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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 June 30, 2002

Commission file number: 0-30900

XO Communications, Inc.



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(Exact name of registrant as specified in its charter)


|                                         |  |                    
|---------------------------------------- |  | -------------------
|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




(Registrants telephone number, including area code)


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 August 1, 2002, the number of shares of Class A and Class B common stock
of XO Communications, Inc. issued and outstanding was 337,813,235 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 June 30, 2002 and December 31, 2001                           |    |         | 1      | 
|                                 |                                                                                                  | Condensed
Consolidated Statements of Operations for the Three and Six Months
EndedJune 30, 2002 and 2001  |    |         | 2      | 
|                                 |                                                                                                  | Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 30, 2002 and 2001 |    |         | 3      | 
|                                 |                                                                                                  | Notes to Condensed Consolidated Financial Statements                                                      |    |         | 4 - 15 | 
|                                 | Item 2.    Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                           |    | 16 - 30 |       
|                                 | Item 3.    Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                           |    | 30      |       
|Part II.    Other Information    |                                                                                                  |                                                                                                           |    |        
|                                 | Item 1.    Legal Proceedings                                                                     |                                                                                                           |    | 31      |       
|                                 | Item 2.    Changes in Securities and Use of Proceeds                                             |                                                                                                           |    | 31      |       
|                                 | Item 3.    Defaults Upon Securities                                                              |                                                                                                           |    | 31 - 32 |       
|                                 | Item 4.    Submission of Matters to a Vote of Security Holders                                   |                                                                                                           |    | 32      |       
|                                 | Item 5.    Other Information                                                                     |                                                                                                           |    | 32      |       
|                                 | Item 6.    Exhibits and Reports on Form 8-K                                                      |                                                                                                           |    | 32      |       
|Signatures                       |                                                                                                  |                                                                                                           | 33 |        

i



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##### 



PART I. FINANCIAL STATEMENTS
    Item 1. Financial Statements

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

|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |            |           | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------- | ----------- | ---------- | ------------ | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           | June 30,    |            | December 31,
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           | 2002        |            | 2001        
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |             
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           | (Unaudited) |            |              |           |           
|ASSETS                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|Current assets:                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                             |                                                      | $         | 328,052     |            |              | $         | 246,189    |          
|                                                                                                                                                                                                                                                                                                                     | Marketable securities                                                                                                                                                                                                                                                                                                                                 |                                                      |           | 207,889     |            |              |           | 508,978    |          
|                                                                                                                                                                                                                                                                                                                     | Accounts receivable, net of allowance for doubtful
accounts of $42,674 and $32,492, respectively                                                                                                                                                                                                                                                      |                                                      |           | 168,124     |            |              |           | 216,753    |          
|                                                                                                                                                                                                                                                                                                                     | Other current assets                                                                                                                                                                                                                                                                                                                                  |                                                      |           | 92,832      |            |              |           | 85,137     |          
|                                                                                                                                                                                                                                                                                                                     | Pledged securities                                                                                                                                                                                                                                                                                                                                    |                                                      |           | 14,072      |            |              |           | 16,623     |          
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total current assets                                 |           |             | 810,969    |              |           |            | 1,073,680 | 
|Property and equipment, net                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 3,528,991 |             |            |              | 3,742,577 |           
|Fixed wireless licenses, net                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 930,449   |             |            |              | 947,545   |           
|Goodwill, net                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                       |                                                      |          |             |            |              | 1,876,626 |           
|Other intangibles, net                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 102,779   |             |            |              | 153,404   |           
|Other assets, net                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 65,575    |             |            |              | 136,633   |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total assets                                         |           | $           | 5,438,763  |              |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |            |          
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|Current liabilities not subject to compromise:                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     | Accounts payable                                                                                                                                                                                                                                                                                                                                      |                                                      | $         | 70,737      |            |              | $         | 156,488    |          
|                                                                                                                                                                                                                                                                                                                     | Accrued liabilities                                                                                                                                                                                                                                                                                                                                   |                                                      |           | 263,294     |            |              |           | 341,094    |          
|                                                                                                                                                                                                                                                                                                                     | Accrued interest payable                                                                                                                                                                                                                                                                                                                              |                                                      |           |            |            |              |           | 114,882    |          
|                                                                                                                                                                                                                                                                                                                     | Long-term debt in default                                                                                                                                                                                                                                                                                                                             |                                                      |           |            |            |              |           | 5,109,503  |          
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Current liabilities not subject to compromise        |           |             | 334,031    |              |           |            | 5,721,967 | 
|Current liabilities subject to compromise                                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 5,488,625 |             |            |              |          |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total current liabilities                            |           |             | 5,822,656  |              |           |            | 5,721,967 | 
|Long-term liabilities not subject to compromise                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 77,925    |             |            |              | 129,092   |           
|Long-term liabilities subject to compromise                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                                                       |                                                      | 8,553     |             |            |              |          |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total liabilities                                    |           |             | 5,909,134  |              |           |            | 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 June 30, 2002 and
December 31, 2001, respectively; aggregate liquidation
preference of $1,693,293 and $1,693,328 on June 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: 337,813,237 and 337,774,204 shares issued
and outstanding on June 30, 2002 and December 31, 2001,
respectively; Class B, 120,000,000 shares authorized:
104,423,158 shares issued and outstanding on June 30,
2002 and December 31, 2001 |                                                      |           | 4,628,138   |            |              |           | 4,628,509  |          
|                                                                                                                                                                                                                                                                                                                     | Deferred compensation                                                                                                                                                                                                                                                                                                                                 |                                                      |           | (19,442     | )          |              |           | (37,428    | )        
|                                                                                                                                                                                                                                                                                                                     | Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                |                                                      |           | 2,018       |            |              |           | 10,406     |          
|                                                                                                                                                                                                                                                                                                                     | Accumulated deficit                                                                                                                                                                                                                                                                                                                                   |                                                      |           | (6,789,401  | )          |              |           | (4,304,071 | )        
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total stockholders (deficit) equity                 |           |             | (2,178,687 | )            |           |            | 297,416   | 
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       |                                                      |           |             |            |              |           |           
|                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                       | Total liabilities and stockholders (deficit) equity |           | $           | 5,438,763  |              |           | $          | 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
(Dollars in thousands, except for share and per share data)
(Unaudited)

|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |         |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ----------- | ------------------ | ------- | ---------------- | ----------- | ------- | ------- | ---- | ----------- | ------- | --------- | - | ----------- | ------- | --------- | 
|                                                                                                                                                                                      |                                                                     |                          |             | Three Months Ended |         | Six Months Ended
|                                                                                                                                                                                      |                                                                     |                          |             | June 30,           |         | June 30,        
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                 
|                                                                                                                                                                                      |                                                                     |                          |             | 2002               |         | 2001             |             | 2002    |         | 2001
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |     
|Revenue                                                                                                                                                                               |                                                                     | $                        | 325,480     |                    |         | $                | 306,779     |         |         | $    | 658,885     |         |           | $ | 584,086     |        
|Costs and expenses:                                                                                                                                                                   |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                      | Cost of service                                                     |                          |             | 134,346            |         |                  |             | 122,942 |         |      |             | 274,713 |           |   |             | 237,836 |          
|                                                                                                                                                                                      | Selling, operating, and general (excludes
stock-based compensation) |                          |             | 188,253            |         |                  |             | 254,569 |         |      |             | 393,503 |           |   |             | 494,095 |          
|                                                                                                                                                                                      | Reorganization                                                      |                          |             | 69,170             |         |                  |             |        |         |      |             | 70,146  |           |   |             |        |          
|                                                                                                                                                                                      | Restructuring                                                       |                          |             | 2,918              |         |                  |             |        |         |      |             | 2,918   |           |   |             |        |          
|                                                                                                                                                                                      | Stock-based compensation                                            |                          |             | 8,891              |         |                  |             | 9,316   |         |      |             | 17,986  |           |   |             | 18,627  |          
|                                                                                                                                                                                      | Depreciation and amortization                                       |                          |             | 167,843            |         |                  |             | 282,370 |         |      |             | 329,199 |           |   |             | 554,194 |          
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|                                                                                                                                                                                      |                                                                     | Total costs and expenses |             |                    | 571,421 |                  |             |         | 669,197 |      |             |         | 1,088,465 |   |             |         | 1,304,752 | 
|                                                                                                                                                                                     
|Loss from operations                                                                                                                                                                  |                                                                     |                          | (245,941    | )                  |         |                  | (362,418    | )       |         |      | (429,580    | )       |           |   | (720,666    | )      
|Interest income                                                                                                                                                                       |                                                                     |                          | 4,225       |                    |         |                  | 21,771      |         |         |      | 9,765       |         |           |   | 56,879      |        
|Interest expense, net (contractual interest
was $121,512 and $241,115 for the three and
six months ended June 30, 2002)                                                               |                                                                     |                          | (104,419    | )                  |         |                  | (115,841    | )       |         |      | (225,145    | )       |           |   | (234,432    | )      
|Other income (loss), net                                                                                                                                                              |                                                                     |                          | 2           |                    |         |                  | (4,628      | )       |         |      | (200        | )       |           |   | (6,408      | )      
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss before cumulative effect of
accounting change                                                                                                                                |                                                                     |                          | (346,133    | )                  |         |                  | (461,116    | )       |         |      | (645,160    | )       |           |   | (904,627    | )      
|Cumulative effect of accounting change                                                                                                                                                |                                                                     |                          |            |                    |         |                  |            |         |         |      | (1,876,626  | )       |           |   |            |        
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss                                                                                                                                                                              |                                                                     |                          | (346,133    | )                  |         |                  | (461,116    | )       |         |      | (2,521,786  | )       |           |   | (904,627    | )      
|Recognition of preferred stock modification
fee  reorganization item                                                                                                                 |                                                                     |                          | 81,516      |                    |         |                  |            |         |         |      | 81,516      |         |           |   |            |        
|Other preferred stock
reorganization items, net                                                                                                                                       |                                                                     |                          | (2,813      | )                  |         |                  |            |         |         |      | (2,813      | )       |           |   |            |        
|Preferred stock dividends and accretion of
preferred stock redemption obligation, net
(contractual dividend was $24,603 and
$49,022 for the three and six months ended
June 30, 2002) |                                                                     |                          | (19,421     | )                  |         |                  | (39,606     | )       |         |      | (42,247     | )       |           |   | (78,647     | )      
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss applicable to common shares                                                                                                                                                  |                                                                     | $                        | (286,851    | )                  |         | $                | (500,722    | )       |         | $    | (2,485,330  | )       |           | $ | (983,274    | )      
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted:                                                                                                                                         |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss before cumulative effect of
accounting change                                                                                                                                |                                                                     | $                        | (0.78       | )                  |         | $                | (1.21       | )       |         | $    | (1.46       | )       |           | $ | (2.41       | )      
|Cumulative effect of accounting change                                                                                                                                                |                                                                     |                          |            |                    |         |                  |            |         |         |      | (4.24       | )       |           |   |            |        
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss                                                                                                                                                                              |                                                                     |                          | (0.78       | )                  |         |                  | (1.21       | )       |         |      | (5.70       | )       |           |   | (2.41       | )      
|Recognition of preferred stock modification
fee  reorganization
item                                                                                                                 |                                                                     |                          | 0.18        |                    |         |                  |            |         |         |      | 0.18        |         |           |   |            |        
|Other preferred stock
reorganization items, net                                                                                                                                       |                                                                     |                          | (0.01       | )                  |         |                  |            |         |         |      | (0.01       | )       |           |   |            |        
|Preferred stock dividends and accretion of
preferred stock redemption obligation, net                                                                                                 |                                                                     |                          | (0.04       | )                  |         |                  | (0.11       | )       |         |      | (0.09       | )       |           |   | (0.21       | )      
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Net loss per common share, basic and diluted                                                                                                                                          |                                                                     | $                        | (0.65       | )                  |         | $                | (1.32       | )       |         | $    | (5.62       | )       |           | $ | (2.62       | )      
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        
|Weighted average shares, basic and diluted                                                                                                                                            |                                                                     |                          | 442,219,619 |                    |         |                  | 380,300,361 |         |         |      | 442,212,843 |         |           |   | 374,712,398 |        
|                                                                                                                                                                                      |                                                                     |                          |             |                    |         |                  |             |         |         |      |             |         |           |   |             |        

