##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION




FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended March 31, 2002

Commission file number: 0-30900

XO COMMUNICATIONS, INC.




(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                     
|------------------------------------------------------------------ |  | ------------------------------------
|Delaware                                                           |  | 54-1983517                          
|                                                                   |  |                                     
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                                  
|11111 Sunset Hills Road, Reston, VA                                |  | 20190                               
|                                                                   |  |                                     
|(Address of principal executive offices)                           |  | (Zip Code)                          
|                                                                  
|(703) 547-2000                                                    
|                                                                  
|(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 May 1, 2002, the number of shares of
Class A and Class B common stock of
XO Communications, Inc. issued and outstanding was
337,791,856 and 104,423,158, respectively.









---

TABLE OF CONTENTS



|                              |                                                                                               |                                                                  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              |                                                                                               | Condensed Consolidated Balance Sheets                           
|                              |                                                                                               | Condensed Consolidated Statements of Operations                 
|                              |                                                                                               | Condensed Consolidated Statements of Cash Flows                 
|                              |                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited)
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 2. Changes in Securities and Use of Proceeds                                            
|                              | Item 3. Defaults Upon Senior Securities                                                      
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 5. Other Information                                                                    
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                   



---



##### Table of Contents



XO Communications, Inc.

Index to Form 10-Q


|                              |         |                                                                                                        |                                                                                           |      |   
|----------------------------- | ------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ---- | --
|                              |         |                                                                                                        |                                                                                           | Page
|                              |         |                                                                                                        |                                                                                           |     
|Part I. Financial Information |         |                                                                                                       
|                              | Item 1. |                                                                                                        | XO Communications, Inc. Financial Statements                                              |      |   
|                              |         | Condensed Consolidated Balance Sheets as of
    March 31, 2002 and December 31, 2001                   |                                                                                           | 1   
|                              |         | Condensed Consolidated Statements of Operations
    for the Three Months Ended March 31, 2002 and 2001 |                                                                                           | 2   
|                              |         | Condensed Consolidated Statements of Cash Flows
    for the Three Months Ended March 31, 2002 and 2001 |                                                                                           | 3   
|                              |         | Notes to Condensed Consolidated Financial
    Statements                                               |                                                                                           | 4   
|                              | Item 2. |                                                                                                        | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |      | 10
|                              | Item 3. |                                                                                                        | Quantitative and Qualitative Disclosures about
    Market Risk                            |      | 20
|Part II. Other Information    |         |                                                                                                       
|                              | Item 1. |                                                                                                        | Legal Proceedings                                                                         |      | 21
|                              | Item 2. |                                                                                                        | Changes in Securities and Use of Proceeds                                                 |      | 21
|                              | Item 3. |                                                                                                        | Defaults Upon Senior Securities                                                           |      | 21
|                              | Item 4. |                                                                                                        | Submission of Matters to a Vote of Security
    Holders                                   |      | 22
|                              | Item 5. |                                                                                                        | Other Information                                                                         |      | 22
|                              | Item 6. |                                                                                                        | Exhibits and Reports on Form 8-K                                                          |      | 22
|                              |         | Signatures                                                                                             |                                                                                           | 23  

ii



---



##### Table of Contents






PART I. FINANCIAL INFORMATION






Item 1.     Financial
Statements


XO Communications, Inc.






Condensed Consolidated Balance
Sheets


(Dollars in thousands, except for share and
per share data)


|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |            |           | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------- | ------------ | ---------- | - | --------- | ---------- | --------- | 
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | March 31,                                                |           | December 31,
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | 2002                                                     |           | 2001        
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |             
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | (Unaudited)                                              |           |             
|ASSETS                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|Current assets:                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                       |                                                          | $         | 352,591      |            |   | $         | 246,189    |          
|                                                                                                                                                                                                                                                                             | Marketable securities                                                                                                                                                                                                                                                                                                                                                           |                                                          |           | 236,381      |            |   |           | 508,978    |          
|                                                                                                                                                                                                                                                                             | Accounts receivable, net of allowance for
    doubtful accounts of $36,789 and $32,492, respectively                                                                                                                                                                                                                                                                            |                                                          |           | 174,088      |            |   |           | 216,753    |          
|                                                                                                                                                                                                                                                                             | Other current assets                                                                                                                                                                                                                                                                                                                                                            |                                                          |           | 96,474       |            |   |           | 85,137     |          
|                                                                                                                                                                                                                                                                             | Pledged securities                                                                                                                                                                                                                                                                                                                                                              |                                                          |           | 14,656       |            |   |           | 16,623     |          
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total current assets                                     |           |              | 874,190    |   |           |            | 1,073,680 | 
|Property and equipment, net                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 3,633,380 |              |            |   | 3,742,577 |           
|Fixed wireless licenses, net                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 939,603   |              |            |   | 947,545   |           
|Goodwill, net                                                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |          |              |            |   | 1,876,626 |           
|Other intangibles, net                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 125,512   |              |            |   | 153,404   |           
|Other assets, net                                                                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 131,812   |              |            |   | 136,633   |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total assets                                             |           | $            | 5,704,497  |   |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|Current liabilities:                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             | Accounts payable                                                                                                                                                                                                                                                                                                                                                                |                                                          | $         | 72,884       |            |   | $         | 156,488    |          
|                                                                                                                                                                                                                                                                             | Accrued liabilities                                                                                                                                                                                                                                                                                                                                                             |                                                          |           | 287,765      |            |   |           | 322,997    |          
|                                                                                                                                                                                                                                                                             | Accrued interest payable                                                                                                                                                                                                                                                                                                                                                        |                                                          |           | 180,019      |            |   |           | 114,882    |          
|                                                                                                                                                                                                                                                                             | Long-term debt in default                                                                                                                                                                                                                                                                                                                                                       |                                                          |           | 5,144,851    |            |   |           | 5,109,503  |          
|                                                                                                                                                                                                                                                                             | Current portion of capital lease obligations                                                                                                                                                                                                                                                                                                                                    |                                                          |           | 11,125       |            |   |           | 18,097     |          
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total current liabilities                                |           |              | 5,696,644  |   |           |            | 5,721,967 | 
|Other long-term liabilities                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 122,792   |              |            |   | 129,092   |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total liabilities                                        |           |              | 5,819,436  |   |           |            | 5,851,059 | 
|Redeemable preferred stock, par value $0.01 per
    share, 25,000,000 shares authorized: 7,857,612 shares issued and
    outstanding on March 31, 2002 and December 31, 2001;
    aggregate liquidation preference of $1,693,328 on March 31,
    2002 and December 31, 2001 |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          | 1,785,960 |              |            |   | 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: 337,791,856 and 337,774,204 shares issued and
    outstanding on March 31, 2002 and December 31, 2001,
    respectively; Class B, 120,000,000 shares authorized:
    104,423,158 shares issued and outstanding on March 31, 2002
    and December 31, 2001 |                                                          |           | 4,628,099    |            |   |           | 4,628,509  |          
|                                                                                                                                                                                                                                                                             | Deferred compensation                                                                                                                                                                                                                                                                                                                                                           |                                                          |           | (28,333      | )          |   |           | (37,428    | )        
|                                                                                                                                                                                                                                                                             | Accumulated other comprehensive income                                                                                                                                                                                                                                                                                                                                          |                                                          |           | 1,884        |            |   |           | 10,406     |          
|                                                                                                                                                                                                                                                                             | Accumulated deficit                                                                                                                                                                                                                                                                                                                                                             |                                                          |           | (6,502,549   | )          |   |           | (4,304,071 | )        
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total stockholders (deficit) equity                     |           |              | (1,900,899 | ) |           |            | 297,416   | 
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 | Total liabilities and stockholders
    (deficit) equity |           | $            | 5,704,497  |   |           | $          | 7,930,465 | 
|                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                 |                                                          |           |              |            |   |           |           

See accompanying notes to the unaudited condensed
consolidated financial statements.

1



---



##### Table of Contents



XO Communications, Inc.






