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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, 2002

Commission file number: 0-30900

XO Communications, Inc.



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| |                                 |  |                     | 
| | ------------------------------- |  | ------------------- | 
| | Delaware                        |  | 54-1983517          | 
|
| | (State or other jurisdiction of |  | (I.R.S. Employer    | 
| | incorporation or organization)  |  | 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. Yes X No ___.

As of November 1, 2002, the number of shares of Class A and Class B common
stock of XO Communications, Inc. issued and outstanding was 337,886,801 and
104,423,158, respectively.





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XO Communications, Inc. and Subsidiaries
Index to Form 10-Q

|                                |    |                                                                                                 |                                                                                                                 |   |      |  | 
|------------------------------- | -- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | - | ---- |  | 
|                                |    |                                                                                                 |                                                                                                                 |   | Page
|                                |    |                                                                                                 |                                                                                                                 |   |     
|Part I.   Financial Information |   
|                                |    | Item 1.    XO Communications, Inc. and Subsidiaries Condensed Consolidated Financial Statements |                                                                                                                 |  
|                                |    |                                                                                                 | Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001                            | 1
|                                |    |                                                                                                 | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2002 and 2001 | 2
|                                |    |                                                                                                 | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001           | 3
|                                |    |                                                                                                 | Notes to Condensed Consolidated Financial Statements                                                            | 5
|                                |    | Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations | 17                                                                                                             
|                                |    | Item 3.   Quantitative and Qualitative Disclosures about Market Risk                            | 29                                                                                                             
|                                |    | Item 4.   Controls
and Procedures                                                               | 29                                                                                                             
|Part II.   Other Information    |   
|                                |    | Item 1.   Legal Proceedings                                                                     | 30                                                                                                             
|                                |    | Item 2.   Changes in Securities and Use of Proceeds                                             | 30                                                                                                             
|                                |    | Item 3.   Defaults Upon Securities                                                              | 30                                                                                                             
|                                |    | Item 4.   Submission of Matters to a Vote of Security Holders                                   | 31                                                                                                             
|                                |    | Item 5.   Other Information                                                                     | 31                                                                                                             
|                                |    | Item 6.   Exhibits and Reports on Form 8-K                                                      | 31                                                                                                             
|Signatures                      | 32
|Certifications                  | 33

i



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##### 



PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements

XO Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)

|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |            |           | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ---------------------------------------------------- | --------- | ------------- | ---------- | ------------ | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           | September 30, |            | December 31,
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           | 2002          |            | 2001        
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |             
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           | (Unaudited)   |            |              |           |           
|ASSETS                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                  |                                                      |           |               |            |              |           |           
|Current assets:                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                | Cash and cash equivalents                                                                        |                                                      | $         | 311,430       |            |              | $         | 246,189    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Marketable securities                                                                            |                                                      |           | 243,102       |            |              |           | 508,978    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Accounts receivable, net of allowance for doubtful
accounts of $45,020 and $32,492, respectively |                                                      |           | 137,266       |            |              |           | 216,753    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Other current assets                                                                             |                                                      |           | 90,589        |            |              |           | 85,137     |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Pledged securities                                                                               |                                                      |           | 4,760         |            |              |           | 16,623     |          
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total current assets                                 |           |               | 787,147    |              |           |            | 1,073,680 | 
|Property and equipment, net                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                  |                                                      | 2,903,643 |               |            |              | 3,742,577 |           
|Fixed wireless licenses, net                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                  |                                                      | 920,507   |               |            |              | 947,545   |           
|Goodwill, net                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                  |                                                      |          |               |            |              | 1,876,626 |           
|Other intangibles, net                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                  |                                                      | 86,425    |               |            |              | 153,404   |           
|Other assets, net                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                  |                                                      | 68,066    |               |            |              | 136,633   |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total assets                                         |           | $             | 4,765,788  |              |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                      |           |               |            |              |           |           
|Current liabilities not subject to compromise:                                                                                                                                                                                                                                                                                                                                                  |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                | Accounts payable                                                                                 |                                                      | $         | 68,221        |            |              | $         | 156,488    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Accrued liabilities                                                                              |                                                      |           | 236,458       |            |              |           | 341,094    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Accrued interest payable                                                                         |                                                      |           | 211           |            |              |           | 114,882    |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Long-term debt in default                                                                        |                                                      |           |              |            |              |           | 5,109,503  |          
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Current liabilities not subject to compromise        |           |               | 304,890    |              |           |            | 5,721,967 | 
|Current liabilities subject to compromise                                                                                                                                                                                                                                                                                                                                                       |                                                                                                  |                                                      | 5,506,634 |               |            |              |          |           
|Post petition liabilities                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                  |                                                      | 21,926    |               |            |              |          |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total current liabilities                            |           |               | 5,833,450  |              |           |            | 5,721,967 | 
|Long-term liabilities not subject to compromise                                                                                                                                                                                                                                                                                                                                                 |                                                                                                  |                                                      | 80,384    |               |            |              | 129,092   |           
|Long-term liabilities subject to compromise                                                                                                                                                                                                                                                                                                                                                     |                                                                                                  |                                                      | 7,924     |               |            |              |          |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total liabilities                                    |           |               | 5,921,758  |              |           |            | 5,851,059 | 
|Redeemable preferred stock, par value $0.01 per share,
25,000,000 shares authorized: 7,856,918 and 7,857,612
shares issued and outstanding on September 30, 2002 and
December 31, 2001, respectively; aggregate liquidation
preference of $1,693,293 and $1,693,328 on September 30,
2002 and December 31, 2001, respectively:                                                                  |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Subject to compromise                                |           |               | 1,708,316  |              |           |            |          | 
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Not subject to compromise                            |           |               |           |              |           |            | 1,781,990 | 
|Commitments and contingencies                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                  |                                                      |           |               |            |              |           |           
|Stockholders (deficit) equity:
Common stock, par value $0.02 per share, stated at
amounts paid in Class A, 1,000,000,000 shares
authorized: 337,863,231 and 337,774,204 shares issued
and outstanding on September 30, 2002 and December 31,
2001, respectively; Class B, 120,000,000 shares
authorized: 104,423,158 shares issued and outstanding
on September 30, 2002 and December 31, 2001 |                                                                                                  |                                                      | 4,628,139 |               |            |              | 4,628,509 |           
|                                                                                                                                                                                                                                                                                                                                                                                                | Deferred compensation                                                                            |                                                      |           | (10,666       | )          |              |           | (37,428    | )        
|                                                                                                                                                                                                                                                                                                                                                                                                | Accumulated other comprehensive income                                                           |                                                      |           | 2,851         |            |              |           | 10,406     |          
|                                                                                                                                                                                                                                                                                                                                                                                                | Accumulated deficit                                                                              |                                                      |           | (7,484,610    | )          |              |           | (4,304,071 | )        
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total stockholders (deficit) equity                 |           |               | (2,864,286 | )            |           |            | 297,416   | 
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  | Total liabilities and stockholders (deficit) equity |           | $             | 4,765,788  |              |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                                                                                                                                                |                                                                                                  |                                                      |           |               |            |              |           |           

See accompanying notes to the unaudited condensed consolidated financial
statements.

1



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##### 



XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)

|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ----------- | ------------------ | ------- | ----------------- | ----------- | ------- | ------- | ---- | ----------- | ------- | --------- | - | ----------- | ------- | --------- | 
|                                                                                                                                                                                            |                                                                     |                          |             | Three Months Ended |         | Nine Months Ended
|                                                                                                                                                                                            |                                                                     |                          |             | September 30,      |         | September 30,    
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                  
|                                                                                                                                                                                            |                                                                     |                          |             | 2002               |         | 2001              |             | 2002    |         | 2001
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |     
|Revenue                                                                                                                                                                                     |                                                                     | $                        | 301,526     |                    |         | $                 | 331,478     |         |         | $    | 960,411     |         |           | $ | 915,564     |        
|                                                                                                                                                                                           
|Costs and expenses:                                                                                                                                                                         |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                            | Cost of service                                                     |                          |             | 126,215            |         |                   |             | 138,100 |         |      |             | 400,928 |           |   |             | 375,936 |          
|                                                                                                                                                                                            | Selling, operating, and general (excludes
stock-based compensation) |                          |             | 175,030            |         |                   |             | 246,864 |         |      |             | 568,533 |           |   |             | 740,959 |          
|                                                                                                                                                                                            | Reorganization                                                      |                          |             | 25,407             |         |                   |             |        |         |      |             | 95,553  |           |   |             |        |          
|                                                                                                                                                                                            | Restructuring and asset write-downs                                 |                          |             | 477,250            |         |                   |             | 189,137 |         |      |             | 480,168 |           |   |             | 189,137 |          
|                                                                                                                                                                                            | Stock-based compensation                                            |                          |             | 8,776              |         |                   |             | 9,230   |         |      |             | 26,762  |           |   |             | 27,857  |          
|                                                                                                                                                                                            | Depreciation and amortization                                       |                          |             | 187,256            |         |                   |             | 295,432 |         |      |             | 516,455 |           |   |             | 849,626 |          
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                            |                                                                     | Total costs and expenses |             |                    | 999,934 |                   |             |         | 878,763 |      |             |         | 2,088,399 |   |             |         | 2,183,515 | 
|                                                                                                                                                                                           
|Loss from operations                                                                                                                                                                        |                                                                     |                          | (698,408    | )                  |         |                   | (547,285    | )       |         |      | (1,127,988  | )       |           |   | (1,267,951  | )      
|Interest income                                                                                                                                                                             |                                                                     |                          | 3,840       |                    |         |                   | 15,041      |         |         |      | 13,605      |         |           |   | 71,920      |        
|Interest expense, net (contractual interest
was $128,546 and $369,661 for the three and
nine months ended September 30, 2002)                                                               |                                                                     |                          | (641        | )                  |         |                   | (115,804    | )       |         |      | (225,786    | )       |           |   | (350,236    | )      
|Other income (loss), net                                                                                                                                                                    |                                                                     |                          |            |                    |         |                   | (86,607     | )       |         |      | (200        | )       |           |   | (93,015     | )      
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Net loss before extraordinary gain and
cumulative effect of accounting change                                                                                                               |                                                                     |                          | (695,209    | )                  |         |                   | (734,655    | )       |         |      | (1,340,369  | )       |           |   | (1,639,282  | )      
|Extraordinary gain on early extinguishments of
debt, net                                                                                                                                    |                                                                     |                          |            |                    |         |                   | 335,738     |         |         |      |            |         |           |   | 335,738     |        
|Cumulative effect of accounting change                                                                                                                                                      |                                                                     |                          |            |                    |         |                   |            |         |         |      | (1,876,626  | )       |           |   |            |        
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                           
|Net loss                                                                                                                                                                                    |                                                                     |                          | (695,209    | )                  |         |                   | (398,917    | )       |         |      | (3,216,995  | )       |           |   | (1,303,544  | )      
|                                                                                                                                                                                           
|Recognition of preferred stock modification
fee  reorganization item                                                                                                                       |                                                                     |                          |            |                    |         |                   |            |         |         |      | 81,516      |         |           |   |            |        
|Other preferred stock reorganization items,
net                                                                                                                                             |                                                                     |                          |            |                    |         |                   |            |         |         |      | (2,813      | )       |           |   |            |        
|Gain on repurchases of preferred stock, net                                                                                                                                                 |                                                                     |                          |            |                    |         |                   | 376,879     |         |         |      |            |         |           |   | 376,879     |        
|Preferred stock dividends and accretion of
preferred stock redemption obligation, net
(contractual dividend was $24,692 and $73,714
for the three and nine months ended September
30, 2002) |                                                                     |                          |            |                    |         |                   | (28,714     | )       |         |      | (42,247     | )       |           |   | (107,361    | )      
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                           
|Net loss applicable to common shares                                                                                                                                                        |                                                                     | $                        | (695,209    | )                  |         | $                 | (50,752     | )       |         | $    | (3,180,539  | )       |           | $ | (1,034,026  | )      
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted:                                                                                                                                               |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Net loss before extraordinary gain and
cumulative effect of accounting change                                                                                                               |                                                                     | $                        | (1.57       | )                  |         | $                 | (1.71       | )       |         | $    | (3.03       | )       |           | $ | (4.17       | )      
|Extraordinary gain on early extinguishments of
debt, net                                                                                                                                    |                                                                     |                          |            |                    |         |                   | 0.78        |         |         |      |            |         |           |   | 0.85        |        
|Cumulative effect of accounting change                                                                                                                                                      |                                                                     |                          |            |                    |         |                   |            |         |         |      | (4.24       | )       |           |   |            |        
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Net loss                                                                                                                                                                                    |                                                                     |                          | (1.57       | )                  |         |                   | (0.93       | )       |         |      | (7.27       | )       |           |   | (3.32       | )      
|Recognition of preferred stock modification
fee  reorganization item                                                                                                                       |                                                                     |                          |            |                    |         |                   |            |         |         |      | 0.18        |         |           |   |            |        
|Other preferred stock reorganization items, net                                                                                                                                             |                                                                     |                          |            |                    |         |                   |            |         |         |      | (0.01       | )       |           |   |            |        
|Gain on repurchases of preferred stock, net                                                                                                                                                 |                                                                     |                          |            |                    |         |                   | 0.88        |         |         |      |            |         |           |   | 0.96        |        
|Preferred stock dividends and accretion of
preferred stock redemption obligation, net                                                                                                       |                                                                     |                          |            |                    |         |                   | (0.07       | )       |         |      | (0.09       | )       |           |   | (0.27       | )      
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted                                                                                                                                                |                                                                     | $                        | (1.57       | )                  |         | $                 | (0.12       | )       |         | $    | (7.19       | )       |           | $ | (2.63       | )      
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        
|Weighted average shares, basic and diluted                                                                                                                                                  |                                                                     |                          | 442,260,268 |                    |         |                   | 428,730,311 |         |         |      | 442,228,825 |         |           |   | 392,916,237 |        
|                                                                                                                                                                                            |                                                                     |                          |             |                    |         |                   |             |         |         |      |             |         |           |   |             |        

See accompanying notes to the unaudited condensed consolidated financial
statements.