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
(Dollars in thousands)
(Unaudited)

|                                                                            |                                                                                                        |   |                  |           |      |   |            |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | - | ---------------- | --------- | ---- | - | ---------- | ------- | -
|                                                                            |                                                                                                        |   | Six Months Ended
|                                                                            |                                                                                                        |   | June 30,        
|                                                                            |                                                                                                        |   |                 
|                                                                            |                                                                                                        |   | 2002             |           | 2001
|                                                                            |                                                                                                        |   |                  |           |     
|OPERATING ACTIVITIES:                                                       |                                                                                                        |   |                  |           |      |   |            |        
|Net loss                                                                    |                                                                                                        | $ | (2,521,786       | )         |      | $ | (904,627   | )      
|Adjustments to reconcile net loss to net cash used in operating
activities: |                                                                                                        |   |                  |           |      |   |            |        
|                                                                            | Non cash reorganization and restructuring items                                                        |   |                  | 57,189    |      |   |            |        |  
|                                                                            | Depreciation and amortization                                                                          |   |                  | 329,199   |      |   |            | 554,194 |  
|                                                                            | Stock-based compensation                                                                               |   |                  | 17,986    |      |   |            | 18,627  |  
|                                                                            | Cumulative effect of accounting change                                                                 |   |                  | 1,876,626 |      |   |            |        |  
|                                                                            | Accretion of interest on senior unsecured notes                                                        |   |                  |          |      |   |            | 66,170  |  
|                                                                            | Net losses on investments                                                                              |   |                  |          |      |   |            | 3,937   |  
|Changes in assets and liabilities:                                          |                                                                                                        |   |                  |           |      |   |            |        
|                                                                            | Accounts receivable                                                                                    |   |                  | 42,617    |      |   |            | (16,934 | )
|                                                                            | Other assets                                                                                           |   |                  | (17,845   | )    |   |            | (64,728 | )
|                                                                            | Other liabilities subject to
compromise                                                                |   |                  | 197,572   |      |   |            |        |  
|                                                                            | Other liabilities not subject to compromise                                                            |   |                  | (45,733   | )    |   |            | 31,788  |  
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|Net cash used in operating activities                                       |                                                                                                        |   | (64,175          | )         |      |   | (311,573   | )      
|INVESTING ACTIVITIES:                                                       |                                                                                                        |   |                  |           |      |   |            |        
|Purchases of property and equipment, net                                    |                                                                                                        |   | (149,467         | )         |      |   | (1,030,928 | )      
|Purchases of marketable securities                                          |                                                                                                        |   | (15,786          | )         |      |   | (1,532,677 | )      
|Sales of marketable securities                                              |                                                                                                        |   | 317,643          |           |      |   | 2,030,693  |        
|Investments in unconsolidated affiliates                                    |                                                                                                        |   |                 |           |      |   | (2,545     | )      
|Prepayment for network assets                                               |                                                                                                        |   |                 |           |      |   | (120,800   | )      
|Proceeds from sale of equity investments                                    |                                                                                                        |   |                 |           |      |   | 14,771     |        
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|Net cash provided by (used in) investing activities                         |                                                                                                        |   | 152,390          |           |      |   | (641,486   | )      
|FINANCING ACTIVITIES:                                                       |                                                                                                        |   |                  |           |      |   |            |        
|Borrowings under senior secured credit facility                             |                                                                                                        |   |                 |           |      |   | 237,500    |        
|Proceeds from equity investment                                             |                                                                                                        |   |                 |           |      |   | 248,657    |        
|Proceeds from issuance of subordinated convertible notes                    |                                                                                                        |   |                 |           |      |   | 517,500    |        
|Proceeds from issuance of common stock under employee benefit plans         |                                                                                                        |   |                 |           |      |   | 25,689     |        
|Repayments of capital leases and other obligations                          |                                                                                                        |   | (5,096           | )         |      |   | (28,266    | )      
|Dividends paid on convertible preferred stock                               |                                                                                                        |   |                 |           |      |   | (26,890    | )      
|Costs incurred in connection with financing activities                      |                                                                                                        |   |                 |           |      |   | (14,200    | )      
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|Net cash (used in) provided by financing activities                         |                                                                                                        |   | (5,096           | )         |      |   | 959,990    |        
|Effect of exchange rate changes on cash                                     |                                                                                                        |   | (1,256           | )         |      |   | (4,959     | )      
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|Net increase in cash and cash equivalents                                   |                                                                                                        |   | 81,863           |           |      |   | 1,972      |        
|Cash and cash equivalents, beginning of period                              |                                                                                                        |   | 246,189          |           |      |   | 493,004    |        
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|Cash and cash equivalents, end of period                                    |                                                                                                        | $ | 328,052          |           |      | $ | 494,976    |        
|                                                                            |                                                                                                        |   |                  |           |      |   |            |        
|SUPPLEMENTAL DATA:                                                          |                                                                                                        |   |                  |           |      |   |            |        
|Non-cash financing and investing activities:                                |                                                                                                        |   |                  |           |      |   |            |        
|                                                                            | Redeemable preferred stock dividends paid and accrued, payable
in shares of redeemable preferred stock |   | $                | 45,683    |      |   | $          | 39,588  |  
|Cash paid for interest                                                      |                                                                                                        | $ | 30,452           |           |      | $ | 172,437    |        

See accompanying notes to the unaudited condensed consolidated financial statements.

3



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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 AICPA 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, as they are not directly involved
with 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 six month periods ended
June 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
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.

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
includes two alternative reorganization scenarios, either of which would result
in a substantial reorganization and restructuring of XO Parents balance sheet.

4



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##### 



On July 26, 2002, XO Parent commenced solicitation of its creditors to obtain
the approvals needed to confirm
and ultimately implement the Plan of Reorganization. The Bankruptcy Court
has established August 26, 2002 as the date for the hearing at which XO Parent
expects to seek Bankruptcy Court confirmation of the Plan of Reorganization.

The first of the two reorganization alternatives included in the Plan of
Reorganization would implement the transactions contemplated by the Stock
Purchase Agreement, dated January 15, 2002 (the Stock Purchase Agreement),
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. (collectively the Investors), that
provides for $800.0 million of new capital to be invested in XO Parent in
exchange for approximately 80% of the initial outstanding common stock in
reorganized XO (the Forstmann Little/Telmex Investment). This reorganization
alternative under the Plan of Reorganization also contemplates that the loans
outstanding under XO Parents $1.0 billion senior secured credit facility (the
Facility) would be reinstated with specific modifications and that holders of
XO Parents senior unsecured notes and general unsecured creditors would
collectively receive 18% of the initial outstanding equity in reorganized XO
and $200.0 million in cash. Lenders representing more than a majority of the
loans outstanding under the Facility support the reorganization alternative
contemplated by the Forstmann Little/Telmex Investment and have executed a Bank
Plan Support Agreement, which requires them, subject to certain conditions, to
vote in favor of a plan implementing its terms. In addition, the Official
Committee of Unsecured Creditors appointed in XO Parents bankruptcy case (the
Creditors Committee) has informed the Bankruptcy Court that it will support
the reorganization alternative in the Plan of Reorganization that implements
the Forstmann Little/Telmex Investment and will recommend that holders of XO
Parents senior unsecured notes and general unsecured creditors of XO Parent
vote to accept that alternative.

Although the terms of the Forstmann Little/Telmex Investment remain in
full force and effect at this time, its consummation remains subject to the
satisfaction of a number of conditions and could be terminated if certain
conditions are not satisfied by September 15, 2002, other than the conditions
related to the receipt of regulatory approvals, including, without limitation:



| |  |  | that all pending or threatened litigation (other than
ordinary course litigation) against XO Parent, the Investors or
their respective officers and directors shall have been resolved in
a manner satisfactory to each Investor in their sole discretion;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | that, as of the closing date of the Forstmann Little/Telmex
Investment, there shall not have been a material adverse change in
the Companys business, operations, assets, financial condition,
prospects or results of operations;                       
|
| |  |  | that the Plan of Reorganization and the related confirmation
order shall be reasonably acceptable to the Investors;                                                                                                                                       
|
| |  |  | that all required regulatory approvals shall have been
obtained within the times specified by the Stock Purchase Agreement;                                                                                                                               
|
| |  |  | that the amended Facility contemplated by the Plan of
Reorganization shall be reasonably acceptable to the Investors;                                                                                                                                     
|
| |  |  | that XO shall not have entered into a written agreement with
respect to an alternative proposal, including the second
reorganization alternative described below that would implement a
stand-alone reorganization; and                                   
|
| |  |  | that XO shall have adopted a business plan that is reasonably
acceptable to the Investors.                                                                                                                                                                

The Investors have informed XO Parent that they believe that it is
virtually impossible that the conditions to the Forstmann Little/Telmex
Investment will ever be satisfied, have advised XO Parent that they will not
waive any of the conditions to their obligations under the Stock Purchase
Agreement, and have asked XO Parent to consider terminating the agreement.
Some of the reasons given by the Investors for their position are listed in the
Risks and Uncertainties section in Managements Discussion and Analysis.

