10. SEGMENT INFORMATION
  XO Communications
   Nextlink
  12




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Three Months Ended June 30, 2007
    
    
    Three Months Ended June 30, 2006Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    352,830
    
    
    $
    303
    
    
    $
    (240
    )
    
    $
    352,893
    
    
    $
    354,166
    
    
    $
    116
    
    
    $
    
    
    
    $
    354,282Depreciation and
amortization
    
    $
    52,428
    
    
    $
    95
    
    
    $
    
    
    
    $
    52,523
    
    
    $
    48,635
    
    
    $
    1,662
    
    
    
    
    
    
    $
    50,297Loss from operations
    
    $
    (28,729
    )
    
    $
    (2,495
    )
    
    $
    
    
    
    $
    (31,224
    )
    
    $
    (26,692
    )
    
    $
    (3,766
    )
    
    
    
    
    
    $
    (30,458
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,122Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,191
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,745
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (36,370
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (36,081
    )Capital expenditures
    
    $
    65,802
    
    
    $
    2,509
    
    
    $
    
    
    
    $
    68,311
    
    
    $
    26,529
    
    
    $
    263
    
    
    $
    
    
    
    $
    26,792
 Six Months Ended June 30, 2007
    
    
    Six Months Ended June 30, 2006Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    701,364
    
    
    $
    526
    
    
    $
    (484
    )
    
    $
    701,406
    
    
    $
    703,746
    
    
    $
    227
    
    
    $
    
    
    
    $
    703,973Depreciation and
amortization
    
    
    102,984
    
    
    
    176
    
    
    
    
    
    
    $
    103,160
    
    
    $
    101,432
    
    
    $
    3,302
    
    
    
    
    
    
    $
    104,734Loss from operations
    
    
    (40,064
    )
    
    
    (5,057
    )
    
    
    
    
    
    $
    (45,121
    )
    
    $
    (57,978
    )
    
    $
    (10,470
    )
    
    
    
    
    
    $
    (68,448
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,096Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,826
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,388
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (500
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (57,004
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (79,740
    )Capital expenditures
    
    $
    106,599
    
    
    $
    2,830
    
    
    $
    
    
    
    $
    109,429
    
    
    $
    47,401
    
    
    $
    2,158
    
    
    $
    
    
    
    $
    49,559
  XOC
    
    Nextlink
    
    ConsolidatedJune 30, 2007
    
    $
    1,022,520
    
    
    $
    44,853
    
    
    $
    1,067,373December 31, 2006
    
    $
    1,073,590
    
    
    $
    42,521
    
    
    $
    1,116,111
 11. COMMITMENTS AND CONTINGENCIES
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Allegiance Telecom Liquidating Trust Litigation
    (a)
    
    with respect to the ATLTs reimbursement claim of approximately $20 million, XOH must
pay to the ATLT damages in the minimum amount of approximately $8.0 million, subject to an
upward adjustment of up to an additional amount of approximately $2.0 million pending
resolution of the dispute regarding the true-up of certain disputed liabilities (the
Disputed Liabilities True-Up) by the Referee, together with interest accruing at the New
York statutory rate of 9% per annum (the New York Rate);(b)
    
    the Company must pay to the ATLT the amount of approximately $0.5 million, together
with interest accruing at the New York Rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition (the Closing), provided there is a corresponding
reduction in accounts receivable included in the Acquired Assets (as defined in the
Order);(c)
    
    the Company shall immediately pay or deliver to the ATLT certain checks in the
approximate aggregate amount of $0.6 million issued by the U.S. Internal Revenue Service on
account of tax refunds owed to Allegiance, together with interest accruing at the New York
Rate;(d)
    
    with respect to the Disputed Liabilities True-Up dispute, the ATLT shall pay to XOH the
amount of approximately $2.8 million, together with interest accruing at the New York Rate,
which amount may be increased by the Referee;(e)
    
    XOH is fully subrogated to the obligations of approximately $1.7 million of Allegiance
liabilities that the Company caused to be honored after the Closing; and(f)
    
    to the extent not satisfied, the ATLT shall pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York Rate.
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Litigation Relating to the Wireline Sale
    15




