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, 2008
 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
(State or other jurisdiction of incorporation or organization)
    
    54-1983517
(I.R.S. Employer Identification No.)
 
 
 þ o
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company 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, 2008
(Unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statements of Operations for the Three and
Nine
Months Ended September 30, 2008 and 2007 (Unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2008 and 2007 (Unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    4ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    24ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    40ITEM 4.
    
    Controls and Procedures
    
    
    41PART II  OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    42ITEM 1A.
    
    Risk Factors
    
    
    44ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    47ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    47ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    48ITEM 5.
    
    Other Information
    
    
    48ITEM 6.
    
    Exhibits
    
    
    48SIGNATURES
    
    
    49




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##### 



PART I  FINANCIAL INFORMATION
  XO Holdings, Inc.
Condensed Consolidated Balance Sheets
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent AssetsCash and cash equivalents
    
    $
    319,076
    
    
    $
    108,075Marketable securities
    
    
    37,015
    
    
    
    885Accounts receivable, net of allowance
for doubtful accounts of $8,532 at
September 30, 2008 and $10,116 at
December 31, 2007
    
    
    134,812
    
    
    
    131,705Prepaid expenses and other current assets
    
    
    43,595
    
    
    
    30,928Total current assets
    
    
    534,498
    
    
    
    271,593Property and equipment, net
    
    
    734,304
    
    
    
    720,396Goodwill and other intangible assets, net
    
    
    53,515
    
    
    
    53,515Other assets
    
    
    42,292
    
    
    
    44,622Total Assets
    
    $
    1,364,609
    
    
    $
    1,090,126LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    97,287
    
    
    $
    106,488Accrued liabilities
    
    
    228,933
    
    
    
    252,217Total current liabilities
    
    
    326,220
    
    
    
    358,705Long-term debt and accrued interest payable
    
    
    
    
    
    
    377,213Other long-term liabilities
    
    
    69,526
    
    
    
    67,050Total Liabilities
    
    
    395,746
    
    
    
    802,968Class A convertible preferred stock
    
    
    256,080
    
    
    
    244,811Class B convertible preferred stock
    
    
    563,907
    
    
    
    Class C perpetual preferred stock
    
    
    195,403
    
    
    
    Commitments and contingenciesStockholders 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, 2008 and December 31, 2007;
555,000 shares of Class B convertible preferred stock issued and outstanding
on September 30, 2008 and none issued as of December 31, 2007; 225,000
shares of Class C perpetual preferred stock issued and outstanding on
September 30, 2008 and none issued as of December 31, 2007
    
    
    
    
    
    
    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, 2008 and December 31, 2007
    
    
    960,456
    
    
    
    953,427Accumulated deficit
    
    
    (1,006,983
    )
    
    
    (911,080
    )Total Stockholders (Deficit) Equity
    
    
    (46,527
    )
    
    
    42,347Total Liabilities, Preferred Stock and Stockholders Equity
    
    $
    1,364,609
    
    
    $
    1,090,126
  1




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##### 



XO Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
 Three Months Ended
    
    
    Three Months Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007
    
    
    September 30, 2008
    
    
    September 30, 2007Revenue
    
    $
    373,925
    
    
    $
    360,682
    
    
    $
    1,102,444
    
    
    $
    1,064,969Cost and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    210,925
    
    
    
    199,398
    
    
    
    652,540
    
    
    
    597,881Selling, general and administrative
    
    
    119,921
    
    
    
    132,716
    
    
    
    374,692
    
    
    
    380,481Depreciation and amortization
    
    
    47,847
    
    
    
    44,834
    
    
    
    140,515
    
    
    
    146,887Loss (gain) on disposition of assets
    
    
    796
    
    
    
    1,063
    
    
    
    (37
    )
    
    
    2,169Total costs and expenses
    
    
    379,489
    
    
    
    378,011
    
    
    
    1,167,710
    
    
    
    1,127,418Loss from operations
    
    
    (5,564
    )
    
    
    (17,329
    )
    
    
    (65,266
    )
    
    
    (62,449
    )Interest and other income
    
    
    1,855
    
    
    
    1,558
    
    
    
    3,783
    
    
    
    8,001Interest expense, net
    
    
    (3,871
    )
    
    
    (9,904
    )
    
    
    (22,135
    )
    
    
    (27,730
    )Investment (loss) gain, net
    
    
    (15,408
    )
    
