##### 



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




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##### 



XO Holdings, Inc.
Index to Form 10-Q
 PagePART I  FINANCIAL INFORMATIONITEM 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2007
(Unaudited) and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2007 and 2006 (Unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2007 and 2006 (Unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    5ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    19ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    34ITEM 4.
    
    Controls and Procedures
    
    
    34PART II  OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    35ITEM 1A.
    
    Risk Factors
    
    
    38ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    41ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41ITEM 5.
    
    Other Information
    
    
    41ITEM 6.
    
    Exhibits
    
    
    41SIGNATURES
    
    
    42Exhibit 10.3Exhibit 31.1Exhibit 31.2Exhibit 32.1
 1




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##### 



PART
I  FINANCIAL INFORMATION
  XO Holdings, Inc.
Condensed Consolidated Balance Sheets
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    90,882
    
    
    $
    168,563Marketable securities
    
    
    1,220
    
    
    
    2,420Accounts receivable, net of allowance
for doubtful accounts of $11,461 at
September 30, 2007 and $16,754 at
December 31, 2006
    
    
    146,124
    
    
    
    146,278Prepaid expenses and other current assets
    
    
    30,464
    
    
    
    30,859Total current assets
    
    
    268,690
    
    
    
    348,120Property and equipment, net
    
    
    716,776
    
    
    
    678,233Broadband wireless licenses and other intangibles, net
    
    
    53,515
    
    
    
    63,507Other assets
    
    
    44,158
    
    
    
    41,361Total Assets
    
    $
    1,083,139
    
    
    $
    1,131,221LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    91,158
    
    
    $
    98,860Accrued liabilities
    
    
    218,231
    
    
    
    235,891Total current liabilities
    
    
    309,389
    
    
    
    334,751Long-term debt and accrued interest payable to related parties
    
    
    366,553
    
    
    
    336,650Other long-term liabilities
    
    
    66,674
    
    
    
    58,430Total Liabilities
    
    
    742,616
    
    
    
    729,831Class A convertible preferred stock
    
    
    241,164
    
    
    
    230,542Commitments and contingencies
    
    
    
    
    
    
    Stockholders EquityPreferred stock: par value $0.01 per share, 200,000,000 shares
authorized; 4,000,000 shares of Class A convertible preferred
stock issued and outstanding on September 30, 2007 and December
31, 2006
    
    
    
    
    
    
    Warrants, common stock and additional paid in capital: par value
$0.01 per share, 1,000,000,000 shares authorized; 182,075,035
shares issued and outstanding on September 30, 2007 and
182,001,285 shares issued and outstanding on December 31, 2006
    
    
    956,570
    
    
    
    965,394Accumulated other comprehensive (loss) income
    
    
    (320
    )
    
    
    880Accumulated deficit
    
    
    (856,891
    )
    
    
    (795,426
    )Total Stockholders Equity
    
    
    99,359
    
    
    
    170,848Total Liabilities, Convertible Preferred stock and Stockholders Equity
    
    $
    1,083,139
    
    
    $
    1,131,221
  2




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##### 



XO Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue
    
    $
    359,354
    
    
    $
    352,334
    
    
    $
    1,060,760
    
    
    $
    1,056,307Cost and expensesCost of service (exclusive of
depreciation and
amortization)
    
    
    140,911
    
    
    
    141,840
    
    
    
    427,345
    
    
    
    449,310Selling, operating and general
    
    
    189,875
    
    
    
    176,930
    
    
    
    546,808
    
    
    
    537,147Depreciation and amortization
    
    
    45,897
    
    
    
    50,134
    
    
    
    149,056
    
    
    
    154,868Total costs and expenses
    
    
    376,683
    
    
    
    368,904
    
    
    
    1,123,209
    
    
    
    1,141,325Loss from operations
    
    
    (17,329
    )
    
    
    (16,570
    )
    
    
    (62,449
    )
    
    
    (85,018
    )Other income, net
    
    
    23,076
    
    
    
    2,148
    
    
    
    29,519
    
    
    
    6,244Interest expense, net
    
    
    (9,904
    )
    
    
    (8,550
    )
    
    
    (27,730
    )
    
    
    (23,938
    )Net loss before income taxes
    
    
    (4,157
    )
    
    
    (22,972
    )
    
    
    (60,660
    )
    
    
    (102,712
    )Income tax expense
    
    
    (305
    )
    
    
    
    
    
    
    (805
    )
    
    
    Net loss
    
    
    (4,462
    )
    
    
    (22,972
    )
    
    
    (61,465
    )
    
    
    (102,712
    )Preferred stock accretion
    
    
    (3,593
    )
    
    
    (3,387
    )
    
    
    (10,622
    )
    
    
    (10,048
    )Net loss
allocable to common shareholders
    
    $
    (8,055
    )
    
    $
    (26,359
    )
    
    $
    (72,087
    )
    
    $
    (112,760
    )Net loss allocable to common
shareholders per common share,
basic and diluted
    
    $
    (0.04
    )
    
    $
    (0.14
    )
    
    $
    (0.40
    )
    
    $
    (0.62
    )Weighted average shares, basic
and diluted
    
    
    182,075,035
    
    
    
    182,001,285
    
    
    
    182,039,403
    
    
    