5



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##### 



The Investors have
also asserted that they may currently be entitled to
terminate the Stock Purchase Agreement and claim a break-up fee as a result of
actions taken by XO Parent with respect to the stand-alone contingency
alternative included in the Plan of Reorganization discussed below.
Nonetheless, the Investors have not terminated or purported to terminate the
Stock Purchase Agreement.

XO Parent does not believe that the Investors have a right to terminate
the Stock Purchase Agreement at this time and, although not free from doubt, XO
Parent believes that the conditions to the Investors obligations under the
agreement can be timely satisfied. Nevertheless, XO cannot be certain that all
such conditions will be deemed satisfied or that the Investors will not
otherwise attempt to terminate the Stock Purchase Agreement because of the
Investors prior statements regarding the likelihood that the transaction contemplated by
the agreement will close. Consequently, the Plan of Reorganization also
includes a stand-alone contingency alternative (the Stand-Alone
Reorganization) that XO Parent would seek to implement if the Forstmann
Little/Telmex Investment is not consummated, unless a superior alternative is
presented.

XO has not entered into any written agreements with respect to the
Stand-Alone Reorganization alternative, in part because the Stock
Purchase Agreement provides that, if the Company enters into a
written agreement with respect to an alternative proposal, the
Investors would have the right to terminate the Stock Purchase Agreement. The Company
believes, however, that the Stand-Alone Reorganization will have the support of
both the informal steering committee of lenders under the Facility (the Senior
Lenders Committee) and the Creditors Committee.

Under the Stand-Alone Reorganization alternative, the $1.0 billion of
principal outstanding under the Facility plus accrued interest would be
converted into:



| |  |  | either 95% or 100% of the outstanding equity of reorganized
XO, depending on the support garnered by the holders of senior
unsecured notes and general unsecured creditors of XO Parent, as
discussed below; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $500.0 million in principal amount of junior secured loans
with no interest payments required by reorganized XO until it
achieves specified financial targets.                                                  

In addition:



| |  |  | nontransferable rights to purchase $200.0 million (subject to
increase in certain events) of reorganized XOs common stock, at a
per share price equal to the implied equity value in the Stand-Alone
Reorganization alternative, would be granted to holders of XO
Parents senior unsecured notes, and, if not fully subscribed by the
holders of senior unsecured notes, to holders of XO Parents
subordinated convertible notes and preferred and common stock and XO
Parents general unsecured creditors, or
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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, if the Stand-Alone Reorganization alternative garners
sufficient support from holders of XO Parents senior unsecured notes and XO
Parents general unsecured creditors in the Plan of Reorganization confirmation
process, such note holders and general unsecured creditors would collectively
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.          

6



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##### 



Regardless of which alternative under the Plan of Reorganization is
completed, all equity interests in XO Parent, including its class A common
stock, will be cancelled and discharged and the holders of such equity
securities will not receive any distribution. XO Parent believes that this
outcome is also likely to occur even if a new alternative plan of
reorganization is proposed and subsequently confirmed by the Bankruptcy Court
and implemented by XO Parent. Under the Stand-Alone Restructuring alternative,
the current holders of common stock may be allowed to participate in the
$200.0 million 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 senior 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 June 30, 2002
(Unaudited)

|                                                                                     |                       |                                            |           |            |           | 
|------------------------------------------------------------------------------------ | --------------------- | ------------------------------------------ | --------- | ---------- | --------- | 
|ASSETS                                                                               |                       |                                            |           |           
|Current assets:                                                                      |                       |                                            |           |           
|                                                                                     | Pledged securities    |                                            | $         | 13,822     |          
|                                                                                     | Other current assets  |                                            |           | 70,740     |          
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total current assets                       |           |            | 84,562    | 
|Property and equipment, net                                                          |                       |                                            | 71,037    |           
|Fixed wireless licenses, net                                                         |                       |                                            | 67,039    |           
|Other intangibles, net                                                               |                       |                                            | 99,368    |           
|Notes receivable from subsidiaries, net                                              |                       |                                            | 8,378,314 |           
|Other assets, net                                                                    |                       |                                            | 53,493    |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total assets                               |           | $          | 8,753,813 | 
|                                                                                     |                       |                                            |           |           
|LIABILITIES AND STOCKHOLDERS EQUITY                                                 |                       |                                            |           |           
|Current liabilities not subject to compromise                                        |                       | $                                          | 65,826    |           
|Debt and accrued interest payable to subsidiary subject to compromise                |                       |                                            | 620,389   |           
|Current liabilities subject to compromise                                            |                       |                                            | 5,488,625 |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total current liabilities                  |           |            | 6,174,840 | 
|Long-term liabilities not subject to compromise                                      |                       |                                            | 61,426    |           
|Long-term liabilities subject to compromise                                          |                       |                                            | 8,553     |           
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total liabilities                          |           |            | 6,244,819 | 
|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          |                                            |           | 4,628,138  |          
|                                                                                     | Deferred compensation |                                            |           | (19,090    | )        
|                                                                                     | Accumulated deficit   |                                            |           | (4,323,010 | )        
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total stockholders equity                 |           |            | 286,038   | 
|                                                                                     |                       |                                            |           |           
|                                                                                     |                       | Total liabilities and stockholders equity |           | $          | 8,753,813 | 
|                                                                                     |                       |                                            |           |           

8



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##### 



XO Communications, Inc.
(XO Parent)
Debtor in Possession
Stand-Alone Statement of Operations
For the Period From the Petition Date of June 17, 2002 through June 30, 2002
(Unaudited)

|                                                                    |                                                                     |                          |         |        |        | 
|------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------- | ------ | ------ | 
|Revenue                                                             |                                                                     | $                        |        |       
|Costs and expenses:                                                 |                                                                     |                          |         |       
|                                                                    | Selling, operating, and general (excludes stock-based compensation) |                          |         | 6,015  |       
|                                                                    | Reorganization                                                      |                          |         | 69,170 |       
|                                                                    | Stock-based compensation                                            |                          |         | 1,411  |       
|                                                                    | Depreciation and amortization                                       |                          |         | 3,461  |       
|                                                                    |                                                                     |                          |         |       
|                                                                    |                                                                     | Total costs and expenses |         |        | 80,057 | 
|Loss from operations                                                |                                                                     |                          | (80,057 | )     
|Interest income on notes receivable from subsidiaries               |                                                                     |                          | 30,555  |       
|Interest expense                                                    |                                                                     |                          | (2,706  | )     
|                                                                    |                                                                     |                          |         |       
|Net loss                                                            |                                                                     |                          | (52,208 | )     
|Recognition of preferred stock modification fee-reorganization item |                                                                     |                          | 81,516  |       
|Other preferred stock reorganization items, net                     |                                                                     |                          | (2,813  | )     
|                                                                    |                                                                     |                          |         |       
|Net income applicable to common shares                              |                                                                     | $                        | 26,495  |       
|                                                                    |                                                                     |                          |         |       

XO Communications, Inc.
(XO Parent)
Debtor in Possession
Stand-Alone Statement of Cash Flows
For the Period From the Petition Date of June 17, 2002 through June 30, 2002
(Unaudited)

|                                                   |                                                       |   |         |         |  
|-------------------------------------------------- | ----------------------------------------------------- | - | ------- | ------- | -
|OPERATING ACTIVITIES:                              |                                                       |   |         |        
|Net loss                                           |                                                       | $ | (52,208 | )      
|Adjustments for noncash items:                     |                                                       |   |         |        
|                                                   | Depreciation and amortization                         |   |         | 3,461   |  
|                                                   | Reorganization                                        |   |         | 69,170  |  
|                                                   | Stock-based compensation                              |   |         | 1,411   |  
|                                                   | Interest income on notes receivable from subsidiaries |   |         | (30,555 | )
|                                                   | Interest expense                                      |   |         | 2,706   |  
|Changes in assets and liabilities:                 |                                                       |   |         |        
|                                                   | Notes receivable from subsidiaries, net               |   |         | 6,015   |  
|                                                   |                                                       |   |         |        
|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           |                                                       | $ |        |        
|                                                   |                                                       |   |         |        

9



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##### 



Accounting Impact of Bankruptcy Filing

Liabilities subject to compromise 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. XO Parent
submitted a motion with the Bankruptcy Court rejecting operating lease
agreements with a total commitment of approximately $54.8 million. 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 June 30,
2002 (dollars in thousands):

|                                                                |  |   |           |  
|--------------------------------------------------------------- |  | - | --------- | -
|Long-term debt in default                                       |  | $ | 5,165,718 |  
|Accrued interest and preferred stock dividends                  |  |   | 297,981   |  
|Prepetition accounts payable                                    |  |   | 20,419    |  
|Capital lease obligations                                       |  |   | 13,060    |  
|                                                                |  |   |           |  
|Total liabilities subject to compromise                         |  |   | 5,497,178 |  
|Less: long-term capital lease obligations
subject to compromise |  |   | (8,553    | )
|                                                                |  |   |           |  
|Current liabilities subject to compromise                       |  | $ | 5,488,625 |  
|                                                                |  |   |           |  

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 debt issuance costs, discounts and purchase
accounting adjustments (collectively the Deferred Financing Fees) related to
debt 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 fees for bankruptcy services.
Reorganization expenses for the three and six month periods ended June 30, 2002
consisted of the following (dollars in thousands):

|                        |                              |   |                    |        |                  |   |        |        | 
|----------------------- | ---------------------------- | - | ------------------ | ------ | ---------------- | - | ------ | ------ | 
|                        |                              |   | Three Months Ended |        | Six Months Ended
|                        |                              |   | June 30, 2002      |        | June 30, 2002   
|                        |                              |   |                    |        |                 
|Deferred Financing Fees |                              | $ | 56,270             |        |                  | $ | 56,270 |       
|Professional fees       |                              |   | 12,900             |        |                  |   | 13,876 |       
|                        |                              |   |                    |        |                  |   |        |       
|                        | Total reorganization expense |   | $                  | 69,170 |                  |   | $      | 70,146 | 
|                        |                              |   |                    |        |                  |   |        |       

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. As only the Facility will have any principal
recovery pursuant to the Plan of Reorganization, XO Parent recognized interest
expense subsequent to the Petition Date only with respect to the loans under
the Facility.