Condensed Consolidated Statements of
Operations


(Dollars in thousands, except for share and
per share data)


(Unaudited)


|                                                                                          |                                                                         |                              |             |         |         |   |             |         |         | 
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------- | ----------- | ------- | ------- | - | ----------- | ------- | ------- | 
|                                                                                          |                                                                         |                             
|                                                                                          |                                                                         | Three Months Ended March 31,
|                                                                                          |                                                                         |                             
|                                                                                          |                                                                         | 2002                         |             | 2001   
|                                                                                          |                                                                         |                              |             |        
|Revenue                                                                                   |                                                                         | $                            | 333,405     |         |         | $ | 277,307     |        
|Costs and expenses:                                                                       |                                                                         |                              |             |         |         |   |             |        
|                                                                                          | Cost of service                                                         |                              |             | 140,367 |         |   |             | 114,894 |        
|                                                                                          | Selling, operating, and general (excludes
    stock-based compensation) |                              |             | 205,250 |         |   |             | 239,526 |        
|                                                                                          | Recapitalization                                                        |                              |             | 976     |         |   |             |        |        
|                                                                                          | Stock-based compensation                                                |                              |             | 9,095   |         |   |             | 9,311   |        
|                                                                                          | Depreciation and amortization                                           |                              |             | 161,356 |         |   |             | 271,824 |        
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|                                                                                          |                                                                         | Total costs and expenses     |             |         | 517,044 |   |             |         | 635,555 | 
|Loss from operations                                                                      |                                                                         |                              | (183,639    | )       |         |   | (358,248    | )      
|Interest income                                                                           |                                                                         |                              | 5,540       |         |         |   | 35,108      |        
|Interest expense, net                                                                     |                                                                         |                              | (120,726    | )       |         |   | (118,591    | )      
|Other loss, net                                                                           |                                                                         |                              | (203        | )       |         |   | (1,780      | )      
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss before cumulative effect of accounting
    change                                |                                                                         |                              | (299,028    | )       |         |   | (443,511    | )      
|Cumulative effect of accounting change for
    goodwill impairment                        |                                                                         |                              | (1,876,626  | )       |         |   |            |        
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss                                                                                  |                                                                         |                              | (2,175,654  | )       |         |   | (443,511    | )      
|Preferred stock dividends and accretion of
    preferred stock redemption obligation, net |                                                                         |                              | (22,826     | )       |         |   | (39,041     | )      
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss applicable to common shares                                                      |                                                                         | $                            | (2,198,480  | )       |         | $ | (482,552    | )      
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss per common share, basic and diluted:                                             |                                                                         |                              |             |         |         |   |             |        
|Net loss before cumulative effect of accounting
    change                                |                                                                         | $                            | (0.68       | )       |         | $ | (1.20       | )      
|Cumulative effect of accounting change                                                    |                                                                         |                              | (4.24       | )       |         |   |            |        
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss                                                                                  |                                                                         |                              | (4.92       | )       |         |   | (1.20       | )      
|Preferred stock dividends and accretion of
    preferred stock redemption obligation, net |                                                                         |                              | (0.05       | )       |         |   | (0.11       | )      
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Net loss per common share, basic and diluted                                              |                                                                         | $                            | (4.97       | )       |         | $ | (1.31       | )      
|                                                                                          |                                                                         |                              |             |         |         |   |             |        
|Weighted average shares, basic and diluted                                                |                                                                         |                              | 442,205,796 |         |         |   | 369,025,470 |        
|                                                                                          |                                                                         |                              |             |         |         |   |             |        

See accompanying notes to the unaudited condensed
consolidated financial statements.

2



---



##### Table of Contents



XO Communications, Inc.






Condensed Consolidated Statements of Cash
Flows


(Dollars in thousands)


(Unaudited)


|                                                                                |                                                                                                   |                    |            |           |   |   |          |         |  
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ------------------ | ---------- | --------- | - | - | -------- | ------- | -
|                                                                                |                                                                                                   |                   
|                                                                                |                                                                                                   | Three Months Ended
|                                                                                |                                                                                                   | March 31,         
|                                                                                |                                                                                                   |                   
|                                                                                |                                                                                                   | 2002               |            | 2001     
|                                                                                |                                                                                                   |                    |            |          
|OPERATING ACTIVITIES:                                                           |                                                                                                   |                    |            |           |   |   |          |        
|Net loss                                                                        |                                                                                                   | $                  | (2,175,654 | )         |   | $ | (443,511 | )      
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                                   |                    |            |           |   |   |          |        
|                                                                                | Depreciation and amortization                                                                     |                    |            | 161,356   |   |   |          | 271,824 |  
|                                                                                | Stock-based compensation                                                                          |                    |            | 9,095     |   |   |          | 9,311   |  
|                                                                                | Equity in losses of unconsolidated entities                                                       |                    |            |          |   |   |          | 1,448   |  
|                                                                                | Cumulative effect of accounting change for
    goodwill impairment                                |                    |            | 1,876,626 |   |   |          |        |  
|                                                                                | Accretion of interest on senior notes                                                             |                    |            | 36,045    |   |   |          | 34,464  |  
|Changes in assets and liabilities:                                              |                                                                                                   |                    |            |           |   |   |          |        
|                                                                                | Accounts receivable                                                                               |                    |            | 39,224    |   |   |          | (13,046 | )
|                                                                                | Other assets                                                                                      |                    |            | (17,164   | ) |   |          | (30,621 | )
|                                                                                | Accounts payable                                                                                  |                    |            | 23,671    |   |   |          | 23,125  |  
|                                                                                | Accrued liabilities                                                                               |                    |            | (607      | ) |   |          | 49,071  |  
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|Net cash used in operating activities                                           |                                                                                                   |                    | (47,408    | )         |   |   | (97,935  | )      
|INVESTING ACTIVITIES:                                                           |                                                                                                   |                    |            |           |   |   |          |        
|Purchases of property and equipment                                             |                                                                                                   |                    | (136,454   | )         |   |   | (592,770 | )      
|Proceeds from sales of property and equipment                                   |                                                                                                   |                    | 24,339     |           |   |   |         |        
|Payments to acquire fixed wireless licenses                                     |                                                                                                   |                    |           |           |   |   | (206     | )      
|Net releases (assumptions) of pledged
    securities                            |                                                                                                   |                    | 1,960      |           |   |   | (7       | )      
|Sales of marketable securities and investments                                  |                                                                                                   |                    | 278,293    |           |   |   | 768,104  |        
|Purchases of marketable securities                                              |                                                                                                   |                    | (8,224     | )         |   |   | (554,192 | )      
|Investments in unconsolidated affiliates                                        |                                                                                                   |                    |           |           |   |   | (1,281   | )      
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|Net cash provided by (used in) investing
    activities                         |                                                                                                   |                    | 159,914    |           |   |   | (380,352 | )      
|FINANCING ACTIVITIES:                                                           |                                                                                                   |                    |            |           |   |   |          |        
|Borrowings under senior secured credit facility                                 |                                                                                                   |                    |           |           |   |   | 237,500  |        
|Proceeds from issuance of unsecured notes                                       |                                                                                                   |                    |           |           |   |   | 517,500  |        
|Proceeds from issuance of common stock under
    employee benefit plans         |                                                                                                   |                    |           |           |   |   | 21,049   |        
|Repayments of capital leases and other obligations                              |                                                                                                   |                    | (4,848     | )         |   |   | (19,836  | )      
|Dividends paid on convertible preferred stock                                   |                                                                                                   |                    |           |           |   |   | (13,447  | )      
|Costs incurred in connection with financing
    activities                      |                                                                                                   |                    |           |           |   |   | (14,200  | )      
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|Net cash (used in) provided by financing
    activities                         |                                                                                                   |                    | (4,848     | )         |   |   | 728,566  |        
|Effect of exchange rate changes on cash                                         |                                                                                                   |                    | (1,256     | )         |   |   | (3,231   | )      
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|Net increase in cash and cash equivalents                                       |                                                                                                   |                    | 106,402    |           |   |   | 247,048  |        
|Cash and cash equivalents, beginning of period                                  |                                                                                                   |                    | 246,189    |           |   |   | 493,004  |        
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|Cash and cash equivalents, end of period                                        |                                                                                                   | $                  | 352,591    |           |   | $ | 740,052  |        
|                                                                                |                                                                                                   |                    |            |           |   |   |          |        
|SUPPLEMENTAL DATA:                                                              |                                                                                                   |                    |            |           |   |   |          |        
|Non-cash financing and investing activities:                                    |                                                                                                   |                    |            |           |   |   |          |        
|                                                                                | Redeemable preferred stock dividends, paid in
    shares of redeemable preferred stock            |                    | $          |          |   |   | $        | 24,716  |  
|                                                                                | Accrued redeemable preferred stock dividends,
    payable in shares of redeemable preferred stock |                    |            | 12,357    |   |   |          | 14,687  |  
|Cash paid for interest                                                          |                                                                                                   | $                  | 19,192     |           |   | $ | 25,983   |        

See accompanying notes to the unaudited condensed
consolidated financial statements.

3



---



##### Table of Contents



XO Communications, Inc.






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).

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-month period ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 2002.

Reporting Format

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

2.  RECAPITALIZATION

Background

As described in the 2001 Annual Report, 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, reducing its debt service and
preferred security dividend payments and reducing its capital
expansion plans. Conditions in the capital markets for
telecommunications companies continued to deteriorate, and, in
late 2001, XO determined that, in light of the substantial
declines in market valuation suffered by telecommunications
service providers throughout its industry in 2001, it would be
unable to obtain the additional funding needed to conduct its
business plan without a significant balance sheet
recapitalization.