2



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##### 



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

|                                                                            |                                                                       |   |            |                   |   |      |            |          |   | 
|--------------------------------------------------------------------------- | --------------------------------------------------------------------- | - | ---------- | ----------------- | - | ---- | ---------- | -------- | - | 
|                                                                            |                                                                       |   |            | Nine Months Ended
|                                                                            |                                                                       |   |            | September 30,    
|                                                                            |                                                                       |   |            |                  
|                                                                            |                                                                       |   |            | 2002              |   | 2001
|                                                                            |                                                                       |   |            |                   |   |     
|OPERATING ACTIVITIES:                                                       |                                                                       |   |            |                   |   |      |            |         
|Net loss                                                                    |                                                                       | $ | (3,216,995 | )                 |   | $    | (1,303,544 | )       
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                       |   |            |                   |   |      |            |         
|                                                                            | Non-cash reorganization and restructuring items and asset write-downs |   |            | 557,366           |   |      |            | 188,033  |  
|                                                                            | Depreciation and amortization                                         |   |            | 516,455           |   |      |            | 849,626  |  
|                                                                            | Stock-based compensation                                              |   |            | 26,762            |   |      |            | 27,857   |  
|                                                                            | Extraordinary gain on early extinguishments of debt, net              |   |            |                  |   |      |            | (335,738 | )
|                                                                            | Cumulative effect of accounting change                                |   |            | 1,876,626         |   |      |            |         |  
|                                                                            | Accretion of interest on senior unsecured notes                       |   |            |                  |   |      |            | 100,508  |  
|                                                                            | Net losses on investments                                             |   |            |                  |   |      |            | 90,197   |  
|Changes in assets and liabilities:                                          |                                                                       |   |            |                   |   |      |            |         
|                                                                            | Accounts receivable                                                   |   |            | 71,755            |   |      |            | (45,220  | )
|                                                                            | Other assets                                                          |   |            | (20,055           | ) |      |            | (79,873  | )
|                                                                            | Other liabilities subject to compromise                               |   |            | 196,545           |   |      |            |         |  
|                                                                            | Other liabilities not subject to compromise                           |   |            | (50,243           | ) |      |            | 59,580   |  
|                                                                            | Post petition liabilities                                             |   |            | 20,155            |   |      |            |         |  
|                                                                            |                                                                       |   |            |                   |   |      |            |         
|Net cash used in operating activities                                       |                                                                       |   | (21,629    | )                 |   |      | (448,574   | )       
|                                                                           
|INVESTING ACTIVITIES:                                                       |                                                                       |   |            |                   |   |      |            |         
|Purchases of property and equipment, net                                    |                                                                       |   | (177,255   | )                 |   |      | (1,299,365 | )       
|Purchases of marketable securities                                          |                                                                       |   | (72,465    | )                 |   |      | (1,870,751 | )       
|Sales of marketable securities                                              |                                                                       |   | 339,942    |                   |   |      | 2,673,947  |         
|Cash received for (paid for) divestitures (acquisitions)                    |                                                                       |   | 3,000      |                   |   |      | (25,203    | )       
|Investments in unconsolidated affiliates                                    |                                                                       |   |           |                   |   |      | (8,060     | )       
|Prepayment for network assets                                               |                                                                       |   |           |                   |   |      | (120,800   | )       
|Proceeds from sale of equity investments                                    |                                                                       |   |           |                   |   |      | 17,385     |         
|                                                                            |                                                                       |   |            |                   |   |      |            |         
|Net cash provided by (used in) investing activities                         |                                                                       |   | 93,222     |                   |   |      | (632,847   | )       
|                                                                           
|FINANCING ACTIVITIES:                                                       |                                                                       |   |            |                   |   |      |            |         
|Borrowings under senior secured credit facility                             |                                                                       |   |           |                   |   |      | 625,000    |         
|Proceeds from equity investment, net                                        |                                                                       |   |           |                   |   |      | 248,657    |         
|Proceeds from issuance of subordinated convertible notes                    |                                                                       |   |           |                   |   |      | 517,500    |         
|Proceeds from issuance of common stock under employee benefit plans         |                                                                       |   |           |                   |   |      | 27,209     |         
|Repurchase of senior unsecured notes                                        |                                                                       |   |           |                   |   |      | (199,972   | )       
|Repurchase of redeemable preferred stock                                    |                                                                       |   |           |                   |   |      | (88,424    | )       
|Repayments of capital leases and other obligations                          |                                                                       |   | (5,096     | )                 |   |      | (34,916    | )       
|Dividends paid on convertible preferred stock                               |                                                                       |   |           |                   |   |      | (40,334    | )       
|Costs incurred in connection with financing activities                      |                                                                       |   |           |                   |   |      | (14,200    | )       
|                                                                            |                                                                       |   |            |                   |   |      |            |         
|Net cash (used in) provided by financing activities                         |                                                                       |   | (5,096     | )                 |   |      | 1,040,520  |         
|Effect of exchange rate changes on cash                                     |                                                                       |   | (1,256     | )                 |   |      | 2,011      |         
|                                                                            |                                                                       |   |            |                   |   |      |            |         
|Net increase (decrease) in cash and cash equivalents                        |                                                                       |   | 65,241     |                   |   |      | (38,890    | )       
|                                                                           
|Cash and cash equivalents, beginning of period                              |                                                                       |   | 246,189    |                   |   |      | 493,004    |         
|                                                                            |                                                                       |   |            |                   |   |      |            |         
|Cash and cash equivalents, end of period                                    |                                                                       | $ | 311,430    |                   |   | $    | 454,114    |         
|                                                                            |                                                                       |   |            |                   |   |      |            |         

- Continued -

3



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##### 



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

|                                             |                                                                                                         |  |  |  |  |   |                   |        |      |   |         |        | 
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  | - | ----------------- | ------ | ---- | - | ------- | ------ | 
|                                             |                                                                                                         |  |  |  |  |   | Nine Months Ended
|                                             |                                                                                                         |  |  |  |  |   | September 30,    
|                                             |                                                                                                         |  |  |  |  |   |                  
|                                             |                                                                                                         |  |  |  |  |   | 2002              |        | 2001
|                                             |                                                                                                         |  |  |  |  |   |                   |        |     
|SUPPLEMENTAL DATA:                           |                                                                                                         |  |  |  |  |   |                   |        |      |   |         |       
|Non-cash financing and investing activities: |                                                                                                         |  |  |  |  |   |                   |        |      |   |         |       
|                                             | Redeemable preferred stock dividends paid and accrued, payable in  shares of redeemable preferred stock |  |  |  |  | $ |                   | 45,683 |      | $ |         | 57,314 | 
|                                             | Common stock issued in acquisitions                                                                     |  |  |  |  |   |                   |       |      |   |         | 14,100 | 
|                                             | Prepayment applied toward accepted network assets                                                       |  |  |  |  |   |                   |       |      |   |         | 69,337 | 
|                                             | Assumption of liabilities in acquisitions                                                               |  |  |  |  |   |                   |       |      |   |         | 8,677  | 
|Cash paid for interest                       |                                                                                                         |  |  |  |  |   | 30,452            |        |      |   | 232,356 |       

See accompanying notes to the unaudited condensed consolidated financial
statements.

4



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##### 



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

1.  BASIS OF PRESENTATION

The condensed consolidated financial statements of XO Communications, Inc.
(XO Parent) and its 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 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 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, 2001 as filed with the
Commission on March 29, 2002 (the 2001 Annual Report).

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

The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments, except as noted elsewhere in
the notes to the 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 and nine month periods ended
September 30, 2002 are not indicative of the results that may be expected for
the year ending December 31, 2002.

Consummation of a plan of reorganization confirmed by the Bankruptcy
Court, including the plan of reorganization filed by XO Parent as discussed in
note 2, will likely materially change the amounts and classifications reported
in the accompanying condensed consolidated financial statements, and the XO
Parent stand-alone financial statements included in note 2. Based on the
current terms of XO Parents plan of reorganization discussed in note 2, the
Company believes it would qualify for and be required to implement the Fresh
Start accounting provisions of SOP 90-7 upon emergence from bankruptcy, which
would establish a fair value basis for the carrying value of the assets and
liabilities for reorganized XO. The Company expects that the implementation of
Fresh Start accounting would result in a substantial reduction in the carrying
value of the Companys long-lived assets, including property and equipment,
fixed wireless licenses, other intangible assets and other noncurrent assets.

Reporting Format

Certain items related to prior periods have been reclassified to conform
to the 2002 reporting format.

New Accounting Pronouncements

In April 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections as of April 2002, (SFAS No. 145). SFAS No. 145
eliminates the requirement to report material gains or losses from debt
extinguishments as an extraordinary item, net of any applicable income tax
effect, in an entitys statement of operations. SFAS No. 145 instead requires
that a gain or loss recognized from a debt extinguishment be classified as an
extraordinary item only when the extinguishment meets the criteria of both
unusual in nature and infrequent in occurrence as prescribed under
Accounting Principles Board (APB) Opinion No. 30,
Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The
provisions of SFAS No. 145 are effective for fiscal years beginning after May
15, 2002 with respect to the rescission of SFAS No. 4 and for transactions
occurring after May 15, 2002, with respect to provisions related to SFAS No.
13. The Company has recognized extraordinary gains from debt extinguishments in
2001 and believes that the classification of such gains will change under SFAS
No. 145 effective as of the first quarter of 2003.

5



---



##### 



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

2.   REORGANIZATION

Background

Bankruptcy Proceeding

Concurrent with the Chapter 11 filing, XO Parent filed a proposed plan of
reorganization (the Plan of Reorganization) with the Bankruptcy Court that
included two alternative reorganization scenarios, either of which would have
resulted in a substantial reorganization and restructuring of XO Parents
balance sheet.

The first of the two reorganization alternatives (the Forstmann
Little/Telmex Investment) included in the Plan of Reorganization would have
implemented the transactions contemplated by the Stock Purchase Agreement,
dated January 15, 2002 (the Stock Purchase
Agreement), among XO Parent and
two investment partnerships affiliated with Forstmann Little & Co., Forstmann
Little & Co. Equity Partnership-VII, L.P. and Forstmann Little & Co.
Subordinated Debt and Equity Management Buyout Partnership-VIII, L.P., and
Télefonos de México S.A. de C.V. (collectively the Investors).

On October 13, 2002, XO Parent agreed with each of the Investors to
mutually terminate the Stock Purchase Agreement and to settle any potential
claims relating to the agreement or its termination (the Settlement
Agreement). Under the terms of the Settlement Agreement, the Stock Purchase
Agreement will be deemed terminated, the Investors each will pay XO $12.5
million, or a total of $25.0 million, and all parties will release any claims
they may have relating to the Stock Purchase Agreement. XO Parent has a hearing
scheduled on November 15, 2002 with the Bankruptcy Court to consider approval
of the Settlement Agreement. Pursuant to the Settlement Agreement, the
Investors have been deemed to have delivered a notice to XO Parent reflecting
their election to terminate the Stock Purchase Agreement, based on the
Investors determination that specified conditions in the Stock Purchase
Agreement had not been and could not be met, following relief granted by the
Bankruptcy Court necessary to allow such notice to be delivered.

Based on the execution of the Settlement Agreement and delivery of the
termination notice described above, XO Parent has concluded that the Investors
will not complete the transactions contemplated by the Stock Purchase
Agreement. Based on this assessment, XO Parent is proceeding with the second
alternative in its Plan of Reorganization, the stand-alone alternative (the
Stand-Alone Reorganization) that XO Parent included as part of its Plan of
Reorganization as a contingency plan in the event that the Forstmann
Little/Telmex Investment was not consummated. As part of this process, XO
Parent will withdraw the Forstmann Little/Telmex Investment alternative, which
the Bankruptcy Court confirmed on August 26, 2002, and seek confirmation by the
Bankruptcy Court of the Stand-Alone Reorganization. The Bankruptcy Court has
scheduled a hearing for confirmation of the Stand-Alone Reorganization on
November 15, 2002.

XO Parent believes
that entities controlled by Carl C. Icahn and the
Official Committee of Unsecured Creditors appointed in XO Parents bankruptcy
case (the Creditors Committee) have reached agreement and approved
the terms of various plan supplement documents and agreements filed with the
U.S. Bankruptcy Court for the Southern District of New York that would take
effect upon implementation of the Stand-Alone Reorganization. Entities
controlled by Mr. Icahn hold approximately 85% of the principal amount of XO
Parents $1.0 billion senior secured credit facility (the Facility) and more
than $1.3 billion of principal amount of XOs senior
unsecured notes. The Company expects that, based upon the agreement reached on the plan supplement
documents and agreements, neither these Icahn controlled entities nor the Creditors Committee, which represent
the most significant creditor constituencies in the XO Parent Chapter 11 proceedings, will object to the
confirmation of the Stand-Alone Reorganization. Neither of these parties
has filed such an objection with the Bankruptcy Court as of
November 8, 2002, the deadline for creditors and other interested parties to
object to confirmation of the plan.

6



---



##### 



Under the Stand-Alone Reorganization, XO Parent expects that the $1.0
billion in principal outstanding under the Facility plus accrued interest will
be converted into the following securities:



| |  |  | 95% of the outstanding equity of reorganized XO; and                                                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $500.0 million in principal amount of junior secured loans
with required principal payments occurring later than provided in
the Facility and no cash interest payments required by reorganized
XO until it achieves specified financial targets.

In addition:



| |  |  | nontransferable rights to purchase $200.0 million (subject to
increase as described below) of reorganized XOs common stock, at
$5.00 per share, will be granted to holders of XO Parents senior
unsecured notes and XO Parents general unsecured creditors, and, if
not fully subscribed by these holders and creditors, to holders of
XO Parents subordinated convertible notes and preferred and common
stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to the extent that rights to purchase reorganized XOs common
stock with an aggregate exercise price of less than $16.7 million
are made available to existing holders of XO Parents class A common
stock, additional rights will be issued to these holders such that
rights with an aggregate exercise price of $16.7 million are made
available to such holders; and                                            
|
| |  |  | to the extent such rights are not exercised, reorganized XO
would be permitted to obtain a senior secured exit facility of up to
$200.0 million.                                                                                                                                                                                                                                                                    

In addition, based on the level of support for the Stand-Alone
Reorganization received from holders of XO Parents senior unsecured notes and
XO Parents general unsecured creditors in the Plan of Reorganization
confirmation process, XO Parent expects that such note holders and general
unsecured creditors collectively will receive, among other consideration:



| |  |  | 5% of the initial outstanding common equity in reorganized XO; and                 
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | three series of warrants exercisable over a seven year period, which would include:



| |  |  | warrants to purchase up to 10% of the common equity
of reorganized XO at an exercise price equal to 125% of
reorganized XOs implied equity value in the Stand-Alone
Reorganization;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants to purchase up to 7 1/2% of the common
equity of reorganized XO at an exercise price equal to 150% of
the implied equity value in the Stand-Alone Reorganization; and      
|
| |  |  | warrants to purchase up to 7 1/2% of the common
equity of reorganized XO at an exercise price equal to 200% of
the implied equity value in the Stand-Alone Reorganization.          