    
    21,518
    
    
    
    (11,302
    )
    
    
    21,518Net loss before income taxes
    
    
    (22,988
    )
    
    
    (4,157
    )
    
    
    (94,920
    )
    
    
    (60,660
    )Income tax expense
    
    
    (299
    )
    
    
    (305
    )
    
    
    (983
    )
    
    
    (805
    )Net loss
    
    
    (23,287
    )
    
    
    (4,462
    )
    
    
    (95,903
    )
    
    
    (61,465
    )Preferred stock accretion
    
    
    (15,021
    )
    
    
    (3,593
    )
    
    
    (22,478
    )
    
    
    (10,622
    )Net loss allocable to common shareholders
    
    $
    (38,308
    )
    
    $
    (8,055
    )
    
    $
    (118,381
    )
    
    $
    (72,087
    )Net loss allocable to common
shareholders per common share, basic
and diluted
    
    $
    (0.21
    )
    
    $
    (0.04
    )
    
    $
    (0.65
    )
    
    $
    (0.40
    )Weighted average shares, basic and diluted
    
    
    182,075,035
    
    
    
    182,075,035
    
    
    
    182,075,035
    
    
    
    182,039,403
  2




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##### 



XO Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007OPERATING ACTIVITIES:Net loss
    
    $
    (95,903
    )
    
    $
    (61,465
    )Depreciation and amortization
    
    
    140,515
    
    
    
    146,887(Gain) loss on disposal of assets
    
    
    (37
    )
    
    
    2,169Accrual of interest expense
    
    
    20,829
    
    
    
    29,902Provision for doubtful accounts
    
    
    7,963
    
    
    
    15,312Stock-based compensation
    
    
    1,185
    
    
    
    1,430Non-cash loss on marketable securities
    
    
    11,302
    
    
    
    Gain from investments
    
    
    
    
    
    
    (21,518
    )Changes in assets and liabilitiesAccounts receivable
    
    
    (11,070
    )
    
    
    (15,158
    )Other assets
    
    
    (14,118
    )
    
    
    (2,402
    )Accounts payable
    
    
    10,011
    
    
    
    (4,280
    )Accrued liabilities
    
    
    (15,946
    )
    
    
    (10,841
    )Net cash provided by operating activities
    
    
    54,731
    
    
    
    80,036INVESTING ACTIVITIES:Capital expenditures
    
    
    (174,998
    )
    
    
    (174,808
    )Proceeds from fixed assets sales
    
    
    1,400
    
    
    
    Payments for marketable securities purchases
    
    
    (42,775
    )
    
    
    Proceeds from marketable securities sales
    
    
    132
    
    
    
    Proceeds from recovery of investment
    
    
    
    
    
    
    21,518Net cash used in investing activities
    
    
    (216,241
    )
    
    
    (153,290
    )FINANCING ACTIVITIES:Proceeds from preferred stock issuance
    
    
    329,242
    
    
    
    Proceeds from related party note
    
    
    75,000
    
    
    
    Repayments of long-term debt
    
    
    (22,285
    )
    
    
    Financing costs
    
    
    (4,523
    )
    
    
    Payments on capital leases
    
    
    (4,923
    )
    
    
    (4,795
    )Proceeds from employee stock option exercises
    
    
    
    
    
    
    368Net cash provided by (used in) financing activities
    
    
    372,511
    
    
    
    (4,427
    )Net increase (decrease) in cash and cash equivalents
    
    
    211,001
    
    
    
    (77,681
    )Cash and cash equivalents, beginning of period
    
    
    108,075
    
    
    
    168,563Cash and cash equivalents, end of period
    
    $
    319,076
    
    
    $
    90,882SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    918
    
    
    $
    856Cash paid for income taxes
    
    $
    900
    
    
    $
    Accrued interest converted to long-term debt
    
    $
    20,829
    
    
    $
    29,902Non-cash debt extinguishment through issuance of preferred stock
    
    $
    450,758
    
    
    $
    Increase in additional paid in capital related to extinguishment of
debt through the issuance of preferred stock
    
    $
    30,491
    
    
    $
    
  3




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##### 



XO Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of Presentation
    Changes in Accounting Estimates
  4




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##### 



Transaction Based Taxes and Other Surcharges
  Error Correction
  Reclassification
    5