    181,960,722
  3




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##### 



XO Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006OPERATING ACTIVITIES:Net loss
    
    $
    (61,465
    )
    
    $
    (102,712
    )Adjustments to reconcile net loss to net cash provided by
operating activitiesDepreciation and amortization
    
    
    149,056
    
    
    
    154,837Accrual of interest
    
    
    29,902
    
    
    
    25,985Stock-based compensation
    
    
    1,430
    
    
    
    1,714Gain on recovery of investment
    
    
    (21,518
    )
    
    
    Changes in assets and liabilitiesAccounts receivable
    
    
    154
    
    
    
    11,427Other assets
    
    
    (2,402
    )
    
    
    (7,207
    )Accounts payable
    
    
    (4,280
    )
    
    
    (9,213
    )Accrued liabilities
    
    
    (10,841
    )
    
    
    (11,314
    )Net cash provided by operating activities
    
    
    80,036
    
    
    
    63,517INVESTING ACTIVITIES:Capital expenditures
    
    
    (174,808
    )
    
    
    (81,611
    )Proceeds from recovery of investment
    
    
    21,518
    
    
    
    7,562Net cash used in investing activities
    
    
    (153,290
    )
    
    
    (74,049
    )FINANCING ACTIVITIES:Repayments of capital leases
    
    
    (4,795
    )
    
    
    (2,091
    )Proceeds from employee stock option exercises
    
    
    368
    
    
    
    341Net cash used in financing activities
    
    
    (4,427
    )
    
    
    (1,750
    )Net decrease in cash and cash equivalents
    
    
    (77,681
    )
    
    
    (12,282
    )Cash and cash equivalents, beginning of period
    
    
    168,563
    
    
    
    176,838Cash and cash equivalents, end of period
    
    $
    90,882
    
    
    $
    164,556SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    856
    
    
    $
    1,399Accrued interest converted to long-term debt
    
    $
    29,902
    
    
    $
    25,985
  4




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##### 



XO Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNICANT ACCOUNTING POLICIES
 Organization and Operations
   Basis of Presentation
    5




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##### 



Changes in Accounting Policies
  Changes in Accounting Estimates
    Transaction Based Taxes and Other Surcharges
  New Accounting Pronouncements
 Fair Value Measurements
 6




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##### 



The Fair Value Option for Financial Assets and
Financial Liabilities
 2. COMPREHENSIVE LOSS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss
    
    $
    (4,462
    )
    
    $
    (22,972
    )
    
    $
    (61,465
    )
    
    $
    (102,712
    )Other comprehensive (loss) income:Net unrealized (losses) gains on
investments
    
    
    (360
    )
    
    
    (240
    )
    
    
    (1,200
    )
    
    
    40Comprehensive loss
    
    $
    (4,822
    )
    
    $
    (23,212
    )
    
    $
    (62,665
    )
    
    $
    (102,672
    )
 3. MARKETABLE SECURITIES
  Estimated Fair
    
    (Losses) Gains in AccumulatedEquity Securities
    
    Value
    
    Other Comprehensive Incomeas of September 30, 2007
    
    $
    1,220
    
    
    $
    (320
    )as of December 31, 2006
    
    $
    2,420
    
    
    $
    880
 7




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##### 



4. LONG-LIVED ASSETS
  Property and Equipment
  September 30,
    
    
    December 31,2007
    
    
    2006Telecommunications networks and acquired bandwidth
    
    $
    996,914
    
    
    $
    856,093Furniture, fixtures, equipment and other
    
    
    329,336
    
    
    
    299,8511,326,250
    
    
    
    1,155,944Less: accumulated depreciation
    
    
    (698,924
    )
    
    
    (564,833
    )627,326
    
    
    
    591,111Construction-in-progress and undeployed assets
    
    
    89,450
    
    
    
    87,122Property and equipment, net
    
    $
    716,776
    
    
    $
    678,233
  Broadband Wireless Licenses and Other Intangibles
 Goodwill and Other Intangible Assets
 8




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##### 



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




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##### 



6. UNDERUTILIZED OPERATING LEASES
   Balance as of January 1, 2007
    
    $
    31,040Usage, net
    
    
    (8,127
    )Accretion
    
    
    3,478Estimate revisions
    
    
    894Balance as of September 30, 2007
    
    $
    27,285
 10




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##### 



7. INCOME TAXES
 Accounting for Uncertainty in Income Taxes, an
interpretation of SFAS No. 109
 Definition of Settlement in FASB
Interpretation No. 48
  Reconciliation of Unrecognized Tax Benefits
 Gross unrecognized tax benefits at January 1, 2007
    
    $
    504,912Gross amount of increases and decreases from tax positionsprior period
    
    
    Gross amount of increases and decreases from tax positionscurrent period
    
    
    Decreases resulting from settlements with taxing authorities
    
    
    Decreases resulting from expiration of statutes of limitation
    
    
    Gross unrecognized tax benefits at September 30, 2007
    
    $
    504,912
  Interest and Penalties
  Accrued interest as of January 1, 2007
    
    $
    1,054Interest recognized
    
    
    282Accrued interest as of September 30, 2007
    
    $
    1,336
  Possible Changes in Unrecognized Tax Benefits
  11




---



##### 



Open Tax Years
  8. EARNINGS PER SHARE
   9. RELATED PARTY TRANSACTIONS
  Outstanding
    