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Houlihan Lokey Howard and Zukin Capital LLC
 nd
 Level 3
  Verizon Indemnification Notice
  16




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
    
    Overview of the Business;
    
    Critical Accounting Policies and Estimates;
    
    Results of Operations;
    
    Comparison of Segment Financial Results;
    
    Liquidity and Capital Resources;
    
    New Accounting Pronouncements; and
    
    Regulatory Overview.
 Forward-looking and Cautionary Statements
  
    
    Our services, including the development and deployment of data products and services
based on Internet Protocol (IP), Ethernet, broadband wireless and other technologies and
strategies to expand our targeted customer base and broaden our sales channels;
    
    The operation of our network and back-office systems;
    
    Liquidity and financial resources, including anticipated capital expenditures, funding
of capital expenditures and anticipated levels of indebtedness;
    
    Trends related to and expectations regarding the results of operations in future
periods; and
    
    The impact of judicial decisions, legislation, and regulatory developments on our cost
structure, services, and marketing initiatives.
  
    
    The covenants in the Credit Facility restrict our financial and operational flexibility,
which could have an adverse effect on our results of operations;
    
    We have incurred net losses in the past and may not generate funds from operations
sufficient to meet all of our cash requirements or execute our business strategy;
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
    
    Our ability to raise additional capital through one or more offerings of debt and/or
equity securities;
    
    We may not prevail in our claims against the ATLT and we may not be successful in
defending against the ATLTs counterclaims;
    
    Our rights to use the unlit capacity in our network may be affected by the financial
health of, or disputes with, our fiber providers;
    
    We may not be able to continue to connect our network to ILEC networks or to maintain
Internet peering arrangements on favorable terms, which would impair our growth and
performance;
    
    Technological advances and regulatory changes are eroding traditional barriers between
formerly distinct telecommunications markets, which could increase the competition we face
and put downward pressure on prices;
    
    An entity owned and controlled by our Chairman is our majority stockholder and may have
the ability to control matters requiring shareholder approval;
    
    Future sales or issuances of our common stock could adversely affect our stock price
and/or our ability to raise capital; and
    
    The highly competitive nature of the telecommunications industry, which has experienced
the consolidation of many existing competitors and the introduction of new competitors,
could affect our ability to achieve and maintain market penetration and revenue levels
sufficient to provide financial viability to our business.
  Overview of the Business
   
    
    Revenue decreased slightly to $701.4 million, although both the dollar amount and the
percentage of revenue generated by our Data Services and VoIP services continues to
increase;
    
    Cost of service as a percentage of sales decreased 2.9 percentage points;
    
    Gross margin (our non-GAAP financial measure, see reconciliation below) increased more
than $18 million;
    
    Net loss decreased $22.7 million;
 18




---



##### Table of Contents




    
    Nextlink expanded the number of operating markets where it provides broadband wireless services to 37 metropolitan markets across
the United States; and
    
    Our balance of cash and cash equivalents decreased approximately $57 million from
December 31, 2006 to June 30, 2007.
 Critical Accounting Policies and Estimates
   Results of Operations
  19




---



##### Table of Contents



%
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedThree Months Ended June 30,
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    352,893
    
    
    
    100.0
    %
    
    $
    354,282
    
    
    
    100.0
    %
    
    $
    (1,389
    )
    
    
    (0.4
    )%Cost and expensesCost of service *
    
    
    150,192
    
    
    
    42.6
    
    
    
    153,089
    
    
    
    43.2
    
    
    $
    (2,897
    )
    
    
    (1.9
    )%Selling, operating, and general
    
    
    181,402
    
    
    
    51.4
    
    
    
    181,354
    
    
    
    51.2
    
    
    $
    48
    
    
    NMDepreciation and amortization
    
    
    52,523
    
    
    
    14.9
    
    
    
    50,297
    
    
    
    14.2
    
    
    $
    2,226
    
    
    
    4.4
    %Total cost and expenses
    
    
    384,117
    
    
    
    108.8
    
    
    
    384,740
    
    
    