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##### 



New Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB SFAS No. 133
 Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible Assets Business Combinations
 6




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##### 



The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
 2. COMPREHENSIVE LOSS
  Three Months Ended September 30
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (23,287
    )
    
    $
    (4,462
    )
    
    $
    (95,903
    )
    
    $
    (61,465
    )Other comprehensive loss:Loss reclassified into earnings
    
    
    2,255
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized loss on investments
    
    
    
    
    
    
    (360
    )
    
    
    
    
    
    
    (1,200
    )Comprehensive loss
    
    $
    (21,032
    )
    
    $
    (4,822
    )
    
    $
    (95,903
    )
    
    $
    (62,665
    )
 3. FAIR VALUE MEASUREMENTS
  7




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##### 



Quoted Prices in Active Markets (Level 1)Available-for-sale securitiesEquity securities
    
    $
    15,848Corporate debt securities
    
    
    21,167Total marketable securities
    
    $
    37,015
   JPMorgan Chase
Bank v. Gary Winnick et al
 4. LONG-LIVED ASSETS
  8




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##### 



Property and Equipment
  September 30, 2008
    
    
    December 31, 2007Telecommunications networks and acquired
bandwidth
    
    $
    1,186,747
    
    
    $
    1,056,102Furniture, fixtures, equipment and other
    
    
    365,556
    
    
    
    340,0041,552,303
    
    
    
    1,396,106Less: accumulated depreciation
    
    
    (893,411
    )
    
    
    (757,677
    )658,892
    
    
    
    638,429Construction-in-progress, parts and equipment
    
    
    75,412
    
    
    
    81,967Property and equipment, net
    
    $
    734,304
    
    
    $
    720,396
  Broadband Wireless Licenses and Other Intangibles
  September 30, 2008
    
    
    December 31, 2007Customer relationships
    
    $
    112,366
    
    
    $
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired trade names
    
    
    5,673
    
    
    
    5,673127,560
    
    
    
    127,560Less: accumulated amortization
    
    
    (127,560
    )
    
    
    (127,560
    )
    
    
    
    Broadband 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
    
    
    $
    53,515
  5. UNDERUTILIZED OPERATING LEASES
  9




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##### 



Balance as of January 1, 2008
    
    $
    20,422Usage, net
    
    
    (6,993
    )Accretion
    
    
    2,942Estimate revisions
    
    
    (1,478
    )Balance as of September 30, 2008
    
    $
    14,893
 6. LONG-TERM DEBT
    7. ISSUANCE OF PREFERRED STOCK TO RELATED PARTIES
  10




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##### 



Issuance of Class B Convertible Preferred Stock and Class C Perpetual Preferred Stock
    Terms of Class B Convertible Preferred Stock
   11




---



##### 



Terms of Class C Perpetual Preferred Stock
  12




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##### 



Initial Recognition
 Presentation in Financial Statements of Redeemable Preferred
Stocks Classification and Measurement of Redeemable Securities
  13




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##### 



8. EARNINGS (LOSS) PER SHARE
  9. INTEREST AND OTHER INCOME
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Interest income
    
    $
    1,851
    
    
    $
    1,558
    
    
    $
    3,528
    
    
    $
    5,901Other income
    
    
    4
    
    
    
    
    
    
    
    255
    
    
    
    2,100Interest and other income
    
    $
    1,855
    
    
    $
    1,558
    
    
    $
    3,783
    
    
    $
    8,001
 10. INCOME TAXES
   14




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##### 



Open Tax Years
  Tax Sharing Agreement
  11. RELATED PARTY TRANSACTIONS
   At September 30, 2008(1)
    
    At December 31, 2007(2)Outstanding Common Stock
    
    Greater than 50%
    
    Greater than 50%Series A, B and C Warrants
    
    Greater than 40%
    
    Greater than 40%Credit Facility
    
    
    N/A
    
    
    Greater than 90%Promissory Note
    
    
    N/A
    
    
    N/APreferred Stock Class A
    
    Greater than 60%
    
    Greater than 50%Preferred Stock Class B
    
    
    100
    %
    
    N/APreferred Stock Class C
    
    
    100
    %
    
    N/A
 
 (1)
    
    As reported in the October 1, 2008 Forms 4 for the Chairman, and the October 2, 2008
Amendment No. 13 to Schedule 13D filed by Cardiff Holding, LLC and other parties to such joint
filing.(2)
    