    Series A, B and CCommon Stock
    
    Warrants
    
    Credit Facility
    
    Preferred StockAt December 31, 2006
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    Greater than 50%At September 30,
2007 (1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    Greater than 50%
 
 (1)
    
    As reported in the October 2, 2007 Form 4 for the Chairman, and the July 2, 2007 Amendment No.
9 to Schedule 13D filed by Cardiff Holding, LLC (Cardiff) and other parties to such joint
filings.   12




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##### 



10. SEGMENT INFORMATION
  XO Communications
   Nextlink
    13




---



##### 



Three Months Ended September 30, 2007
    
    
    Three Months Ended September 30, 2006Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    359,228
    
    
    $
    446
    
    
    $
    (320
    )
    
    $
    359,354
    
    
    $
    351,799
    
    
    $
    751
    
    
    $
    (216
    )
    
    $
    352,334Depreciation and
amortization
    
    $
    45,719
    
    
    $
    178
    
    
    
    
    
    
    $
    45,897
    
    
    $
    48,485
    
    
    $
    1,649
    
    
    
    
    
    
    $
    50,134Loss from operations
    
    $
    (13,965
    )
    
    $
    (3,364
    )
    
    
    
    
    
    $
    (17,329
    )
    
    $
    (13,000
    )
    
    $
    (3,570
    )
    
    
    
    
    
    $
    (16,570
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,076
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,148Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,904
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,550
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,462
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (22,972
    )Capital expenditures
    
    $
    63,840
    
    
    $
    1,539
    
    
    $
    
    
    
    $
    65,379
    
    
    $
    31,681
    
    
    $
    371
    
    
    $
    
    
    
    $
    32,052
 Nine Months Ended September 30, 2007
    
    
    Nine Months Ended September 30, 2006Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    1,060,593
    
    
    $
    971
    
    
    $
    (804
    )
    
    $
    1,060,760
    
    
    $
    1,055,545
    
    
    $
    978
    
    
    $
    (216
    )
    
    $
    1,056,307Depreciation and
amortization
    
    $
    148,702
    
    
    $
    354
    
    
    
    
    
    
    $
    149,056
    
    
    $
    149,917
    
    
    $
    4,951
    
    
    
    
    
    
    $
    154,868Loss from operations
    
    $
    (54,027
    )
    
    $
    (8,422
    )
    
    
    
    
    
    $
    (62,449
    )
    
    $
    (70,978
    )
    
    $
    (14,040
    )
    
    
    
    
    
    $
    (85,018
    )Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,519
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,244Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,730
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,938
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (805
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (61,465
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (102,712
    )Capital expenditures
    
    $
    170,439
    
    
    $
    4,369
    
    
    $
    
    
    
    $
    174,808
    
    
    $
    79,082
    
    
    $
    2,529
    
    
    $
    
    
    
    $
    81,611
  XOC
    
    Nextlink
    
    ConsolidatedSeptember 30, 2007
    
    $
    1,038,228
    
    
    $
    44,911
    
    
    $
    1,083,139December 31, 2006
    
    $
    1,088,700
    
    
    $
    42,521
    
    
    $
    1,131,221
 11. COMMITMENTS AND CONTINGENCIES
  14




---



##### 



Allegiance Telecom Liquidating Trust Litigation
    (a)
    
    with respect to the ATLTs reimbursement claim of approximately $20 million, XOH must
pay to the ATLT damages in the minimum amount of approximately $8.0 million, subject to an
upward adjustment of up to an additional amount of approximately $2 million pending
resolution of the dispute regarding the true-up of certain disputed liabilities (the
Disputed Liabilities True-Up) by the Referee, together with interest accruing at the New
York statutory rate of 9% per annum (the New York Rate);(b)
    
    the Company must pay to the ATLT the amount of approximately $0.5 million, together
with interest accruing at the New York Rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition (the Closing), provided there is
a corresponding reduction in accounts receivable included in the Acquired Assets (as
defined in the Order);(c)
    
    the Company shall immediately pay or deliver to the ATLT certain checks in the
approximate aggregate amount of $0.6 million issued by the U.S. Internal Revenue Service on
account of tax refunds owed to Allegiance, together with interest accruing at the New York
Rate;(d)
    
    with respect to the Disputed Liabilities True-Up, the ATLT shall pay to XOH the
approximate amount of $2.8 million, together with interest accruing at the New York Rate,
which amount may be increased by the Referee;(e)
    
    XOH is fully subrogated to the obligations of approximately $1.7 million of Allegiance
liabilities that the Company caused to be honored after the Closing; and(f)
    
    to the extent not satisfied, the ATLT shall pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York Rate.
   15




---



##### 



Litigation Relating to the Wireline Sale
     16




---



##### 



Houlihan Lokey Howard and Zukin Capital LLC
 nd
 Level 3
  Metro Nashville
  17




---



##### 



Verizon Indemnification Notice
  12. OTHER INCOME, NET
  13. SUBSEQUENT EVENTS
 Settlement of Litigation Relating to the Wireline Sale
  Refinancing
  18




---



##### 




    
    Overview of the Business;
    