In furtherance of these plans:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In October 2001, XO retained Houlihan Lokey
    Howard & Zukin Capital as its outside financial advisor
    to assist XO in exploring a variety of investment and
    deleveraging alternatives and, beginning in November 2001,
    Houlihan Lokey contacted over fifty potential investors, both
    strategic and financial, in an effort to raise new capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In November 2001, XO Parent determined not to
    continue to make cash interest and dividend payments on its
    unsecured debt obligations and preferred stock from and after
    December 1, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | In January 2002, XO entered into a Stock Purchase
    Agreement (the Stock Purchase Agreement) with 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. (together, the Forstmann Little Investors), and
    Télefonos de México S.A. de C.V. (Telmex
    and, collectively with the Forstmann Little Investors, the
    Investors) that provides for a new capital
    investment in XO Parent, subject to the satisfaction of a
    number of conditions, including the resolution of certain
    pending litigation, receipt of regulatory approvals and the
    completion of a substantial balance sheet recapitalization.

4



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In March 2002, an informal committee of holders
    of XO Parents senior unsecured notes rejected various
    proposals made by the Investors with respect to the
    recapitalization of XO Parents balance sheet
    contemplated by the Stock Purchase Agreement, and, at that time
    and subsequently, as described below, the informal committee
    presented XO with preliminary proposals for new capital advanced
    by certain holders of XO Parents senior unsecured
    notes, including an affiliate of Mr. Carl Icahn, which proposals
    also contemplated a substantial balance sheet recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | XO determined that, to implement the balance
    sheet recapitalization required by either the Stock Purchase
    Agreement or the noteholder proposals, XO Parent would need
    to commence a voluntary bankruptcy proceeding and seek approval
    of a related plan of reorganization that would eliminate its
    outstanding equity and much of its outstanding debt, and result
    in a less than full recovery for its outstanding senior
    unsecured notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | On March 22, 2002, Mr. Icahn, through
    his Chelonian Corp. affiliate (the Icahn Group)
    submitted a draft term sheet to the Company with respect to a
    recapitalization proposal, which was revised on April 1,
    2002 and by subsequent discussions. The Icahn Group holds a
    substantial amount of XO senior notes, and represented to the
    Company that their proposal had the support of other holders of
    substantial amounts of senior notes. The Company has engaged in
    negotiations relating to this proposal regarding a potential
    investment of $550 million in cash and a related corporate
    reorganization that would result in the Icahn Group owning a 55%
    ownership interest in the business and assets currently operated
    by the Company, in addition to the equity to be received in
    respect of their senior notes. The Icahn proposal contemplates
    modifications to the Companys $1 billion senior
    secured credit facility (the Facility), including
    longer maturities and the extension of prepayment dates, as well
    as changes in a number of financial and operational covenants.
    These or any other modifications to the Facility would require
    the agreement of the lenders under the Facility (the
    Secured Lenders), which agreement has not been
    obtained with respect to the Icahn Group proposal.
|
| |  | The Company is also considering a
    standalone business plan in the event that
    third-party equity financing transactions are not available. In
    that event, certain of the Secured Lenders have indicated a
    willingness to consider conversion of a substantial portion of
    the loans under the Facility into non-cash-pay securities,
    including equity. A business plan for this scenario is still
    under development, but the plans currently being evaluated by
    the Company contemplate an equity rights offering to unsecured
    creditors and existing equity holders, to be
    backstopped by senior secured loan or equity
    purchase commitments from investors, who may include one or more
    Secured Lenders. These plans also contemplate possible
    additional secured loans from one or more Secured Lenders or
    other parties. The equity rights offering and the related
    backstop commitments would be structured to provide
    the Company with adequate funding to support the implementation
    of the standalone business plan. The development and
    implementation of any standalone business plan would require the
    support and approval of a number of constituencies, including
    the Secured Lenders, which has not yet been obtained.                                                                                     

XO is actively engaged in discussions with its
various creditor constituencies and other interested parties and
their advisors with the goal of reaching agreements necessary to
expeditiously complete a recapitalization transaction that
results in XO having adequate funding for its business, a
significantly reduced debt and a strengthened overall balance
sheet (such a recapitalization, whether completed pursuant to
the transactions contemplated by the Stock Purchase Agreement,
the proposal from the Icahn Group, the standalone business plan
or an alternative transaction, the Proposed
Recapitalization). Currently, there are no definitive
agreements relating to any proposed investment and any related
balance sheet recapitalization other than the Stock Purchase
Agreement. There can be no assurance that current negotiations
with the Icahn Group or with respect to a standalone business
plan will lead to agreement, or that, failing such an agreement,
the transactions contemplated by the Stock Purchase Agreement or
any alternative transaction will lead to a viable
recapitalization plan.

5



---



##### Table of Contents



The Company anticipates that the completion of
its proposed recapitalization will require the support of many
of the Companys creditors, as well as satisfaction or
waiver of the conditions to such transactions. If the
recapitalization is completed through a chapter 11 bankruptcy
proceeding, any proposed plan of reorganization would also be
subject to confirmation by the bankruptcy court after it has
been voted on by certain creditors whose interests would be
impaired by the plan, including the Secured Lenders under the
Facility and holders of its senior notes, and satisfaction or
waiver of certain conditions. Satisfaction of certain of the
conditions under the Stock Purchase Agreement are either out of
the Companys control or must be satisfied in the
Investors sole discretion.

Also, as described in the 2001 Annual Report, if,
as anticipated, the Proposed Recapitalization is completed and
implemented through a voluntary chapter 11 bankruptcy proceeding
and the confirmation and consummation of a plan of
reorganization approved by the bankruptcy court in that
proceeding, the Company will be subject to the provisions of
Statement of Position 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code
(SOP 90-7). Under this guidance and the current
terms of the investment proposals, the Company believes it would
qualify for and implement Fresh Start reporting upon
emergence from bankruptcy, which would establish a new basis of
accounting for the reorganized company.

3.  CUMULATIVE EFFECT OF ACCOUNTING
CHANGE

In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Standards No. 142,
Goodwill and Other Intangible Assets, (SFAS
No. 142) which revises the accounting for purchased
goodwill and intangible assets and supersedes APB Opinion
No. 17, Intangible Assets. Under SFAS
No. 142, goodwill and intangible assets with indefinite
lives are no longer amortized but must be tested for impairment
annually or more frequently if an event indicates that the asset
might be impaired. This impairment test under SFAS No. 142 is
based on fair values determined by using market prices, current
prices for similar assets and liabilities, or a discounted cash
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 the completion of the initial
impairment analysis of goodwill by June 30, 2002. The Company
performed the required impairment tests of goodwill as of
January 1, 2002, and based on these tests 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 months ended March 31, 2001 compared
to the actual results for the three months ended March 31,
2002 for the change in amortization policy is as follows
(dollars in thousands, except for per share data):

|                                                                                                        |                                                                     |           |          |       |   |   |          |       |  
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------- | -------- | ----- | - | - | -------- | ----- | -
|                                                                                                        |                                                                     |          
|                                                                                                        |                                                                     | March 31,
|                                                                                                        |                                                                     |          
|                                                                                                        |                                                                     | 2002      |          | 2001 
|                                                                                                        |                                                                     |           |          |      
|Net loss before cumulative effect of accounting
    change                                              |                                                                     | $         | (299,028 | )     |   | $ | (443,511 | )    
|Goodwill amortization                                                                                   |                                                                     |           |         |       |   |   | 148,853  |      
|                                                                                                        |                                                                     |           |          |       |   |   |          |      
|Adjusted net loss before cumulative effect of
    accounting change                                     |                                                                     | $         | (299,028 | )     |   | $ | (294,658 | )    
|                                                                                                        |                                                                     |           |          |       |   |   |          |      
|Net loss per common share before cumulative
    effect of accounting change, basic and diluted:         |                                                                     |           |          |       |   |   |          |      
|                                                                                                        | Reported net loss before cumulative effect of
    accounting change |           | $        | (0.68 | ) |   | $        | (1.20 | )
|                                                                                                        | Goodwill amortization                                               |           |          |      |   |   |          | 0.40  |  
|                                                                                                        |                                                                     |           |          |       |   |   |          |      
|Adjusted net loss per common share before
    cumulative effect of accounting change, basic and diluted |                                                                     | $         | (0.68    | )     |   | $ | (0.80    | )    
|                                                                                                        |                                                                     |           |          |       |   |   |          |      