XO Parent has commenced the process of seeking the regulatory approvals
required to complete the Stand-Alone Reorganization. XO Parent believes that
the receipt of these regulatory approvals and the confirmation of the
Stand-Alone Reorganization by the Bankruptcy Court are the two most
significant steps that it must accomplish before the reorganization can be
completed and XO Parent can emerge from bankruptcy.

Consummation of the
Stand-Alone Reorganization will result in all equity
interests in XO Parent, including its class A common stock, being cancelled and
discharged and the holders of such equity securities would not receive any
distribution under the Stand-Alone Reorganization. However, the Stand-Alone
Reorganization does provide that the current holders of common stock will be
allowed to participate in the rights offering discussed above.

As a consequence of the bankruptcy petition, all pending claims and
litigation against XO Parent are stayed automatically by Section 362 of the
Bankruptcy Code, and absent further order of the Bankruptcy Court, no party may
take any action to recover any pre-petition claims, enforce any lien against or
obtain possession of any property from XO Parent. In addition, pursuant to
Section 365 of the Bankruptcy Code, XO Parent may reject or assume pre-petition
executory contracts and unexpired leases, and parties affected by rejections of
these contracts or leases, may file claims with the Bankruptcy Court in
accordance with the Chapter 11 reorganization process. The Creditors Committee
has been formed to represent all unsecured creditors including all holders of XO Parents unsecured notes and, in
accordance with the provisions of the Bankruptcy Code, will have the right to
be heard on all matters that come before the Bankruptcy Court.

7



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##### 



XO Parent Stand-Alone Financial Statements

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

XO Communications, Inc.
(XO Parent)
Debtor in Possession
Stand-Alone Balance Sheet
As of September 30, 2002
(Unaudited)

|                                                                                     |                       |                                            |           |            |           | 
|------------------------------------------------------------------------------------ | --------------------- | ------------------------------------------ | --------- | ---------- | --------- | 
|ASSETS                                                                               |                       |                                            |           |           
|Current assets:                                                                      |                       |                                            |           |           
|                                                                                     | Pledged securities    |                                            | $         | 4,509      |          
|                                                                                     | Other current assets  |                                            |           | 68,115     |          
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total current assets                       |           |            | 72,624    | 
|Property and equipment, net                                                          |                       |                                            | 68,037    |           
|Fixed wireless licenses, net                                                         |                       |                                            | 67,039    |           
|Other intangibles, net                                                               |                       |                                            | 88,928    |           
|Notes receivable from subsidiaries, net                                              |                       |                                            | 8,455,622 |           
|Other assets, net                                                                    |                       |                                            | 51,940    |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total assets                               |           | $          | 8,804,190 | 
|                                                                                     |                       |                                            |           |           
|                                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY                                                 |                       |                                            |           |           
|Current liabilities not subject to compromise                                        |                       | $                                          | 28,969    |           
|Post petition liabilities                                                            |                       |                                            | 21,926    |           
|Debt and accrued interest payable to subsidiary subject to compromise                |                       |                                            | 620,389   |           
|Current liabilities subject to compromise                                            |                       |                                            | 5,506,634 |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total current liabilities                  |           |            | 6,177,918 | 
|Long-term liabilities not subject to compromise                                      |                       |                                            | 66,796    |           
|Long-term liabilities subject to compromise                                          |                       |                                            | 7,924     |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total liabilities                          |           |            | 6,252,638 | 
|                                                                                    
|Redeemable preferred stock held by and payable to a subsidiary
subject to compromise |                       |                                            | 514,640   |           
|Redeemable preferred stock subject to compromise                                     |                       |                                            | 1,708,316 |           
|Commitments and contingencies                                                        |                       |                                            |           |           
|Stockholders equity:                                                                |                       |                                            |           |           
|                                                                                     | Common stock          |                                            |           | 4,628,139  |          
|                                                                                     | Deferred compensation |                                            |           | (10,315    | )        
|                                                                                     | Accumulated deficit   |                                            |           | (4,289,228 | )        
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total stockholders equity                 |           |            | 328,596   | 
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total liabilities and stockholders equity |           | $          | 8,804,190 | 
|                                                                                     |                       |                                            |           |           

8



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##### 



XO Communications, Inc.
(XO Parent)
Debtor in Possession
Stand-Alone Statement of Operations
(Unaudited)

|                                                                      |                                                                     |                          |         |                    |        |                            |          |                          |         | 
|--------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------- | ------------------ | ------ | -------------------------- | -------- | ------------------------ | ------- | 
|                                                                      |                                                                     |                          |         |                    |        |                            |          | Period From the Petition
|                                                                      |                                                                     |                          |         | Three Months Ended |        | Date of June 17, 2002     
|                                                                      |                                                                     |                          |         | September 30, 2002 |        | through September 30, 2002
|                                                                      |                                                                     |                          |         |                    |        |                           
|Revenue                                                               | $                                                                   |                          |        |                    | $      |                            |         |                         
|                                                                     
|Costs and expenses:                                                   |                                                                     |                          |         |                    |        |                            |          |                         
|                                                                      | Selling, operating, and general (excludes
stock-based compensation) |                          |         | 35,019             |        |                            |          | 41,035                   |        
|                                                                      | Reorganization                                                      |                          |         | 25,407             |        |                            |          | 94,577                   |        
|                                                                      | Stock-based compensation                                            |                          |         | 8,776              |        |                            |          | 10,186                   |        
|                                                                      | Depreciation and amortization                                       |                          |         | 23,370             |        |                            |          | 26,831                   |        
|                                                                      |                                                                     |                          |         |                    |        |                            |          |                         
|                                                                      |                                                                     | Total costs and expenses |         |                    | 92,572 |                            |          |                          | 172,629 | 
|                                                                     
|Loss from operations                                                  |                                                                     |                          | (92,572 | )                  |        |                            | (172,629 | )                       
|                                                                     
|Interest income on notes receivable from subsidiaries                 |                                                                     |                          | 126,693 |                    |        |                            | 157,248  |                         
|Interest expense                                                      |                                                                     |                          | (339    | )                  |        |                            | (3,045   | )                       
|                                                                      |                                                                     |                          |         |                    |        |                            |          |                         
|                                                                     
|Net income (loss)                                                     |                                                                     |                          | 33,782  |                    |        |                            | (18,426  | )                       
|                                                                     
|Recognition of preferred stock modification fee -
reorganization item |                                                                     |                          |        |                    |        |                            | 81,516   |                         
|Other preferred stock reorganization items, net                       |                                                                     |                          |        |                    |        |                            | (2,813   | )                       
|                                                                      |                                                                     |                          |         |                    |        |                            |          |                         
|                                                                     
|Net income applicable to common shares                                | $                                                                   |                          | 33,782  |                    | $      |                            | 60,277   |                         
|                                                                      |                                                                     |                          |         |                    |        |                            |          |                         

9



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##### 



XO Communications, Inc.
(XO Parent)
Debtor in Possession
Stand-Alone Statement of Cash Flows
(Unaudited)

|                                                   |                                                       |   |                               |          |  
|-------------------------------------------------- | ----------------------------------------------------- | - | ----------------------------- | -------- | -
|                                                   |                                                       |   | Period From the Petition Date
|                                                   |                                                       |   | of June 17, 2002 through     
|                                                   |                                                       |   | September 30, 2002           
|OPERATING ACTIVITIES:                              |                                                       |   |                               |         
|Net loss                                           |                                                       | $ | (18,426                       | )       
|Adjustments for non-cash items:                    |                                                       |   |                               |         
|                                                   | Depreciation and amortization                         |   |                               | 26,831   |  
|                                                   | Reorganization                                        |   |                               | 94,078   |  
|                                                   | Stock-based compensation                              |   |                               | 10,186   |  
|                                                   | Interest income on notes receivable from subsidiaries |   |                               | (157,248 | )
|                                                   | Interest expense                                      |   |                               | 3,045    |  
|Changes in assets and liabilities:                 |                                                       |   |                               |         
|                                                   | Notes receivable from subsidiaries, net               |   |                               | 41,534   |  
|                                                   |                                                       |   |                               |         
|Net cash used in operating activities              |                                                       |   |                              |         
|Net change in cash and cash equivalents            |                                                       |   |                              |         
|Cash and cash equivalents, beginning of the period |                                                       |   |                              |         
|                                                   |                                                       |   |                               |         
|Cash and cash equivalents, end of period           |                                                       | $ |                              |         
|                                                   |                                                       |   |                               |         

Accounting Impact of Bankruptcy Filing

Liabilities subject to compromise reflected in the accompanying condensed
consolidated financial statements and the XO Parent stand-alone financial
statements refer to the liabilities of XO Parent incurred prior to the
Petition Date that are with unrelated parties (other than those that are
payable to a subsidiary in the XO Parent Stand-Alone Balance Sheet above). In
accordance with SOP 90-7, liabilities subject to compromise are recorded at the
estimated amount that is expected to be allowed on prepetition claims in the
Chapter 11 proceedings and are subject to future adjustments. Adjustments may
result from negotiations, actions of the Bankruptcy Court, further developments
with respect to disputed claims, rejection of executory contracts and unexpired
leases, proofs of claim, implementation of the Plan of Reorganization, or other
events. Approximately $50 million of commitments under executory agreements
have been approved for rejection by the Bankruptcy Court as of September 30,
2002. Other obligations of the Companys subsidiaries that are not subject to
compromise have retained their historical balance sheet classifications and
amounts. Liabilities subject to compromise consisted of the following as of
September 30, 2002 (dollars in thousands):

|                                                                |   |  |           | 
|--------------------------------------------------------------- | - |  | --------- | 
|Long-term debt                                                  | $ |  | 5,165,718 | 
|Accrued interest and preferred stock dividends                  |   |  | 297,669   | 
|Prepetition accounts payable and accrued liabilities            |   |  | 39,996    | 
|Capital lease obligations                                       |   |  | 11,175    | 
|                                                                |   |  |           | 
|Total liabilities subject to compromise                         |   |  | 5,514,558 | 
|                                                               
|Less: long-term capital lease obligations subject
to compromise |   |  | 7,924     | 
|                                                                |   |  |           | 
|Current liabilities subject to compromise                       | $ |  | 5,506,634 | 
|                                                                |   |  |           | 

In order to record its debt instruments at the amount expected to be
allowed by the Bankruptcy Court in accordance with SOP 90-7, as of the Petition
Date, XO Parent wrote off all of its debt issuance costs, discounts and purchase
accounting adjustments related to debt (collectively the Deferred Financing
Fees) as a component of reorganization expense. Reorganization expense also
includes deferred professional fees associated with the Plan of Reorganization
that were written off as of the Petition Date and post petition fees for
bankruptcy services, as well as gains or losses from the settlement or
rejection of liabilities subject to compromise. Reorganization expenses for the three and nine-month
periods ended September 30, 2002 consisted of the following (dollars in
thousands):

10



---



##### 



|                                                                               |  |                    |        |                    |  |   |        | 
|------------------------------------------------------------------------------ |  | ------------------ | ------ | ------------------ |  | - | ------ | 
|                                                                               |  | Three Months Ended |        | Nine Months Ended 
|                                                                               |  | September 30, 2002 |        | September 30, 2002
|                                                                               |  |                    |        |                   
|Net loss from the
settlement or rejection of
liabilities subject to
compromise |  | $                  | 21,757 |                    |  | $ | 21,757 | 
|Deferred Financing Fees                                                        |  |                    |       |                    |  |   | 56,270 | 
|Professional fees                                                              |  |                    | 3,650  |                    |  |   | 17,526 | 
|                                                                               |  |                    |        |                    |  |   |        | 
|Total reorganization expense                                                   |  | $                  | 25,407 |                    |  | $ | 95,553 | 
|                                                                               |  |                    |        |                    |  |   |        | 

XO Parent is required to accrue interest expense during the Chapter 11
proceedings only to the extent that it is probable that such interest will be
paid pursuant to the proceedings. Based on the status of negotiations with the
Ichan entities and the Creditors Committee referred to above, the Company
believes that confirmation and consummation of the Stand-Alone Reorganization
is probable. Under the Stand-Alone Reorganization, there will be no cash
payments of interest on the loans outstanding under the Facility or XO Parents
unsecured notes. Therefore, XO Parent ceased accruing interest on the Facility
as of July 1, 2002 and on its unsecured notes as of the Petition Date. The
contractual interest amounts reflected on the accompanying condensed
consolidated statement of operations represent the interest expense that would
have been accrued under the relevant financing agreements had the Company not
ceased accruing interest as described above.

In accordance with SOP 90-7, XO Parent is required to record its preferred
stock at the amount expected to be allowed by the Bankruptcy Court.
Accordingly, during the second quarter of 2002, XO Parent recognized a gain
equal to the remaining $81.5 million unamortized balance of a deferred
modification fee. Also during the second quarter of 2002, XO Parent wrote off
all issuance costs and recognized purchase accounting adjustments related to
its preferred stock, which resulted in a charge of $2.8 million that is
included in other preferred stock reorganization items, net. In addition, the
Company stopped accruing preferred stock dividends subsequent to the Petition
Date. The contractual dividend amounts reflected on the accompanying condensed
consolidated statement of operations represent the dividends that would have
been accrued under the terms of the relevant preferred stock had the Company
not ceased accruing such dividends as described above.