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, as of the Petition Date, XO Parent recognized a deferred
modification fee of $81.5 million. XO Parent also wrote off all issuance costs
and recognized purchase accounting adjustments related to its preferred stock
totaling $11.7 million and $8.9 million, respectively, which amounts are included in other preferred stock reorganization items, net. In addition, the
Company stopped accruing preferred stock dividends subsequent to the Petition
Date.

10



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##### 



3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

In July 2001, the
Financial Accounting Standards Board (the FASB) issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
(SFAS No. 142) which revises the accounting for purchased goodwill and
intangible assets and supersedes Accounting Principles Board 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 six months ended June 30, 2002 and 2001
compared to the actual results for those same periods is as follows (dollars in
thousands, except for per share data):

|                                                                                                    |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | ------------------------- |  | ---- | -------- | ---- |  | - | -------- | - |  | - | -------- | -
|                                                                                                    |  | Three Months Ended June 30, |          | Six Months Ended June 30,
|                                                                                                    |  |                             |          |                          
|                                                                                                    |  | 2002                        |          | 2001                      |  | 2002 |          | 2001
|                                                                                                    |  |                             |          |                           |  |      |          |     
|Net loss before
cumulative effect of
accounting change                                              |  | $                           | (346,133 | )                         |  | $    | (461,116 | )    |  | $ | (645,160 | ) |  | $ | (904,627 | )
|Goodwill amortization                                                                               |  |                             |         |                           |  |      | 149,888  |      |  |   |         |   |  |   | 298,741  |  
|                                                                                                    |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Adjusted net loss
before cumulative
effect of accounting
change                                     |  | $                           | (346,133 | )                         |  | $    | (311,228 | )    |  | $ | (645,160 | ) |  | $ | (605,886 | )
|                                                                                                    |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Net loss per common
share before
cumulative effect of
accounting change,
basic and diluted:         |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Reported net loss
before cumulative
effect of accounting
change                                     |  | $                           | (0.78    | )                         |  | $    | (1.21    | )    |  | $ | (1.46    | ) |  | $ | (2.41    | )
|Goodwill amortization                                                                               |  |                             |         |                           |  |      | 0.39     |      |  |   |         |   |  |   | 0.80     |  
|                                                                                                    |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  
|Adjusted net loss
per common share
before cumulative
effect of accounting
change, basic and
diluted |  | $                           | (0.78    | )                         |  | $    | (0.82    | )    |  | $ | (1.46    | ) |  | $ | (1.61    | )
|                                                                                                    |  |                             |          |                           |  |      |          |      |  |   |          |   |  |   |          |  

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
June 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

11



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Plan of Reorganization, or any similar plan of 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.

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

|                        |  |                |         |                   |  |                |          |        |  |                |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|----------------------- |  | -------------- | ------- | ----------------- |  | -------------- | -------- | ------ |  | -------------- | ------- | -------------- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                        |  | June 30, 2002  |         | December 31, 2001
|                        |  |                |         |                  
|                        |  | Gross Carrying |         | Accumulated       |  |                |          |        |  | Gross Carrying |         | Accumulated    |  |   |         | 
|                        |  | Amount         |         | Amortization      |  | Net Book Value |          | Amount |  | Amortization   |         | Net Book Value
|                        |  |                |         |                   |  |                |          |        |  |                |         |               
|Acquired technology     |  | $              | 136,028 |                   |  | $              | (73,719  | )      |  | $              | 62,309  |                |  | $ | 141,541 |  |  | $ | (56,027  | ) |  | $ | 85,514  | 
|Customer lists          |  |                | 123,744 |                   |  |                | (94,605  | )      |  |                | 29,139  |                |  |   | 124,873 |  |  |   | (80,845  | ) |  |   | 44,028  | 
|Other                   |  |                | 35,420  |                   |  |                | (24,089  | )      |  |                | 11,331  |                |  |   | 48,731  |  |  |   | (24,869  | ) |  |   | 23,862  | 
|                        |  |                |         |                   |  |                |          |        |  |                |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|Total intangible assets |  | $              | 295,192 |                   |  | $              | (192,413 | )      |  | $              | 102,779 |                |  | $ | 315,145 |  |  | $ | (161,741 | ) |  | $ | 153,404 | 
|                        |  |                |         |                   |  |                |          |        |  |                |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|Fixed wireless licenses |  | $              | 997,942 |                   |  | $              | (67,493  | )      |  | $              | 930,449 |                |  | $ | 997,942 |  |  | $ | (50,397  | ) |  | $ | 947,545 | 
|                        |  |                |         |                   |  |                |          |        |  |                |         |                |  |   |         |  |  |   |          |   |  |   |         | 

The Company amortizes its intangible assets with definite useful lives on
a straight-line basis over their useful lives that 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 six months
ended June 30, 2002 was $26.4 million and $52.7 million, respectively, and
$28.0 million and $55.8 million for the three and six months ended June 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 June 30, 2002, the Company had approximately $1,232.3 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

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
and reduced its workforce by approximately 350 additional employees, the
majority of which were employed in the network operations group, 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 June 30, 2002, the remaining restructuring accrual was $90.2
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 due to payments associated with exited lease facilities.

12



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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 June 30, |         | Six Months Ended June 30,
|                                   |               |   |                             |         |                          
|                                   |               |   | 2002                        |         | 2001                      |   | 2002    |         | 2001
|                                   |               |   |                             |         |                           |   |         |         |     
|Voice services                     |               | $ | 174,893                     |         |                           | $ | 147,742 |         |      | $ | 343,193 |         |  | $ | 278,841 |        
|Data services                      |               |   | 118,630                     |         |                           |   | 148,978 |         |      |   | 254,391 |         |  |   | 291,187 |        
|Integrated voice
and data services |               |   | 31,529                      |         |                           |   | 8,539   |         |      |   | 60,339  |         |  |   | 12,128  |        
|Other services                     |               |   | 428                         |         |                           |   | 1,520   |         |      |   | 962     |         |  |   | 1,930   |        
|                                   |               |   |                             |         |                           |   |         |         |      |   |         |         |  |   |         |        
|                                   | Total revenue |   | $                           | 325,480 |                           |   | $       | 306,779 |      |   | $       | 658,885 |  |   | $       | 584,086 | 
|                                   |               |   |                             |         |                           |   |         |         |      |   |         |         |  |   |         |        

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
European operations, which was sold in February 2002. The following table
reflects the Companys calculation of comprehensive loss for the three and six
months ended June 30, 2002 and 2001 (dollars in thousands):

|                                     |                                                                            |   |                             |     |                           |   |          |       |      |   |            |        |   |   |          |        | 
|------------------------------------ | -------------------------------------------------------------------------- | - | --------------------------- | --- | ------------------------- | - | -------- | ----- | ---- | - | ---------- | ------ | - | - | -------- | ------ | 
|                                     |                                                                            |   | Three Months Ended June 30, |     | Six Months Ended June 30,
|                                     |                                                                            |   |                             |     |                          
|                                     |                                                                            |   | 2002                        |     | 2001                      |   | 2002     |       | 2001
|                                     |                                                                            |   |                             |     |                           |   |          |       |     
|Net loss applicable to common shares |                                                                            | $ | (286,851                    | )   |                           | $ | (500,722 | )     |      | $ | (2,485,330 | )      |   | $ | (983,274 | )     
|Other comprehensive gains (loss):    |                                                                            |   |                             |     |                           |   |          |       |      |   |            |        |   |   |          |       
|                                     | Net unrealized gains (losses)
and foreign currency translation
adjustments |   |                             | 134 |                           |   |          | 8,925 |      |   |            | (8,388 | ) |   |          | 14,479 | 
|                                     |                                                                            |   |                             |     |                           |   |          |       |      |   |            |        |   |   |          |       
|Comprehensive loss                   |                                                                            | $ | (286,717                    | )   |                           | $ | (491,797 | )     |      | $ | (2,493,718 | )      |   | $ | (968,795 | )     
|                                     |                                                                            |   |                             |     |                           |   |          |       |      |   |            |        |   |   |          |       

8. NEW ACCOUNTING PRONOUNCEMENT

In June 2002, the FASB issued
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). SFAS 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 were accrued upon managements commitment to an exit plan,
which is generally before an actual liability has been incurred. The
provisions of SFAS 146 are to be applied prospectively to exit or disposal
activities initiated after December 31, 2002, although earlier adoption is
allowed.

9. RELATED PARTY TRANSACTIONS

The Company provides telecommunications services
to Nextel Communications, Inc. (Nextel) and purchases various administrative
services from Nextel. For the year ended December 31, 2001 and the six-month period
ending June 30, 2002, the Company recognized revenue of $27.6 million and $37.2 million, respectivelly,
of which $12.4 million remained outstanding at June 30, 2002. Payments to Nextel during the
year ended December 31, 2001 and six-month period ending June 30, 2002 totaled $6.2 million
and $1.5 million, respectively. In addition, the Company provides certain telecommunications services to
McLeodUSA (McLeod), and also purchases similar services from McLeod. For the year
ended December 31, 2001 and the six-month period ending June 30, 2002, the Company recognized revenue
of $7.1 million and $0.2 million, respectively. Payments to McLeod for the year ended December 31, 2001
and the six-month period ending June 30, 2002 totaled $8.4 million and $1.0 million, respectively.

10. 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.

13



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In addition, state court lawsuits filed in New York and Delaware allege
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 one of the
following: (1) if the Forstmann/Telmex Investment closes, the Senior Secured
Lenders will fund the settlement out of interest payments due to them under the
Facility or (2) if the Forstmann/Telmex Investment does not close, the
plaintiff class would share in any recovery received by the Company from the
Investors through a lawsuit or settlement of any litigation for breach of the
Stock Purchase Agreement. The settlement is subject to bankruptcy and state
court approvals.

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 June 30, 2002 to cover these
risks.

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 modification 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s Court
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 Plan of 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 its
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.

11. SUBSEQUENT EVENTS

Intercity Network Agreement

On August 8, 2002, the Company entered into a Master Agreement with Level
3 Communications, Inc., (Level 3) which will amend various agreements related to XOs
acquisition of fiber networks in the United States from Level 3 and the
recurring maintenance thereon. Effective as of the closing, which is subject
to, among other things, Bankruptcy Court and regulatory approvals, Level 3 will
reduce the operating and maintenance fees as well as expected fiber
relocation charges from approximately $17 million annually
to a fixed rate of $5.0 million
per year beginning January 1, 2003, over the remaining term
of the initial agreement. In exchange for this reduction and certain other
concessions, the Company will surrender its indefeasible right to use the empty
conduit and 6 of the 24 fibers previously acquired from Level 3.
Other provisions of the agreement stipulate the conditions and price under which XO
can lease segments of the conduit that is returned to Level 3, terms and conditions
of credits that can be applied to future services by both companies, and Level 3 conveying
certain metro conduit to XO. With respect
to the transaction, we expect to record a non-cash loss, currently estimated at
approximately $300.0 million, in the second half of 2002. Either party may terminate the Master
Agreement in the event that the contemplated transactions do not close by
February 28, 2003.