    108.6
    
    
    $
    (623
    )
    
    
    (0.2
    )%Loss from operations
    
    
    (31,224
    )
    
    
    (8.8
    )
    
    
    (30,458
    )
    
    
    (8.6
    )
    
    $
    766
    
    
    
    2.5
    %Other income, net
    
    
    4,245
    
    
    
    1.2
    
    
    
    2,122
    
    
    
    0.6
    
    
    $
    2,123
    
    
    
    100.0
    %Interest expense, net
    
    
    (9,191
    )
    
    
    (2.6
    )
    
    
    (7,745
    )
    
    
    (2.2
    )
    
    $
    1,446
    
    
    
    18.7
    %Net loss before income taxes
    
    
    (36,170
    )
    
    
    (10.2
    )
    
    
    (36,081
    )
    
    
    (10.2
    )
    
    $
    89
    
    
    
    0.2
    %Income tax expense
    
    
    (200
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.0
    )
    
    $
    200
    
    
    NMNet loss
    
    
    (36,370
    )
    
    
    (10.3
    )
    
    
    (36,081
    )
    
    
    (10.2
    )
    
    $
    289
    
    
    
    0.8
    %Preferred stock accretion
    
    
    (3,540
    )
    
    
    (1.0
    )
    
    
    (3,374
    )
    
    
    (1.0
    )
    
    $
    166
    
    
    
    4.9
    %Net loss applicable to common shares
    
    $
    (39,910
    )
    
    
    (11.3
    )%
    
    $
    (39,455
    )
    
    
    (11.2
    )%
    
    $
    455
    
    
    
    1.2
    %Gross Margin (1)
    
    $
    202,701
    
    
    
    57.4
    %
    
    $
    201,193
    
    
    
    56.8
    %
    
    $
    1,508
    
    
    
    0.7
    %
 %
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedSix Months Ended June 30,
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    701,406
    
    
    
    100.0
    %
    
    $
    703,973
    
    
    
    100.0
    %
    
    $
    (2,567
    )
    
    
    (0.4
    )%Cost and expensesCost of service *
    
    
    286,434
    
    
    
    40.8
    
    
    
    307,470
    
    
    
    43.7
    
    
    $
    (21,036
    )
    
    
    (6.8
    )%Selling, operating, and general
    
    
    356,933
    
    
    
    50.9
    
    
    
    360,217
    
    
    
    51.2
    
    
    $
    (3,284
    )
    
    
    (0.9
    )%Depreciation and amortization
    
    
    103,160
    
    
    
    14.7
    
    
    
    104,734
    
    
    
    14.9
    
    
    $
    (1,574
    )
    
    
    (1.5
    )%Total cost and expenses
    
    
    746,527
    
    
    
    106.4
    
    
    
    772,421
    
    
    
    109.7
    
    
    $
    (25,894
    )
    
    
    (3.4
    )%Loss from operations
    
    
    (45,121
    )
    
    
    (6.4
    )
    
    
    (68,448
    )
    
    
    (9.7
    )
    
    $
    (23,327
    )
    
    
    (34.1
    )%Other income, net
    
    
    6,443
    
    
    
    0.9
    
    
    
    4,096
    
    
    
    0.6
    
    
    $
    2,347
    
    
    
    57.3
    %Interest expense, net
    
    
    (17,826
    )
    
    
    (2.5
    )
    
    
    (15,388
    )
    
    
    (2.2
    )
    
    $
    2,438
    
    
    
    15.8
    %Net loss before income taxes
    
    
    (56,504
    )
    
    
    (8.1
    )
    
    
    (79,740
    )
    
    
    (11.3
    )
    
    $
    (23,236
    )
    
    
    (29.1
    )%Income tax expense
    
    
    (500
    )
    
    
    (0.0
    )
    
    
    
    
    
    
    (0.0
    )
    
    $
    500
    
    
    NMNet loss
    
    
    (57,004
    )
    
    
    (8.1
    )
    
    
    (79,740
    )
    
    
    (11.3
    )
    
    $
    (22,736
    )
    
    
    (28.5
    )%Preferred stock accretion
    
    
    (7,029
    )
    