3.  CUMULATIVE EFFECT OF ACCOUNTING CHANGE

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

As described in greater detail in the 2001 Annual Report, SFAS No. 142
requires that the initial impairment analysis of goodwill be completed by June
30, 2002. The Company performed the required impairment tests of goodwill as of
January 1, 2002, and during the first quarter of 2002 recorded a $1,876.6
million adjustment as a cumulative effect of accounting change to write-off all
of its goodwill. The pro forma impact on net loss before cumulative effect of
accounting change for the three and nine months ended September 30, 2002 and
2001 compared to the actual results for those same periods is as follows
(dollars in thousands, except for per share data):

11



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|                                                                                                                           |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | -------- | ------------------------------ |  | ---- | -------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                                           |  | Three
Months EndedSeptember 30, |          | Nine
Months EndedSeptember 30,
|                                                                                                                           |  |                                 |          |                               
|                                                                                                                           |  | 2002                            |          | 2001                           |  | 2002 |          | 2001
|                                                                                                                           |  |                                 |          |                                |  |      |          |     
|Net loss before
extraordinary gain
and cumulative
effect of accounting
change                                              |  | $                               | (695,209 | )                              |  | $    | (734,655 | )    |  | $ | (1,340,369 | ) |  | $ | (1,639,282 | )
|Goodwill amortization                                                                                                      |  |                                 |         |                                |  |      | 149,104  |      |  |   |           |   |  |   | 447,845    |  
|                                                                                                                           |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  
|Adjusted net loss
before extraordinary
gain and cumulative
effect of accounting
change                                     |  | $                               | (695,209 | )                              |  | $    | (585,551 | )    |  | $ | (1,340,369 | ) |  | $ | (1,191,437 | )
|                                                                                                                           |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  
|Net loss per common
share before
extraordinary gain
and cumulative
effect of accounting
change, basic and
diluted:         |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  
|Reported net loss
before extraordinary
gain and cumulative
effect of accounting
change                                     |  | $                               | (1.57    | )                              |  | $    | (1.71    | )    |  | $ | (3.03      | ) |  | $ | (4.17      | )
|Goodwill amortization                                                                                                      |  |                                 |         |                                |  |      | 0.35     |      |  |   |           |   |  |   | 1.14       |  
|                                                                                                                           |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  
|Adjusted net loss
per common share
before extraordinary
gain and cumulative
effect of accounting
change, basic and
diluted |  | $                               | (1.57    | )                              |  | $    | (1.36    | )    |  | $ | (3.03      | ) |  | $ | (3.03      | )
|                                                                                                                           |  |                                 |          |                                |  |      |          |      |  |   |            |   |  |   |            |  

4.  LONG-LIVED ASSETS

Long-lived assets, including property and equipment, fixed wireless
licenses, and intangible assets with definite useful lives to be held and used,
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount should be addressed pursuant to SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, (SFAS No.
144). SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, (SFAS No.
121). In accordance with implementation requirements, the Company implemented
the provisions of SFAS No. 144 in 2002. The criteria for determining impairment
for long-lived assets to be held and used are generally consistent with SFAS
No. 121. Pursuant to SFAS No. 144, impairment is determined by comparing the
carrying value of these long-lived assets to managements best estimate of
future undiscounted cash flows expected to result from the use of the assets
and their eventual disposition.

The Company believes that no impairment existed under SFAS No. 144 as of
September 30, 2002. In the event that there are changes in the planned use of
the Companys long-lived assets or its expected future undiscounted cash flows
are reduced significantly, the Companys assessment of its ability to recover
the carrying value of these assets under SFAS No. 144 could change. In
addition, as discussed in note 2, if the Stand-Alone Reorganization is
implemented, the Company believes it would be required to apply Fresh Start
accounting upon emergence from bankruptcy under which its assets and
liabilities would be recorded at their then fair values resulting in a
significant write-down of the Companys long-lived assets. If the Stand-Alone
Reorganization is confirmed and ultimately consummated, the Company estimates
that the fair value of its long-lived assets for purposes of Fresh Start accounting
would be approximately $1.0 billion.

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

|                        |                    |                |                   |              |   |                |          |        |   |                |         |                |   |  |         |  |   |  |          |   |   |  |         | 
|----------------------- | ------------------ | -------------- | ----------------- | ------------ | - | -------------- | -------- | ------ | - | -------------- | ------- | -------------- | - |  | ------- |  | - |  | -------- | - | - |  | ------- | 
|                        | September 30, 2002 |                | December 31, 2001
|                        |                    |                |                  
|                        |                    | Gross Carrying |                   | Accumulated  |   |                |          |        |   | Gross Carrying |         | Accumulated    |   |  |         | 
|                        |                    | Amount         |                   | Amortization |   | Net Book Value |          | Amount |   | Amortization   |         | Net Book Value
|                        |                    |                |                   |              |   |                |          |        |   |                |         |               
|Acquired technology     | $                  |                | 130,515           |              | $ |                | (76,175  | )      | $ |                | 54,340  |                | $ |  | 141,541 |  | $ |  | (56,027  | ) | $ |  | 85,514  | 
|Customer lists          |                    |                | 123,745           |              |   |                | (101,567 | )      |   |                | 22,178  |                |   |  | 124,873 |  |   |  | (80,845  | ) |   |  | 44,028  | 
|Other                   |                    |                | 35,413            |              |   |                | (25,506  | )      |   |                | 9,907   |                |   |  | 48,731  |  |   |  | (24,869  | ) |   |  | 23,862  | 
|                        |                    |                |                   |              |   |                |          |        |   |                |         |                |   |  |         |  |   |  |          |   |   |  |         | 
|Total intangible assets | $                  |                | 289,673           |              | $ |                | (203,248 | )      | $ |                | 86,425  |                | $ |  | 315,145 |  | $ |  | (161,741 | ) | $ |  | 153,404 | 
|                        |                    |                |                   |              |   |                |          |        |   |                |         |                |   |  |         |  |   |  |          |   |   |  |         | 
|Fixed wireless licenses | $                  |                | 997,942           |              | $ |                | (77,435  | )      | $ |                | 920,507 |                | $ |  | 997,942 |  | $ |  | (50,397  | ) | $ |  | 947,545 | 
|                        |                    |                |                   |              |   |                |          |        |   |                |         |                |   |  |         |  |   |  |          |   |   |  |         | 

12



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The Company amortizes its intangible assets with definite useful lives on
a straight-line basis over their useful lives which range from three to five
years. Fixed wireless licenses are amortized over their estimated useful life of 20 years on a straight-line basis. Amortization
expense related to these intangible assets and fixed wireless licenses for the
three and nine months ended September 30, 2002 was $26.3 million and $79.0
million, respectively, and $29.8 million and $85.6 million for the three and
nine months ended September 30, 2001, respectively. Amortization expense
related to these intangible assets and fixed wireless licenses for the year
ended December 31, 2001 was $120.6 million.

As of September 30, 2002, the Company had approximately $728.5 million of
long-lived assets, including construction-in-progress and certain fixed
wireless licenses, that are not currently ready for their intended use and
accordingly, are not currently being depreciated or amortized.

5.  RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS

On August 8, 2002, the Company entered into a Master Agreement with Level
3 Communications, Inc. (Level 3), which amends various agreements related to
XOs acquisition of fiber networks in the United States from Level 3 and the
recurring maintenance thereon. Beginning on January 1, 2003 and continuing over
the remaining term of the initial agreement, Level 3 will reduce the operating
and maintenance fees as well as fiber relocation charges from approximately
$17.0 million annually to a fixed rate of $5.0 million annually. In exchange
for this reduction and certain other concessions, upon closing, the Company
will surrender its indefeasible right to use an empty conduit and six of the 24
fibers previously acquired from Level 3. Closing of these transactions is
subject to several conditions, including regulatory and Bankruptcy Court
approvals. The Bankruptcy Court approved the Master Agreement on September 27,
2002. Either party may terminate the Master Agreement if these transactions do
not close by February 28, 2003. Because the Company has committed to this plan
of disposal and believes that consummation of the transaction contemplated by
the Master Agreement is probable, it recorded a $477.3 million non-cash
write-down of these assets during the third quarter of 2002. Pursuant to
applicable accounting principles, the write-down is based on the book value of
the surrendered facilities and does not reflect the future benefits to be
received by the Company under the Master Agreement. As discussed above, the
Company expects to implement the Fresh Start accounting provisions of SOP
90-7 upon emergence from bankruptcy, which will result in a further reduction in
the carrying value of the fiber networks previously acquired from
Level 3.

During the second half of 2001, the Company implemented a plan to
restructure certain of its business operations. The restructuring plan included
reducing the Companys discretionary spending, capital expenditures and
workforce based on its assessment of current and future market conditions. In
the second quarter of 2002, the Company continued to restructure its
operations, reducing its workforce by approximately 350 additional employees,
the majority of which were employed in network operations, sales and marketing
and information technology, and recorded a $2.9 million restructuring charge
related to involuntary termination severance liabilities. These employees were
notified of their termination of employment in the second quarter of 2002 and
the employment of the majority of the notified employees was terminated by June
30, 2002. As of September 30, 2002, the remaining restructuring accrual was
$84.5 million, which relates primarily to payments due to landlords on exited,
leased facilities. The restructuring accrual has decreased from $125.8 million
as of December 31, 2001 primarily due to payments associated with exited lease
facilities.

13



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##### 



6.  OPERATING SEGMENTS

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

|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |   |   |         |         | 
|---------------------------------- | ------------- | - | -------------------------------- | ------- | ------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | 
|                                   |               |   | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                   |               |   |                                  |         |                                
|                                   |               |   | 2002                             |         | 2001                            |   | 2002    |         | 2001
|                                   |               |   |                                  |         |                                 |   |         |         |     
|Voice services                     | $             |   | 158,003                          |         | $                               |   | 161,546 |         | $    |   | 501,196 |         | $ |   | 440,387 |        
|Data services                      |               |   | 109,892                          |         |                                 |   | 152,679 |         |      |   | 364,283 |         |   |   | 443,866 |        
|Integrated voice
and data services |               |   | 33,426                           |         |                                 |   | 16,386  |         |      |   | 93,765  |         |   |   | 28,514  |        
|Other services                     |               |   | 205                              |         |                                 |   | 867     |         |      |   | 1,167   |         |   |   | 2,797   |        
|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |   |   |         |        
|                                   | Total revenue | $ |                                  | 301,526 |                                 | $ |         | 331,478 |      | $ |         | 960,411 |   | $ |         | 915,564 | 
|                                   |               |   |                                  |         |                                 |   |         |         |      |   |         |         |   |   |         |        

7.  COMPREHENSIVE LOSS

Comprehensive loss includes the Companys net loss applicable to common
shares, as well as net unrealized gains and losses on available-for-sale
investments and foreign currency translation adjustments from the Companys
former European operations, which were sold in February 2002. The following
table reflects the Companys calculation of comprehensive loss for the three
and nine months ended September 30, 2002 and 2001 (dollars in thousands):

|                                     |                                                                            |  |                                 |     |                                |  |         |        |      |  |            |        |   |  |            |        | 
|------------------------------------ | -------------------------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ |  | ------- | ------ | ---- |  | ---------- | ------ | - |  | ---------- | ------ | 
|                                     |                                                                            |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30, |  |         |       
|                                     |                                                                            |  |                                 |     |                                |  |         |       
|                                     |                                                                            |  | 2002                            |     | 2001                           |  | 2002    |        | 2001
|                                     |                                                                            |  |                                 |     |                                |  |         |        |     
|Net loss applicable to common shares | $                                                                          |  | (695,209                        | )   | $                              |  | (50,752 | )      | $    |  | (3,180,539 | )      | $ |  | (1,034,026 | )     
|Other comprehensive (gains) loss:    |                                                                            |  |                                 |     |                                |  |         |        |      |  |            |        |   |  |            |       
|                                     | Net unrealized (gains) losses
and foreign currency translation
adjustments |  |                                 | 833 |                                |  |         | 14,078 |      |  |            | (7,555 | ) |  |            | 28,557 | 
|                                     | Less: Net realized (gains)
losses transferred to current
period earnings   |  |                                 |    |                                |  |         | 4,891  |      |  |            |       |   |  |            | 4,891  | 
|                                     |                                                                            |  |                                 |     |                                |  |         |        |      |  |            |        |   |  |            |       
|Comprehensive loss                   | $                                                                          |  | (694,376                        | )   | $                              |  | (31,783 | )      | $    |  | (3,188,094 | )      | $ |  | (1,000,578 | )     
|                                     |                                                                            |  |                                 |     |                                |  |         |        |      |  |            |        |   |  |            |       

8.   RELATED PARTY TRANSACTIONS

The Company provides telecommunications services to Nextel Communications,
Inc. (Nextel) and McLeodUSA (McLeod) and purchases various services from
both Nextel and McLeod. For the year ended December 31, 2001, the Company paid
Nextel $6.2 million and paid McLeod $8.4 million for services received and
recognized revenue of $27.6 million and $7.1 million, respectively, for
services provided to Nextel and McLeod. The following table summarizes the
Companys transactions with Nextel and McLeod (dollars in thousands):

|       |   |                                  |        |                                 |   |                            |       |                            |   |      |        |      |   |      |        |      |   |  |     |  |   |  |       |  |   |  |       |  |   |  |       | 
|------ | - | -------------------------------- | ------ | ------------------------------- | - | -------------------------- | ----- | -------------------------- | - | ---- | ------ | ---- | - | ---- | ------ | ---- | - |  | --- |  | - |  | ----- |  | - |  | ----- |  | - |  | ----- | 
|       |   | Revenue Recognized for the       |        | Revenue Recognized for the      |   | Payments for the Three     |       | Payments for the Nine     
|       |   | Three Months Ended September 30, |        | Nine Months Ended September 30, |   | Months Ended September 30, |       | Months Ended September 30,
|       |   |                                  |        |                                 |   |                            |       |                           
|       |   | 2002                             |        | 2001                            |   | 2002                       |       | 2001                       |   | 2002 |        | 2001 |   | 2002 |        | 2001
|       |   |                                  |        |                                 |   |                            |       |                            |   |      |        |      |   |      |        |     
|McLeod | $ |                                  | 70     |                                 | $ |                            | 151   |                            | $ |      | 303    |      | $ |      | 576    |      | $ |  | 753 |  | $ |  | 148   |  | $ |  | 1,567 |  | $ |  | 4,591 | 
|Nextel | $ |                                  | 12,860 |                                 | $ |                            | 3,872 |                            | $ |      | 50,016 |      | $ |      | 13,680 |      | $ |  | 590 |  | $ |  | 1,800 |  | $ |  | 2,139 |  | $ |  | 4,670 | 

14



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

|       |   |                           |        |                        |   |      |       |      |   |  |       |  |   |  |       | 
|------ | - | ------------------------- | ------ | ---------------------- | - | ---- | ----- | ---- | - |  | ----- |  | - |  | ----- | 
|       |   | Accounts Receivable as of |        | Accounts Payable as of
|       |   | September 30,             |        | September 30,         
|       |   |                           |        |                       
|       |   | 2002                      |        | 2001                   |   | 2002 |       | 2001
|       |   |                           |        |                        |   |      |       |     
|McLeod | $ |                           | 11     |                        | $ |      | 759   |      | $ |  | 33    |  | $ |  |      | 
|Nextel | $ |                           | 10,634 |                        | $ |      | 4,706 |      | $ |  | 1,548 |  | $ |  | 1,026 | 

9. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company, members of its board of directors, and the Investors had been
named as party defendants in a number of lawsuits filed that purported to be
class actions brought on behalf of XOs stockholders. Some of these suits were
filed in the United States Federal Court for the Eastern District of Virginia.
The federal actions contained various allegations of federal securities law
violations by the Company and certain directors relating to certain financial
disclosures during the year 2001, and breaches of certain fiduciary duties by
certain directors of the Company in connection with the proposed investments by
the Investors, and that the Investors aided and abetted the directors with
respect to such alleged breaches.In May 2002, the federal court dismissed all
of the claims based on alleged securities law violations with prejudice and
dismissed the breach of fiduciary duty claims without prejudice.