14



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Prepaid Calling Card Tax Matter

On July 26, 2002, the Company was advised by the staff of the Securities
and Exchange Commission that it was conducting an informal inquiry 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. Sales generated by the
Company 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. On August 8, 2002, the Company responded to the SECs
request for information. The Company believes that its accounting for these
potential tax obligations is appropriate and that its accruals of liabilities
relating to these obligations is adequate.

15



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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 data and voice communications
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. Our voice
services include bundled local and long distance, interactive voice response
and shared tenant 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
inter-city 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
inter-city 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 inter-city 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 inter-city networks.

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 had an impact on our ability to maintain historical revenue
growth levels.

Proposed Reorganization

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 includes two alternative
restructuring scenarios, either of which is intended to result in a substantial
reorganization and recapitalization of XO Parents balance sheet. On July 26,
2002, XO Parent commenced solicitation of its creditors to obtain the approvals
needed to confirm and ultimately implement the Plan of Reorganization. The
Bankruptcy Court has established August 26, 2002 as the date for the hearing at
which XO Parent expects to seek Bankruptcy Court confirmation of the Plan of
Reorganization.

16



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The first of the two reorganization alternatives in the Plan of
Reorganization would implement 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. This
reorganization alternative provides for $800.0 million in new capital to be
invested in XO Parent in exchange for approximately 80% of the initial
outstanding common stock in reorganized XO. We refer to this investment and the
related transactions as the Forstmann Little/Telmex Investment. The Forstmann
Little/Telmex Investment also contemplates that the loans outstanding under XO
Parents $1.0 billion senior secured credit facility, which we refer to as the
Facility, would be reinstated with specified modifications and that the holders
of XO Parents senior unsecured notes and general unsecured creditors would
collectively receive 18% of the initial outstanding equity in reorganized XO
and $200 million in cash. Lenders representing more than a majority of the
loans outstanding under the Facility support the reorganization alternative
contemplated by the Forstmann Little/Telmex Investment and have executed a Bank
Plan Support Agreement, which requires them, subject to certain conditions, to
vote in favor of a plan implementing its terms. In addition, the Official
Committee of Unsecured Creditors appointed in XO Parents bankruptcy case,
which we refer to as the Creditors Committee, has informed the Bankruptcy Court
that it will support the reorganization alternative in the Plan of
Reorganization that implements the Forstmann Little/Telmex Investment and will
recommend that holders of XO Parents senior unsecured notes and general
unsecured creditors of XO Parent vote to accept that alternative.

Although the terms of the Forstmann Little/Telmex Investment remain in
full force and effect at this time, its consummation remains subject to the
satisfaction of a number of conditions, and could be terminated if certain
conditions are not satisfied by September 15, 2002, other than the conditions
related to the receipt of regulatory approvals, including without limitation:



| |  |  | that all pending or threatened litigation (other than
ordinary course litigation) against XO Parent, the Investors or
their respective officers and directors shall be resolved in a
manner satisfactory to each Investor in their sole discretion;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | that, as of the closing date of the Forstmann Little/Telmex
Investment, there shall not have been a material adverse change in
the Companys business, operations, assets, financial condition,
prospects or results of operations;                
|
| |  |  | that the Plan of Reorganization and the related confirmation
order shall be reasonably acceptable to the Investors;                                                                                                                                
|
| |  |  | that all required regulatory approvals shall have been
obtained within the times specified by the Stock Purchase Agreement;                                                                                                                        
|
| |  |  | that the amended Facility contemplated by the Plan of
Reorganization shall be reasonably acceptable to the Investors;                                                                                                                              
|
| |  |  | that XO shall not have entered into a written agreement with
respect to an alternative proposal, including the second
reorganization alternative described below that would implement a
stand-alone reorganization; and                            
|
| |  |  | that XO shall have adopted a business plan that is reasonably
acceptable to the Investors.                                                                                                                                                         

The Investors have informed XO Parent that they believe that it is
virtually impossible that the conditions to the Forstmann Little/Telmex
Investment will ever be satisfied, have advised XO Parent that they will not
waive any of the conditions to their obligations under the Stock Purchase
Agreement applicable at the time of closing and have asked XO Parent to
consider terminating the agreement. Some of the reasons given by the Investors
for their position are listed under the heading Risks and Uncertainties
below.

The Investors have also asserted that they may currently be entitled to
terminate the Stock Purchase Agreement and claim a break-up fee as a result of
actions taken by XO Parent with respect to the stand-alone contingency
alternative included in the Plan of Reorganization discussed below.
Nonetheless, the Investors have not terminated or purported to terminate the
Stock Purchase Agreement.

We do not believe that the Investors have a right to terminate the Stock
Purchase Agreement at this time, and, although not free from doubt, we believe
that the conditions to the Investors obligations under the agreement can be satisfied.
Nevertheless, we cannot be certain that
all such conditions will be deemed satisfied or that the Investors will not
otherwise attempt to terminate the Stock Purchase Agreement because of the
Investors prior statements regarding the likelihood that the transaction
contemplated by
the agreement will close. Consequently, the Plan of Reorganization also
includes a stand-alone contingency alternative, which we refer to as the
Stand-Alone Reorganization, that we would seek to implement only if the
Forstmann Little/Telmex Investment is not consummated, unless a superior
alternative is presented.

17



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We have not entered into any written agreements with respect to the
Stand-Alone Reorganization, in part because the Stock Purchase Agreement provides that, if we enter into a written agreement
with respect to an alternative proposal, the Investors
would have the right to terminate the Stock Purchase Agreement. We believe, however, that
the Stand-Alone Reorganization will have the support of both the informal
steering committee of lenders under the Facility, which we refer to as the
Senior Lenders Committee and the Creditors Committee.

Under the Stand-Alone Reorganization alternative, the $1 billion in
principal outstanding under the Facility plus accrued interest would be
converted into:



| |  |  | either 95% or 100% of the outstanding equity of reorganized
XO, depending on the support garnered by the holders of senior
unsecured notes and general unsecured creditors of XO Parent, as
discussed below; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $500.0 million in principal amount of junior secured loans
with no interest payments required by reorganized XO until it
achieves specified financial targets.                                                  

In addition:



| |  |  | nontransferable rights to purchase $200.0 million (subject to
increase in certain events) of reorganized XOs common stock, at a
per share price equal to the implied equity value in the Stand-Alone
Reorganization alternative, would be granted to holders of XO
Parents senior unsecured notes, and if not fully subscribed by the
holders of senior unsecured notes, to holders of XO Parents
subordinated convertible notes and preferred and common stock and to
XO Parents general unsecured creditors; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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, if the Stand-Alone Reorganization alternative garners
sufficient support of holders of XO Parents senior unsecured notes and XO
Parents general unsecured creditors in the Plan of Reorganization confirmation
process, such note holders and creditors would collectively 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.          

Regardless of which alternative under the Plan of Reorganization is
completed, all equity interests in XO Parent, including its class A common
stock, will be cancelled and discharged and the holders of such equity
securities will not receive any distribution. XO Parent believes that this
outcome is also likely to occur even if a new alternative plan of
reorganization is proposed and subsequently confirmed by the Bankruptcy Court
and implemented by XO Parent. Under the Stand-Alone Plan, the current holders
of common stock may be allowed to participate in the $200.0 million rights
offering discussed above.

18



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##### 



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 it by the Bankruptcy Court.

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. We conduct our operations
through direct and indirect subsidiaries of XO Parent. While XO Parent is in
the reorganization process under Chapter 11 of the Bankruptcy Code, our
subsidiaries are expected to continue to operate in the ordinary course of
business. Bankruptcy Court approval of our Plan of Reorganization could
materially change the amounts and classifications reported in the condensed
consolidated financial statements. Additionally, we may, subject to Bankruptcy
Court approval, if required, or as permitted in the normal course of business,
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the financial statements. Based on the
current terms of the Plan of 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 value of the our long-lived assets,
including property and equipment, fixed wireless licenses, other intangible
assets and other noncurrent assets.

New Accounting Pronouncement

In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No, 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 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 were accrued
upon managements commitment to an exit plan, which is generally before an
actual liability has been incurred. The provisions of SFAS 146 are to be
applied prospectively to exit or disposal activities initiated after December
31, 2002, although earlier adoption is allowed.

Subsequent Events

Intercity Network Agreement

On August 8,
2002, we entered into a Master Agreement with Level 3
Communications, Inc., which will amend various agreements related
to our acquisition of fiber networks in the United States from Level 3 and the
recurring maintenance thereon. Effective as of the closing, which is subject
to, among other things, Bankruptcy Court and regulatory approvals, Level 3 will
reduce the operating and maintenance fees as well as expected fiber
relocation charges from approximately $17 million annually to a fixed rate of $5.0 million
per year beginning January 1, 2003, over the remaining term
of the initial agreement. In exchange for this reduction and certain other
concessions, we will surrender our indefeasible right to use the empty conduit
and six of the 24 fibers previously acquired from Level 3. Other
provisions of the agreement stipulate the conditions and price under which XO
can lease segments of the conduit that is returned to Level 3, terms
and conditions of credits that can be applied to future services by
both companies, and Level 3 conveying certain metro conduit to XO. With respect to the
transaction, we expect to record a non-cash loss, currently estimated at
approximately $300.0 million, in the second half of 2002. Either party may terminate the Master
Agreement in the event that the contemplated transactions do not close by
February 28, 2003.

19



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##### 



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 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. Sales generated by us
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. On August 8, 2002, we responded to the SECs request for information.
We believe that our accounting for these potential obligations is appropriate
and that our accruals of liabilities relating to these tax obligations is adequate.

Comparison of Financial Results

Three and Six Months Ended June 30, 2002 versus Three and Six Months Ended
June 30, 2001

All of the discussions of our expectations with respect to future periods
below, 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 as qualified by all of the substantial uncertainties
surrounding any such transaction, as well as uncertainties with respect to
general economic conditions and the telecommunications industry. See Risks
and Uncertainties.