    Critical Accounting Policies and Estimates;
    
    Results of Operations;
    
    Comparison of Segment Financial Results;
    
    Liquidity and Capital Resources;
    
    New Accounting Pronouncements; and
    
    Regulatory Overview.
 Forward-looking and Cautionary Statements
  
    
    Our services, including the development and deployment of data products and services
based on Internet Protocol (IP), Ethernet, broadband wireless and other technologies and
strategies to expand our targeted customer base and broaden our sales channels;
    
    The operation of our network and back-office systems;
    
    Liquidity and financial resources, including anticipated capital expenditures, funding
of capital expenditures and anticipated levels of indebtedness;
    
    Trends related to and expectations regarding the results of operations in future
periods; and
    
    The impact of judicial decisions, legislation, and regulatory developments on our cost
structure, services, and marketing initiatives.
  
    
    The covenants in our Credit Facility restrict our financial and operational flexibility,
which could have an adverse effect on our results of operations and our ability to
refinance our debt;
    
    We have incurred net losses in the past and may not generate funds from operations
sufficient to meet all of our cash requirements or execute our business strategy;
    
    Our ability to raise additional capital through one or more offerings of debt and/or
equity securities;
 19




---



##### 




    
    We may not prevail in our claims against the ATLT and we may not be successful in
defending against the ATLTs counterclaims;
    
    Our rights to use the unlit capacity in our network may be affected by the financial
health of, or disputes with, our fiber providers;
    
    We may not be able to continue to connect our network to ILEC networks or to maintain
Internet peering arrangements on favorable terms, which would impair our growth and
performance;
    
    Technological advances and regulatory changes are eroding traditional barriers between
formerly distinct telecommunications markets, which could increase the competition we face
and put downward pressure on prices;
    
    An entity owned and controlled by our Chairman is our majority stockholder and may have
the ability to control matters requiring shareholder approval;
    
    Future sales or issuances of our common stock could adversely affect our stock price
and/or our ability to raise capital; and
    
    The highly competitive nature of the telecommunications industry, which has experienced
the consolidation of many existing competitors and the introduction of new competitors,
could affect our ability to achieve and maintain market penetration and revenue levels
sufficient to provide financial viability to our business.
  Overview of the Business
   20




---



##### 




    
    Revenue increased $4.5 million to $1,060.8 million;
    
    Cost of service decreased $22.0 million;
    
    Gross margin (our non-GAAP financial measure, see reconciliation below) increased more
than $26 million; and
    
    Loss from operations declined by $22.6 million.
 Critical Accounting Policies and Estimates
   Results of Operations
  21




---



##### 



%
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedThree Months Ended September 30,
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    359,354
    
    
    
    100.0
    %
    
    $
    352,334
    
    
    
    100.0
    %
    
    $
    7,020
    
    
    
    2.0
    %Cost and expensesCost of service *
    
    
    140,911
    
    
    
    39.2
    
    
    
    141,840
    
    
    
    40.3
    
    
    $
    (929
    )
    
    
    (0.7
    )%Selling, operating, and general
    
    
    189,875
    
    
    
    52.8
    
    
    
    176,930
    
    
    
    50.2
    
    
    $
    12,945
    
    
    
    7.3
    %Depreciation and amortization
    
    
    45,897
    
    
    
    12.8
    
    
    
    50,134
    
    
    
    14.2
    
    
    $
    (4,237
    )
    
    
    (8.5
    )%Total cost and expenses
    
    
    376,683
    
    
    
    104.8
    
    
    
    368,904
    
    
    
    104.7
    
    
    $
    7,779
    
    
    
    2.1
    %Loss from operations
    
    
    (17,329
    )
    
    
    (4.8
    )
    
    
    (16,570
    )
    
    
    (4.7
    )
    
    $
    759
    
    
    
    4.6
    %Other income, net
    
    
    23,076
    
    
    
    6.4
    
    
    
    2,148
    
    
    
    0.6
    
    
    $
    20,928
    
    
    
    974.3
    %Interest expense, net
    
    
    (9,904
    )
    
    
    (2.8
    )
    
    
    (8,550
    )
    
    
    (2.4
    )
    
    $
    1,354
    
    
    
    15.8
    %Net loss before income taxes
    
    
    (4,157
    )
    
    
    (1.2
    )
    
    
    (22,972
    )
    
    
    (6.5
    )
    
    $
    (18,815
    )
    
    
    (81.9
    )%Income tax expense
    
    
    (305
    )
    
    NM
    
    
    
    
    
    
    
    
    
    
    $
    305
    
    
    NMNet loss
    
    
    (4,462
    )
    
    
    (1.2
    )
    
    
    (22,972
    )
    
    
    (6.5
    )
    
    $
    (18,510
    )
    
    
    (80.6
    )%Preferred stock accretion
    
    
    (3,593
    )
    
    
    (1.0
    )
    
    
    (3,387
    )
    
    
    (1.0
    )
    
    $
    206
    
    
    
    6.1
    %Net loss applicable to common shares
    
    $
    (8,055
    )
    
    
    (2.2
    )%
    
    $
    (26,359
    )
    
    
    (7.5
    )%
    
    $
    (18,304
    )
    