6



---



##### Table of Contents



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 March 31, 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, assuming the Proposed
Recapitalization is implemented through consummation of a plan
of reorganization pursuant to a voluntary bankruptcy proceeding,
the Company believes it would be required to apply Fresh Start
reporting under which its assets and liabilities would be
recorded at their then fair values. This would result 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):

|                        |  |                |         |                   |  |                |          |                |  |              |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|----------------------- |  | -------------- | ------- | ----------------- |  | -------------- | -------- | -------------- |  | ------------ | ------- | -------------- |  | - | ------- |  |  | - | -------- | - |  | - | ------- | 
|                        |  |                |         |                  
|                        |  | March 31, 2002 |         | December 31, 2001
|                        |  |                |         |                  
|                        |  | Gross Carrying |         | Accumulated       |  |                |          | Gross Carrying |  | Accumulated  |         |               
|                        |  | Amount         |         | Amortization      |  | Net Book Value |          | Amount         |  | Amortization |         | Net Book Value
|                        |  |                |         |                   |  |                |          |                |  |              |         |               
|Acquired technology     |  | $              | 141,541 |                   |  | $              | (64,873  | )              |  | $            | 76,668  |                |  | $ | 141,541 |  |  | $ | (56,027  | ) |  | $ | 85,514  | 
|Customer lists          |  |                | 135,053 |                   |  |                | (98,964  | )              |  |              | 36,089  |                |  |   | 124,873 |  |  |   | (80,845  | ) |  |   | 44,028  | 
|Other                   |  |                | 35,409  |                   |  |                | (22,654  | )              |  |              | 12,755  |                |  |   | 48,731  |  |  |   | (24,869  | ) |  |   | 23,862  | 
|                        |  |                |         |                   |  |                |          |                |  |              |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|Total intangible assets |  | $              | 312,003 |                   |  | $              | (186,491 | )              |  | $            | 125,512 |                |  | $ | 315,145 |  |  | $ | (161,741 | ) |  | $ | 153,404 | 
|                        |  |                |         |                   |  |                |          |                |  |              |         |                |  |   |         |  |  |   |          |   |  |   |         | 
|Fixed wireless licenses |  | $              | 997,942 |                   |  | $              | (58,339  | )              |  | $            | 939,603 |                |  | $ | 997,942 |  |  | $ | (50,397  | ) |  | $ | 947,545 | 
|                        |  |                |         |                   |  |                |          |                |  |              |         |                |  |   |         |  |  |   |          |   |  |   |         | 

The Company amortizes its intangible assets with
definite useful lives on a straight-line basis over 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 quarters
ended March 31, 2002 and 2001 was $26.3 million and
$27.8 million, respectively, and $120.6 million for
the year ended December 31, 2001.

5.  OPERATING SEGMENTS

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
|                                   |               | March 31,         
|                                   |               |                   
|                                   |               | 2002               |         | 2001   
|                                   |               |                    |         |        
|Voice services                     |               | $                  | 168,300 |         |  | $ | 131,099 |        
|Data services                      |               |                    | 135,761 |         |  |   | 142,209 |        
|Integrated voice and data services |               |                    | 28,810  |         |  |   | 3,589   |        
|Other services                     |               |                    | 534     |         |  |   | 410     |        
|                                   |               |                    |         |         |  |   |         |        
|                                   | Total revenue |                    | $       | 333,405 |  |   | $       | 277,307 | 
|                                   |               |                    |         |         |  |   |         |        

7



---



##### Table of Contents



6.  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 on European operations. The
following table reflects the Companys calculation of
comprehensive loss for the three months ended March 31,
2002 and 2001 (dollars in thousands):

|                                     |                                                                                |                    |            |        |   |   |          |       | 
|------------------------------------ | ------------------------------------------------------------------------------ | ------------------ | ---------- | ------ | - | - | -------- | ----- | 
|                                     |                                                                                |                   
|                                     |                                                                                | Three Months Ended
|                                     |                                                                                | March 31,         
|                                     |                                                                                |                   
|                                     |                                                                                | 2002               |            | 2001  
|                                     |                                                                                |                    |            |       
|Net loss applicable to common shares |                                                                                | $                  | (2,198,480 | )      |   | $ | (482,552 | )    
|Other comprehensive income (loss):   |                                                                                |                    |            |        |   |   |          |      
|                                     | Net unrealized gains (losses) and foreign
    currency translation adjustments |                    |            | (8,522 | ) |   |          | 5,554 | 
|                                     |                                                                                |                    |            |        |   |   |          |      
|Comprehensive loss                   |                                                                                | $                  | (2,207,002 | )      |   | $ | (476,998 | )    
|                                     |                                                                                |                    |            |        |   |   |          |      

7.  COMMITMENTS AND
CONTINGENCIES

Legal
Proceedings

The Company, members of its board of directors,
and the Forstmann Little Investors and/or Télefonos de
México S.A. de C.V. have been named as party defendants in
a number of lawsuits filed that purport to be class actions
brought on behalf of XOs stockholders. Some of these suits
are 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 contain various allegations of
federal securities law violations by the Company and certain
directors relating to certain financial disclosures during the
year 2001. The state court actions, and some of the federal
actions, allege that the members of the Companys board of
directors breached certain fiduciary duties in connection with
the proposed investments by the Forstmann Little Investors and
Telmex, and that the Forstmann Little Investors and Telmex aided
and abetted the directors with respect to such alleged breaches.
The Company believes these claims are without merit and intends
to vigorously contest these suits by appropriate proceedings.
However due to the early stage of the proceedings and inherent
uncertainties in litigation, the Company is unable to predict
the ultimate outcome with any certainty. The Stock Purchase
Agreement provides that one of the conditions to the
Investors obligations to complete the investment is that
all lawsuits pending or threatened against the Company and the
Investors and their affiliates relating to matters specified in
the Stock Purchase Agreement, other than those brought in the
ordinary course of business, must be resolved to the
satisfaction of the Investors in their sole discretion.
Consequently, satisfactory resolution of the purported class
action suits is a condition to complete the investment under the
Stock Purchase Agreement.

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.

Senior
Secured Credit Facility

As disclosed in the 2001 Annual Report, in
conjunction with its Proposed Recapitalization, the Company
stopped making all scheduled interest payments due under the
terms of its unsecured notes effective December 1, 2001.
The failure to make these interest payments triggered
cross-default provisions under the Facility. In addition, as of
December 31, 2001 and March 31, 2002, the Company was
in breach of the respective covenants in the Facility relating
to the Companys fourth quarter 2001 and first quarter 2002
minimum revenues. XO has continued to pay interest with respect
to the outstanding borrowings under the Facility.

8



---



##### Table of Contents



On December 14, 2001, XO Parent and all
guarantors under the Facility entered into a Forbearance
Agreement with the lenders under the Facility in which the
lenders agreed not to exercise their remedies under the Facility
with respect to cross-defaults and the defaults described above.
The lenders obligations to forebear expired on
April 15, 2002. At that time, the lenders indicated to XO
that they did not intend to take any additional action with
respect to the enforcement of their rights under the Facility,
so long as satisfactory progress on the recapitalization
continued to be made. There can be no assurance that the lenders
will not seek to enforce their rights under the Facility.

Going
Concern

The condensed consolidated financial statements
have been prepared assuming the Company will continue as a going
concern. The Companys independent accountants, 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 has incurred recurring
operating losses and negative cash flows from operating
activities and XO Parent has defaulted on its debt obligations.
These financial issues raise 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, completion of the Proposed Recapitalization and the infusion
of a significant amount of capital, customer and employee
retention, and the Companys continued ability to provide
high quality services. There can be no assurance that the
negotiations with respect to the Icahn or stand alone
recapitalization proposals will lead to an agreement, or that,
failing such an agreement, that the transactions contemplated by
the Stock Purchase Agreement or any alternative transaction will
lead to a viable recapitalization plan. If the Proposed
Recapitalization is not completed, 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
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 that might result from the outcome of this
uncertainty.

9



---



##### Table of Contents



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
unlit fiber optic strands and an empty conduit on the routes
served by our inter-city networks.

Proposed Recapitalization

As described in our annual report on
Form 10-K for the year ended December 31, 2001, which
we filed with the Securities and Exchange Commission on
March 29, 2002 and refer to as the 2001 annual report, 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, reducing its debt
service and preferred security dividend payments and reducing
its capital expansion plans. Conditions in the capital markets
for telecommunications companies continued to deteriorate, and,
in late 2001, XO determined that, in light of the substantial
declines in market valuation suffered by telecommunications
service providers throughout its industry in 2001, it would be
unable to obtain the additional funding needed to conduct its
business plan without a significant balance sheet
recapitalization.