Revenue. Total revenue in the second quarter of 2002 increased 6.1% to
$325.5 million from $306.8 million in the second quarter of 2001, and revenue
for the six months ended June 30, 2002 increased 12.8% to $658.9 million from
$584.1 million in the same period of 2001. The revenue growth is primarily due
to the penetration of enhanced products to new and existing customers. Revenue
for the second quarter of 2002 declined slightly, when compared with revenue
for the first quarter of 2002 of $333.4 million, primarily as a result of our
February 2002 sale of our European operations, customer bankruptcies and churn.
We believe that total revenue in the near term will decline somewhat due to the
impact of recent customer bankruptcies, the weakened economy and customer
churn, and the perceived uncertainties in the market regarding XO Parents bankruptcy
proceedings.

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

|                          |               |   |                             |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |     |  
|------------------------- | ------------- | - | --------------------------- | ------- | ------------ |  | ---- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | --- | -
|                          |               |   | Three Months Ended June 30,
|                          |               |   |                            
|                          |               |   | 2002                        |         | % of Revenue |  | 2001 |       | % of Revenue |   | % Change
|                          |               |   |                             |         |              |  |      |       |              |   |         
|Voice services            |               | $ | 174,893                     |         |              |  | 53.7 | %     |              | $ | 147,742  |         |  |  | 48.2 | %     |   |  | 18.4  | %  
|Data services             |               |   | 118,630                     |         |              |  | 36.5 | %     |              |   | 148,978  |         |  |  | 48.5 | %     |   |  | (20.4 | %) 
|Integrated voice and data |               |   | 31,529                      |         |              |  | 9.7  | %     |              |   | 8,539    |         |  |  | 2.8  | %     |   |  | 269.2 | %  
|Other services            |               |   | 428                         |         |              |  | 0.1  | %     |              |   | 1,520    |         |  |  | 0.5  | %     |   |  | (71.8 | %) 
|                          |               |   |                             |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |    
|                          | Total revenue |   | $                           | 325,480 |              |  |      | 100.0 | %            |   | $        | 306,779 |  |  |      | 100.0 | % |  |       | 6.1 | %
|                          |               |   |                             |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |    

|                          |               |   |                           |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |      |  
|------------------------- | ------------- | - | ------------------------- | ------- | ------------ |  | ---- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | ---- | -
|                          |               |   | Six Months Ended June 30,
|                          |               |   |                          
|                          |               |   | 2002                      |         | % of Revenue |  | 2001 |       | % of Revenue |   | % Change
|                          |               |   |                           |         |              |  |      |       |              |   |         
|Voice services            |               | $ | 343,193                   |         |              |  | 52.1 | %     |              | $ | 278,841  |         |  |  | 47.7 | %     |   |  | 23.1  | %   
|Data services             |               |   | 254,391                   |         |              |  | 38.6 | %     |              |   | 291,187  |         |  |  | 49.9 | %     |   |  | (12.6 | %)  
|Integrated voice and data |               |   | 60,339                    |         |              |  | 9.2  | %     |              |   | 12,128   |         |  |  | 2.1  | %     |   |  | 397.5 | %   
|Other services            |               |   | 962                       |         |              |  | 0.1  | %     |              |   | 1,930    |         |  |  | 0.3  | %     |   |  | (50.2 | %)  
|                          |               |   |                           |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |     
|                          | Total revenue |   | $                         | 658,885 |              |  |      | 100.0 | %            |   | $        | 584,086 |  |  |      | 100.0 | % |  |       | 12.8 | %
|                          |               |   |                           |         |              |  |      |       |              |   |          |         |  |  |      |       |   |  |       |     

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 second quarter of 2002 increased to $174.9 million from $147.7
million in the second quarter of 2001, and for the six months ended June 30,
2002, it increased to $343.2 million from $278.8 million in the same period of
2001. The increase was primarily due to our targeting of larger business
customers and the rollout of our carrier long distance product. We expect that
voice services revenue will decrease in the near term
due to recently announced customer bankruptcies as well as continued
pricing pressures in the carrier long distance market place.

20



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Data services revenue includes revenue from Internet access, network
access and applications hosting services. Data services revenue in the second
quarter of 2002 decreased to $118.6 million from $149.0 million in the second
quarter of 2001, and for the six months ended June 30, 2002, it decreased to
$254.4 million from $291.2 million in the same period of 2001. The decrease is
primarily attributable to the February 2002 sale of our European operations,
customer bankruptcies, and decreased capacity sales. In the near term, we expect data
services revenue to decline in both absolute dollars and as a percentage of
total revenue.

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 second
quarter of 2002 increased to $31.5 million from $8.5 million in the second
quarter of 2001, and for the six months ended June 30, 2002, it increased to
$60.3 million from $12.1 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.

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

|                    |                                |   |                             |         |              |  |      |      |              |   |          |         |  |  |  |      |   |  |       |       |   
|------------------- | ------------------------------ | - | --------------------------- | ------- | ------------ |  | ---- | ---- | ------------ | - | -------- | ------- |  |  |  | ---- | - |  | ----- | ----- | --
|                    |                                |   | Three Months Ended June 30,
|                    |                                |   |                            
|                    |                                |   | 2002                        |         | % of Revenue |  | 2001 |      | % of Revenue |   | % Change
|                    |                                |   |                             |         |              |  |      |      |              |   |         
|Costs and expenses: |                                |   |                             |         |              |  |      |      |              |   |          |         |  |  |  |      |   |  |       |      
|                    | Cost of service                |   | $                           | 134,346 |              |  |      | 41.3 | %            |   | $        | 122,942 |  |  |  | 40.1 | % |  |       | 9.3   | % 
|                    | Selling, operating and general |   |                             | 188,253 |              |  |      | 57.8 | %            |   |          | 254,569 |  |  |  | 83.0 | % |  |       | (26.1 | %)
|                    | Reorganization                 |   |                             | 69,170  |              |  |      | 21.3 | %            |   |          |        |  |  |  |     |   |  | NM   
|                    | Restructuring                  |   |                             | 2,918   |              |  |      | 0.9  | %            |   |          |        |  |  |  |     |   |  | NM   
|                    | Stock-based compensation       |   |                             | 8,891   |              |  |      | 2.7  | %            |   |          | 9,316   |  |  |  | 3.0  | % |  |       | (4.6  | %)
|                    | Depreciation and amortization  |   |                             | 167,843 |              |  |      | 51.6 | %            |   |          | 282,370 |  |  |  | 92.0 | % |  |       | (40.6 | %)
|                    |                                |   |                             |         |              |  |      |      |              |   |          |         |  |  |  |      |   |  |       |      
|Total               |                                | $ | 571,421                     |         |              |  |      |      |              | $ | 669,197  |         |  |  |  |      |   |  | (14.6 | %)   
|                    |                                |   |                             |         |              |  |      |      |              |   |          |         |  |  |  |      |   |  |       |      

|                    |                                |   |                           |         |              |  |      |      |              |   |           |         |  |  |  |      |   |  |       |       |   
|------------------- | ------------------------------ | - | ------------------------- | ------- | ------------ |  | ---- | ---- | ------------ | - | --------- | ------- |  |  |  | ---- | - |  | ----- | ----- | --
|                    |                                |   | Six Months Ended June 30,
|                    |                                |   |                          
|                    |                                |   | 2002                      |         | % of Revenue |  | 2001 |      | % of Revenue |   | % Change 
|                    |                                |   |                           |         |              |  |      |      |              |   |          
|Costs and expenses: |                                |   |                           |         |              |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|                    | Cost of service                |   | $                         | 274,713 |              |  |      | 41.7 | %            |   | $         | 237,836 |  |  |  | 40.7 | % |  |       | 15.5  | % 
|                    | Selling, operating and general |   |                           | 393,503 |              |  |      | 59.7 | %            |   |           | 494,095 |  |  |  | 84.6 | % |  |       | (20.4 | %)
|                    | Reorganization                 |   |                           | 70,146  |              |  |      | 10.7 | %            |   |           |        |  |  |  |     |   |  | NM   
|                    | Restructuring                  |   |                           | 2,918   |              |  |      | 0.4  | %            |   |           |        |  |  |  |     |   |  | NM   
|                    | Stock-based compensation       |   |                           | 17,986  |              |  |      | 2.7  | %            |   |           | 18,627  |  |  |  | 3.2  | % |  |       | (3.4  | %)
|                    | Depreciation and amortization  |   |                           | 329,199 |              |  |      | 50.0 | %            |   |           | 554,194 |  |  |  | 94.9 | % |  |       | (40.6 | %)
|                    |                                |   |                           |         |              |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|Total               |                                | $ | 1,088,465                 |         |              |  |      |      |              | $ | 1,304,752 |         |  |  |  |      |   |  | (16.6 | %)   
|                    |                                |   |                           |         |              |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      

*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 six months ended June 30,
2002 increased as a percentage of revenue as compared to the same period in
2001 due primarily to change in product mix and the impact of customer
bankruptcies. Voice and integrated services revenue has increased as a
percentage of our total revenue, resulting in lower margins as voice and
integrated services are more likely to utilize leased versus owned network
facilities to terminate calls. Specific carrier bankruptcies have resulted in
lost revenue with no reduction in costs of service. Cost of service as a
percentage of revenue for the second quarter of 2002 improved from the first
quarter of 2002 percentage of 42.1% due to cost savings realized from improving
network configuration and transferring traffic from leased facilities onto
facilities that are owned or controlled by XO. We expect cost of service as a
percentage of revenue to fluctuate with the trend in revenue, product mix and
the impact of customer bankruptcies.

21



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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 second quarter
of 2002 was $188.3 million compared to $254.6 million in the second quarter of
2001. For the six months ended June 30, 2002, selling, operating, and general
expense was $393.5 million compared to $494.1 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 our February 2002 sale of our European operations. In the near
term, we expect selling, operating and general expense to decrease slightly.

Reorganization.Reorganization expenses include non-cash charges for
adjustments of the historical carrying amounts of our Facility and senior
unsecured notes to the estimated allowed claim amount by the Bankruptcy
Court. These charges included all issuance costs, discounts and purchase
accounting adjustments related to our debt. Reorganization expense also
includes deferred professional fees associated with our Plan of Reorganization
that were written off as of the Petition Date and fees for bankruptcy services.
Reorganization expense for the three and six months ended June 30, 2002 was
$69.2 million and $70.1 million, respectively.

Restructuring.During the second half of 2001, we implemented a plan to
restructure certain of our business operations. The restructuring plan includes
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, 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.