    
    (1.0
    )
    
    
    (6,661
    )
    
    
    (1.0
    )
    
    $
    368
    
    
    
    5.5
    %Net loss applicable to common shares
    
    $
    (64,033
    )
    
    
    (9.1
    )%
    
    $
    (86,401
    )
    
    
    (12.3
    )%
    
    $
    (22,368
    )
    
    
    (25.9
    )%Gross Margin (1)
    
    $
    414,972
    
    
    
    59.2
    %
    
    $
    396,503
    
    
    
    56.3
    %
    
    $
    18,469
    
    
    
    4.7
    %
 
 *
    
    Exclusive of depreciation and amortization expense.NM
    
     not meaningful  20




---



##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss before income taxes
    
    $
    (36,170
    )
    
    $
    (36,081
    )
    
    $
    (56,504
    )
    
    $
    (79,740
    )Selling, operating and general
    
    
    181,402
    
    
    
    181,354
    
    
    
    356,933
    
    
    
    360,217Other income, net
    
    
    (4,245
    )
    
    
    (2,122
    )
    
    
    (6,443
    )
    
    
    (4,096
    )Interest expense, net
    
    
    9,191
    
    
    
    7,745
    
    
    
    17,826
    
    
    
    15,388Depreciation and amortization
    
    
    52,523
    
    
    
    50,297
    
    
    
    103,160
    
    
    
    104,734Gross margin
    
    $
    202,701
    
    
    $
    201,193
    
    
    $
    414,972
    
    
    $
    396,503
 Revenue
  Three Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTraditional Voice Services & Other
    
    $
    171,492
    
    
    
    48.6
    %
    
    $
    177,651
    
    
    
    50.1
    %
    
    $
    (6,159
    )
    
    
    (3.5
    )%Data Services
    
    
    108,309
    
    
    
    30.7
    
    
    
    102,195
    
    
    
    28.8
    
    
    $
    6,114
    
    
    
    6.0
    %Integrated Voice and Data Services
    
    
    47,597
    
    
    
    13.5
    
    
    
    59,524
    
    
    
    16.8
    
    
    $
    (11,927
    )
    
    
    (20.0
    )%XOptions Flex IP
    
    
    17,985
    
    
    
    5.1
    
    
    
    7,748
    
    
    
    2.2
    
    
    $
    10,237
    
    
    
    132.1
    %Carrier VoIP
    
    
    7,510
    
    
    
    2.1
    
    
    
    7,164
    
    
    
    2.0
    
    
    $
    346
    
    
    
    4.8
    %Total Revenue
    
    $
    352,893
    
    
    
    100.0
    %
    
    $
    354,282
    
    
    
    100.0
    %
    
    $
    (1,389
    )
    
    
    (0.4
    )%
 Six Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTraditional Voice Services & Other
    
    $
    340,440
    
    
    
    48.5
    %
    
    $
    356,458
    
    
    
    50.6
    %
    
    $
    (16,018
    )
    
    
    (4.5
    )%Data Services
    
    
    213,533
    
    
    
    30.4
    
    
    
    202,118
    
    
    
    28.7
    
    
    $
    11,415
    
    
    
    5.7
    %Integrated Voice and Data Services
    
    
    98,960
    
    
    
    14.1
    
    
    
    120,920
    
    
    
    17.2
    
    
    $
    (21,960
    )
    
    
    (18.2
    )%XOptions Flex IP
    
    
    33,387
    
    
    
    4.8
    
    
    
    13,167
    
    
    
    1.9
    
    
    $
    20,220
    
    
    
    153.6
    %Carrier VoIP
    
    
    15,086
    
    
    
    2.2
    
    
    
    11,310
    
    
    
    1.6
    
    
    $
    3,776
    
    
    
    33.4
    %Total Revenue
    
    $
    701,406
    
    
    
    100.0
    %
    
    $
    703,973
    
    
    
    100.0
    %
    
    $
    (2,567
    )
    