In furtherance of these plans:



| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In October 2001, we retained Houlihan Lokey
    Howard & Zukin Capital as our outside financial advisor
    to assist in exploring a variety of investment and deleveraging
    alternatives and, beginning in November 2001, Houlihan Lokey
    contacted over fifty potential investors, both strategic and
    financial, in an effort to raise new capital.
|
| |  | In November 2001, XO Parent determined not
    to continue to make cash interest and dividend payments on its
    unsecured debt obligations and preferred stock from and after
    December 1, 2001.                                                                                                                                                          

10



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2002, we entered into a Stock Purchase
    Agreement with 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., which
    we refer to as the Stock Purchase Agreement, that provides for a
    new capital investment in XO Parent, subject to the satisfaction
    of a number of conditions, including the resolution of certain
    pending litigation, receipt of regulatory approvals and the
    completion of a substantial balance sheet recapitalization (we
    refer to the Forstmann Little & Co. investment
    partnerships and Télefonos de México S.A. de C.V.
    collectively as the Investors).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In March 2002, an informal committee of holders
    of XO Parents senior unsecured notes rejected various
    proposals made by the Investors with respect to the
    recapitalization of XO Parents balance sheet
    contemplated by the Stock Purchase Agreement, and, at that time
    and subsequently, as described below, the informal committee
    presented XO with preliminary proposals for new capital advanced
    by certain holders of XO Parents senior unsecured
    notes, including an affiliate of Mr. Carl Icahn, which
    proposals also contemplated a substantial balance sheet
    recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We determined that, to implement the balance
    sheet recapitalization required by either the Stock Purchase
    Agreement or the noteholder proposals, XO Parent would need
    to commence a voluntary bankruptcy proceeding and seek approval
    of a related plan of reorganization that would eliminate its
    outstanding equity and much of its outstanding debt, and result
    in a less than full recovery for its outstanding senior
    unsecured notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | On March 22, 2002, Mr. Icahn, through
    his Chelonian Corp. affiliate, which we refer to as the Icahn
    Group submitted a draft term sheet to us with respect to a
    recapitalization proposal, which was revised on April 1,
    2002 and by subsequent discussions. The Icahn Group holds a
    substantial amount of XO senior notes, and represented to us
    that their proposal had the support of other holders of
    substantial amounts of senior notes. We have engaged in
    negotiations relating to this proposal regarding a potential
    investment of $550 million in cash and a related corporate
    reorganization that would result in the Icahn Group owning a 55%
    ownership interest in the business and assets currently operated
    by the Company, in addition to the equity to be received in
    respect of their senior notes. The Icahn proposal contemplates
    modifications to our $1 billion senior secured credit
    facility, including longer maturities and the extension of
    prepayment dates, as well as changes in a number of financial
    and operational covenants. These or any other modifications to
    the credit facility would require the agreement of the secured
    lenders under our credit facility, which agreement has not been
    obtained with respect to the Icahn Group proposal.                                       
|
| |  | We are also considering a standalone
    business plan in the event that third-party equity financing
    transactions are not available. In that event, certain of the
    secured lenders under our credit facility have indicated a
    willingness to consider conversion of a substantial portion of
    the loans under the facility into non- cash-pay securities,
    including equity. A business plan for this scenario is still
    under development, but the plans currently being evaluated by us
    contemplate an equity rights offering to unsecured creditors and
    existing equity holders, to be backstopped by senior
    secured loan or equity purchase commitments from investors, who
    may include one or more secured lenders under our credit
    facility. These plans also contemplate possible additional
    secured loans from one or more secured lenders under our credit
    facility or other parties. The equity rights offering and the
    related backstop commitments would be structured to
    provide us with adequate funding to support the implementation
    of the standalone business plan. The development and
    implementation of any standalone business plan would require the
    support and approval of a number of constituencies, including
    the secured lenders under our credit facility, which has not yet
    been obtained.

We are actively engaged in discussions with our
various creditor constituencies and other interested parties and
their advisors with the goal of reaching agreements necessary to
expeditiously complete a recapitalization transaction that
results in XO having adequate funding for its business,
significantly reduced debt and a strengthened overall balance
sheet. We refer to such a recapitalization, whether completed
pursuant to the transactions contemplated by the Stock Purchase
Agreement, the proposal from

11



---



##### Table of Contents



the Icahn Group, the standalone business plan or
an alternative transaction, as the proposed recapitalization.
Currently, there are no definitive agreements relating to any
proposed investment and any related balance sheet
recapitalization other than the Stock Purchase Agreement. There
can be no assurance that current negotiations with the Icahn
Group or with respect to a standalone business plan will lead to
agreement, or that, failing such an agreement, the transactions
contemplated by the Stock Purchase Agreement or any alternative
transaction will lead to a viable recapitalization plan.


If, as anticipated, our proposed recapitalization
is completed and implemented through a voluntary chapter 11
bankruptcy proceeding and the confirmation and consummation of a
plan of reorganization approved by the bankruptcy court in that
proceeding, we will be subject to the provisions of Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code. Under this
guidance and the current terms of the investment proposals, we
believe we would qualify for and implement Fresh
Start reporting upon emergence from bankruptcy, which
would establish a new basis of accounting for the reorganized
company.

Results of Operations

Operating results for any period are not
necessarily indicative of results for any future period.

Operating
Data

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

|                                           |  |                 |           |      |  |                |           |      |  |        |       |    |  |   |           |  |  |  |       |   
|------------------------------------------ |  | --------------- | --------- | ---- |  | -------------- | --------- | ---- |  | ------ | ----- | -- |  | - | --------- |  |  |  | ----- | --
|                                           |  |                 |           |      |  |                |           |     
|                                           |  | As of March 31, |           |      |  |                |           |     
|                                           |  |                 |           | %    |  | As of Dec. 31, |           | %   
|                                           |  | 2002            |           | 2001 |  | Change         |           | 2001 |  | Change
|                                           |  |                 |           |      |  |                |           |      |  |       
|Operating data (a):                        |  |                 |           |      |  |                |           |      |  |        |       |    |  |   |           |  |  |  |       |   
|Route miles (b)                            |  |                 | 23,472    |      |  |                | 22,416    |      |  |        | 4.7   | %  |  |   | 22,398    |  |  |  | 4.8   | % 
|Fiber miles (c)                            |  |                 | 1,204,427 |      |  |                | 1,042,902 |      |  |        | 15.5  | %  |  |   | 1,141,084 |  |  |  | 5.6   | % 
|On-net buildings (d)                       |  |                 | 2,388     |      |  |                | 2,090     |      |  |        | 14.3  | %  |  |   | 2,379     |  |  |  | 0.4   | % 
|Voice grade equivalents (in thousands) (e) |  |                 | 20,932    |      |  |                | 14,867    |      |  |        | 40.8  | %  |  |   | 21,155    |  |  |  | (1.1  | %)
|Customers (f)                              |  |                 | 100,844   |      |  |                | 91,722    |      |  |        | 9.9   | %  |  |   | 100,049   |  |  |  | 0.8   | % 
|Average revenue per customer (g)           |  | $               | 1,044     |      |  | $              | 941       |      |  |        | 10.9  | %  |  | $ | 1,066     |  |  |  | (2.1  | %)
|Employees                                  |  |                 | 5,975     |      |  |                | 7,425     |      |  |        | (19.5 | %) |  |   | 6,712     |  |  |  | (11.0 | %)



|    |                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | We define certain business metrics used above as
    follows:                                                                                                                                                                                                                           
|   
|(a) | Operating data  Except as noted below,
    the operating data for all periods presented include the
    statistics of the Las Vegas network for which we obtained
    control in June 2001 and in which we have a 90% equity interest
    as of March 31, 2002.                        
|   
|(b) | Route miles  The number of operational
    miles of the telecommunications path in which XO-owned or
    controlled fiber optic cables are installed. These include metro
    and inter-city miles and exclude wavelength capacity.                                                    
|   
|(c) | Fiber miles  The number of route
    miles, per (b) above, multiplied by our estimate of the
    number of fibers along that path.                                                                                                                                                     
|   
|(d) | On-net buildings  Buildings connected
    to our networks either by XO-owned or controlled cable or LMDS
    antenna.                                                                                                                                                                  
|   
|(e) | Voice grade equivalents  Voice grade
    equivalents, or VGEs, is a digital broadband equivalent of
    64 kilobits per second, known as DS-0 level, the standard
    capacity of a voice grade line, and measures the network
    utilization of both our voice and data services.    
|   
|(f) | Customers  The number of
    revenue-generating invoices as of the current period. This
    statistic excludes Europe as well as consumer dial up and shared
    hosting accounts. The March 2001 information excludes customers
    serviced over our network in the Las Vegas market.

12



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) | Average revenue per customer 
    Represents average monthly revenue for the quarter divided by
    the average monthly customers for the quarter. This calculation
    excludes both the associated revenue and customer counts for
    Europe, as well as consumer dial-up and shared hosting accounts.
    The March 2001 information excludes customers serviced over our
    network in the Las Vegas market.

Comparison of Financial Results

Three
Months Ended March 31, 2002 versus Three Months Ended
March 31, 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 a recapitalization will be effectuated in the near term,
and should therefore 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.

Revenue.Total revenue in the first quarter
of 2002 increased 20.2% to $333.4 million from
$277.3 million in the first quarter of 2001. The revenue
growth is primarily due to an increase in the number of
customers and average monthly revenue per customer. The growth
in our customer base was largely due to our penetration of
existing markets, and expansion into new markets in mid-2001.
The growth in average monthly revenue per customer was primarily
due to the expansion of our service offerings and our emphasis
on selling to larger business customers.

Revenue for the first quarter of 2002 declined
slightly, when compared with revenue for the fourth quarter of
2001 of $343.0 million, primarily as a result of our
February 2002 sale of our European operations, and, to a lesser
extent, customer bankruptcies and disconnects. We believe that
total revenue in the near term may remain flat or continue to
decrease slightly due to the impact of the weakened economy and
the perceived uncertainties in the market regarding our proposed
recapitalization.