    
    (69.4
    )%Gross Margin (1)
    
    $
    218,443
    
    
    
    60.8
    %
    
    $
    210,494
    
    
    
    59.7
    %
    
    $
    7,949
    
    
    
    3.8
    %
 %
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedNine Months Ended September 30,
    
    2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    $ Change
    
    
    % ChangeRevenue
    
    $
    1,060,760
    
    
    
    100.0
    %
    
    $
    1,056,307
    
    
    
    100.0
    %
    
    $
    4,453
    
    
    
    0.4
    %Cost and expensesCost of service *
    
    
    427,345
    
    
    
    40.3
    
    
    
    449,310
    
    
    
    42.5
    
    
    $
    (21,965
    )
    
    
    (4.9
    )%Selling, operating, and general
    
    
    546,808
    
    
    
    51.5
    
    
    
    537,147
    
    
    
    50.8
    
    
    $
    9,661
    
    
    
    1.8
    %Depreciation and amortization
    
    
    149,056
    
    
    
    14.1
    
    
    
    154,868
    
    
    
    14.7
    
    
    $
    (5,812
    )
    
    
    (3.8
    )%Total cost and expenses
    
    
    1,123,209
    
    
    
    105.9
    
    
    
    1,141,325
    
    
    
    108.0
    
    
    $
    (18,116
    )
    
    
    (1.6
    )%Loss from operations
    
    
    (62,449
    )
    
    
    (5.9
    )
    
    
    (85,018
    )
    
    
    (8.0
    )
    
    $
    (22,569
    )
    
    
    (26.5
    )%Other income, net
    
    
    29,519
    
    
    
    2.8
    
    
    
    6,244
    
    
    
    0.6
    
    
    $
    23,275
    
    
    
    372.8
    %Interest expense, net
    
    
    (27,730
    )
    
    
    (2.6
    )
    
    
    (23,938
    )
    
    
    (2.3
    )
    
    $
    3,792
    
    
    
    15.8
    %Net loss before income taxes
    
    
    (60,660
    )
    
    
    (5.7
    )
    
    
    (102,712
    )
    
    
    (9.7
    )
    
    $
    (42,052
    )
    
    
    (40.9
    )%Income tax expense
    
    
    (805
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    
    
    
    $
    805
    
    
    NMNet loss
    
    
    (61,465
    )
    
    
    (5.8
    )
    
    
    (102,712
    )
    
    
    (9.7
    )
    
    $
    (41,247
    )
    
    
    (40.2
    )%Preferred stock accretion
    
    
    (10,622
    )
    
    
    (1.0
    )
    
    
    (10,048
    )
    
    
    (1.0
    )
    
    $
    574
    
    
    
    5.7
    %Net loss applicable to common shares
    
    $
    (72,087
    )
    
    
    (6.8
    )%
    
    $
    (112,760
    )
    
    
    (10.7
    )%
    
    $
    (40,673
    )
    
    
    (36.1
    )%Gross Margin (1)
    
    $
    633,415
    
    
    
    59.7
    %
    
    $
    606,997
    
    
    
    57.5
    %
    
    $
    26,418
    
    
    
    4.4
    %
 
 *
    
    Exclusive of depreciation and amortization expense
NM  not meaningfulNM  not meaningful(1) We define gross margin as revenue less cost of service excluding depreciation and amortization
expenses. Gross margin is a non-GAAP financial measure which we use to assess our operating
performance related solely to providing telecommunications services to our customers without taking
into account expenditures that are not directly related to providing such services. Gross margin is
not intended to replace operating income (loss), net income (loss), cash flow or other measures of
financial performance reported in accordance with GAAP. We believe that gross margin allows
management to further assess (i) our operating performance, (ii) profitability across our customer
base and (iii) trends in our competitive and regulatory environments. Additionally, we believe that
gross margin is a standard measure of operating performance that is commonly reported and widely
used by analysts, investors, and other interested parties in the telecommunications industry. We
believe gross margin provides investors with an additional means to evaluate the results of our
operations. Gross margin as used in this report may
not be comparable to similarly titled measures reported by other companies due to differences in
accounting policies and differences in definition of gross margin. Therefore, we provide additional
information on the components of gross margin throughout this report and provide the
reconciliations to the most comparable GAAP financial measure. The following table reconciles gross
margin to net loss before income taxes (in thousands). 22




---



##### 



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net loss before income taxes
    
    $
    (4,157
    )
    
    $
    (22,972
    )
    
    $
    (60,660
    )
    
    $
    (102,712
    )Selling, operating and general
    
    
    189,875
    
    
    
    176,930
    
    
    
    546,808
    
    
    
    537,147Other income, net
    
    
    (23,076
    )
    
    
    (2,148
    )
    
    
    (29,519
    )
    
    
    (6,244
    )Interest expense, net
    
    
    9,904
    
    
    
    8,550
    
    
    
    27,730
    
    
    
    23,938Depreciation and amortization
    
    
    45,897
    
    
    
    50,134
    
    
    
    149,056
    
    
    
    154,868Gross margin
    
    $
    218,443
    
    
    $
    210,494
    
    
    $
    633,415
    
    
    $
    606,997
 Revenue.
  Three Months Ended September 30,
    
    
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTraditional Voice Services & Other
    