    
    (0.4
    )%
 Traditional Voice Services & Other.
 21




---



##### Table of Contents



Data Services.
 Integrated Voice and Data Services.
 XOptions Flex IP.
 Carrier VoIP.
 Cost of service (excluding depreciation and amortization)
  22




---



##### Table of Contents



Gross margin.
 Depreciation and amortization.
 Other
income, net
 Interest expense, net.
 Comparison of Segment Financial Results
  23




---



##### Table of Contents



XO Communications
     24




---



##### Table of Contents



XOC
    
    Three Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    352,830
    
    
    
    100.0
    %
    
    $
    354,166
    
    
    
    100.0
    %
    
    $
    (1,336
    )
    
    
    (0.4
    )%Costs and expensesCost of service*
    
    
    150,344
    
    
    
    42.6
    
    
    
    153,089
    
    
    
    43.2
    
    
    $
    (2,745
    )
    
    
    (1.8
    )%Selling, operating and general
    
    
    178,787
    
    
    
    50.7
    
    
    
    179,134
    
    
    
    50.6
    
    
    $
    (347
    )
    
    
    (0.2
    )%Depreciation and amortization
    
    
    52,428
    
    
    
    14.9
    
    
    
    48,635
    
    
    
    13.7
    
    
    $
    3,793
    
    
    
    7.8
    %Total costs and expenses
    
    
    381,559
    
    
    
    108.2
    
    
    
    380,858
    
    
    
    107.5
    
    
    $
    (701
    )
    
    
    (0.2
    )%Loss from operations
    
    $
    (28,729
    )
    
    
    (8.2
    )%
    
    $
    (26,692
    )
    
    
    (7.5
    )%
    
    $
    2,037
    
    
    
    7.6
    %Capital expenditures
    
    $
    65,802
    
    
    
    18.7
    %
    
    $
    26,529
    
    
    
    7.5
    %
    
    $
    39,273
    
    
    
    148.0
    %
 
 *
    
    exclusive of depreciation and amortization XOC
    
    Six Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    701,364
    
    
    
    100.0
    %
    
    $
    703,746
    
    
    
    100.0
    %
    
    $
    (2,382
    )
    
    
    (0.3
    )%Costs and expensesCost of service*
    
    
    286,742
    
    
    
    40.9
    
    
    
    307,470
    
    
    
    43.7
    
    
    $
    (20,728
    )
    
    
    (6.7
    )%Selling, operating and general
    
    
    351,702
    
    
    
    50.2
    
    
    
    352,822
    
    
    
    50.1
    
    
    $
    (1,120
    )
    
    
    (0.3
    )%Depreciation and amortization
    
    
    102,984
    
    
    
    14.7
    
    
    
    101,432
    
    
    
    14.4
    
    
    $
    1,552
    
    
    
    1.5
    %Total costs and expenses
    
    
    741,428
    
    
    
    105.8
    
    
    
    761,724
    
    
    
    108.2
    
    
    $
    (20,296
    )
    
    
    (2.7
    )%Loss from operations
    
    $
    (40,064
    )
    
    
    (5.8
    )%
    
    $
    (57,978
    )
    
    
    (8.2
    )%
    
    $
    (17,914
    )
    
    
    (30.9
    )%Capital expenditures
    
    $
    106,599
    
    
    
    15.2
    %
    
    $
    47,401
    
    
    
    6.7
    %
    
    $
    59,198
    
    
    
    124.9
    %
 
 *
    
    exclusive of depreciation and amortization  Nextlink
  25




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##### Table of Contents



Nextlink
    
    Three Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    303
    
    
    
    100.0
    %
    
    $
    116
    
    
    
    100.0
    %
    
    $
    187
    
    
    
    161.2
    %Costs and expensesCost of service*
    
    
    88
    
    
    
    29.0
    
    
    
    
    
    
    NM
    
    $
    88
    
    
    NMSelling, operating and general
    
    
    2,615
    
    
    
    863.0
    
    
    
    2,220
    
    
    
    1,913.8
    
    
    $
    395
    
    
    
    17.8
    %Depreciation and amortization
    
    
    95
    
    
    
    31.4
    
    
    
    1,662
    
    
    