In addition, state court lawsuits filed in New York and Delaware alleged
that the members of the Companys board of directors breached certain fiduciary
duties in connection with the proposed investments by the Investors, and that
the Investors aided and abetted the directors with respect to such alleged
breaches. In July 2002, the Company entered into a settlement agreement
pursuant to which the plaintiff class would dismiss and release all claims and
causes of action. In exchange for this release, the Company agreed that the
plaintiff class would share in any recovery from the Investors with respect to
the Stock Purchase Agreement, which would include the $25.0 million payment
that would be made to XO Parent pursuant to the Settlement Agreement. The
settlement with the plaintiff class also provides for the grant of certain
rights to the plaintiff class with respect to any offering of rights to
purchase common equity under the Stand-Alone Reorganization. The settlement
with the plaintiff class has been approved by the Bankruptcy Court and the
dismissal of all claims with prejudice by the plaintiff class has been approved
by both state courts.

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

Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk exist primarily in its trade receivables.
Although the Companys trade receivables are geographically dispersed and
include customers in many different industries, a portion of the Companys
revenue is generated from services provided to other telecommunications service
providers. Several of these companies have recently filed for protection under
Chapter 11 of the Bankruptcy Code. The Company believes that its established
valuation and credit allowances are adequate as of September 30, 2002 to cover
these risks.

Prepaid Calling Card Tax Matter

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

15



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##### 



Going Concern

The condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Companys
independent accountants as of December 31, 2001, Arthur Andersen LLP, issued a
going concern opinion qualification in its report on the Companys financial
statements for the year ended December 31, 2001. The Company had incurred
recurring operating losses and negative cash flows from operating activities
and XO Parent had defaulted on its debt obligations. These financial issues
raised substantial doubt about the Companys ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
upon a number of factors including, but not limited to, the Bankruptcy Courts
approval of, and the Companys implementation of the Plan of Reorganization,
customer and employee retention, and the Companys continued ability to provide
high quality services. If the Stand-Alone Reorganization is not approved and
implemented, the Company may be forced to liquidate under applicable provisions
of the Bankruptcy Code. There can be no assurance of the level of recovery the Companys
secured and unsecured creditors would receive in such a liquidation. The
condensed consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities if the Company was
forced to liquidate.

16



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##### 



PART I. FINANCIAL INFORMATION

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

Overview

We provide a
comprehensive array of voice and data communications
services. Our voice
services include bundled local and long distance, interactive voice response
and shared tenant services. Our data services include Internet access, private data networking,
including dedicated transmission capacity on our networks, virtual private
network services and Ethernet services, and hosting services. We also combine many of these
services in flat rate
service packages.

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

To develop these networks, we have assembled a collection of metro and
intercity network assets in the United States, substantially all of which we
own or control, making us a facilities-based carrier. These network assets
incorporate state-of-the-art fiber optic cable, dedicated wavelengths and
transmission equipment and fixed wireless spectrum and equipment capable of
carrying high volumes of data, voice, video and Internet traffic. We operate 37
metro broadband fiber optic networks in 22 states and the District of Columbia,
including 25 of the 30 largest metropolitan areas in the U.S. We have
constructed or acquired many of these metro networks, which consist of up to
432 strands of fiber optic cable and, in some cases, additional empty fiber
conduits. For our intercity network, we have acquired dedicated, high-capacity
wavelengths on fiber optic cables, onto which we have deployed our own
switching, routing and optical equipment, thereby giving us greater control
over the transmission of voice and data information. We also hold indefeasible
exclusive rights to use additional facilities, including unlit fiber optic
strands, on the routes served by our intercity networks pursuant to
arrangements with Level 3 Communications, Inc. In July 2002, we agreed to
modify certain of these arrangements. The effectiveness of these modifications
is subject to the satisfaction of specified conditions. For a discussion of
these arrangements with Level 3, see Intercity Network Agreements below.

The Chapter 11 proceedings discussed below have not disrupted our ability
to operate our networks or provide our services to new and existing customers,
but they have, in addition to other factors, had an impact on our ability to
maintain historical revenue growth levels.

Recent Events

Bankruptcy Proceeding

On June 17, 2002, or the Petition Date, XO Communications, Inc., the
holding company that owns and operates our more than 60 operating subsidiaries,
and which we refer to as XO Parent, filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York, which we refer to as
the Bankruptcy Court, as part of the balance sheet recapitalization process
that we commenced in November 2001. Concurrent with the Chapter 11 filing, XO
Parent filed a proposed plan of reorganization, which we refer to as the Plan
of Reorganization, with the Bankruptcy Court that included two alternative
restructuring scenarios. None of the operating subsidiaries are debtors in the
Chapter 11 proceedings.

The first of the two reorganization alternatives in the Plan of
Reorganization, the Forstmann Little/Telmex Investment as defined below, would
have implemented the transactions contemplated by the Stock Purchase Agreement,
dated January 15, 2002, with XO Parent, and two investment partnerships
affiliated with Forstmann Little & Co., Forstmann Little & Co. Equity
Partnership-VII, L.P. and Forstmann Little & Co. Subordinated Debt and Equity
Management Buyout Partnership-VIII, L.P., and Télefonos de México S.A. de C.V.
We refer to the Forstmann Little & Co. investment partnerships and Télefonos de
México S.A. de C.V. collectively as the Investors. We refer to the transactions
contemplated by the Stock Purchase Agreement as the Forstmann Little/Telmex
Investment.

17



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##### 



On October 13, 2002, XO Parent agreed with each
of the Investors to mutually terminate the Stock Purchase Agreement and to settle any potential claims
relating to the agreement or its termination. Under the terms of the settlement
agreement, the Stock Purchase Agreement will be deemed terminated, the
Investors each will pay XO $12.5 million, or a total of $25.0 million, and all parties will release
any claims they may have relating to the Stock Purchase Agreement. We have scheduled a
hearing with the Bankruptcy Court for November 15, 2002 to consider the
approval of the settlement agreement. Pursuant to the Settlement Agreement, the
Investors have been deemed to have delivered a notice to XO Parent reflecting their election to
terminate the Stock Purchase Agreement based on the Investors determination
that specified conditions in the Stock Purchase Agreement had not been and
could not be met, following relief granted by the Bankruptcy Court necessary to allow
such notice to be delivered.

Based on the execution of the settlement agreement and delivery of the
termination notice described above, XO Parent has concluded that the Investors
will not complete the transactions contemplated by the Stock Purchase
Agreement. Based on this assessment, XO Parent is proceeding with the second
alternative in its Plan of Reorganization, the stand-alone alternative, which
we refer to as the Stand-Alone Reorganization, that XO Parent included as part
of its Plan of Reorganization as a contingency plan in the event that the
Forstmann Little/Telmex Investment was not consummated. As part of this
process, XO Parent will withdraw the Forstmann Little/Telmex Investment
alternative, which the Bankruptcy Court confirmed on August 26, 2002, and seek
confirmation by the Bankruptcy Court of the Stand-Alone Reorganization. The
Bankruptcy Court has scheduled a hearing for confirmation of the Stand-Alone
Reorganization on November 15, 2002.

XO Parent believes
that entities controlled by Carl C. Icahn and the
Official Committee of Unsecured Creditors appointed in XO Parents bankruptcy
case, which we refer to as the Creditors Committee, have reached
agreement and approved the terms of various plan supplement documents and
agreements filed with the U.S. Bankruptcy Court for the Southern District of
New York that would take effect upon implementation of the Stand-Alone
Reorganization. Entities controlled by Mr. Icahn hold approximately 85% of the
principal amount of XO Parents $1.0 billion senior secured credit facility,
which we refer to as the Facility, and more than $1.3 billion of principal
amount of XOs senior unsecured notes. We expect that, based upon the agreement reached on the
plan supplement documents and agreements, neither these Icahn
controlled entities nor
the Creditors Committee, which represent the most significant creditor
constituencies in the XO Parent Chapter 11 proceedings, will object to the
confirmation of the Stand-Alone Reorganization. Neither of these parties
has filed such an objection with the Bankruptcy Court as of November
8, 2002, the deadline for creditors and other interested parties to
object to confirmation of the plan.

Under the Stand-Alone Reorganization, XO Parent expects that the $1.0
billion in principal outstanding under the Facility plus accrued interest will
be converted into the following securities:



| |  |  | 95% of the outstanding equity of reorganized XO; and                                                                                                                                                                                             
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $500.0 million in principal amount of junior secured loans
with required principal payments occurring later than provided in
the Facility and no cash interest payments required by reorganized
XO until it achieves specified financial targets.



| |             
| | ------------
| | In addition:



| |  |  | nontransferable rights to purchase $200.0 million (subject to
increase as described below) of reorganized XOs common stock, at
$5.00 per share, would be granted to holders of XO Parents senior
unsecured notes and XO Parents general unsecured creditors, and if
not fully subscribed by these holders and creditors, to holders of
XO Parents subordinated convertible notes and preferred and common
stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to the extent that rights to purchase reorganized XOs common
stock with an aggregate exercise price of less than $16.7 million
are made available to existing holders of XO Parents class A common
stock, additional rights will be issued to these holders such that
rights with an aggregate exercise price of $16.7 million are made
available to such holders; and                                            
|
| |  |  | to the extent such rights are not exercised, reorganized XO
would be permitted to obtain a senior secured exit facility of up to
$200.0 million.                                                                                                                                                                                                                                                                    

In addition, based on the level of support for the Stand-Alone
Reorganization received from holders of XO Parents senior unsecured notes and
XO Parents general unsecured creditors in the Plan of Reorganization
confirmation process, XO Parent expects that such note holders and general
unsecured creditors collectively will receive, among other consideration:

18



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##### 





| |  |  | 5% of the initial outstanding common equity in reorganized XO; and                 
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | three series of warrants exercisable over a seven year period, which would include:



| |  |  | warrants to purchase up to 10% of the common equity
of reorganized XO at an exercise price equal to 125% of
reorganized XOs implied equity value in the Stand-Alone
Reorganization;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants to purchase up to 7 1/2% of the common
equity of reorganized XO at an exercise price equal to 150% of
the implied equity value in the Stand-Alone Reorganization; and      
|
| |  |  | warrants to purchase up to 7 1/2% of the common
equity of reorganized XO at an exercise price equal to 200% of
the implied equity value in the Stand-Alone Reorganization.          

We have commenced the process of seeking the regulatory approvals required
to complete the Stand-Alone Reorganization. We believe that the receipt of
these regulatory approvals and the confirmation of the Stand-Alone
Reorganization by the Bankruptcy Court are the two most significant steps
that we must accomplish before the reorganization can be completed and XO
Parent can emerge from bankruptcy.

Consummation of the Stand-Alone Reorganization will result in all equity
interests in XO Parent, including its class A common stock, being cancelled and
discharged and the holders of such equity securities would not receive any
distribution under the Stand-Alone Reorganization. However, the Stand-Alone
Reorganization does provide that the current holders of common stock will be
allowed to participate in the rights offering discussed above.

As a consequence of the bankruptcy petition, all pending claims and
litigation against XO Parent are stayed automatically by Section 362 of the
Bankruptcy Code, and absent further order of the Bankruptcy Court, no party may
take any action to recover any pre-petition claims, enforce any lien against or
obtain possession of any property from XO Parent. In addition, pursuant to
Section 365 of the Bankruptcy Code, XO Parent may reject or assume pre-petition
executory contracts and unexpired leases, and parties affected by rejections of
these contracts or leases, may file claims with the Bankruptcy Court in
accordance with the Chapter 11 reorganization process. The Creditors Committee
has been formed to represent all unsecured creditors including all holders of
XO Parents unsecured notes and, in accordance with the provisions of the
Bankruptcy Code, will have the right to be heard on all matters that come
before the Bankruptcy Court.

We conduct our operations through direct and indirect subsidiaries of XO
Parent. While XO Parent has been in the reorganization process under Chapter 11
of the Bankruptcy Code, our subsidiaries have continued to operate in the
ordinary course of business, and we expect them to continue to do so through
completion of the Chapter 11 proceedings. None of the operating subsidiaries
are debtors in the Chapter 11 proceedings. Bankruptcy Court approval of our
Plan of Reorganization could materially change the amounts and classifications
reported in the condensed consolidated financial statements.

Due to XO Parents Chapter 11 filing, our financial statements have been
prepared in accordance with AICPA Statement of Position 90-7 Financial
Reporting by Entities in Reorganization under the Bankruptcy Code, hereinafter
referred to as SOP 90-7. As such, the financial statements for the periods
presented distinguish transactions and events that are directly associated with
our reorganization from our ongoing operations. Based on the current terms of
the Stand-Alone Reorganization, we believe we would qualify for and be required
to implement the Fresh Start accounting provisions of SOP 90-7 upon emergence
from bankruptcy, which would establish a fair value basis for the carrying
value of the assets and liabilities of reorganized XO. We expect that the
implementation of Fresh Start accounting would result in a substantial
reduction in the carrying amount of our long-lived assets, including property
and equipment, fixed wireless licenses, other intangible assets and other
non-current assets. Specifically, if the Stand-Alone Reorganization is
confirmed and ultimately consummated, we estimate that the fair value of our
long-lived assets for the purposes of SOP 90-7 would be approximately $1.0 billion.

Intercity Network Agreement

On August 8, 2002, we entered into a Master Agreement with Level 3
Communications, Inc., which amends various agreements related to
XOs acquisition of fiber networks in the United States from Level 3 and the
recurring maintenance thereon. Beginning on January 1, 2003 and continuing over
the remaining term of the initial agreement, Level 3 will reduce the operating
and maintenance fees as well as fiber relocation charges from approximately
$17.0 million annually to a fixed rate of $5.0 million annually. In exchange
for this reduction and certain other concessions, upon closing, we will
surrender our indefeasible right to use an empty conduit and six of the 24
fibers previously acquired from Level 3.