    As reported in the January 2, 2008 Form 4 for the Chairman, and the July 2, 2007 Amendment No.
9 to Schedule 13D filed by Cardiff and other parties to such joint filing. 15




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##### 



12. SEGMENT INFORMATION
  XO Communications
   16




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##### 



Nextlink
    Three Months Ended September 30, 2008
    
    
    Three Months Ended September 30, 2007Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue from
external customers
    
    $
    373,519
    
    
    $
    406
    
    
    $
    
    
    
    $
    373,925
    
    
    $
    360,493
    
    
    $
    189
    
    
    $
    
    
    
    $
    360,682Inter-segment
revenue
    
    
    153
    
    
    
    449
    
    
    
    (602
    )
    
    
    
    
    
    
    63
    
    
    
    257
    
    
    
    (320
    )
    
    
    Total revenue
    
    $
    373,672
    
    
    $
    855
    
    
    $
    (602
    )
    
    $
    373,925
    
    
    $
    360,556
    
    
    $
    446
    
    
    $
    (320
    )
    
    
    360,682Depreciation and
amortization
    
    $
    47,675
    
    
    $
    172
    
    
    $
    
    
    
    $
    47,847
    
    
    $
    44,656
    
    
    $
    178
    
    
    $
    
    
    
    $
    44,834Loss on disposition
of assets
    
    $
    796
    
    
    $
    
    
    
    $
    
    
    
    $
    796
    
    
    $
    1,063
    
    
    $
    
    
    
    $
    
    
    
    $
    1,063Loss from operations
    
    $
    (2,067
    )
    
    $
    (3,497
    )
    
    $
    
    
    
    $
    (5,564
    )
    
    $
    (13,965
    )
    
    $
    (3,364
    )
    
    $
    
    
    
    $
    (17,329
    )Interest and other
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,558Interest expense,
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,871
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,904
    )Investment (loss)
gain, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,408
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,518Net loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,988
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,157
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (23,287
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (4,462
    )Capital expenditures
    
    $
    55,062
    
    
    $
    1,412
    
    
    $
    
    
    
    $
    56,474
    
    
    $
    63,840
    
    
    $
    1,539
    
    
    $
    
    
    
    $
    65,379
 17




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##### 



Nine Months Ended September 30, 2008
    
    
    Nine Months Ended September 30, 2007Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue from
external customers
    
    
    1,100,907
    
    
    $
    1,537
    
    
    $
    
    
    
    $
    1,102,444
    
    
    $
    1,064,614
    
    
    $
    355
    
    
    $
    
    
    
    $
    1,064,969Inter-segment
revenue
    
    
    347
    
    
    
    1,163
    
    
    
    (1,510
    )
    
    
    
    
    
    
    188
    
    
    
    616
    
    
    
    (804
    )
    
    
    Total revenue
    
    
    1,101,254
    
    
    $
    2,700
    
    
    $
    (1,510
    )
    
    $
    1,102,444
    
    
    $
    1,064,802
    
    
    $
    971
    
    
    $
    (804
    )
    
    
    1,064,969Depreciation and
amortization
    
    $
    139,954
    
    
    $
    561
    
    
    $
    
    
    
    $
    140,515
    
    
    $
    146,533
    
    
    $
    354
    
    
    $
    
    
    
    $
    146,887(Gain) loss on
disposition of
assets
    
    $
    (37
    )
    
    $
    
    
    
    $
    
    
    
    $
    (37
    )
    
    $
    2,169
    
    
    $
    
    
    
    $
    
    
    
    $
    2,169Loss from operations
    
    $
    (55,284
    )
    
    $
    (9,982
    )
    
    $
    
    
    
    $
    (65,266
    )
    
    $
    (54,027
    )
    
    $
    (8,422
    )
    
    $
    
    
    
    $
    (62,449
    )Interest and other
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,783
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,001Interest expense,
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,135
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,730
    )Investment (gain)
loss, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,302
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,518Net loss before
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94,920
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,660
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (983
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (805
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (95,903
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (61,465
    )Capital expenditures
    
    $
    169,948
    
    
    $
    5,050
    
    
    $
    
    
    
    $
    174,998
    
    
    $
    170,439
    
    
    $
    4,369
    
    
    $
    
    
    