    1,432.8
    
    
    $
    (1,567
    )
    
    
    (94.3
    )%Total costs and expenses
    
    
    2,798
    
    
    
    923.4
    
    
    
    3,882
    
    
    
    3,346.6
    
    
    $
    (1,084
    )
    
    
    (27.9
    )%Loss from operations
    
    $
    (2,495
    )
    
    
    (823.4
    )%
    
    $
    (3,766
    )
    
    
    3,246.6
    %
    
    $
    (1,271
    )
    
    
    (33.7
    )%Capital expenditures
    
    $
    2,509
    
    
    
    828.1
    %
    
    $
    263
    
    
    
    226.7
    %
    
    $
    2,246
    
    
    
    854.0
    %
 
 * exclusive of depreciation and amortizationNM - not meaningful 26




---



##### Table of Contents



Nextlink
    
    Six Months Ended June 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    526
    
    
    
    100.0
    %
    
    $
    227
    
    
    
    100.0
    %
    
    $
    299
    
    
    
    131.7
    %Costs and expensesCost of service*
    
    
    176
    
    
    
    33.5
    
    
    
    
    
    
    NM
    
    $
    176
    
    
    NMSelling, operating and general
    
    
    5,231
    
    
    
    994.5
    
    
    
    7,395
    
    
    
    3,257.7
    
    
    $
    (2,164
    )
    
    
    (29.3
    )%Depreciation and amortization
    
    
    176
    
    
    
    33.5
    
    
    
    3,302
    
    
    
    1,454.6
    
    
    $
    (3,126
    )
    
    
    (94.7
    )%Total costs and expenses
    
    
    5,583
    
    
    
    1,061.5
    
    
    
    10,697
    
    
    
    4,712.3
    
    
    $
    (5,114
    )
    
    
    (47.8
    )%Loss from operations
    
    $
    (5,057
    )
    
    
    (961.5
    )%
    
    $
    (10,470
    )
    
    
    (4,612.3
    )%
    
    $
    (5,413
    )
    
    
    (51.7
    )%Capital expenditures
    
    $
    2,830
    
    
    
    538.0
    %
    
    $
    2,158
    
    
    
    950.7
    %
    
    $
    672
    
    
    
    31.1
    %
 
 *
    
    exclusive of depreciation and amortizationNM
    
     not meaningful Revenue
 Cost of service (exclusive of depreciation and amortization)
 Selling, operating and general.
 Depreciation and amortization
 Capital expenditures
 27




---



##### Table of Contents



Liquidity and Capital Resources
  Cash Flow
     28




---



##### Table of Contents



Credit Facility and Borrowing Capacity
      29




---



##### Table of Contents



Capital Requirements
  New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Regulatory Overview
  Additional Federal Regulations
  30




---



##### Table of Contents



Additional State and Local Regulation
  
   
  Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  31




---



##### Table of Contents



PART II  OTHER INFORMATION
 
   Allegiance Telecom Liquidating Trust Litigation
    (a)
    
    with respect to a the ATLTs reimbursement claim of approximately $20 million, XOH must
pay to the ATLT damages in the minimum amount of approximately $8.0 million, subject to an
upward adjustment of up to an additional amount of approximately $2.0 million pending
resolution of the dispute regarding the true-up of certain disputed liabilities (the
Disputed Liabilities True-Up) by the Referee, together with interest accruing at the New
York statutory rate of 9% per annum (the New York Rate);(b)
    
    XOH must pay to the ATLT the amount of approximately $0.5 million, together with
interest accruing at the New York Rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition (the
Closing), provided there is a corresponding
reduction in accounts receivable included in the Acquired Assets (as defined in the Order);
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(c)
    
    XOH shall immediately pay or deliver to the ATLT certain checks in the approximate
aggregate amount of $0.6 million issued by the U.S. Internal Revenue Service on account of
tax refunds owed to Allegiance, together with interest accruing at the New York Rate.(d)
    
    with respect to the Disputed Liabilities True-Up dispute, the ATLT shall pay to XOH the
amount of approximately $2.8 million, together with interest accruing at the New York Rate,
which amount may be increased by the Referee;(e)
    