Stock-based compensation. Stock-based compensation expense represents
non-cash charges recorded in connection with the grant of compensatory stock
options and restricted stock grants to employees whose compensation is included
in selling, operating and general expense. Compensation expense is recognized
over the vesting periods of compensatory stock options and restricted stock
based on the excess of the fair value of the common stock at the date of grant
(determined by reference to the market price on that date) over the exercise
price of the option. Stock-based compensation of $8.9 million in the second
quarter of 2002 was consistent with the $9.3 million recorded in the second
quarter of 2001. For the first six months of 2002, stock-based compensation of
$18.0 million was consistent with the $18.6 million for the first six 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 into new and existing markets, more assets were placed into service,
which caused depreciation expense to increase to $141.5 million for the second
quarter of 2002 from $104.5 million for the second quarter of 2001 and to
$276.5 million for the first six months of 2002 from $199.7 million in the
first six months of 2001. Assuming we complete our Plan of 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. As of June 30, 2002, we had
approximately $1.2 billion 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 $26.4 million
for the second quarter of 2002 from $177.9 million in the second quarter of
2001, and it decreased to $52.7 million for the first six months of 2002 from
$354.5 million for the first six months of 2001. The significant decrease is
primarily due to our implementation of Statement of Financial 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 our Plan of
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 decrease further.

22



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Interest income. Interest income in the second quarter of 2002 decreased
to $4.2 million from $21.8 million in the second quarter of 2001. For the six
months ended June 30, 2002, interest income decreased to $9.8 million from
$56.9 million in the first six 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 second quarter of 2002
decreased to $104.4 million from $115.8 million in the second quarter of 2001.
For the six months ended June 30, 2002, interest expense decreased to $225.1
million from $234.4 million in the first six months of 2001. Interest expense
for the first and second quarter of 2002 includes interest on all of our
outstanding debt through the Petition Date. Interest expense decreased as we
ceased accruing interest and penalties on our senior unsecured and subordinated
notes as of the Petition Date as under either alternative in the Plan of
Reorganization, no principal amount would remain outstanding on these
obligations.

Other income (loss), net.Other income (loss), net in the second quarter
of 2002 was income of $2,000 and a loss of $4.6 million in the second quarter
of 2001 and was a loss of $0.2 million for the first six months of 2002 and a
loss of $6.4 million for the comparable period of 2001. The 2001 losses related
to nonrecurring losses on equity investments during the second quarter of 2001.

Net loss before cumulative effect of accounting change. Net loss before
cumulative effect of accounting change in the second quarter of 2002 improved
to $346.1 million from a net loss before cumulative effect of accounting change
of $461.1 million in the second quarter of 2001, and improved to $645.2 million
for the first six months of 2002 from $904.6 million in the first six months of
2001 due to the foregoing factors.

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 second quarter of 2002 improved to $346.1
million from a net loss of $461.1 million in the second quarter of 2001, and
was $2,521.8 million for the first six months of 2002 versus $904.6 million in
the first six months of 2001 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 deferred
balance of $81.5 million was recognized as of the Petition Date.

Other preferred stock reorganization items, net.As our
preferred stock is deemed subject to compromise under SOP 90-7, as of the
Petition Date, we have written off certain issuance costs and recognized
certain purchase accounting adjustments related to the preferred stock totaling $11.7 million and $8.9 million, respectively.

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 the
Petition Date. As a result, preferred stock dividends and accretion of preferred stock redemption obligation, net
in the second quarter of 2002 was $19.4 million versus $39.6 million in the
second quarter of 2001, and $42.2 million for the first six months of 2002
versus $78.6 million for the first six months of 2001.

Net loss applicable to common shares.Net loss applicable to common shares
in the second quarter of 2002 was $286.9 million versus a net loss of $500.7
million in the second quarter of 2001, and was
$2,485.3 million for the first six months of 2002 versus $983.3 million in
the first six months of 2001 due to the foregoing factors.

23



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Other Operating Data

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

|       |  |                             |       |                           |  |      |         |      |  |   |        |   |  |   |          |  
|------ |  | --------------------------- | ----- | ------------------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | -------- | -
|       |  | Three Months Ended June 30, |       | Six Months Ended June 30,
|       |  |                             |       |                          
|       |  | 2002                        |       | 2001                      |  | 2002 |         | 2001
|       |  |                             |       |                           |  |      |         |     
|EBITDA |  | $                           | 2,881 |                           |  | $    | (70,732 | )    |  | $ | (9,331 | ) |  | $ | (147,845 | )

EBITDA has improved for the three and six months ending June 30, 2002 over
comparable periods in 2001, due to revenue growth and the decrease in selling,
operating and general expenses as discussed above. EBITDA for the second
quarter of 2002 was $2.8 million versus an EBITDA loss of $12.2 million in the
first quarter of 2002 primarily as a result of our operating cost reductions. In the near
term, we expect EBITDA to fluctuate depending on the overall revenue trend and product mix changes driven by churn and future customer bankruptcies, if any.

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, unless and until we are able to
establish an adequate customer base.

Reorganization Overview

As described in the 2001 Annual Report and our Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2002, in light of conditions in
the capital markets and its funding needs, XO took a number of steps during
2001 to conserve cash on hand by reducing its operating expenses, stopping
payment on its debt service and preferred security dividend payments and
reducing our capital expansion plans. 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 its 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 the 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. On
July 26, 2002, XO Parent commenced solicitation of its creditors to obtain the
approvals needed to confirm and ultimately implement the Plan of
Reorganization. The Bankruptcy Court has established August 26, 2002 as the
date for the hearing at which XO Parent expects to seek confirmation of the
Plan of Reorganization. If the Plan of Reorganization is ultimately approved by
the Bankruptcy Court and implemented by XO, we anticipate that XO Parent would:



| |  |  | emerge from bankruptcy with significant reductions of its
existing debt and interest obligations and the elimination of its
preferred stock and dividend obligations;                                                                                                                                                                                                                                                                                                         
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | have an amended secured credit facility in place with
financial covenants generally more favorable than under the existing
Facility and with maturity and repayment terms of the principle and
interest extended several years; and, in the case of the Stand-Alone
Reorganization alternative, the borrowings outstanding under the
facility would be reduced by half with no interest payments required
by reorganized XO until it achieves specified financial targets; and
|
| |  |  | have sufficient cash to fund its business operations, at
least in the short term, pending any unforeseen future events or
further deterioration in the U.S. economy.                                                                                                                                                                                                                                                                                                          

24



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##### 



Liquidity Assessment

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. We
used $53.0 million of cash in the second quarter of 2002 versus $166.2 million
in the first quarter of 2002. This reduction in the rate at which we use our
cash was accomplished by:



| |  |  | a significant reduction in our capital requirements largely due to
the completion of several significant technology and network
enhancements projects and decreases in success-based spending, which has
resulted in a reduction of capital expenditures to $37.4 million in the
second quarter of 2002 from $136.5 million in the first quarter of
2002; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the implementation of a series of expense reduction and cash
conservation initiatives, which has resulted in improved gross margins
and a reduction of selling, operating and general expenses in both
absolute dollars and as a percentage of revenue.                                                                                                      

These reductions in cash use were partially offset by the slight decrease
in revenues for the second quarter of 2002 compared to revenues for the first
quarter of 2002. Under our current assumptions with respect to future
operations including nonpayment of interest and dividends during the
reorganization process, we estimate that our $535.9 million of cash and
marketable securities on hand as of June 30, 2002 will be sufficient to fund
our current operations well into 2003.

We conduct our operations through direct and indirect subsidiaries of XO
Parent. While XO Parent is in the Chapter 11 reorganization process, we expect
our subsidiaries will continue to operate in the ordinary course of business.
Our plans with respect to the proposed Plan of Reorganization contemplate that
most of our trade suppliers, unsecured general creditors, employees and
customers will not be adversely affected while XO Parent is involved in the
Chapter 11 bankruptcy proceedings. During this reorganization process, we have
attempted to maintain normal and regular trade terms with our suppliers and
customers. There can be no assurance that our suppliers will continue to
provide normal trade credit or credit on terms acceptable to us, if at all, or
that customers will continue to do business or enter into new business with us.

There can be no assurance that the proposed Plan of Reorganization will be
approved or implemented. In particular, as noted in Risks and Uncertainties
below, the Investors have asserted a number of grounds, based on the conditions
contained in the Stock Purchase Agreement, in support of their position that it
is virtually impossible that the conditions to the Forstmann Little/Telmex
Investment will ever be satisfied. If the reorganization alternative under the
Plan of Reorganization that implements the Forstmann Little/Telmex Investment
is not approved or completed, or if XO parent determines that it is unlikely to
be completed, XO Parent intends, subject to receipt of necessary Bankruptcy
Court approvals, to proceed with the implementation of the Stand-Alone
Reorganization, which provides for substantially reduced recoveries by XO
Parents creditors.

If XO Parent is unable to implement either of the alternatives under the
Plan of 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 Plan of 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 Plan of 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.

25



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##### 



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 June 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
modification 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 relating to the processes relating 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.

XOs Plan of Reorganization

The Investors believe that it is virtually impossible that the conditions to
their obligations to consummate the transactions contemplated by the Stock
Purchase Agreement will ever be met and will not waive any of those conditions.

The Investors have repeatedly informed us that they believe it to be
virtually impossible that the conditions to their obligations under the Stock
Purchase Agreement for the Forstmann Little/Telmex Investment will ever be
satisfied, that they will not waive any of those conditions and, therefore,
that we and our creditors should not anticipate that a closing under the Stock
Purchase Agreement will occur. We agree that there is substantial uncertainty
as to whether or not those conditions will be satisfied, but we do not agree
that it is virtually impossible to satisfy them. In particular, but without
limitation, the Investors have informed us that none of the Plan of
Reorganization, a term sheet that summarizes modifications to our credit
facility to be made in connection with the Forstmann Little/Telmex Investment
or the proposed settlement to certain litigation involving us are satisfactory
to them, approval of each of which is a condition to their obligation to
complete the Forstmann Little/Telmex Investment. The Investors also assert
that a pending lawsuit brought by the Treasurer of the State of Connecticut
against certain investment partnerships affiliated with Forstmann Little & Co.
must be resolved to the satisfaction of the Investors as a condition to their
obligation to complete the Forstmann Little/Telmex Investment.

Despite these statements by the Investors, we currently have no plans to
terminate the Stock Purchase Agreement and do not believe that the Investors
are entitled to terminate the agreement unilaterally at this time. The
Investors, however, have advised us that they intend to avail themselves of any
available conditions to their obligations under the Stock Purchase Agreement
applicable at the time of the closing.