    $
    174,808
  XOC
    
    Nextlink
    
    ConsolidatedSeptember 30, 2008
    
    $
    1,312,970
    
    
    $
    51,639
    
    
    $
    1,364,609December 31, 2007
    
    $
    1,042,060
    
    
    $
    48,066
    
    
    $
    1,090,126
 13. COMMITMENTS AND CONTINGENCIES
 Loss Contingencies
 Allegiance Telecom Liquidating Trust Litigation
  18




---



##### 



(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 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 by the
referee, together with interest accruing at the New York statutory rate of 9% per annum;(b)
    
    the Company must pay to the ATLT the amount of $0.5 million, together with interest
accruing at the New York statutory rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition, provided there is a corresponding
reduction in accounts receivable included in the Acquired Assets;(c)
    
    the Company must immediately pay or deliver to the ATLT certain checks in the 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 statutory rate;(d)
    
    with respect to the true-up of certain disputed liabilities, the ATLT shall pay to XOH
$2.8 million, together with interest accruing at the New York statutory rate, which amount
may be increased by the referee;(e)
    
    XOH is fully subrogated to the obligations of $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 must pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York statutory rate.
   19




---



##### 



Litigation Relating to the Wireline Sale
    20




---



##### 



Houlihan Lokey Howard and Zukin Capital LLC
 nd nd
 Metro Nashville
  21




---



##### 



Nashville Electric Service
  Choice Tel
  22




---



##### 



City of Memphis Franchise Fees
 BellSouth vs. City of Memphis
 23




---



##### 



Cautionary Language Concerning Forward-Looking Statements
 The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are
forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act
of 1995, that involve risks and uncertainties. These statements can be identified by the use of
words such as anticipate, believe, estimate, expect, plan, intend, can, may,
could or other comparable words. Our forward-looking statements are based on currently available
operational, financial and competitive information and managements current expectations, estimates
and projections. These forward-looking statements include:
 
    
    expectations regarding revenue, expenses, capital expenditures and financial position in
future periods;
    
    our ability to remain an industry leader, enhance our communications solutions, broaden
our customer reach, grow our revenues, expand our market share, continue to deliver a broad
range of high-capacity network services and mid-band Ethernet services, pursue growth
opportunities, meet the growing demand for high-speed Internet access services, scale to
multi-terabit capable router nodes; and
    
    the necessity of obtaining future financing to fund our business plan and repay our
scheduled obligations.
 Readers are cautioned that these forward-looking statements are only predictions and are subject to
a number of both known and unknown risks and uncertainties. Should one or more of these risks or
uncertainties materialize, or should our underlying assumptions prove incorrect, our actual results
in future periods may differ materially from the future results, performance, and/or achievements
expressed or implied in this document. These risks include any failure by us to:
 
    
    generate funds from operations sufficient to meet our cash requirements or execute our
business strategy;
    
    prevail in our legal proceedings;
    
    increase the volume of traffic on our network;
    
    develop a market for our fixed wireless licenses; and
    
    achieve and maintain market penetration and revenue levels given the highly competitive
nature of the telecommunications industry.
 For a detailed discussion of risk factors affecting our business and operations, see Part II, Item
1A Risk Factors in this Quarterly Report on Form 10-Q and Part I, Item 1A Risk Factors in our
2007 Annual Report. We undertake no obligation to update any forward-looking statements, whether as
a result of new information, future events or otherwise. These forward-looking statements should
not be relied on as representing our estimates or views as of any subsequent date.
 24




---



##### 



Executive Summary
      25




---



##### 




    
    Our cash balance increased over $200 million during the nine months ended September 30,
2008 as a result of the issuance of Class B Convertible Preferred Stock and Class C
Perpetual Preferred Stock;
    
    Revenue for the nine months ended September 30, 2008 increased 3.5 % over the same
period in 2007; and
    
    Cost of service increased 9.1% for the nine months ended September 30, 2008 compared to
the same period in the prior year.
  Critical Accounting Policies and Estimates
   Liquidity and Capital Resources
  26




---



##### 



Debt Retirement through Issuance of Preferred Stock
   ERISA Liabilities
    27




---



##### 



Cash Flow
   2008
    
    2007Cash provided by operating activities
    
    $
    54,731
    
    
    $
    80,036Cash used in investing activities
    
    $
    (216,241
    )
    
