##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 Commission file no. 0-30900
 
 XO Holdings, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    54-1983517(State or other jurisdiction of
    
    (I.R.S. employerincorporation or organization)
    
    identification no.)
 11111 Sunset Hills Road
Reston, Virginia 20190
(Address of principal executive offices, including zip code)
(703) 547-2000
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ




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##### 



XO Holdings, Inc.
Index to Form 10-Q
 PagePart I. Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and March 31, 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and March 31, 2006 (unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    24Item 1A.
    
    Risk Factors
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3.
    
    Defaults Upon Senior Securities
    
    
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    28Item 5.
    
    Other Information
    
    
    28Item 6.
    
    Exhibits
    
    
    28Signatures
    
    
    29Exhibit 10.7Exhibit 31.1Exhibit 31.2Exhibit 32.1
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 XO Holdings, Inc.
 
 Condensed Consolidated Balance Sheets
 (Amounts in thousands, except for share and per share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    140,845
    
    
    $
    168,563Marketable securities
    
    
    2,460
    
    
    
    2,420Accounts receivable, net of allowance for doubtful accounts of $12,691 at
March 31, 2007, and $16,754 at December 31, 2006
    
    
    118,703
    
    
    
    131,168Prepaid expenses and other current assets
    
    
    31,195
    
    
    
    30,859Total current assets
    
    
    293,203
    
    
    
    333,010Property and equipment, net
    
    
    679,515
    
    
    
    678,233Broadband wireless licenses and other intangibles, net
    
    
    58,309
    
    
    
    63,507Other assets
    
    
    44,299
    
    
    
    41,361Total assets
    
    $
    1,075,326
    
    
    $
    1,116,111LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    101,031
    
    
    $
    98,860Accrued liabilities
    
    
    187,228
    
    
    
    220,781Total current liabilities
    
    
    288,259
    
    
    
    319,641Long-term debt and accrued interest payable to related parties
    
    
    346,217
    
    
    
    336,650Other long-term liabilities
    
    
    59,529
    
    
    
    58,430Total liabilities
    
    
    694,005
    
    
    
    714,721Class A convertible preferred stock
    
    
    234,030
    
    
    
    230,542Commitments and contingencies
    
    
    
    
    
    
    Stockholders equity:Preferred stock: par value $0.01 per share, 200,000,000 shares
authorized: 4,000,000 shares of Class A convertible preferred stock
issued and outstanding on March 31, 2007 and December 31, 2006
    
    
    
    
    
    
    Warrants, common stock and additional paid in capital: par value $0.01
per share, 1,000,000,000 shares authorized; 182,003,100 shares issued and
outstanding on March 31, 2007 and 182,001,285 shares issued and
outstanding on December 31, 2006
    
    
    962,430
    
    
    
    965,394Accumulated other comprehensive income
    
    
    920
    
    
    
    880Accumulated deficit
    
    
    (816,059
    )
    
    
    (795,426
    )Total stockholders equity
    
    
    147,291
    
    
    
    170,848Total liabilities, convertible preferred stock and stockholders equity
    
    $
    1,075,326
    
    
    $
    1,116,111
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XO Holdings, Inc.
 
 Condensed Consolidated Statements of Operations
 (Amounts in thousands, except for share and per share data)
 (Unaudited)
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2007
    
    
    2006Revenue
    
    $
    348,512
    
    
    $
    349,690Costs and expenses:Cost of service (exclusive of depreciation and amortization)
    
    
    136,242
    
    
    
    154,380Selling, operating, and general
    
    
    175,531
    
    
    
    178,863Depreciation and amortization
    
    
    50,636
    
    
    
    54,436Total costs and expenses
    
    
    362,409
    
    
    
    387,679Loss from operations
    
    
    (13,897
    )
    
    
    (37,989
    )Investment income, net
    
    
    2,199
    
    
    
    1,974Interest expense, net
    
    
    (8,635
    )
    
    
    (7,643
    )Net loss before income taxes
    
    
    (20,333
    )
    
    
    (43,658
    )Income tax expense
    
    
    (300
    )
    
    
    Net loss
    
    
    (20,633
    )
    
    
    (43,658
    )Preferred stock accretion
    
    
    (3,488
    )
    
    
    (3,288
    )Net loss allocable to common shareholders
    
    $
    (24,121
    )
    
    $
    (46,946
    )Net loss allocable to common shareholders per common share, basic and diluted
    
    $
    (0.13
    )
    
    $
    (0.26
    )Weighted average shares, basic and diluted
    
    
    182,001,910
    
    
    
    181,933,035
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##### Table of Contents



XO Holdings, Inc.
 