19



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##### 



Closing of these transactions is subject to several conditions, including
regulatory and Bankruptcy Court approvals. The Bankruptcy Court approved the
Master Agreement on September 27, 2002. Either party may terminate the Master
Agreement if these transactions do not close by February 28, 2003. Because we
have committed to this plan of disposal and believe that consummation of the
transaction contemplated by the Master Agreement is probable, we recorded a
$477.3 million non-cash write-down of these assets during the third quarter of
2002. Pursuant to applicable accounting principles, the write-down is based on
the book value of the surrendered facilities and does not reflect the future
benefits to be received by us under the Master Agreement. As discussed above,
we expect to implement the Fresh Start accounting provisions of SOP 90-7 upon
emergence from bankruptcy which will result in a further reduction in the
carrying value of the fiber networks previously acquired from Level 3.

Prepaid Calling Card Tax Matter

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

New Accounting Pronouncement

In April 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002). SFAS No. 145 eliminates the requirement to
report material gains or losses from debt extinguishments as an extraordinary
item, net of any applicable income tax effect, in an entitys statement of
operations. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both unusual in nature and infrequent
in occurrence as prescribed under Accounting Principles Board
Opinion No. 30,
Reporting the Results of Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions. The provisions of SFAS No. 145 are effective for
fiscal years beginning after May 15, 2002 with respect to the rescission of
SFAS No. 4 and for transactions occurring after May 15, 2002, with respect to
provisions related to SFAS No. 13. We have recognized extraordinary gains from
debt extinguishments in 2001 and believe that the classification of such gains
as extraordinary items will change under SFAS No. 145 effective as of the first
quarter of 2003.

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

Comparison of Financial Results



|Three and Nine Months Ended September 30, 2002 versus Three and Nine Months
Ended September 30, 2001
|----------------------------------------------------------------------------------------------------

All of the discussions below regarding our expectations with respect to
future periods, particularly with respect to revenue and operating expenses,
are predicated on the assumption that the Plan of Reorganization will be
confirmed by the Bankruptcy Court and subsequently consummated in the near
term, and, therefore, should be read in conjunction with all of the substantial
risks and uncertainties surrounding any such transaction, as well as
uncertainties with respect to general economic conditions and the
telecommunications industry. For a discussion of some of these risks and
uncertainties, see Risks and Uncertainties below.

20



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##### 



Revenue. Total revenue for the nine months ended September 30, 2002
increased 4.9% to $960.4 million from $915.6 million in the same period of
2001. This increase is in large measure the result of the penetration of enhanced products to new and existing
customers in 2002. Total revenue in the third quarter of 2002 decreased 9.0% to
$301.5 million from $331.5 million in the third quarter of 2001. This decrease
is primarily attributed to the effects of customer churn, lower demand from
large customers due to reductions in those customers telecommunications
capacity needs, large customer bankruptcies, particularly by carrier customers,
and the February 2002 sale of our European operations. Lower growth in customer
additions and expansions of service provided to existing customers, in part as
a result of the uncertainty regarding XO Parents ability to successfully
emerge from bankruptcy, prevented us from completely offsetting the effects
described above. We believe that total revenue in the near term will remain
relatively stable. Assuming that the Stand-Alone Reorganization is confirmed by
the Bankruptcy Court and XO Parent emerges from bankruptcy in late 2002, and no
significant further deterioration of industry or general economic conditions,
we expect modest revenue growth to resume in the second half of 2003.

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

|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |  |       |      |   
|------------------------- | ------------- | - | ------- | ------- | ------------ |  | -------------------------------- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | ---- | --
|                          |               |   |         |         |              |  | Three Months Ended September 30, |       |              |   |         
|                          |               |   |        
|                          |               |   | 2002    |         | % of Revenue |  | 2001                             |       | % of Revenue |   | % Change
|                          |               |   |         |         |              |  |                                  |       |              |   |         
|Voice services            |               | $ | 158,003 |         |              |  | 52.4                             | %     |              | $ | 161,546  |         |  |  | 48.7 | %     |   |  | (2.2  | %)  
|Data services             |               |   | 109,892 |         |              |  | 36.4                             | %     |              |   | 152,679  |         |  |  | 46.1 | %     |   |  | (28.0 | %)  
|Integrated voice and data |               |   | 33,426  |         |              |  | 11.1                             | %     |              |   | 16,386   |         |  |  | 4.9  | %     |   |  | 104.0 | %   
|Other services            |               |   | 205     |         |              |  | 0.1                              | %     |              |   | 867      |         |  |  | 0.3  | %     |   |  | (76.4 | %)  
|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |  |       |     
|                          | Total revenue |   | $       | 301,526 |              |  |                                  | 100.0 | %            |   | $        | 331,478 |  |  |      | 100.0 | % |  |       | (9.0 | %)
|                          |               |   |         |         |              |  |                                  |       |              |   |          |         |  |  |      |       |   |  |       |     

|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |  |       |     |  
|------------------------- | ------------- | - | ------- | ------- | ------------ |  | ------------------------------- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | --- | -
|                          |               |   |         |         |              |  | Nine Months Ended September 30, |       |              |   |         
|                          |               |   |        
|                          |               |   | 2002    |         | % of Revenue |  | 2001                            |       | % of Revenue |   | % Change
|                          |               |   |         |         |              |  |                                 |       |              |   |         
|Voice services            |               | $ | 501,196 |         |              |  | 52.2                            | %     |              | $ | 440,387  |         |  |  | 48.1 | %     |   |  | 13.8  | %  
|Data services             |               |   | 364,283 |         |              |  | 37.9                            | %     |              |   | 443,866  |         |  |  | 48.5 | %     |   |  | (17.9 | %) 
|Integrated voice and data |               |   | 93,765  |         |              |  | 9.8                             | %     |              |   | 28,514   |         |  |  | 3.1  | %     |   |  | 228.8 | %  
|Other services            |               |   | 1,167   |         |              |  | 0.1                             | %     |              |   | 2,797    |         |  |  | 0.3  | %     |   |  | (58.3 | %) 
|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |  |       |    
|                          | Total revenue |   | $       | 960,411 |              |  |                                 | 100.0 | %            |   | $        | 915,564 |  |  |      | 100.0 | % |  |       | 4.9 | %
|                          |               |   |         |         |              |  |                                 |       |              |   |          |         |  |  |      |       |   |  |       |    

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 2002 decreased to $158.0 million from $161.5
million in the third quarter of 2001 primarily due to lower FCC mandated rates
for Carrier Access Billing effective late July 2002, and major customer
bankruptcies. This decrease was partially offset by growth in voice services
sold to carriers. Voice services revenue for the nine months ended September 30,
2002 increased to $501.2 million from $440.4 million in the same period of
2001. This increase is primarily due to our targeting of larger business
customers and the growth in voice services sold to carriers. This growth was
somewhat mitigated by customer bankruptcies and churn. We believe that voice
services revenue in the near term will remain relatively stable. Assuming the
Stand-Alone Reorganization is confirmed by the Bankruptcy Court and XO Parent
emerges from bankruptcy in late 2002, we expect modest revenue growth in voice
services to resume in the second half of 2003.

Data services revenue includes revenue from Internet access, network
access and applications hosting services. Data services revenue in the third
quarter of 2002 decreased to $109.9 million from $152.7 million in the third
quarter of 2001. For the nine months ended September 30, 2002, data revenue
decreased to $364.3 million from $443.9 million in the same period of 2001. The
decreases during both periods were primarily attributable to customer
bankruptcies, customer churn, lower demand from large customers due to
reductions in those customers data capacity needs, as well as the February
2002 sale of our European operations. In the near term, we expect data services
revenue to remain relatively constant or decline slightly. Assuming the
Stand-Alone Reorganization is confirmed by the Bankruptcy Court and XO Parent
emerges from bankruptcy late in 2002, we expect modest revenue growth in data
services revenue to resume in the second half of 2003.

Integrated voice and data services revenue is generated largely from our
XOptions product, a flat-rate bundled package offering a combination of voice
and data services, which was added to our product portfolio in the fourth
quarter of 2000. Integrated voice and data services revenue in the third
quarter of 2002 increased to $33.4 million from $16.4 million in the third
quarter of 2001. For the nine months ended September 30, 2002, integrated voice
and data services revenue increased to $93.8 million from $28.5 million in the same period of 2001. The increase is primarily
attributable to the success of our XOptions service offering. We expect that
the rate of growth of integrated voice and data services revenue will slow in
the near term, but experience stronger growth in the second half of 2003,
assuming that the Stand-Alone Reorganization is confirmed by the Bankruptcy
Court and XO Parent emerges from bankruptcy late in 2002.

21



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##### 



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

|                    |                                     |   |                                  |         |              |  |      |       |              |   |          |         |  |  |    |      |    |  |      |       |   
|------------------- | ----------------------------------- | - | -------------------------------- | ------- | ------------ |  | ---- | ----- | ------------ | - | -------- | ------- |  |  | -- | ---- | -- |  | ---- | ----- | --
|                    |                                     |   | Three Months Ended September 30,
|                    |                                     |   |                                 
|                    |                                     |   | 2002                             |         | % of Revenue |  | 2001 |       | % of Revenue |   | % Change
|                    |                                     |   |                                 
|Costs and expenses: |                                     |   |                                  |         |              |  |      |       |              |   |          |         |  |  |    |      |    |  |      |      
|                    | Cost of service                     |   | $                                | 126,215 |              |  |      | 41.9  | %            |   | $        | 138,100 |  |  |    | 41.7 | %  |  |      | (8.6  | %)
|                    | Selling, operating and general      |   |                                  | 175,030 |              |  |      | 58.0  | %            |   |          | 246,864 |  |  |    | 74.5 | %  |  |      | (29.1 | %)
|                    | Reorganization                      |   |                                  | 25,407  |              |  |      | 8.4   | %            |   |          |        |  |  | NM |      | NM
|                    | Restructuring and asset
write-downs |   |                                  | 477,250 |              |  |      | 158.3 | %            |   |          | 189,137 |  |  |    | 57.1 | %  |  |      | 152.3 | % 
|                    | Stock-based compensation            |   |                                  | 8,776   |              |  |      | 2.9   | %            |   |          | 9,230   |  |  |    | 2.8  | %  |  |      | (4.9  | %)
|                    | Depreciation and amortization       |   |                                  | 187,256 |              |  |      | 62.1  | %            |   |          | 295,432 |  |  |    | 89.1 | %  |  |      | (36.6 | %)
|                    |                                     |   |                                  |         |              |  |      |       |              |   |          |         |  |  |    |      |    |  |     
|Total               |                                     | $ | 999,934                          |         |              |  |      |       |              | $ | 878,763  |         |  |  |    |      |    |  | 13.8 | %    
|                    |                                     |   |                                  |         |              |  |      |       |              |   |          |         |  |  |    |      |    |  |     

NM  Not Meaningful

|                    |                                     |   |                                 |         |              |  |      |      |              |   |           |         |  |  |    |      |    |  |      |       |   
|------------------- | ----------------------------------- | - | ------------------------------- | ------- | ------------ |  | ---- | ---- | ------------ | - | --------- | ------- |  |  | -- | ---- | -- |  | ---- | ----- | --
|                    |                                     |   | Nine Months Ended September 30,
|                    |                                     |   |                                
|                    |                                     |   | 2002                            |         | % of Revenue |  | 2001 |      | % of Revenue |   | % Change 
|                    |                                     |   |                                
|Costs and expenses: |                                     |   |                                 |         |              |  |      |      |              |   |           |         |  |  |    |      |    |  |      |      
|                    | Cost of service                     |   | $                               | 400,928 |              |  |      | 41.7 | %            |   | $         | 375,936 |  |  |    | 41.1 | %  |  |      | 6.6   | % 
|                    | Selling, operating and general      |   |                                 | 568,533 |              |  |      | 59.2 | %            |   |           | 740,959 |  |  |    | 80.9 | %  |  |      | (23.3 | %)
|                    | Reorganization                      |   |                                 | 95,553  |              |  |      | 9.9  | %            |   |           |        |  |  | NM |      | NM
|                    | Restructuring and asset
write-downs |   |                                 | 480,168 |              |  |      | 50.0 | %            |   |           | 189,137 |  |  |    | 20.7 | %  |  |      | 153.9 | % 
|                    | Stock-based compensation            |   |                                 | 26,762  |              |  |      | 2.8  | %            |   |           | 27,857  |  |  |    | 3.0  | %  |  |      | (3.9  | %)
|                    | Depreciation and amortization       |   |                                 | 516,455 |              |  |      | 53.8 | %            |   |           | 849,626 |  |  |    | 92.8 | %  |  |      | (39.2 | %)
|                    |                                     |   |                                 |         |              |  |      |      |              |   |           |         |  |  |    |      |    |  |      |       |   
|Total               |                                     | $ | 2,088,399                       |         |              |  |      |      |              | $ | 2,183,515 |         |  |  |    |      |    |  | (4.4 | %)   
|                    |                                     |   |                                 |         |              |  |      |      |              |   |           |         |  |  |    |      |    |  |      |       |   

NM  Not Meaningful

Cost of service. Cost of service includes expenses directly associated
with providing telecommunications services to our customers. Cost of service
includes, among other items, the cost of connecting customers to our networks
via leased facilities, the costs of leasing components of our network
facilities and costs paid to third party providers for interconnect access and
transport services. Cost of service for the three and nine months ended
September 30, 2002 increased slightly as a percentage of revenue versus the
comparable periods in 2001. For the nine months ending September 30, 2002,
voice and integrated services revenue increased as a percentage of total
revenue resulting in lower margins as these services are more likely to utilize
leased versus owned network facilities to terminate calls. In addition,
customer bankruptcies have, in some instances, resulted in losses of high
margin on-net services. During the three and nine months ending September 30,
2002, cost optimization programs to reduce expenses associated with leased
network facilities helped to offset the impact of the change in product mix and
the reduction in revenue due to customer bankruptcies. We expect cost of
service as a percentage of revenue to remain relatively constant, with slight
fluctuations corresponding to the trends in revenue, product mix and the impact
of customer bankruptcies.

Selling, operating and general.Selling, operating and general expense
includes expenses related to sales and marketing, internal network operations
and engineering, information systems, general corporate office functions and
collection risks. Selling, operating and general expense in the third quarter
of 2002 was $175.0 million compared to $246.9 million in the third quarter of
2001. For the nine months ended September 30, 2002, selling, operating, and
general expense was $568.5 million compared to $741.0 million for the same
period in 2001. The decrease in both absolute dollars and as a percentage of
revenue was due to efficiencies resulting from the centralization of many
functions, cost reduction and restructuring initiatives that included
significant head count reductions and the February 2002 sale of our European operations. We expect selling, operating and general expense to
be flat or to decline slightly in absolute dollars and as a percentage of
revenue.