26



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##### 



Based on prior communications from the Investors and their counsel, we
anticipate that the Investors may assert some or all of the following as
grounds among others, in support of their position that it is
virtually impossible that the conditions to their obligations to
consummate the Forstmann Little/Telmex Investment will ever be satisfied and
that they are not obligated to consummate the transactions:



| |  |  | Whether there shall have been, as of the effective date of
the Forstmann Little/Telmex Investment, a material adverse change in
the Companys business, operations, assets, financial condition,
prospects or results of operations;                                                                                                                                                                                                                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Whether the Plan of Reorganization shall have been confirmed
within the time specified by the Stock Purchase Agreement;                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Whether required regulatory approvals shall have been
obtained within the times specified by the Stock Purchase Agreement;                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Whether the Investors are entitled to claim that the
settlement of certain litigation at no direct cost to the Company or the
Investors in the case of a closing under the Stock Purchase
Agreement is not satisfactory to the Investors in their sole
discretion, and whether the Investors have the right to claim that
other litigation pending against one of them, namely the claim
brought by the Treasurer of the State of Connecticut against Forstmann Little, is
covered by this closing condition;
|
| |  |  | Whether an amended bank credit facility contemplated by the
Plan of Reorganization shall be reasonably acceptable to the
Investors;                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Whether the Plan of Reorganization correctly reflects the
terms and conditions of the Stock Purchase Agreement in awarding 18%
of Reorganized XOs equity and $200.0 million in cash to the holders
of our senior unsecured notes and our general unsecured creditors;                                                                                                                                                                                                                                       
|
| |  |  | Whether XO has entered into a written agreement with respect
to the Stand-Alone Reorganization alternative;                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Whether XO shall have adopted a business plan that is
reasonably acceptable to the Investors;                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  |  | Whether the Stock Purchase Agreement is assumable or
enforceable under the Bankruptcy Code;                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Whether the disclosure statement sent to our creditors as
part of the Plan of Reorganization solicitation process met the
requirements of the Stock Purchase Agreement, and whether the Plan
of Reorganization and confirmation order will be reasonably
satisfactory to the Investors;                                                                                                                                                                                                                      
|
| |  |  | Whether the reorganization alternative that implements the
Forstmann Little/Telmex Investment is a feasible plan of
reorganization, as required for confirmation by the Bankruptcy Code
in light of the debt service obligations it entails;                                                                                                                                                                                                                                                                 
|
| |  |  | Whether we are entitled to use the cram down provisions of
the Bankruptcy Code to impose the terms of the Forstmann
Little/Telmex Investment, in the event the holders of our senior
unsecured notes do not consent to its terms, to approve the Plan of
Reorganization; and                                                                                                                                                                                                                               
|
| |  |  | Whether the disclosure statement sent to our creditors as
part of the Plan of Reorganization solicitation process and the Plan
or Reorganization are not, and the order confirming the Plan of
Reorganization will not be, reasonably satisfactory to the Investors
for failure, among other things, to reflect the Investors positions
on these issues throughout those documents.                                                                                                                         

If the Stock Purchase Agreement is terminated, or we conclude that the
Investors will not comply with their obligations to close under such agreement
upon satisfaction of the applicable conditions, we presently intend to
implement the Stand-Alone Reorganization alternative included in the Plan of
Reorganization, unless a superior alternative is presented to us.

27



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##### 



The Forstmann Little/Telmex Investment may not close if regulatory approvals
are not obtained.

It is a condition to the Investors obligation to make the Forstmann
Little/Telmex Investment that the regulatory approvals required in order to
consummate the investment have been obtained or waived in whole or part by the
Investors. If these required approvals (or waivers) are not obtained by January
15, 2003 and by a final order from each applicable regulatory authority on
March 15, 2003, each Investor may terminate its obligations under the Stock
Purchase Agreement.

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 Plan of Reorganization or
prevent them from being obtained.

The Company has no binding commitment from either the Senior Secured Lenders or
the Creditors Committee to support the Stand-Alone Reorganization alternative.

Although we have received a letter on behalf of the administrative agent
under our Facility indicating support of the Senior Lenders Committee for the
Stand-Alone Reorganization alternative, subject to internal lender approvals,
and the Creditors Committee has indicated that it will support and recommend
approval of the Stand-Alone Reorganization alternative, we have not received or
entered into, and cannot enter into, without giving the Investors a right to
terminate the Forstmann Little/Telmex Investment, a binding commitment or other
written agreement with respect to the transactions contemplated by the
Stand-Alone Reorganization. There can be no assurance that the Senior Secured
Lenders, the Creditors Committee or holders of our senior unsecured notes or
general unsecured creditors will support such transactions.

Furthermore, on July 10, 2002, High River Limited Partnership, a Delaware
limited partnership controlled by Mr. Carl Icahn, announced an offer to
purchase up to an aggregate of $331 million in principal amount of the loans
outstanding under the credit facility at a purchase price of $0.40 per $1.00 in
principal amount of such loans, which offer was later increased to $0.50 per
$1.00 in principal amount of such loans, and then subsequently to $0.70 per
$1.00 in principal amount of such loans, subject to certain conditions, one of
which is Mr. Icahn being granted the right to appoint a certain number of
directors. In connection with the amendment of the offer, Mr. Icahn indicated
that while he would support the reorganization alternative in the Plan of
Reorganization that implements the Forstmann Little/Telmex Investment, he would
oppose the Stand-Alone Reorganization alternative as filed with the Bankruptcy
Court. In the event that the lenders under the credit facility decide to
accept Mr. Icahns purchase offer, Mr. Icahn and his affiliates would hold a
majority of the principal amount of the loans and would therefore be able to
exercise a significant degree of control over the reorganization process. In
this event, it would be unlikely that the Stand-Alone Reorganization
alternative would be confirmed. In such a circumstance, there would be no
contingency plan to implement if the Forstmann Little/Telmex Investment is not
completed.

The Chapter 11 Case

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.

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.

28



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##### 



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

Even if all impaired voting classes support the Plan of Reorganization,
and with respect to any impaired class deemed to have rejected the Plan the
requirements for a cram down are met, the Bankruptcy Court, which, as a court
of equity, may exercise substantial discretion, may choose not to
confirm the Plan of 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 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 are also a
number of conditions under the Stock Purchase Agreement that must be satisfied
prior to consummation of the Forstmann Little/Telmex Investment. 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.

The filing of the Chapter 11 case by us 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.

Covenants in the Stock Purchase Agreement may restrict or preclude actions by
us.

The Stock Purchase Agreement contains several covenants regarding the
conduct of our business from the time of the execution of the Stock Purchase
Agreement until it is terminated or the Forstmann Little/Telmex Investment
contemplated thereby is consummated. The covenants require, among other things,
that, unless the Investors consent, we must conduct our business only in the
ordinary course, consistent with past practice or as may be ordered by the
Bankruptcy Court and must use reasonable best efforts to preserve its assets,
properties and business relationships. The covenants also preclude several
actions by us. The covenants may limit our ability to respond to certain market
events or take advantage of certain market opportunities, and as a result, our
operations could be materially adversely affected.

29



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##### 



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 and;                                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 inter-city networks; and
|
| |  |  | liquidity and financial resources, and with respect to the Plan of
Reorganization, the transactions contemplated by the Stock Purchase
Agreement, the Stand-Alone Reorganization alternative or any
alternative investment and related 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 those 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 $4,165.7 million in fixed rate unsecured debt and $1,708.3 million
in fixed rate redeemable preferred stock as of June 30, 2002. If our Plan of
Reorganization is confirmed by the Bankruptcy Court and implemented, all of the
outstanding obligations on these securities would be eliminated. Our Facility
has variable rates at which interest accrues. Variable rate debt subjects us to
cash flow exposure resulting from changes in interest rates. If the Stand-Alone
Reorganization alternative were implemented, a portion of our Facility would be
exchanged for equity interests of reorganized XO. We expect that the
consideration to be paid in the exchange for such notes 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 Plan of Reorganization, rather than changes in
interest rates, and that 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.

30



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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 of
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.

The state court actions allege 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. To avoid any cost to us, the Forstmann Little
Investors or Telmex, if the Forstmann/Telmex Investment closes, the Plan of
Reorganization provides that the Senior Secured Lenders will fund the
settlement out of interest payments due to them under the Facility. If the
Forstmann/Telmex Investment does not close, the plaintiff class would share in
any recovery by us against the Investors through a lawsuit or settlement of any
litigation, if any, brought for breach of the Stock Purchase Agreement by the
Investors. The settlement 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 alternative. The settlement is
subject to bankruptcy and state court approvals.

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. Concurrent with the
Chapter 11 filing, XO Parent a proposed Plan of Reorganization with the
Bankruptcy Court that includes two alternative reorganization scenarios, either
of which would result in a substantial reorganization and restructuring of XO
Parents balance sheet. On July 26, 2002, XO Parent commenced solicitation of
its creditors to obtain the approvals needed to confirm and ultimately
implement the Plan of Reorganization. The Bankruptcy Court has established
August 26, 2002 as the date for the hearing at which XO Parent expects to seek
Bankruptcy Court confirmation of the Plan of 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 become effective
on September 26, 1997. The net proceeds we received from the offering totaled
approximately $226.8 million. As of June 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 June 30, 2002, we failed to make interest payments of $196.1 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.

31



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##### 



In addition, during December 2001 and in the first and second quarter of
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 June 30, 2002, XO
Parent had failed to make cash dividend payments of $32.3 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 June 30, 2002.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

|     |  |                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------
|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 dated May 1, 2002,
reporting under Item 5 the Companys financial projections,
which were reported to an informal committee of its senior
noteholders in January 2002.                                                         
|(2) |  | Current Report on Form 8-K dated May 16, 2002,
reporting under Item 4 the Company dismissed its independent
auditors, Arthur Andersen LLP, and appointed Ernst & Young LLP
to serve as its new independent auditors for the year ending
December 31, 2002.
|(3) |  | Current Report on Form 8-K dated June 10, 2002,
reporting under Item 5 the Companys responses to a letter from
attorneys for partnerships affiliated with Forstmann Little &
Co. and Télefonos de Mexico, S.A. de C.V.                                   
|(4) |  | Current Report on Form 8-K dated June 17, 2002,
reporting under Item 3 the Company filed a voluntary petition
under Chapter 11 of the U.S. Bankruptcy Code in the U.S.
Bankruptcy Court for the Southern District of New York.                            

32



---



##### 



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: August 14, 2002 |  | By: /s/ Wayne M. RehbergerWayne M. Rehberger
Senior Vice President and Chief Financial Officer
(Principal financial and accounting officer)

33