 Condensed Consolidated Statements of Cash Flows
 (Amounts in thousands)
 (Unaudited)
 Three months
    
    Three monthsended
    
    endedMarch 31,
    
    March 31,2007
    
    2006OPERATING ACTIVITIES:Net loss
    
    $
    (20,633
    )
    
    $
    (43,658
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    50,636
    
    
    
    54,436Accrual of interest
    
    
    9,566
    
    
    
    8,062Stock-based compensation
    
    
    506
    
    
    
    939Changes in assets and liabilitiesAccounts receivable
    
    
    12,465
    
    
    
    8,065Other assets
    
    
    (3,274
    )
    
    
    (1,962
    )Accounts payable
    
    
    (3,421
    )
    
    
    1,692Accrued liabilities
    
    
    (31,891
    )
    
    
    (26,889
    )Net cash provided by operating activities
    
    
    13,954
    
    
    
    685INVESTING ACTIVITIES:Capital expenditures
    
    
    (41,128
    )
    
    
    (22,767
    )Proceeds from sales of marketable securities, investments and other assets
    
    
    
    
    
    
    7,562Net cash used in investing activities
    
    
    (41,128
    )
    
    
    (15,205
    )FINANCING ACTIVITIES:Repayments of capital leases
    
    
    (563
    )
    
    
    (903
    )Proceeds from employee stock option exercises
    
    
    19
    
    
    
    Net cash used in financing activities
    
    
    (544
    )
    
    
    (903
    )Net decrease in cash and cash equivalents
    
    
    (27,718
    )
    
    
    (15,423
    )Cash and cash equivalents, beginning of period
    
    
    168,563
    
    
    
    176,838Cash and cash equivalents, end of period
    
    $
    140,845
    
    
    $
    161,415SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    291
    
    
    $
    444Accrued interest converted to long-term debt
    
    $
    9,566
    
    
    $
    8,062
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XO Holdings, Inc.
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of Presentation
   Significant Accounting Policies
  Principles of Consolidation
  Use of Estimates and Assumptions
   5




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Transaction
Based Taxes and other Surcharges
  New Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Fair Value Measurements
 2. NET LOSS PER SHARE AND COMPREHENSIVE LOSS
 Net Loss Per Share
  Comprehensive Loss
  Three Months Ended March 31,2007
    
    
    2006Net loss
    
    $
    (20,633
    )
    
    $
    (43,658
    )Other comprehensive income:Net unrealized gains on investment
    
    
    40
    
    
    
    240Comprehensive loss
    
    $
    (20,593
    )
    
    $
    (43,418
    )
 6




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3. SEGMENT INFORMATION
  XO Communications
   Nextlink
    Three Months Ended March 31, 2007IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    348,534
    
    
    $
    222
    
    
    $
    (244
    )
    
    $
    348,512Depreciation and amortization
    
    $
    50,555
    
    
    $
    81
    
    
    $
    
    
    
    $
    50,636Loss from operations
    
    $
    (11,334
    )
    
    $
    (2,563
    )
    
    $
    
    
    
    $
    (13,897
    )Investment income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,199Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,635
    )Net loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,333
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (20,633
    )Capital expenditures
    
    $
    40,807
    
    
    $
    321
    
    
    $
    
    
    
    $
    41,128
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Three Months Ended March 31, 2006IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    349,579
    
    
    $
    111
    
    
    $
    
    
    
    $
    349,690Depreciation and amortization
    
    $
    52,795
    
    
    $
    1,641
    
    
    $
    
    
    
    $
    54,436Loss from operations
    
    $
    (31,284
    )
    
    $
    (6,705
    )
    
    $
    
    
    
    $
    (37,989
    )Investment income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,974Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,643
    )Net loss before income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,658
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (43,658
    )Capital expenditures
    
    $
    20,872
    
    
    $
    1,895
    
    
    $
    
    
    