22



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Reorganization.Reorganization expenses include adjustments to our
financial position and professional service fees that are a direct result of
our Chapter 11 filing and our application of the accounting required by SOP
90-7. For the three months ended September 30, 2002, the $25.4 million of
expense included net losses on the rejection of contracts and post-petition
professional fees for bankruptcy services. For the nine months ended September
30, 2002, the $95.6 million of expense included (i) non-cash charges for
issuance costs, discounts and purchase accounting adjustments to adjust the
historical carrying amounts of our Facility and senior unsecured notes to the
estimated allowed claim amount by the Bankruptcy Court, (ii) deferred
professional fees associated with our Plan of Reorganization that were written
off as of the Petition Date (iii) post-petition professional fees for
bankruptcy services and (iv) the net losses on the rejection of contracts.

Restructuring and asset write-downs.Restructuring and asset write-downs
were $477.3 million and $480.2 million, respectively, for the three and nine
months ended September 30, 2002, and $189.1 million for both the three and
nine months ended September 30, 2001. During the third quarter of 2001, we
incurred restructuring charges of $189.1 million due to our plan to
restructure certain of our business operations which included reductions of our
discretionary spending, capital expenditures and workforce based on our
assessment of current and future market conditions. In the second quarter of
2002, we continued to restructure our operations and reduced our workforce by
approximately 350 additional employees, the majority of which were employed in
network operations, sales and marketing and information technology, and
recorded a $2.9 million restructuring charge related to the involuntary
termination severance liability. The employment of the majority of the notified
employees was terminated by June 30, 2002. As discussed above in Recent Events,
we recorded a $477.3 million non-cash asset write-down during the third quarter
of 2002 as a result of our entering into an agreement with Level 3 that will
amend various agreements with Level 3 relating to our intercity fiber network
facilities.

Stock-based compensation. Stock-based compensation expense represents
non-cash charges recorded in connection with the grant of compensatory stock
options and restricted stock to employees whose compensation is included in
selling, operating and general expense. Compensation expense is recognized over
the vesting periods of such grants based on the excess of the fair value of the
common stock at the date of grant (determined by reference to the market price
on that date) over the exercise price. Stock-based compensation of $8.8 million
in the third quarter of 2002 was consistent with the $9.2 million recorded in
the third quarter of 2001. For the first nine months of 2002, stock-based
compensation of $26.8 million was consistent with the $27.9 million for the
first nine months of 2001. Assuming we complete our Plan of Reorganization and
implement Fresh Start accounting, we would eliminate the carrying value of
deferred compensation and the related stock-based compensation expense. Post
reorganization, stock-based compensation expense would relate only to new
grants of compensatory stock options and restricted stock, if any.

Depreciation and amortization. We have constructed and integrated
end-to-end facilities-based networks in the United States, consisting of metro
fiber networks and fixed wireless connections. As we launched and expanded
services and more assets were placed into service, we also increased our
obsolescence expense, both of which caused depreciation expense to increase to
$161.0 million for the third quarter of 2002 from $116.5 million for the third
quarter of 2001 and to $437.5 million for the first nine months of 2002 from
$316.2 million in the first nine months of 2001. Assuming we complete the
Stand-Alone Reorganization and implement Fresh Start accounting, we would
expect to adjust the carrying value of our property and equipment to its
estimated fair value which we estimate to be significantly lower than
historical cost due to competitive market conditions and technological
advancements. Accordingly, we would expect depreciation expense to decrease
significantly to the extent that Fresh Start accounting is applied to the
Company upon completion of our Plan of Reorganization. As of September 30,
2002, we had approximately $728.5 million of long-lived assets, including
construction-in-progress and certain fixed wireless licenses that are not
currently ready for their intended use and accordingly, are not currently being
depreciated or amortized.

Amortization expense includes the amortization of fixed wireless licenses
and other intangible assets with definite lives and, for 2001, also includes
the amortization of goodwill. Amortization expense decreased to $26.3 million
for the third quarter of 2002 from $178.9 million in the third quarter of 2001,
and it decreased to $79.0 million for the first nine months of 2002 from $533.4
million for the first nine months of 2001. This significant decrease is
primarily due to our implementation of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, and the resulting write-off of all
our goodwill as of January 1, 2002. Additionally, assuming we complete the Stand-Alone
Reorganization and implement Fresh Start accounting, we would expect to
significantly reduce the carrying value of our fixed wireless licenses and
other intangible assets to their estimated fair values. Accordingly, we would
expect amortization expense to further decrease in those circumstances.

23



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Interest income. Interest income in the third quarter of 2002 decreased to
$3.8 million from $15.0 million in the third quarter of 2001. For the nine
months ended September 30, 2002, interest income decreased to $13.6 million
from $71.9 million in the first nine months of 2001. The decrease in interest
income corresponds to the decrease in our average cash and marketable
securities balances and a reduction in interest rates. The amount of interest
income attributable to increased cash balances during the bankruptcy
proceedings was not material.

Interest expense, net. Interest expense in the third quarter of 2002
decreased to $0.6 million from $115.8 million in the third quarter of 2001. For
the nine months ended September 30, 2002, interest expense decreased to $225.8
million from $350.2 million in the first nine months of 2001. Interest expense
decreased for the three and nine months ended September 30, 2002 because we
ceased accruing interest and penalties on our senior unsecured and subordinated
notes as of the Petition Date and ceased accruing interest expense on the
Facility as of July 1, 2002. The contractual interest amounts reflected on the
accompanying condensed consolidated statement of operations represent the
interest expense that would have been accrued under the relevant financing
agreements had we not ceased accruing interest as described above.

Other income (loss), net.Other income (loss), net was zero in the third
quarter of 2002, and a net loss of $86.6 million in the third quarter of 2001.
For the nine months ending September 30, 2002 and 2001, we recorded a net loss
of $0.2 million and $93.0 million, respectively. The 2001 balances include an
$87.0 million write-down for an other than temporary decline on the value of
certain available-for-sale and equity method investments, which was recorded in
the third quarter of 2001.

Net loss before extraordinary gain and cumulative effect of accounting
change. Net loss before extraordinary gain and cumulative effect of accounting
change in the third quarter of 2002 improved to $695.2 million from a net loss
before cumulative effect of accounting change of $734.7 million in the third
quarter of 2001, and improved to a net loss of $1,340.4 million for the first
nine months of 2002 from a net loss of $1,639.3 million in the first nine
months of 2001 due to the foregoing factors.

Extraordinary gain on early extinguishments of debt, net.In the third
quarter of 2001, we recorded an extraordinary gain totaling $335.7 million
related to our repurchase of $547.3 million of senior notes at a substantial
discount from their respective face values.

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

Net loss. Net loss in the third quarter of 2002 was $695.2 million,
compared to a net loss of $398.9 million in the third quarter of 2001, and was
$3,217.0 million for the first nine months of 2002, compared to $1,303.5
million in the first nine months of 2001. The increases in our net loss for the
comparable three and nine month periods were due to the foregoing factors.

Recognition of
preferred stock modification fee-reorganization item.We
had been periodically recognizing a deferred modification fee on our preferred
stock. As our preferred stock is deemed subject to compromise under SOP 90-7,
the remaining $81.5 million unamortized balance of this deferred modification
fee was recognized as of the Petition Date.

Other preferred stock reorganization items, net.Because our preferred
stock is deemed subject to compromise under SOP 90-7, as of the Petition Date,
we wrote off certain unamortized issuance costs and recognized certain purchase
accounting adjustments related to the preferred stock which netted a $2.8
million charge during the nine month period ended September 30, 2002.

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

Preferred stock dividends and accretion of preferred stock redemption
obligation, net.As our preferred stock is deemed subject to compromise under
SOP 90-7, we have ceased accruing dividends and accreting the redemption obligation on all of our outstanding preferred
stock as of our Petition Date. As a result, we recorded no preferred stock
dividends during the third quarter of 2002 as compared to a $28.7 million net
expense in the third quarter of 2001. This also caused the net expense to
decrease to $42.3 million for the first nine months of 2002 from $107.4 million
for the first nine months of 2001. The contractual dividend amounts reflected
on the accompanying condensed consolidated statement of operations represent
the dividends that would have been accrued under the terms of our preferred
stock had we not ceased accruing such dividends as described above.

24



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Net loss applicable to common shares. Net loss applicable to common shares
in the third quarter of 2002 was $695.2 million versus a net loss of $50.8
million in the third quarter of 2001, and was $3,180.5 million for the first
nine months of 2002 versus $1,034.0 million in the first nine months of 2001
due to the foregoing factors.

Other Operating Data

EBITDA. EBITDA is not a measure under generally accepted accounting
principles but rather is a measure employed by management to view operating
results adjusted for major non-cash and unusual or infrequent items. EBITDA for
the presented periods, as defined by XO, represents loss from operations
adjusted for: reorganization, restructuring and asset write-downs,
stock-based compensation, and depreciation and amortization expenses. The table
below summarizes EBITDA (dollars in thousands):

|       |  |                                  |     |                                 |  |      |         |      |  |   |        |   |  |   |          |  
|------ |  | -------------------------------- | --- | ------------------------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | -------- | -
|       |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|       |  |                                  |     |                                
|       |  | 2002                             |     | 2001                            |  | 2002 |         | 2001
|       |  |                                  |     |                                 |  |      |         |     
|EBITDA |  | $                                | 281 |                                 |  | $    | (53,486 | )    |  | $ | (9,050 | ) |  | $ | (201,331 | )

EBITDA has improved for the three and nine months ending September 30,
2002 over comparable periods in 2001, primarily due to the decrease in selling,
operating and general expenses as a result of our operating cost reductions as
discussed above. EBITDA for the third quarter of 2002 was $0.3 million versus
an EBITDA loss of $53.5 million in the third quarter of 2001 and EBITDA was a
loss of $9.1 million for the nine months ending September 30, 2002 as compared
to an EBITDA loss of $201.3 million for the nine months ended September 30,
2001. Based on the discussion above, we expect EBITDA to be relatively stable
in the near term, and to grow modestly as revenue grows.

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. Initially, this strategy has increased our operating
losses by requiring us to incur significant costs and to make substantial
capital investments before we realize related revenue. Consequently, our
business is capital-intensive and, as such, has required substantial capital
and will require additional capital investment to bring our operations to
profitability on a company-wide basis. We expect to incur negative cash flows
from operating and investing activities until we are able to establish an
adequate customer base.

Reorganization Overview and Liquidity Assessment

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

In order to complete any proposed recapitalization, we found it necessary
for XO Parent to file a voluntary petition for relief on June 17, 2002 under
Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court.
Concurrent with its Chapter 11 filing, XO Parent submitted a proposed Plan of
Reorganization, which is discussed in detail in the Overview section above and
in note 2 to the accompanying condensed consolidated financial statements. If
the Plan of Reorganization is ultimately approved by the Bankruptcy Court and
implemented by XO, we anticipate that XO Parent would:

25



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| |  |  | emerge from bankruptcy with significant reductions of its
existing debt and interest obligations and the elimination of its
preferred stock and dividend obligations;                                                                                                                                                                                                                                                                                                                                             
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | have sufficient cash to fund its business operations, at
least in the near term, pending any unforeseen future events or
further deterioration in the U.S. economy and the ability under the
junior secured credit facility referred to below to incur additional
senior secured debt in certain circumstances; and                                                                                                                                                                                               
|
| |  |  | have a $500 million junior secured credit facility in place
with financial covenants generally more favorable than those
included in our existing secured credit facility, with maturity and
principal repayment terms modified so that required principal
payments are deferred by approximately two years when compared to
the existing facility, and interest payment terms modified so that
no cash interest payments are required to be made by reorganized XO
until it achieves specified financial targets.

The $500 million junior secured credit facility will become effective upon
consummation of the Stand-Alone Reorganization. The maturity date of the term
loans under the junior facility, and the date at which automatic and permanent
quarterly reductions of the term notes commences, are dependent on the date
that the Stand-Alone Reorganization is consummated. Nevertheless, the maturity
date of the term loans will be no sooner that March 31, 2009, and the date that
automatic and permanent quarterly reductions of the term loans commences will
be no sooner than June 30, 2007, representing an extension of approximately two
years when compared to the terms of the existing Facility. The security for the
junior secured credit facility consists of the stock of certain of our
subsidiaries, all asset of XO and all assets of certain of XOs
subsidiaries. The junior facility limits additional indebtedness, liens,
dividend payments and certain investments and transactions, and contains
certain covenants with respect to minimum cash balance and EBITDA requirements
and maximum capital expenditures.

We are not required to pay accrued interest on the term loans under the
junior secured credit facility in cash until we meet certain financial ratios,
unless we make a prior election to begin paying interest in cash or, at our
request, lenders who hold a majority of the principal amount outstanding under
the junior facility specify a later date. The term loans under the junior
secured credit facility bear interest, at our option, at an alternate base
rate, as defined, or reserve-adjusted London Interbank Offered Rate plus, in
each case, applicable margins. Once the Company begins to pay accrued interest
in cash, the applicable margins are reduced. Under certain circumstances, the
junior secured credit facility permits us to obtain a senior secured facility
of up to $200.0 million.

We continue to focus on minimizing our cash burn rate and preserving cash
and marketable securities and have reduced the rate at which we use cash. For
the past nine months, the reduction in the rate at which we use our cash has
been accomplished by:



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

Our balance of cash and marketable securities increased slightly to $554.5
million at September 30, 2002 from $535.9 million at June 30, 2002. This increase primarily resulted from
positive working capital contributions from our collection of accounts receivable and from the deferral or avoidance of XO Parents
obligation to pay certain expenses as a result of the bankruptcy proceeding. Also contributing to the reduced cash burn rate in the third
quarter was the fact that XO Parent ceased paying interest on the Facility at the end of the second quarter. Following completion of the
Stand-Alone Reorganization and upon XO Parents emergence from
bankruptcy, we expect that our balance of cash and marketable securities will
decline over future periods as a result of capital expenditures, including capital expenditures related to new
business, and the use of cash to meet working capital requirements.

Under our current assumptions with respect to future operations, including
nonpayment of interest and dividends during the reorganization process and the
assumption that the Stand-Alone Reorganization is implemented substantially as
currently contemplated in late 2002, we estimate that the
$554.5 million of cash and marketable securities on hand as of September 30, 2002 will be
sufficient to fund our operations for the remainder of 2002 and throughout
2003.