    XOH is fully subrogated to the holders of approximately $1.7 million of Allegiance
liabilities that the Company caused to be honored after the Closing; and(f)
    
    to the extent not satisfied, the ATLT shall pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York Rate.
   Litigation Relating to the Wireline Sale
  33




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Houlihan Lokey Howard and Zukin Capital LLC
 nd
 Level 3
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Verizon Indemnification Notice
  
   Risks Related to Liquidity, Financial Resources, and Capitalization
 We have incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of our operating or capital cash requirements.
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The covenants in the Credit Facility restrict our financial and operational flexibility, which
could have an adverse effect on our results of operations.
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
    
    It may impair our ability to obtain additional financing in the future;
    
    It may limit our flexibility in planning for or reacting to changes in market
conditions; and
    
    It may cause us to be more vulnerable in the event of a downturn in business.
 We may not prevail in our claims against the ATLT, and we may not be successful in defending
against the ATLTs counterclaims.
  Our rights to the use of the unlit capacity that makes up our network may be affected by the
financial health of our fiber providers or by disputes with our fiber providers.
  
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Votes For
    
    Votes WithheldCarl C. Icahn
    
    
    162,218,437
    
    
    
    26,858,400Carl J. Grivner
    
    
    163,137,000
    
    
    
    25,939,837Peter Shea
    
    
    163,142,493
    
    
    
    25,934,344Adam Dell
    
    
    165,427,332
    
    
    
    23,649,505Vincent J. Intrieri
    
    
    165,426,836
    
    
    
    23,650,001Keith Meister
    
    
    163,140,893
    
    
    
    25,935,944Robert Knauss
    
    
    164,651,083
    
    
    
    24,425,754Fredrik Gradin
    
    
    163,140,405
    
    
    
    25,936,432
 
  Code of Ethics   
   
 SIGNATURES
  XO HOLDINGS, INC.August 9, 2007
    /s/ Gregory W. FreibergGregory W. FreibergSenior Vice President and Chief Financial Officer 38




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EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger, dated as of February 28, 2006 by and among XO
Communications, Inc., XO Holdings, Inc. and XO Communications, LLC (Incorporated by
reference to Form 8-K filed on March 6, 2006)2.2
    
    Amendment No. 1 to Equity Purchase Agreement, dated as of March 1, 2006, by and among XO
Holdings, Inc., XO Communications, LLC (as successor by merger to XO Communications, Inc.)
and Elk Associates LLC (Incorporated by reference to Form 8-K filed on March 6, 2006)2.3
    
    Letter Agreement, dated March 30, 2006, between XO Holdings, Inc. and Elk Associates LLC
(Incorporated by reference to exhibit 2.1 to Form 8-K filed on September 30, 2006)3.1
    
    Certificate of Incorporation of XO Holdings, Inc., as filed with the Secretary of State
of the State of Delaware on October 25, 2005 (Incorporated by reference to Form 8-K filed on
March 6, 2006)3.2
    
    Certificate of Designation of the Powers, Preferences and Relative, Participating,
Optional and other Special Rights of the 6% Class A Convertible Preferred Sock and
Qualifications, Limitations and Restrictions thereof, as filed with the Secretary of State
of the State of Delaware on February 28, 2005 (Incorporated by reference to Form 8-K filed
on March 6, 2006)3.3
    
    Bylaws of XO Holdings, Inc. (Incorporated by reference Form 8-K filed on March 6, 2006)10.1
    
    Waiver with Respect to Amended and Restated Credit Guaranty Agreement dated as of May 7,
2007, between XO Communications, LLC, its subsidiaries and Arnos Corp., as Requisite Lenders
(Incorporated by reference to exhibit 10.7 to Form 10-Q for the period ended March 31, 2007)10.2
    
    Waiver with Respect to Amended and
Restated Credit Guaranty Agreement dated as of August 8,
2007, between XO Communications, LLC, its subsidiaries and Arnos Corp., as Requisite Lenders
(filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended (filed herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of
the Securities Exchange Act, as amended (filed herewith)32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 39