    $
    22,767
  Total Assets
    
    XOC
    
    Nextlink
    
    ConsolidatedMarch 31, 2007
    
    $
    1,031,392
    
    
    $
    43,934
    
    
    $
    1,075,326December 31, 2006
    
    $
    1,073,590
    
    
    $
    42,521
    
    
    $
    1,116,111
 4. MARKETABLE SECURITIES
  GrossGross
    
    UnrealizedUnrealized
    
    HoldingEquity Securities
    
    Fair Value
    
    Cost Basis
    
    Holding Gains
    
    (Losses)as of March 31, 2007
    
    $
    2,460
    
    
    $
    1,540
    
    
    $
    920
    
    
    $
    as of December 31, 2006
    
    $
    2,420
    
    
    $
    1,540
    
    
    $
    880
    
    
    $
    
 5. LONG-LIVED ASSETS
  Property and Equipment
  March 31, 2007
    
    
    December 31, 2006Telecommunications networks and acquired bandwidth
    
    $
    897,641
    
    
    $
    856,093Furniture, fixtures, equipment and other
    
    
    309,554
    
    
    
    299,8511,207,195
    
    
    
    1,155,944Less: accumulated depreciation
    
    
    (609,936
    )
    
    
    (564,833
    )597,259
    
    
    
    591,111Construction-in-progress and undeployed assets
    
    
    82,256
    
    
    
    87,122$
    679,515
    
    
    $
    678,233
  8




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Broadband Wireless Licenses and Other Intangibles
 Goodwill and Other Intangible Assets
  March 31, 2007
    
    
    December 31, 2006Customer relationships
    
    $
    112,366
    
    
    $
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired trade names
    
    
    5,673
    
    
    
    5,673127,560
    
    
    
    127,560Less accumulated amortization
    
    
    (122,766
    )
    
    
    (117,568
    )4,794
    
    
    
    9,992Broadband wireless licenses  indefinite life asset
    
    
    35,782
    
    
    
    35,782Goodwill  indefinite life asset
    
    
    1,071
    
    
    
    1,071XO Trade name  indefinite life asset
    
    
    16,662
    
    
    
    16,662$
    58,309
    
    
    $
    63,507
  6. LONG-TERM DEBT TO RELATED PARTIES
     9




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7. RELATED PARTY TRANSACTIONS
  Outstanding
    
    Series A, B and CCommon Stock
    
    Warrants
    
    Credit Facility
    
    Preferred StockAt
December 31, 2006(1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %At
March 31, 2007(1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %
     8. RESTRUCTURING
   Balance as of January 1, 2007
    
    $
    31,040Estimate revisions
    
    
    (75
    )Accretion
    
    
    1,057Usage, net
    
    
    (2,548
    )Balance as of March 31, 2007
    
    $
    29,474


9. INCOME TAXES


Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109




Reconciliation
of Unrecognized Tax Benefits (dollars in millions)


Gross unrecognized tax benefits at January 1, 2007
    
    $
    504.9Gross amount of increases and decreases from tax positionsprior period
    
    
    Gross amount of increases and decreases from tax positionscurrent period
    
    
    Decreases
resulting from settlements with taxing authorities
    
    
    Decreases resulting from expiration of statutes of limitation
    
    
    Gross unrecognized tax benefits at March 31, 2007
    
    $
    504.9




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Interest and Penalties
  Accrued interest recognized as of January 1, 2007
    
    $
    1.1Interest recognized
    
    
    0.1Accrued interest recognized as of March 31, 2007
    
    $
    1.2
  Possible Changes In Unrecognized Tax Benefits
  Open Tax Years
  10. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
 Accounting for Contingencies
 Allegiance Telecom Liquidating Trust Litigation
   11




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##### Table of Contents



Litigation Relating to the Wireline Sale
 R2 Investments v.
Carl C. Icahn, et al.
 Allegiance Telecom Liquidating Trust, as successor in
interest to the rights of Allegiance Telecom Inc., and its direct and indirect subsidiaries v. Carl
C. Icahn, et al. Donald J.
Hillenmeyer, Jr. v. Carl C. Icahn, et al.
   12




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##### Table of Contents



Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
  Verizon Indemnification Notice
 Aerotel, LTD v. Verizon Company et al
 Verizon Indemnification Notice II
 TGIP, Inc. v.
AT&T Corp, Verizon Communications et al
 13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  
    
    Overview of the Business;
    
    Critical Accounting Policies and Estimates;
    
    Results of Operations;
    