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

|                          |               |                              |         |              |  |      |      |              |   |          |         |         |  |  |      |       |   |  |       |      |  
|------------------------- | ------------- | ---------------------------- | ------- | ------------ |  | ---- | ---- | ------------ | - | -------- | ------- | ------- |  |  | ---- | ----- | - |  | ----- | ---- | -
|                          |               |                             
|                          |               | Three Months Ended March 31,
|                          |               |                             
|                          |               | 2002                         |         | % of Revenue |  | 2001 |      | % of Revenue |   | % Change
|                          |               |                              |         |              |  |      |      |              |   |         
|Voice services            |               | $                            | 168,300 |              |  |      | 50.5 | %            |   | $        | 131,099 |         |  |  | 47.3 | %     |   |  | 28.4  | %   
|Data services             |               |                              | 135,761 |              |  |      | 40.7 | %            |   |          | 142,209 |         |  |  | 51.3 | %     |   |  | (4.5  | %)  
|Integrated voice and data |               |                              | 28,810  |              |  |      | 8.6  | %            |   |          | 3,589   |         |  |  | 1.3  | %     |   |  | 702.7 | %   
|Other services            |               |                              | 534     |              |  |      | 0.2  | %            |   |          | 410     |         |  |  | 0.1  | %     |   |  | 30.2  | %   
|                          |               |                              |         |              |  |      |      |              |   |          |         |         |  |  |      |       |   |  |       |     
|                          | Total revenue |                              | $       | 333,405      |  |      |      | 100.0        | % |          | $       | 277,307 |  |  |      | 100.0 | % |  |       | 20.2 | %
|                          |               |                              |         |              |  |      |      |              |   |          |         |         |  |  |      |       |   |  |       |     

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 first quarter of 2002 increased to
$168.3 million from $131.1 million in the first
quarter of 2001. The increase was primarily due to the growth in
the number of our voice services customers and our targeting of
larger business customers. We expect that the rate of growth of
voice services revenue will slow in the near term.

Data services revenue includes revenue from
Internet access, network access and applications hosting
services. Data services revenue in the first quarter of 2002
decreased to $135.8 million from $142.2 million in the
first quarter of 2001. The decrease is primarily attributable to
the February 2002 sale of our European operations, customer
bankruptcies and new customers choosing our integrated voice and
data services products. In the near term, we expect data
services revenue to decline in 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 first
quarter of

13



---



##### Table of Contents



2002 increased to $28.8 million from
$3.6 million in the first quarter 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 March 31,
|                    |                                |                             
|                    |                                | 2002                         |         | % of Revenue |  | 2001 |  | % of Revenue |   | % Change
|                    |                                |                              |         |              |  |      |  |              |   |         
|Costs and expenses: |                                |                              |         |              |  |      |  |              |   |          |         |         |  |  |  |      |   |  |       |      
|                    | Cost of service                |                              | $       | 140,367      |  |      |  | 42.1         | % |          | $       | 114,894 |  |  |  | 41.4 | % |  |       | 22.2  | % 
|                    | Selling, operating and general |                              |         | 205,250      |  |      |  | 61.6         | % |          |         | 239,526 |  |  |  | 86.4 | % |  |       | (14.3 | %)
|                    | Recapitalization               |                              |         | 976          |  |      |  | 0.3          | % |          |         |        |  |  |  |     |   |  |       | NM    |   
|                    | Stock-based compensation       |                              |         | 9,095        |  |      |  | 2.7          | % |          |         | 9,311   |  |  |  | 3.4  | % |  |       | (2.3  | %)
|                    | Depreciation and amortization  |                              |         | 161,356      |  |      |  | 48.4         | % |          |         | 271,824 |  |  |  | 98.0 | % |  |       | (40.6 | %)
|                    |                                |                              |         |              |  |      |  |              |   |          |         |         |  |  |  |      |   |  |       |      
|Total               |                                | $                            | 517,044 |              |  |      |  |              |   | $        | 635,555 |         |  |  |  |      |   |  | (18.6 | %)   
|                    |                                |                              |         |              |  |      |  |              |   |          |         |         |  |  |  |      |   |  |       |      

| | 
| | 
| | 

| |   |                    
| | - | -------------------
| | * | 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 in
the first quarter of 2002 increased to $140.4 million from
$114.9 million in the first quarter of 2001, due to the
corresponding increase in total revenue. Cost of service for the
first quarter of 2002 increased as a percentage of revenue as
compared to the first quarter of 2001 due to the increase in
voice services revenue as a percentage or our total revenue,
which generally carry lower margins. Cost of service as a
percentage of revenue for the fourth quarter of 2001 was 44.2%.
The improvement from the previous quarter is primarily due to
cost savings from 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 remain relatively
flat in the near term.

Selling, operating and general.Selling, operating and general
expense includes expenses related to sales and marketing,
internal network operations and engineering, information
systems, and general corporate office functions. Selling,
operating and general expense in the first quarter of 2002
decreased to $205.3 million from $239.5 million in the
first quarter of 2001. The majority of the period-over-period
decrease was due to continued efficiencies generated by the
centralization of many functions, cost reduction initiatives
that included head count reductions, and the February 2002 sale
of our European operations. Selling, operating and general
expenses were $230.8 million in the fourth quarter of 2001.
In the near term, we expect selling, operating and general
expense to continue to decrease .

Recapitalization.Recapitalization includes certain
professional fees directly related to our possible plans to file
a voluntary bankruptcy petition in order to complete the
objectives as discussed in Proposed Recapitalization.

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 in the first
quarter of 2002 decreased to $9.1 million from
$9.3 million in the first quarter of 2001. Stock-based
compensation for the first quarter of 2002 was consistent as a
percentage of revenue and in absolute dollars compared to the
comparable period last year. Assuming we complete our proposed
recapitalization and implement Fresh Start reporting, we would
eliminate the carrying value of deferred compensation and the
related stock-

14



---



##### Table of Contents



based compensation expense. Post
recapitalization, 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 continue
to construct integrated end-to-end facilities-based networks in
the United States, consisting of metro fiber networks and fixed
wireless connections. Our net property and equipment increased
to $3,633.4 million as of March 31, 2002 versus
$3,361.6 million as of March 31, 2001. As we launched
and expanded services in new and existing markets, more assets
were placed into service, which caused depreciation expense to
increase to $135.1 million in the first quarter of 2001
from $95.2 million in the first quarter of 2000. Assuming
we complete our proposed recapitalization and implement Fresh
Start reporting, we would adjust the carrying value of our
property and equipment to their estimated fair values which are
significantly lower than historical costs due to competitive
market conditions and technological advancements. Accordingly,
depreciation expense may decrease significantly.

Amortization expense includes the amortization of
goodwill, fixed wireless licenses and other intangible assets.
Amortization in the first quarter of 2002 decreased to
$26.3 million from $176.6 million in the first quarter
of 2001. The significant decrease is primarily due to our
implementation of Statement of Financial Standards No. 142,
Goodwill and Other Intangible Assets, as of
January 1, 2002, which required us to cease amortization of
our goodwill. Goodwill amortization expense for the first
quarter of 2001 was $148.9 million. Additionally, assuming
we complete our proposed recapitalization and implement Fresh
Start reporting, we would significantly reduce the carrying
value of our fixed wireless licenses and other intangible assets
to their estimated fair values. Accordingly, amortization
expense may decrease further if we adopt Fresh Start reporting.

Interest income.Interest income in the first
quarter of 2002 decreased to $5.5 million from
$35.1 million in the first quarter 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.

Interest expense, net.Interest expense, net increased to
$120.7 million in the first quarter of 2002 from
$118.6 million in the first quarter of 2001. We have
continued to accrue interest expense on all of our outstanding
debt, even though we ceased making cash interest payments on our
unsecured debt obligations in December 2001. Interest expense,
net remained flat from the first quarter of 2001 to the first
quarter of 2002 as the impact of increased borrowings under our
senior secured credit facility throughout 2001 was offset by the
impact of our repurchases of certain of our senior notes in the
third and fourth quarters of 2001 and a reduction in interest
rates. Under our proposed recapitalization, our long-term debt
would decrease significantly, which would result in a
substantial reduction in our interest expense.

Other loss, net.Other loss, net in the first
quarter of 2002 decreased to $0.2 million from
$1.8 million in the first quarter of 2001. Other loss, net
in the first quarter of 2002 was consistent as compared to the
first quarter of 2001.

Net loss before cumulative effect of
accounting change.Net loss before
cumulative effect of accounting change in the first quarter of
2002 decreased to $299.0 million from $443.5 million
in the first quarter of 2001 due to the foregoing factors.

Cumulative effect of accounting change for
goodwill impairment.We performed
the newly required impairment tests of goodwill as required by
SFAS No. 142 as of January 1, 2002. Based on these
tests, and as indicated in our 2001 annual report, we recorded a
$1,876.6 million impairment charge to write-off of all of
our goodwill as a cumulative effect of accounting change.