    $
    166,681
    
    
    
    46.4
    %
    
    $
    177,337
    
    
    
    50.3
    %
    
    $
    (10,656
    )
    
    
    (6.0
    )%Data Services
    
    
    122,375
    
    
    
    34.0
    
    
    
    102,161
    
    
    
    29.0
    
    
    
    20,214
    
    
    
    19.8
    %Integrated Voice and Data Services
    
    
    45,725
    
    
    
    12.7
    
    
    
    56,287
    
    
    
    16.0
    
    
    
    (10,562
    )
    
    
    (18.8
    )%XOptions Flex IP
    
    
    20,418
    
    
    
    5.7
    
    
    
    9,962
    
    
    
    2.8
    
    
    
    10,456
    
    
    
    105.0
    %Carrier VoIP
    
    
    4,155
    
    
    
    1.2
    
    
    
    6,587
    
    
    
    1.9
    
    
    
    (2,432
    )
    
    
    (36.9
    )%Total Revenue
    
    $
    359,354
    
    
    
    100.0
    %
    
    $
    352,334
    
    
    
    100.0
    %
    
    $
    7,020
    
    
    
    2.0
    %
 Nine Months Ended September 30,
    
    
    Change% of
    
    
    
    
    
    
    % of2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTraditional Voice Services & Other
    
    $
    509,254
    
    
    
    48.0
    %
    
    $
    533,898
    
    
    
    50.5
    %
    
    $
    (24,644
    )
    
    
    (4.6
    )%Data Services
    
    
    335,908
    
    
    
    31.7
    
    
    
    304,279
    
    
    
    28.8
    
    
    
    31,629
    
    
    
    10.4
    %Integrated Voice and Data Services
    
    
    144,686
    
    
    
    13.6
    
    
    
    177,207
    
    
    
    16.8
    
    
    
    (32,521
    )
    
    
    (18.4
    )%XOptions Flex IP
    
    
    53,805
    
    
    
    5.1
    
    
    
    23,129
    
    
    
    2.2
    
    
    
    30,676
    
    
    
    132.6
    %Carrier VoIP
    
    
    17,107
    
    
    
    1.6
    
    
    
    17,794
    
    
    
    1.7
    
    
    
    (687
    )
    
    
    (3.9
    )%Total Revenue
    
    $
    1,060,760
    
    
    
    100.0
    %
    
    $
    1,056,307
    
    
    
    100.0
    %
    
    $
    4,453
    
    
    
    0.4
    %
 Traditional Voice Services & Other.
 23




---



##### 



Data Services.
 Integrated Voice and Data Services.
 XOptions Flex IP.
 Carrier VoIP.
 Cost of Service (excluding depreciation and amortization)
  24




---



##### 



Gross Margin.
 Selling, Operating and General.
 Depreciation and Amortization.
 25




---



##### 



Other
Income, Net.
 Interest Expense, Net.
 Comparison of Segment Financial Results
  XO Communications.
    26




---



##### 



XOC
 Three Months Ended September 30,
    
    
    Change% of
    
    
    
    
    
    
    % ofXOC
    
    
    
    
    
    
    XOC2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    359,228
    
    
    
    100.0
    %
    
    $
    351,799
    
    
    
    100.0
    %
    
    $
    7,429
    
    
    
    2.1
    %Costs and expensesCost of service*
    
    
    141,058
    
    
    
    39.3
    
    
    
    141,992
    
    
    
    40.4
    
    
    $
    (934
    )
    
    
    (0.7
    )%Selling, operating and general
    
    
    186,416
    
    
    
    51.9
    
    
    
    174,322
    
    
    
    49.5
    
    
    $
    12,094
    
    
    
    6.9
    %Depreciation and amortization
    
    
    45,719
    
    
    
    12.7
    
    
    
    48,485
    
    
    
    13.8
    
    
    $
    (2,766
    )
    
    
    (5.7
    )%Total costs and expenses
    
    
    373,193
    
    
    
    103.9
    
    
    
    364,799
    
    
    
    103.7
    
    
    $
    8,394
    
    
    
    2.3
    %Loss from operations
    
    $
    (13,965
    )
    
    
    (3.9
    )%
    
    $
    (13,000
    )
    
    
    (3.7
    )%
    
    $
    965
    
    
    
    7.4
    %Capital expenditures
    
    $
    63,840
    
    
    
    17.8
    %
    
    $
    31,681
    
    
    
    9.0
    %
    
    $
    32,159
    
    
    
    101.5
    %
 
 *
    
    exclusive of depreciation and amortization XOC
 Nine Months Ended September 30,
    
    
    Change% of
    
    
    
    
    
    
    % ofXOC
    
    
    
    
    
    
    XOC2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    1,060,593
    
    
    
    100.0
    %
    
    $
    1,055,545
    
    
    
    100.0
    %
    
    $
    5,048
    
    
    
    0.5
    %Costs and expensesCost of service*
    
    
    427,800
    
    
    
    40.3
    
    
    
    449,462
    
    
    
    42.6
    
    
    $
    (21,662
    )
    
    
    (4.8
    )%Selling, operating and general
    
    
    538,118
    
    
    
    50.8
    
    
    
    527,144
    
    
    