    Comparison of Segment Financial Results;
    
    Liquidity and Capital Resources; and
    
    Recent Developments.
 Forward-looking and Cautionary Statements
  
    
    our services, including the development and deployment of data products and services
based on Internet protocol (IP), Ethernet, broadband wireless and other technologies and
strategies to expand our targeted customer base and broaden our sales channels;
    
    the operation of our network and back office systems, including with respect to the
development of IPs;
    
    liquidity and financial resources, including anticipated capital expenditures, funding
of capital expenditures and anticipated levels of indebtedness;
    
    trends related to and expectations regarding the results of operations in future
periods; and
    
    the impact of judicial decisions, legislation, and regulatory developments on our cost
structure, services, and marketing initiatives.
  
    
    The covenants in the Credit Facility (as defined below) restrict our financial and
operational flexibility, which could have an adverse effect on our results of operations;
    
    We may not prevail in our claims against the ATLT (as defined below), and we may not be
successful in defending against the ATLTs counterclaims;
    
    We continue to review our strategic alternatives such as renegotiating or
refinancing our existing credit facility, consummating one or more business combinations,
divesting certain assets, businesses or lines of business, raising capital through one or
more offerings of debt and/or equity securities, or selling the Company;
    
    We incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of our cash requirements or execute our business
strategy;
    
    Our rights to the use of the unlit capacity that makes up our network may be affected by
the financial health of our fiber providers or by disputes with our
fiber providers;
    
    We may not be able to continue to connect our network to the Incumbent Local Exchange
Carrier (ILEC) networks or to maintain Internet peering arrangements on favorable terms,
which would impair our growth and performance;
    
    Technological advances and regulatory changes are eroding traditional barriers between
formerly distinct telecommunications markets, which could increase the competition we face
and put downward pressure on prices, which could impair our results;
    
    An entity owned and controlled by our Chairman (as defined below) is our majority
stockholder;
 14




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##### Table of Contents




    
    Future sales or issuances of our common stock could adversely affect our stock price
and/or our ability to raise capital; and
    
    The telecommunications industry is highly competitive, and has experienced the
consolidation of many existing competitors and the introduction of significant new
competitors which could affect our ability to achieve and maintain market penetration and
revenue levels sufficient to provide financial viability to our business.
  Overview of the Business
  XO Communications
     Nextlink
  15




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Critical Accounting Policies and Estimates
   Results of Operations
  16




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Three Months Ended March 31,% of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    Consolidated2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    348,512
    
    
    
    100.0
    %
    
    $
    349,690
    
    
    
    100.0
    %
    
    $
    (1,178
    )
    
    
    (0.3
    %)Cost and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    136,242
    
    
    
    39.1
    %
    
    
    154,380
    
    
    
    44.1
    %
    
    
    (18,138
    )
    
    
    (11.7
    %)Selling, operating, and general
    
    
    175,531
    
    
    
    50.4
    %
    
    
    178,863
    
    
    
    51.1
    %
    
    
    (3,332
    )
    
    
    (1.9
    %)Depreciation and amortization
    
    
    50,636
    
    
    
    14.5
    %
    
    
    54,436
    
    
    
    15.6
    %
    
    
    (3,800
    )
    
    
    (7.0
    %)Total cost and expenses
    
    
    362,409
    
    
    
    104.0
    %
    
    
    387,679
    
    
    
    110.9
    %
    
    
    (25,270
    )
    
    
    (6.5
    %)Loss from operations
    
    
    (13,897
    )
    
    
    (4.0
    %)
    
    
    (37,989
    )
    
    
    (10.9
    %)
    
    
    (24,092
    )
    
    
    (63.4
    %)Investment income, net
    
    
    2,199
    
    
    
    0.7
    %
    
    
    1,974
    
    
    
    0.6
    %
    
    
    225
    
    
    
    11.4
    %Interest expense, net
    
    
    (8,635
    )
    
    
    (2.5
    %)
    
    
    (7,643
    )
    
    
    (2.2
    %)
    
    
    992
    
    
    
    13.0
    %Net loss before income taxes
    
    
    (20,333
    )
    
    
    (5.8
    %)
    
    
    (43,658
    )
    
    
    (12.5
    %)
    
    
    (23,325
    )
    
    
    (53.4
    %)Income tax expense
    
    
    (300
    )
    