Net loss.Net
loss in the first quarter of 2002 increased to $2,175.7 million
from $443.5 million in the first quarter of 2001 due to the
foregoing factors.

Preferred stock dividends and the accretion
of the preferred stock redemption obligation,
net.We have continued to accrue
dividends on all of our outstanding preferred stock, even though
we ceased making cash dividend payments in December 2001.
Preferred stock dividends and the accretion of the

15



---



##### Table of Contents



preferred stock redemption in the first quarter
of 2002 decreased to $22.8 million from $39.0 million
in the first quarter of 2001 due to our repurchases of certain
preferred stock in the third quarter of 2001.


Net loss applicable to common shares.Net loss applicable to common
shares in the first quarter of 2002 increased to
$2,198.5 million from $482.6 million in the first
quarter of 2001 due to the foregoing factors.

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 loss from operations adjusted for:
stock-based compensation, depreciation and amortization, and
recapitalization expenses. The table below summarizes EBITDA,
both in amount and as a percentage of revenue (dollars in
thousands):

|       |  |                              |         |              |  |        |      |              |  |   |         |   |  |  |       |   
|------ |  | ---------------------------- | ------- | ------------ |  | ------ | ---- | ------------ |  | - | ------- | - |  |  | ----- | --
|       |  |                             
|       |  | Three Months Ended March 31,
|       |  |                             
|       |  |                              |         |             
|       |  | 2002                         |         | 2001        
|       |  |                              |         |             
|       |  | Amount                       |         | % of Revenue |  | Amount |      | % of Revenue
|       |  |                              |         |              |  |        |      |             
|EBITDA |  | $                            | (12,212 | )            |  |        | (3.7 | %)           |  | $ | (77,113 | ) |  |  | (27.8 | %)

EBITDA has improved as a percentage of revenue
and in absolute dollars for the three months ending
March 31, 2002, due to revenue growth and the decrease in
selling, operating and general expenses as a percentage of
revenue as discussed above. As we improve the efficiency of our
cost structure, if revenues stay flat, we expect to continue to
reduce our EBITDA loss.

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. To date, we have primarily funded these
requirements through private and public equity and debt
offerings and loan facilities. We will continue to incur
negative cash flows from operating and investing activities,
unless and until we are able to establish an adequate customer
base.

Recapitalization
Overview

As described in the 2001 annual report, 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, reducing its debt service and
preferred security dividend payments and reducing its capital
expansion plans. Conditions in the capital markets for
telecommunications companies continued to deteriorate, and, in
late 2001, XO determined that, in light of the substantial
declines in market valuation suffered by telecommunications
service providers throughout its industry in 2001, it would be
unable to obtain the additional funding needed to conduct its
business plan without a significant balance sheet
recapitalization.

In furtherance of these plans:



| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In October 2001, we retained Houlihan Lokey
    Howard & Zukin Capital as our outside financial advisor
    to assist in exploring a variety of investment and deleveraging
    alternatives and, beginning in November 2001, Houlihan Lokey
    contacted over fifty potential investors, both strategic and
    financial, in an effort to raise new capital.
|
| |  | In November 2001, XO Parent determined not
    to continue to make cash interest and dividend payments on its
    unsecured debt obligations and preferred stock from and after
    December 1, 2001.                                                                                                                                                          

16



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In January 2002, we entered into the Stock
    Purchase Agreement, which provides for a new capital investment
    in XO Parent, subject to the satisfaction of a number of
    conditions, including the resolution of certain pending
    litigation, receipt of regulatory approvals and the completion
    of a substantial balance sheet recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | In March 2002, an informal committee of holders
    of XO Parents senior unsecured notes rejected various
    proposals made by the Investors with respect to the
    recapitalization of XO Parents balance sheet
    contemplated by the Stock Purchase Agreement, and, at that time
    and subsequently, as described below, the informal committee
    presented XO with preliminary proposals for new capital advanced
    by certain holders of XO Parents senior unsecured
    notes, including an affiliate of Mr. Carl Icahn, which
    proposals also contemplated a substantial balance sheet
    recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | We determined that, to implement the balance
    sheet recapitalization required by either the Stock Purchase
    Agreement or the noteholder proposals, XO Parent would need
    to commence a voluntary bankruptcy proceeding and seek approval
    of a related plan of reorganization that would eliminate its
    outstanding equity and much of its outstanding debt, and result
    in a less than full recovery for its outstanding senior
    unsecured notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | On March 22, 2002, the Icahn Group submitted
    a draft term sheet to us with respect to a recapitalization
    proposal, which was revised on April 1, 2002 and by
    subsequent discussions. The Icahn Group holds a substantial
    amount of XO senior notes, and represented to us that their
    proposal had the support of other holders of substantial amounts
    of senior notes. We have engaged in negotiations relating to
    this proposal regarding a potential investment of
    $550 million in cash and a related corporate reorganization
    that would result in the Icahn Group owning a 55% ownership
    interest in the business and assets currently operated by the
    Company, in addition to the equity to be received in respect of
    their senior notes. The Icahn proposal contemplates
    modifications to our $1 billion senior secured credit
    facility, including longer maturities and the extension of
    prepayment dates, as well as changes in a number of financial
    and operational covenants. These or any other modifications to
    the credit facility would require the agreement of the secured
    lenders under our credit facility, which agreement has not been
    obtained with respect to the Icahn Group proposal.                                                                                                                  
|
| |  | We are also considering a standalone
    business plan in the event that third-party equity financing
    transactions are not available. In that event, certain of the
    secured lenders under our credit facility have indicated a
    willingness to consider conversion of a substantial portion of
    the loans under the facility into non- cash-pay securities,
    including equity. A business plan for this scenario is still
    under development, but the plans currently being evaluated by us
    contemplate an equity rights offering to unsecured creditors and
    existing equity holders, to be backstopped by senior
    secured loan or equity purchase commitments from investors, who
    may include one or more secured lenders under our credit
    facility. These plans also contemplate possible additional
    secured loans from one or more secured lenders under our credit
    facility or other parties. The equity rights offering and the
    related backstop commitments would be structured to
    provide us with adequate funding to support the implementation
    of the standalone business plan. The development and
    implementation of any standalone business plan would require the
    support and approval of a number of constituencies, including
    the secured lenders under our credit facility, which has not yet
    been obtained.

We are actively engaged in discussions with our
various creditor constituencies and other interested parties and
their advisors with the goal of reaching agreements necessary to
expeditiously complete the proposed recapitalization. Currently,
there are no definitive agreements relating to any proposed
investment and any related balance sheet recapitalization other
than the Stock Purchase Agreement. There can be no assurance
that current negotiations with the Icahn Group or with respect
to a standalone business plan will lead to agreement, or that,
failing such an agreement, the transactions contemplated by the
Stock Purchase Agreement or any alternative transaction will
lead to a viable recapitalization plan.

We anticipate that in order to complete any
proposed investment and recapitalization it will be necessary
for XO Parent to file a voluntary petition for relief under
chapter 11 of title 11 of the

17



---



##### Table of Contents



Bankruptcy Code and that the investment and
recapitalization will be implemented through the confirmation
and consummation of a plan of reorganization approved by the
bankruptcy court in the bankruptcy proceedings. In such a case,
we currently anticipate that the plan of reorganization would
provide that holders of claims and interests with respect to the
equity securities of, or rights to acquire equity securities of,
XO Parent would be entitled to little or no recovery and that
those claims and interests would be cancelled for little or no
consideration. Accordingly, and as indicated in our previous
disclosures, we anticipate that all, or substantially all, of
the value of all investments in common stock and equivalents of
XO Parent will be lost.


We conduct our operations through direct and
indirect subsidiaries of XO Parent. While we implement the
proposed recapitalization, we expect our subsidiaries to
continue to operate in the ordinary course of business. During
this recapitalization 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.

We anticipate that the completion of our proposed
recapitalization will require the support of many of our
creditors, as well as satisfaction or waiver of the conditions
to such transactions. If the recapitalization is completed
through a chapter 11 bankruptcy proceeding, any proposed plan of
reorganization would also be subject to confirmation by the
bankruptcy court after it has been voted on by certain creditors
whose interests would be impaired by the plan, including the
lenders under our credit facility and holders of our senior
notes, and satisfaction or waiver of certain conditions.
Satisfaction of certain of the conditions under the Stock
Purchase Agreement are either out of our control or must be
satisfied in the Investors sole discretion.

If, as anticipated, our proposed recapitalization
is completed and implemented through a voluntary chapter 11
bankruptcy proceeding and the confirmation and consummation of a
plan of reorganization approved by the bankruptcy court in that
proceeding, we will be subject to the provisions of Statement of
Position 90-7, Financial Reporting by Entities in
Reorganization under the Bankruptcy Code. Under this
guidance and the current terms of the investment proposals, we
believe we would qualify for and implement Fresh
Start reporting upon emergence from bankruptcy, which
would establish a new basis of accounting for a reorganized
company.