    49.9
    
    
    $
    10,974
    
    
    
    2.1
    %Depreciation and amortization
    
    
    148,702
    
    
    
    14.0
    
    
    
    149,917
    
    
    
    14.2
    
    
    $
    (1,215
    )
    
    
    (0.8
    )%Total costs and expenses
    
    
    1,114,620
    
    
    
    105.1
    
    
    
    1,126,523
    
    
    
    106.7
    
    
    $
    (11,903
    )
    
    
    (1.1
    )%Loss from operations
    
    $
    (54,027
    )
    
    
    (5.1
    )%
    
    $
    (70,978
    )
    
    
    (6.7
    )%
    
    $
    (16,951
    )
    
    
    (23.9
    )%Capital expenditures
    
    $
    170,439
    
    
    
    16.1
    %
    
    $
    79,082
    
    
    
    7.5
    %
    
    $
    91,357
    
    
    
    115.5
    %
 
 *
    
    exclusive of depreciation and amortization  Nextlink.
 27




---



##### 



Nextlink
 Three Months Ended September 30,
    
    
    Change% of
    
    
    
    
    
    
    % ofNextlink
    
    
    
    
    
    
    Nextlink2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    446
    
    
    
    100.0
    %
    
    $
    751
    
    
    
    100.0
    %
    
    $
    (305
    )
    
    
    (40.6
    )%Costs and expensesCost of service*
    
    
    173
    
    
    
    38.8
    
    
    
    64
    
    
    
    8.5
    
    
    $
    109
    
    
    
    170.3
    %Selling, operating and general
    
    
    3,459
    
    
    
    775.6
    
    
    
    2,608
    
    
    
    347.3
    
    
    $
    851
    
    
    
    32.6
    %Depreciation and amortization
    
    
    178
    
    
    
    39.9
    
    
    
    1,649
    
    
    
    219.6
    
    
    $
    (1,471
    )
    
    
    (89.2
    )%Total costs and expenses
    
    
    3,810
    
    
    
    854.3
    
    
    
    4,321
    
    
    
    575.4
    
    
    $
    (511
    )
    
    
    (11.8
    )%Loss from operations
    
    $
    (3,364
    )
    
    
    (754.3
    )%
    
    $
    (3,570
    )
    
    
    (475.4
    )%
    
    $
    (206
    )
    
    
    (5.8
    )%Capital expenditures
    
    $
    1,539
    
    
    
    345.1
    %
    
    $
    371
    
    
    
    49.4
    %
    
    $
    1,168
    
    
    
    314.8
    %
 
 *
    
    exclusive of depreciation and amortizationNM  not meaningful 28




---



##### 



Nextlink
 Nine Months Ended September 30,
    
    
    Change% of
    
    
    
    
    
    
    % ofNextlink
    
    
    
    
    
    
    Nextlink2007
    
    
    Revenue
    
    
    2006
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue
    
    $
    971
    
    
    
    100.0
    %
    
    $
    978
    
    
    
    100.0
    %
    
    $
    (7
    )
    
    
    (0.7
    )%Costs and expensesCost of service*
    
    
    349
    
    
    
    35.9
    
    
    
    64
    
    
    
    6.6
    
    
    $
    285
    
    
    
    445.3
    %Selling, operating and general
    
    
    8,690
    
    
    
    895.0
    
    
    
    10,003
    
    
    
    1,022.8
    
    
    $
    (1,313
    )
    
    
    (13.1
    )%Depreciation and amortization
    
    
    354
    
    
    
    36.5
    
    
    
    4,951
    
    
    
    506.2
    
    
    $
    (4,597
    )
    
    
    (92.8
    )%Total costs and expenses
    
    
    9,393
    
    
    
    967.4
    
    
    
    15,018
    
    
    
    1,535.6
    
    
    $
    (5,625
    )
    
    
    (37.5
    )%Loss from operations
    
    $
    (8,422
    )
    
    
    (867.4
    )%
    
    $
    (14,040
    )
    
    
    (1,435.6
    )%
    
    $
    (5,618
    )
    
    
    (40.0
    )%Capital expenditures
    
    $
    4,369
    
    
    
    450.0
    %
    
    $
    2,529
    
    
    
    258.6
    %
    
    $
    1,840
    
    
    
    72.8
    %
 
 *
    
    exclusive of depreciation and amortizationNM  not meaningful Revenue
 Cost of service (exclusive of depreciation and amortization)
 Selling, operating and general.
 Depreciation and amortization
 29




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Capital expenditures
 Liquidity and Capital Resources
  Cash Flow.
  2007
    
    2006
    
    ChangeCash provided by operating activities
    
    $
    80,036
    
    
    $
    63,517
    
    
    $
    16,519Cash used in investing activities
    
    $
    (153,290
    )
    
    $
    (74,049
    )
    
    $
    79,241Cash used in financing activities
    
    $
    (4,427
    )
    
    $
    (1,750
    )
    
    $
    2,677
   30




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Credit Facility and Borrowing Capacity.
    31




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##### 



Capital Requirements.
 New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 32




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##### 



Regulatory Overview
  Additional Federal Regulations
 Customer Proprietary Network Information.
 AT&T Petition for Forbearance.
 Verizon and Qwest Petitions for Forbearance from Unbundling Requirements.
 33




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##### 



Additional State and Local Regulation
 XO Complaints Against Qwest.
    Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   34




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##### 



PART II  OTHER INFORMATION
   Allegiance Telecom Liquidating Trust Litigation
    1.
    