    
    (0.1
    %)
    
    
    
    
    
    
    
    
    
    
    300
    
    
    NMNet loss
    
    
    (20,633
    )
    
    
    (5.9
    %)
    
    
    (43,658
    )
    
    
    (12.5
    %)
    
    
    (23,025
    )
    
    
    (52.7
    %)Preferred stock accretion
    
    
    (3,488
    )
    
    
    (1.0
    %)
    
    
    (3,288
    )
    
    
    (0.9
    %)
    
    
    200
    
    
    
    6.1
    %Net loss allocable to common
shareholders
    
    $
    (24,121
    )
    
    
    (6.9
    %)
    
    $
    (46,946
    )
    
    
    (13.4
    %)
    
    $
    (22,825
    )
    
    
    (48.6
    %)Net loss allocable to common
shareholders, basic and diluted
    
    $
    (0.13
    )
    
    
    
    
    
    $
    (0.26
    )Weighted average shares, basic
and diluted
    
    
    182,001,910
    
    
    
    
    
    
    
    181,933,035Gross margin (1)
    
    $
    212,270
    
    
    
    60.9
    %
    
    $
    195,310
    
    
    
    55.9
    %
    
    $
    16,960
    
    
    
    8.7
    %
 
 NM
    
    Not meaningful(1)
    
    Gross margin is a non-GAAP financial measure, which we define as revenue less cost of service,
and excludes depreciation and amortization expenses. Gross margin is not intended to replace
operating income (loss), net income (loss), cash flow or other measures of financial performance
reported in accordance with U.S. generally accepted accounting principles. Rather, we consider
gross margin to be an important financial measure of our operating performance related solely to
providing telecommunications services to our customers without taking into account expenditures
that are not directly related to providing such services. We believe that gross margin allows
management to further assess (i) our operating performance, (ii) profitability across our customer
base and (iii) trends in our competitive and regulatory environments. Additionally, we believe that
gross margin is a standard measure of operating performance that is commonly reported and widely
used by analysts, investors, and other interested parties in the telecommunications industry. We
believe gross margin provides investors with an alternative means to evaluate the results of our
operations. Gross margin as used in this document may not be comparable to similarly titled
measures reported by other companies due to differences in accounting policies and differences in
definition of gross margin. Therefore, we provide additional information on the components of gross
margin throughout this report and provide the reconciliations to the most comparable GAAP financial
measure. The following table reconciles reported net loss to gross margin, as defined above, for
the respective periods presented (dollars in thousands): Three Months Ended March 31,2007
    
    
    2006Net loss
    
    $
    (20,633
    )
    
    $
    (43,658
    )Selling, operating and general
    
    
    175,531
    
    
    
    178,863Investment income, net
    
    
    (2,199
    )
    
    
    (1,974
    )Interest expense, net
    
    
    8,635
    
    
    
    7,643Depreciation and amortization
    
    
    50,636
    
    
    
    54,436Income tax expense
    
    
    300
    
    
    
    Gross margin
    
    $
    212,270
    
    
    $
    195,310
 Revenue
 17




---



##### Table of Contents



Three Months ended March 31,% of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    Consolidated2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Change
    
    
    % ChangeTraditional Voice Services & Other
    
    $
    168,948
    
    
    
    48.5
    %
    
    $
    178,806
    
    
    
    51.1
    %
    
    $
    (9,858
    )
    
    
    (5.5
    %)Data Services
    
    
    105,224
    
    
    
    30.2
    %
    
    
    99,923
    
    
    
    28.6
    %
    
    
    5,301
    
    
    
    5.3
    %Integrated Voice and Data Services
    
    
    51,363
    
    
    
    14.7
    %
    
    
    61,396
    
    
    
    17.6
    %
    
    
    (10,033
    )
    
    
    (16.3
    %)Carrier VoIP
    
    
    7,575
    
    
    
    2.2
    %
    
    
    4,146
    
    
    
    1.2
    %
    
    
    3,429
    
    
    
    82.7
    %XOptions Flex IP
    
    
    15,402
    
    
    
    4.4
    %
    
    
    5,419
    
    
    
    1.5
    %
    
    
    9,983
    
    
    
    184.2
    %Total revenue
    
    $
    348,512
    
    
    
    100.0
    %
    
    $
    349,690
    
    
    