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. This was accomplished by:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the implementation of a series of expense
    reduction and cash conservation initiatives that have resulted
    in a reduction in total selling, operating and general expenses
    to $205.3 million for the first quarter of 2002, compared
    to $230.8 million in the fourth quarter of 2001 and
    improvement in our gross margins to 57.9% for the first quarter
    of 2002 from 55.8% in the fourth quarter of 2001;
|
| |  | a reduction in our capital requirements due to
    the completion of significant nonrecurring projects;                                                                                                                                                                                                                                                                                                                         
|
| |  | our decision to stop making cash interest and
    dividend payments due under the terms of XO Parents
    unsecured notes and preferred stock in conjunction with our
    recapitalization efforts.                                                                                                                                                                                                                            

These reductions in cash use were partially
offset by the slight decrease in revenues for the first quarter
of 2002 compared to revenues for the fourth quarter of 2001.
Assuming only slight decreases in revenues in the near term,
continued ability to control uses of cash and continued
nonpayment of cash interest and dividend amounts during the
proposed recapitalization process, we estimate that our
$589.0 million of cash and marketable securities on hand as
of March 31, 2002 will be sufficient to fund our current
operations through the completion and implementation of the
proposed recapitalization.

No assurance can be given that our creditors will
support our proposed recapitalization, or that, if the proposed
recapitalization is implemented through consummation of a plan
of reorganization pursuant to a bankruptcy proceeding, parties
entitled to vote will vote in favor of the proposed plan of
reorganization or that the plan of reorganization will be
confirmed by the bankruptcy court, or will not be subsequently

18



---



##### Table of Contents



modified. There can be no assurance that the
negotiations with respect to the Icahn or stand alone
recapitalization proposals will lead to an agreement, or that
failing such an agreement, that the transactions contemplated by
the Stock Purchase Agreement or any alternative transaction will
lead to a viable recapitalization plan. If the process for
implementing such a 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
proposed recapitalization is not completed, and if we are not
able to develop and implement a feasible alternative
recapitalization 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.


XOs consolidated financial statements have
been prepared assuming we will continue as a going concern. Our
independent accountants, Arthur Andersen LLP, issued a going
concern opinion modification in their report on our financial
statements for the year ended December 31, 2001. As
discussed in our 2001 Annual Report, we have defaulted on our
debt obligations and have incurred recurring operating losses
and negative cash flows from operating activities, which raises
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 proposed recapitalization and an infusion of a
significant amount of capital, customer and employee retention,
and our continued ability to provide high quality services. 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 that might result from the outcome of this
uncertainty.

Forward-looking and Cautionary
Statements

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



| |   |                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | results of operations in future periods,
    including expectations regarding revenue trends, including those
    across various product lines, and cost and expense trends,
    including our ability to control costs and improve efficiencies;                                                                                                     
|
| |  | product and service development, including the
    development and deployment of data products and services based
    on IP, Ethernet and other technologies and strategies to expand
    our targeted customer base and broaden our sales channels;                                                                                                  
|
| |  | network development, including those with respect
    to IP network and facilities development and deployment,
    switches using next generation switching technology, broadband
    fixed wireless technology, testing and installation, high speed
    technologies such as DSL, and matters relevant to our metro and
    inter-city networks; and
|
| |  | liquidity and financial resources, and with
    respect to our proposed recapitalization, the transactions
    contemplated by the Stock Purchase Agreement, the proposal from
    the Icahn Group, the standalone business plan or any alternative
    investment and related recapitalization transaction.                                          

19



---



##### Table of Contents



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 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:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the effect of the proposed recapitalization on
    our operations and the risks and uncertainties regarding the
    implementation of the recapitalization and any related
    transactions;
|
| |  | 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 $4,144.9 million in fixed rate debt,
$1.0 billion in variable rate debt and
$1,786.0 million in fixed rate redeemable preferred stock
as of March 31, 2002. Our $1.0 billion senior secured
credit facility has variable rates at which interest accrues.
Variable rate debt subjects us to cash flow exposure resulting
from changes in interest rates. Our existing obligations
relating to our outstanding redeemable preferred stock, senior
notes, and subordinated notes do not have significant cash flow
exposure to changing interest rates as the interest and dividend
rates of these securities are fixed. The fair values of these
financial instruments would normally be subject to interest rate
risk. If our proposed recapitalization is completed, all of our
outstanding senior and subordinated notes and preferred stock
would either be exchanged for consideration consisting of cash
and/or equity interests of recapitalized XO Parent, or be
terminated. 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 proposed
recapitalization, 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 material 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.

20



---



##### Table of Contents






PART II. OTHER INFORMATION






Item 1.  Legal
Proceedings


We, members of our board of directors, and the
Forstmann Little & Co. investment partnerships that are
parties to the Stock Purchase Agreement and/or Télefonos de
México S.A. de C.V. have been named as party defendants in
a number of lawsuits filed that purport to be class action suits
brought on behalf of XOs stockholders. Some of these suits
are filed in the United States Federal Court for the Eastern
District of Virginia, and others in state courts of New York and
Delaware. The federal actions contain various allegations of
federal securities law violations by XO and certain directors
relating to certain financial disclosures during the year 2001.
The state court actions, and some of the federal actions, allege
that the members of our board of directors breached certain
fiduciary duties in connection with the proposed investments by
the Forstmann Little Investors and Telmex, and such Forstmann
Little investment partnerships and Telmex aided and abetted the
directors with respect to such alleged breaches. We believe
these claims are without merit and intend to vigorously contest
these suits by appropriate proceedings. The Stock Purchase
Agreement provides that one of the conditions to the
Investors obligations to complete the investment is that
all lawsuits pending or threatened against us and our affiliates
and the Investors and their affiliates relating to matters
specified in the Stock Purchase Agreement, other than those
brought in the ordinary course of our business, must be resolved
to the satisfaction of the Investors in their sole discretion.
Consequently, satisfactory resolution of the purported class
action suits is a condition to the obligations of the Investors
to complete the investment. 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 March 31, 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 Senior
Securities


As discussed above, in conjunction with our plan
to recapitalize our balance sheet, we ceased making interest and
dividend payments due under the terms of XO Parents senior
unsecured notes and preferred stock effective December 1,
2001. The failure to make these interest payments triggered the
default provisions of the indentures relating to the
cross-default provisions of our senior secured credit facility
and the indentures under which all other senior notes of XO
Parent were issued.

As of March 31, 2002, we had failed to make
interest payments of $79.6 million in the aggregate with respect
to the following senior unsecured notes of XO Parent:
10 1/2% Senior Notes due December 1, 2009;
10 3/4% Senior Notes due June 1, 2009; 9% Senior Notes
due March 15, 2008; 12 3/4% Senior Notes due
December 15, 2007; 12 1/2% Senior Notes due
April 15, 2006; and 5 3/4% Convertible Subordinated
Notes due January 15, 2009 (collectively, the Payment
Default Notes). Consequently, the failure to make these
interest payments has triggered the default provisions of the
indentures relating to the Payment Default Notes and the
cross-default provisions of our senior secured credit facility
and the indentures under which all other senior notes of XO
Parent were issued, which include: 12 1/8% Senior Discount
Notes due December 1, 2009; 9 5/8% Senior Notes due
October 1, 2007; 12 1/4% Senior Discount Notes due
June 1, 2009; 9.45% Senior Discount Notes due
April 15, 2008; and 10 3/4% Senior Notes due
November 15, 2008. In addition, as of December 31,
2001 and March 31, 2002, we were in breach of the
respective covenants in the senior secured credit facility
relating to our fourth quarter 2001 and first quarter 2002
minimum revenues. None of the defaults under the credit facility
have been waived by the lenders thereunder. We, however, have
continued to pay interest with respect to the outstanding
borrowings under our senior secured credit facility.

21



---



##### Table of Contents



In addition, during December 2001 and in the
first 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 March 31,
2002, XO Parent had failed to make cash dividend payments of
$13.4 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 March 31, 2002.




Item 5.  Other
Information

None.




Item 6.  Exhibits and Reports
on Form 8-K



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



| |      
| | -----
| | None.

(b) Reports on Form 8-K

Current Report on Form 8-K dated
January 16, 2002, reporting under Item 5 the execution
of the Stock Purchase Agreement with investment funds affiliated
with Forstmann Little & Co. and Télefonos de
México S.A. de C.V., the execution of the Forebearance
Agreement with the lenders under its secured credit facility and
that XO Communications, Inc. had been named as a party defendant
in a number of lawsuits filed in the federal court in Eastern
District of Virginia and in New York state courts.

22



---



##### Table of Contents






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: May 14, 2002

| |     |                           
| | --- | --------------------------
| | By: | /s/
    WAYNE M. REHBERGER

| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                      
| | Wayne
    M. Rehberger 
                    Senior
    Vice President and 
                    Chief
    Financial Officer 
                    (Principal
    financial and accounting 
                    officer)

23