    With respect to the ATLTs reimbursement claim of approximately $20 million, XOH must
pay to the ATLT damages in the minimum amount of approximately $8.0 million, subject to an
upward adjustment of up to an additional amount of approximately $2.0 million pending
resolution of the dispute regarding the true-up of certain disputed liabilities (the
Disputed Liabilities True-Up) by the Referee, together with interest accruing at the New
York statutory rate of 9% per annum (the New York Rate);2.
    
    XOH must pay to the ATLT the amount of approximately $0.5 million, together with
interest accruing at the New York Rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition (the Closing), provided there is
a corresponding reduction in accounts receivable included in the Acquired Assets (as
defined in the Order);
 35




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##### 



3.
    
    XOH shall immediately pay or deliver to the ATLT certain checks in the approximate
aggregate amount of $0.6 million issued by the U.S. Internal Revenue Service on account of
tax refunds owed to Allegiance, together with interest accruing at the New York Rate;4.
    
    With respect to the Disputed Liabilities True-Up dispute, the ATLT shall pay to XOH the
amount of approximately $2.8 million, together with interest accruing at the New York Rate,
which amount may be increased by the Referee;5.
    
    XOH is fully subrogated to the holders of approximately $1.7 million of Allegiance
liabilities that the Company caused to be honored after the Closing; and6.
    
    To the extent not satisfied, the ATLT shall pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York Rate.
   Litigation Relating to the Wireline Sale
   36




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##### 



Houlihan Lokey Howard and Zukin Capital LLC
 nd
 Level 3
  37




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##### 



Verizon Indemnification Notice
    Risks Related to Liquidity, Financial Resources, and Capitalization
 We have incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of our operating or capital cash requirements.
  38




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##### 



The covenants in the Credit Facility restrict our financial and operational flexibility, which
could have an adverse effect on our results of operations.
       39




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##### 




    
    It may impair our ability to obtain additional financing in the future;
    
    It may limit our flexibility in planning for or reacting to changes in market
conditions; and
    
    It may cause us to be more vulnerable in the event of a downturn in business.
  If we are unable to meet our needs for additional funding in the future, we may be required to
limit, scale back or cease our operations.
  40




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##### 



We may not prevail in our claims against the ATLT, and we may not be successful in defending
against the ATLTs counterclaims.
  Risks Related to our Wireline Operations
 Our rights to the use of the unlit capacity that makes up our network may be affected by the
financial health of our fiber providers or by disputes with our fiber providers.
            41




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##### 



SIGNATURES
  XO HOLDINGS, INC.November 9, 2007
    /s/ Gregory W. FreibergGregory W. FreibergSenior Vice President and Chief Financial Officer 42




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##### 



EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger, dated as of February 28, 2006 by and
among XO Communications, Inc., XO Holdings, Inc. and XO
Communications, LLC (Incorporated by reference to Form 8-K filed on
March 6, 2006)2.2
    
    Amendment No. 1 to Equity Purchase Agreement, dated as of March 1,
2006, by and among XO Holdings, Inc., XO Communications, LLC (as
successor by merger to XO Communications, Inc.) and Elk Associates
LLC (Incorporated by reference to Form 8-K filed on March 6, 2006)2.3
    
    Letter Agreement, dated March 30, 2006, between XO Holdings, Inc. and
Elk Associates LLC (Incorporated by reference to exhibit 2.1 to Form
8-K filed on September 30, 2006)3.1
    
    Certificate of Incorporation of XO Holdings, Inc., as filed with the
Secretary of State of the State of Delaware on October 25, 2005
(Incorporated by reference to Form 8-K filed on March 6, 2006)3.2
    
    Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and other Special Rights of the 6% Class A
Convertible Preferred Sock and Qualifications, Limitations and
Restrictions thereof, as filed with the Secretary of State of the
State of Delaware on February 28, 2005 (Incorporated by reference to
Form 8-K filed on March 6, 2006)3.3
    
    Bylaws of XO Holdings, Inc. (Incorporated by reference to Form 8-K filed
on March 6, 2006)10.1
    
    Waiver with Respect to Amended and Restated Credit Guaranty Agreement
dated as of May 7, 2007, between XO Communications, LLC, its
subsidiaries and Arnos Corp., as Requisite Lenders (Incorporated by
reference to exhibit 10.7 to Form 10-Q for the period ended March 31,
2007)10.2
    
    Waiver with Respect to Amended and Restated Credit Guaranty Agreement
dated as of August 8, 2007, between XO Communications, LLC, its
subsidiaries and Arnos Corp., as Requisite Lenders (Incorporated by
reference to exhibit 10.2 to Form 10-Q for the period ended June 30,
2007)10.3
    
    Waiver with Respect to Amended and Restated Credit Guaranty Agreement
dated as of November 5, 2007, between XO Communications, LLC, its
subsidiaries and Arnos Corp., as Requisite Lenders (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed
herewith)31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed
herewith)32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)
 43