    100.0
    %
    
    $
    (1,178
    )
    
    
    (0.3
    %)
 Traditional Voice Services & Other.
 Data Services.
 Integrated Voice and Data Services.
 Carrier VoIP.
 XOptions Flex IP.
 Cost of service (excluding depreciation and amortization)
  18




---



##### Table of Contents



Gross margin.
 Selling, operating and general.
 Depreciation and amortization
 Comparison of Segment Financial Results
 Overview
   19




---



##### Table of Contents



Three months ended March 31, 2007DepreciationCost of
    
    
    SO&G
    
    
    and
    
    
    Loss fromRevenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    OperationsXOC
    
    $
    348,534
    
    
    $
    136,398
    
    
    $
    172,915
    
    
    $
    50,555
    
    
    $
    (11,334
    )Nextlink
    
    
    222
    
    
    
    88
    
    
    
    2,616
    
    
    
    81
    
    
    
    (2,563
    )Intercompany eliminations
    
    
    (244
    )
    
    
    (244
    )
    
    
    
    
    
    
    
    
    
    
    Total consolidated
    
    $
    348,512
    
    
    $
    136,242
    
    
    $
    175,531
    
    
    $
    50,636
    
    
    
    (13,897
    )Investment gain, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,199Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,635
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (300
    )Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (20,633
    )
 Three months ended March 31, 2006DepreciationCost of
    
    
    SO&G
    
    
    and
    
    
    Loss fromRevenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    OperationsXOC
    
    $
    349,579
    
    
    $
    154,380
    
    
    $
    173,688
    
    
    $
    52,795
    
    
    $
    (31,284
    )Nextlink
    
    
    111
    
    
    
    
    
    
    
    5,175
    
    
    
    1,641
    
    
    
    (6,705
    )Intercompany eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total consolidated
    
    $
    349,690
    
    
    $
    154,380
    
    
    $
    178,863
    
    
    $
    54,436
    
    
    
    (37,989
    )Investment gain, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,974Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,643
    )Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (43,658
    )
 XOC Segment
  Nextlink Segment
  Three months ended March 31,% of Nextlink
    
    
    
    
    
    
    % of Nextlink2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    222
    
    
    
    100.0
    %
    
    $
    111
    
    
    
    100.0
    %
    
    $
    111
    
    
    
    100.0
    %Costs and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    88
    
    
    
    39.6
    %
    
    
    
    
    
    
    
    %
    
    
    88
    
    
    NM
    %Selling, operating, and general
    
    
    2,616
    
    
    
    1,178.4
    %
    
    
    5,175
    
    
    
    4,662.1
    %
    
    
    (2,559
    )
    
    
    (49.4
    %)Depreciation and amortization
    
    
    81
    
    
    
    36.5
    %
    
    
    1,641
    
    
    
    1,478.4
    %
    
    
    (1,560
    )
    
    
    (95.1
    %)Total costs and expenses
    
    
    2,785
    
    
    
    1,254.5
    %
    
    
    6,816
    
    
    
    6,140.5
    %
    
    
    (4,031
    )
    
    
    (59.1
    %)Segment loss
    
    $
    (2,563
    )
    
    
    (1,154.5
    %)
    
    $
    (6,705
    )
    
    
    (6,040.5
    %)
    
    $
    (4,142
    )
    
    
    (61.8
    %)
 
 NM
    
     Not Meaningful Revenue
 Cost of service (exclusive of depreciation and amortization)
 20




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##### Table of Contents



Selling, operating and general.
 Depreciation and amortization
 Liquidity and Capital Resources
  Cash Flow
    Credit Facility and Borrowing Capacity
  21




---



##### Table of Contents



Recent Developments
   Recently Issued Accounting Pronouncements
 The Fair Value Option for Financial Assets and Financial Liabilities
 Fair Value Measurements
 Regulatory Overview
  22




---



##### Table of Contents



Additional Federal Regulations
 FCC
 Customer Proprietary Network Information (CPNI).
 