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If XO Parent is unable to implement the Stand-Alone Reorganization, there
can be no assurance that XO Parent will be able to develop and implement a
viable reorganization plan. If the process for implementing the Stand-Alone
Reorganization or any other such plan is delayed, we may experience difficulty
in retaining customers which could, in turn, result in more significant revenue
declines that would adversely impact our liquidity and reduce the time period
for which our existing cash and marketable securities would fund our
operations. If the Stand-Alone Reorganization is not completed, and if we are
not able to develop and implement a feasible alternative reorganization
transaction, we may be forced to liquidate under applicable provisions of the
Bankruptcy Code. There can be no assurance of the level of recovery our secured
and unsecured creditors would receive in such a liquidation.

Credit Risk

Financial instruments that potentially subject XO to concentrations of
credit risk consist primarily of trade receivables. Although our trade
receivables are geographically dispersed and include customers in many
different industries, a portion of our revenue is generated from services
provided to other telecommunications service providers. Several of these
companies have recently filed for protection under Chapter 11 of the Bankruptcy
Code. We believe that our established valuation and credit allowances are
adequate as of September 30, 2002 to cover these risks.

Going Concern

Our condensed consolidated financial statements have been prepared
assuming we will continue as a going concern. Our independent accountants at
December 31, 2001, Arthur Andersen LLP, issued a going concern opinion
qualification in its report on our financial statements for the year ended
December 31, 2001. As discussed in our Annual Report on Form 10-K for the year
ended December 31, 2001, we had defaulted on our debt obligations and had
incurred recurring operating losses and negative cash flows from operating
activities, which raised substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent upon a
number of factors including, but not limited to, completion of the Plan of
Reorganization, customer and employee retention, and our continued ability to
provide high quality services. If the Plan of Reorganization is not completed,
we may be forced to liquidate under applicable provisions of the Bankruptcy
Code. Our consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities if we were forced to
liquidate.

Risks and Uncertainties

Our ability to complete the balance sheet restructuring contemplated by
our Plan of Reorganization is subject to a number of risks and uncertainties
including those noted below. In addition, our business is subject to the risks
and uncertainties as they relate to the Chapter 11 case
noted below as well as the other risks described in our Annual Report on Form
10-K for the year ended December 31, 2001.

The Stand-Alone Reorganization may not be consummated if regulatory approvals
are not obtained.

Because affiliates of Carl Icahn will hold a controlling interest in XO
Parent upon completion of the Stand-Alone Reorganization, we must obtain the
approval of the Federal Communications Commission and various state public
utility commissions to transfer control of XO and thus consummate the
Stand-Alone Reorganization, the timely receipt of which can not be insured. In
addition, the enactment of new federal, state or local legislation or
regulations, including Federal Communications Commission rulemaking, or
judicial interpretations of new or existing legislation or regulations, could
delay receipt of the approvals necessary to implement the Stand-Alone
Reorganization or prevent them from being obtained.

Holders of certain claims and interests will receive no distribution under the
Plan of Reorganization.

The Plan of Reorganization sets forth the means for satisfying claims
against us. Holders of certain claims and interests receive no distributions
pursuant to the Plan of Reorganization. Reorganization of certain of our
businesses and operations under the proposed Plan of Reorganization also avoids
the potentially adverse impact of liquidation on our employees and other
stakeholders.

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The Bankruptcy Court may not agree with the classifications of claims and
interests contemplated by the Plan of Reorganization.

Section 1122 of the Bankruptcy Code provides that a plan may place a claim
or an interest in a particular class only if such claim or interest is
substantially similar to the other claims or interests of such class. We
believe that the classification of claims and interests under the Plan of
Reorganization complies with the requirements set forth in the Bankruptcy Code.
However, there can be no assurance that the Bankruptcy Court would reach the
same conclusion.

The Bankruptcy Court may not confirm the Plan of Reorganization or conditions
to its consummation may not be satisfied.

Because a sufficient number of holders of XO Parents senior unsecured
notes and general unsecured creditors have not voted to support the Stand-Alone
Reorganization, and certain other impaired classes of claims are deemed to have
rejected the plan, the Bankruptcy Court, which, as a court of equity, may
exercise substantial discretion, may choose not to confirm the Plan of
Reorganization as it relates to the Stand-Alone Reorganization. Section 1129 of
the Bankruptcy Code requires, among other things, a showing that confirmation
of the Plan of Reorganization will not be followed by liquidation or the need
for further financial reorganization of us, and that the value of distributions
to dissenting holders of claims and interests may not be less than the value
such holders would receive if we were liquidated under Chapter 7 of the
Bankruptcy Code. There can be no assurance that the Bankruptcy Court will
conclude the Plan of Reorganization as it relates to the Stand-Alone
Reorganization satisfies the requirements of Section 1129 of the Bankruptcy
Code.

The Plan of Reorganization provides for certain conditions that must be
fulfilled prior to confirmation and consummation of the plan. There can be no
assurance that these conditions will be satisfied (or waived), even if the
Bankruptcy Court confirms the Plan of Reorganization. Therefore, there can be
no assurance that the Plan of Reorganization will be consummated and the
restructuring completed. If the Plan of Reorganization is not consummated, it
could result in the Chapter 11 case becoming protracted or being converted into
Chapter 7 liquidation, either of which could substantially erode the value of
our enterprise to the detriment of all stakeholders.

Our operations may
be disrupted due to the filing of the Chapter 11 proceeding.

The Chapter 11 case could adversely affect the relationships with our
customers, suppliers and employees, who could adversely affect the going
concern value of the business, particularly if the Chapter 11 case is
protracted.

Our Chapter 11 proceeding and the publicity attendant thereto might also
adversely affect the businesses of our operating subsidiaries, which are not
parties to the Chapter 11 proceeding. Because our business is closely related
to the businesses of our operating subsidiaries, any downturn in the business
of our operating subsidiaries could also affect our prospects. Our operating
subsidiaries do not have the benefit of the automatic stay under the Bankruptcy
Code.

Forward-Looking and Cautionary Statements

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



| |  |  | results of operations in future periods, including expectations
regarding revenue trends, including those across various product lines,
and cost and expense trends, including our ability to control costs and
improve efficiencies;                                                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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;                                                                                         
|
| |  |  | 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 intercity networks; and

28



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| |  |  | liquidity and financial resources, and with respect to the Plan of
Reorganization, the transactions contemplated by the Stand-Alone
Reorganization or any alternative reorganization transaction.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All such forward-looking statements are qualified by the inherent risks
and uncertainties surrounding expectations generally, and also may materially
differ from our actual experience involving any one or more of these matters
and subject areas. The operation and results of our business also may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified in the above in the Liquidity
Assessment and Risks and Uncertainties discussion and the Risk Factors
section of our Annual Report on Form 10-K for the year ended December 31, 2001
filed with the Securities and Exchange Commission on March 29, 2002, including,
but not limited to:



| |  |  | our Chapter 11 Plan of Reorganization may not be timely or fully
confirmed or implemented by the Bankruptcy Court, which may require us
to sell or liquidate XO;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the bankruptcy court could approve a plan of reorganization other than one proposed by us;                                                                      
|
| |  |  | our operating subsidiaries may also be forced into bankruptcy proceedings;                                                                                      
|
| |  |  | our reorganization proceedings may have an adverse effect on our financial results;                                                                             
|
| |  |  | 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;                                                                          
|
| |  |  | the quality and price of similar or comparable communications
services offered, or to be offered, by our current or future
competitors; and                     
|
| |  |  | future telecommunications-related legislation or regulatory actions.                                                                                            

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We had $5.2 billion in fixed rate and variable debt and $1.7 billion in
fixed rate redeemable preferred stock as of September 30, 2002. If the
Stand-Alone Reorganization is confirmed by the Bankruptcy Court and
implemented, all of the outstanding obligations on these securities would be
eliminated, other than with respect to the $500.0 million in principal amount of junior secured loans into which
the outstanding principal amount of the Facility will be converted.
We expect that the consideration to be paid in the exchange for
such debt would be substantially below the carrying value of the securities.
Therefore, we believe that the fair value of these financial obligations will
almost entirely be dependent on the terms and conditions of the Stand-Alone
Reorganization, rather than changes in interest rates, and that the interest
rate risk associated with these obligations is not material.

Marketable securities consist of an investment portfolio containing U.S.
government agency issued and other securities with a duration of less than one
year. These securities are classified as available for sale. If interest
rates were to increase or decrease immediately, it would not likely have a
material impact on the fair value of these financial instruments or on the
interest we would earn on our investment portfolio.

There have been no adverse changes in our exposure to market risk since
December 31, 2001. We are not currently engaged in the use of off-balance sheet
derivative financial instruments, to hedge or partially hedge interest rate
exposure.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

29



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Changes in Internal Controls

We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended September 30, 2002, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We, members of our board of directors, and the Investors had been named as
party defendants in a number of lawsuits filed that purported to be class
actions brought on behalf of our stockholders. Some of these suits were filed
in the United States Federal Court for the Eastern District of Virginia, and
others in the state courts of New York and Delaware. The federal actions
contained various allegations of federal securities law violations by us and
certain directors relating to certain financial disclosures during the year
2001, and breaches of certain fiduciary duties by certain of our directors in connection with the proposed investments by the Investors, and that the
Investors aided and abetted the directors with respect to such alleged
breaches. In May 2002, the federal court dismissed the claims based on alleged
securities law violations with prejudice and dismissed the remaining claims
without prejudice.

In addition, state court lawsuits filed in New York and Delaware alleged
that the members of our board of directors breached certain fiduciary duties in
connection with the proposed investments by the Investors, and that the
Investors aided and abetted the directors with respect to such alleged
breaches. In July 2002, we entered into a settlement agreement pursuant to
which the plaintiff class would dismiss and release all claims and causes of
action. In exchange for this release, we agreed that the plaintiff class would
share in any recovery from the Investors with respect to the Stock Purchase
Agreement, which would include the $25 million payment that would be made to XO
Parent pursuant to the Settlement Agreement. The settlement with the plaintiff
class also provides for the grant of certain rights to the plaintiff class with
respect to any offering of rights to purchase common equity under the
Stand-Alone Reorganization. The settlement with the plaintiff class has been
approved by the Bankruptcy Court and the dismissal of all claims with prejudice
by the plaintiff class has been approved by both state courts.

On June 17, 2002, XO Parent filed a voluntary petition for relief under
Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York. The Bankruptcy Court
has established November 15, 2002 as the date for the hearing at which XO
Parent will seek Bankruptcy Court confirmation of the Stand-Alone
Reorganization.

XO is not currently a party to any other 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

The initial public offering, or IPO, of our Class A common stock closed in
October 1997, pursuant to a registration statement on Form S-1 filed with the
Securities and Exchange Commission (File No. 333-32001) that became effective
on September 26, 1997. The net proceeds we received from the offering totaled
approximately $226.8 million. As of September 30, 2002, proceeds from the IPO
remain available for future network build out and other general corporate
purposes. We have raised additional funding from debt and additional equity
offerings in 1998, 1999, 2000 and 2001. The proceeds from these more recent
offerings were applied first in funding the expansion of our network and other
working capital requirements.

Item 3. Defaults Upon Securities

As of September 30, 2002, we failed to make interest payments of approximately $243
million in the aggregate with respect to all interest paying senior secured
debt and senior unsecured and subordinated notes of XO Parent (collectively,
the Payment Default Indebtedness). Consequently, the failure to make these
interest payments has triggered the default provisions of the governing
documents relating to the Payment Default Indebtedness and the cross-default
provisions of the indentures under which all senior discount notes of XO Parent
were issued.

30



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In addition, during 2002, we failed to make dividend payments under the
terms of certain of XO Parents series of redeemable preferred stock that, by
their terms, require the payment of dividends in cash during such periods. As
of September 30, 2002, XO Parent had failed to make cash dividend payments of
$54.0 million in the aggregate with respect to the following series of
preferred stock: 6 1/2% Series B cumulative convertible preferred stock,
Series C cumulative convertible participating preferred stock, Series D
convertible participating preferred stock, Series G cumulative convertible
participating preferred stock, and Series H convertible participating preferred
stock. The terms of all other series of preferred stock required payment of
dividends in the form of additional shares of the applicable series of
preferred stock.

We do not intend to make interest or dividend payments to cure these
defaults, and the lenders, noteholders and preferred stock holders have not
issued waivers related to these defaults.

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

No
matters were submitted to a vote of security holders during the
quarter ended September 30, 2002.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------

10.1
        
        Mutual Release and Settlement Agreement, dated
October 13, 2002, by and among XO Communications, Inc.,
Forstmann Little & Co. Equity Partnership-VII, L.P., Forstmann
Little & Co. Subordinated Debt and Equity Management Buyout
Partnership-VIII, L.P. FLC XXXI Partnership, L.P. and Telefonos
de Mexico, S.A. de C.V. (Incorporated herein by reference to
exhibit 10.1 filed with the Current Report on Form 8-K, filed on
October 15, 2002, of XO Communications, Inc.)99.1
        
        Certificate pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.99.2
        
        Certificate pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.




| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| | (1) |  | Current Report on Form 8-K filed August 15, 2002,
reporting under Item 9 each of the Principal Executive Officer,
Daniel F. Akerson, and Principal Financial Officer, Wayne M.
Rehberger, of XO Communications, Inc., submitted to the
Securities and Exchange Commission sworn statements pursuant to
Securities and Exchange Commission Order No. 4-460.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Current Report on Form 8-K filed October 15, 2002,
reporting under Item 5 an agreement entered into by the Company
to mutually terminate the previously announced Forstmann
Little/Telmex Stock Purchase Agreement and to settle any
potential claims relating to the Stock Purchase Agreement or its
termination.                                        

31



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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 13, 2002 |  |  |  | By: /s/ Wayne M. Rehberger                       
|                        |  |  |  | Wayne M. Rehberger                               
|                        |  |  |  | Senior Vice President and Chief Financial Officer
|                        |  |  |  | (Principal financial and accounting officer)     

32



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##### 



CERTIFICATIONS

I, Daniel F. Akerson, certify that:

1.     I have reviewed this quarterly report in Form 10-Q of XO Communications,
Inc.;

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

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

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

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


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

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


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

Date: November 13, 2002



|                            
|----------------------------
|/s/ Daniel F. Akerson       
|                            
|Daniel F. Akerson           
|Chairman and Chief Executive
|Officer                     

33



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##### 



CERTIFICATIONS

I, Wayne M. Rehberger, certify that:

1.     I have reviewed this quarterly report in Form 10-Q of XO Communications,
Inc.;

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

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

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

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


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

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


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

Date: November 13, 2002



|                                | 
|------------------------------- | 
|/s/ Wayne M. Rehberger          | 
|                                | 
|Wayne M. Rehberger              | 
|Senior Vice President and Chief | 
|Financial Officer               | 

34