 Additional State and Local Regulation
  Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  
 Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  23




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  Allegiance Telecom Liquidating Trust Litigation
   Litigation Relating to the Wireline Sale
 R2 Investments v. Carl C. Icahn, et
al.
 24




---



##### Table of Contents



Allegiance Telecom Liquidating Trust, as successor in
interest to the rights of Allegiance Telecom Inc., and its direct and indirect subsidiaries v. Carl
C. Icahn, et al. Donald J.
Hillenmeyer, Jr. v. Carl C. Icahn, et al.
   Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
  Verizon Indemnification Notice
 Aerotel, LTD v. Verizon Company et al
 25




---



##### Table of Contents



Verizon Indemnification Notice II
 TGIP, Inc. v.
AT&T Corp, Verizon Communications et al
 
 Item 1A. Risk Factors.
 Risks Related to Liquidity, Financial Resources, and Capitalization
 The covenants in the Credit Facility restrict the Companys financial and operational flexibility,
which could have an adverse effect on its results of operations.
  26




---



##### Table of Contents




    
    It may impair the Companys ability to obtain additional financing in the future;
    
    It may limit the Companys flexibility in planning for or reacting to changes in market conditions; and
    
    It may cause the Company to be more vulnerable in the event of a downturn in business.
  The Company may not prevail in its claims against the ATLT, and it may not be successful in
defending against the ATLTs counterclaims.
  The Companys rights to the use of the unlit capacity that makes up its network may be affected by
the financial health of the Companys fiber providers or by disputes with the Companys fiber
providers.
  The Company continues to review its strategic alternatives.
   27




---



##### Table of Contents



The Company incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of its cash requirements.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  28




---



##### Table of Contents



SIGNATURES
  Date: May 10, 2007
    
    XO HOLDINGS, INC.By:
    
    /s / Gregory W. Freiberg

Name: Gregory W. FreibergTitle: Senior Vice President and Chief Financial Officer(Principal Financial Officer)
 29




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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger, dated as of February 28, 2006, by and among XO Communications, Inc., XO Holdings, Inc.
and XO Communications, LLC (Incorporated herein by reference to exhibit 2.1 filed with the Current
Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)2.2
    
    Amendment No. 1 to Equity Purchase Agreement, dated as of March 1, 2006, by
and among XO Holdings, Inc., XO Communications, LLC (as successor by merger to XO Communications, Inc.) and
Elk Associates LLC (Incorporated herein by reference to exhibit 2.2 filed with the Current Report on
Form 8-K of XO Holdings, Inc., filed on March 6, 2006)2.3
    
    Letter Agreement, dated March 30, 2006, between XO Holdings, Inc. and Elk Associates LLC (Incorporated herein
by reference to exhibit 2.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on September 30, 2006)3.1
    
    Certificate of Incorporation of XO Holdings, Inc., as filed with the Secretary of State of the State of Delaware on
October 25, 2005 (Incorporated herein by reference to exhibit 3.1 filed with the Current Report on
Form 8-K of XO Holdings, Inc., filed on March 6, 2006)3.2
    
    Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and other Special Rights of
the 6% Class A Convertible Preferred Stock and Qualifications, Limitations and Restrictions thereof, as filed with the Secretary
of State of the State of Delaware on February 28, 2006 (Incorporated herein by reference to exhibit 3.2 filed with the
Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)3.3
    
    Bylaws of XO Holdings, Inc. (Incorporated herein by reference to exhibit 3.3 filed with the Current Report
on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)10.4
    
    Waiver Agreement, dated as of April 28, 2006, between the Company, its subsidiaries and Arnos Corp., as
Requisite Lenders (Incorporated herein by reference to exhibit 10.1 filed with the Current Report on
Form 8-K/A of XO Holdings, Inc., filed on May 2, 2006)10.5
    
    Amendment No. 1 to Registration Rights Agreement made and enacted by XO Holdings, Inc. as
of April 28, 2006 (Incorporated herein by reference to exhibit 10.2 filed with the Current Report on
Form 8-K/A of XO Holdings, Inc., filed on May 2, 2006)10.6
    
    Waiver Agreement, dated as of November 3, 2006, between the Company, its subsidiaries and Arnos Corp., as
Requisite Lenders (Incorporated herein by reference to exhibit 10.6
filed with the Quarterly Report on
Form 10-Q of XO Holdings, Inc., filed on November 9, 2006)10.7
    
    Waiver with Respect to Amended and Restated Credit Guaranty
Agreement, dated as of May 7, 2007, between XO Communications
LLC, its subsidiaries and Arnos Corp., as Requisite Lenders (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended (filed herewith)31.2
    
    Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act as amended (filed herewith)32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith)
 30