    $
    (153,290
    )Cash provided by (used in) financing activities
    
    $
    372,511
    
    
    $
    (4,427
    )
   28




---



##### 



Results of Operations
  % of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedThree Months Ended September 30,
    
    2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    373,925
    
    
    
    100.0
    %
    
    $
    360,682
    
    
    
    100.0
    %
    
    $
    13,243
    
    
    
    3.7
    %Cost and expensesCost of service*
    
    
    210,925
    
    
    
    56.4
    
    
    
    199,398
    
    
    
    55.3
    
    
    $
    11,527
    
    
    
    5.8
    %Selling, general and administrative
    
    
    119,921
    
    
    
    32.1
    
    
    
    132,716
    
    
    
    36.8
    
    
    $
    (12,795
    )
    
    
    (9.6
    )%Depreciation and amortization
    
    
    47,847
    
    
    
    12.8
    
    
    
    44,834
    
    
    
    12.4
    
    
    $
    3,013
    
    
    
    6.7
    %(Gain) loss on disposition of assets
    
    
    796
    
    
    
    0.2
    
    
    
    1,063
    
    
    
    0.3
    
    
    $
    (267
    )
    
    
    (25.1
    )%Total cost and expenses
    
    
    379,489
    
    
    
    101.5
    
    
    
    378,011
    
    
    
    104.8
    
    
    $
    1,478
    
    
    
    0.4
    %Loss from operations
    
    
    (5,564
    )
    
    
    (1.5
    )
    
    
    (17,329
    )
    
    
    (4.8
    )
    
    $
    (11,765
    )
    
    
    (67.9
    )%Interest and other income
    
    
    1,855
    
    
    
    0.5
    
    
    
    1,558
    
    
    
    0.4
    
    
    $
    297
    
    
    
    19.1
    %Interest expense, net
    
    
    (3,871
    )
    
    
    (1.0
    )
    
    
    (9,904
    )
    
    
    (2.8
    )
    
    $
    (6,033
    )
    
    
    (60.9
    )%Investment
(loss) gain, net
    
    
    (15,408
    )
    
    
    (4.1
    )
    
    
    21,518
    
    
    
    6.0
    
    
    $
    (36,926
    )
    
    
    (171.6
    )%Net loss before income taxes
    
    
    (22,988
    )
    
    
    (6.1
    )
    
    
    (4,157
    )
    
    
    (1.2
    )
    
    $
    18,831
    
    
    
    453.0
    %Income tax expense
    
    
    (299
    )
    
    
    (0.1
    )
    
    
    (305
    )
    
    
    nm
    
    
    $
    (6
    )
    
    
    (2.0
    )%Net loss
    
    
    (23,287
    )
    
    
    (6.2
    )
    
    
    (4,462
    )
    
    
    (1.2
    )
    
    $
    18,825
    
    
    
    421.9
    %Preferred stock accretion
    
    
    (15,021
    )
    
    
    (4.0
    )
    
    
    (3,593
    )
    
    
    (1.0
    )
    
    $
    11,428
    
    
    
    318.1
    %Net loss allocable to common
shareholders
    
    $
    (38,308
    )
    
    
    (10.2
    )%
    
    $
    (8,055
    )
    
    
    (2.2
    )%
    
    $
    30,253
    
    
    
    375.6
    %
 
 nm 
    
    not meaningful 29




---



##### 



% of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedNine Months Ended September 30,
    
    2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    1,102,444
    
    
    
    100.0
    %
    
    $
    1,064,969
    
    
    
    100.0
    %
    
    $
    37,475
    
    
    
    3.5
    %Cost and expensesCost of service*
    
    
    652,540
    
    
    
    59.2
    
    
    
    597,881
    
    
    
    56.2
    
    
    $
    54,659
    
    
    
    9.1
    %Selling, general and administrative
    
    
    374,692
    
    
    
    34.0
    
    
    
    380,481
    
    
    
    35.7
    
    
    $
    (5,789
    )
    
    
    (1.5
    )%Depreciation and amortization
    
    
    140,515
    
    
    
    12.7
    
    
    
    146,887
    
    
    
    13.8
    
    
    $
    (6,372
    )
    
    
    (4.3
    )%(Gain) loss on disposition of assets
    
    
    (37
    )
    
    
    
    
    
    
    2,169
    
    
    
    0.2
    
    
    $
    (2,206
    )
    
    
    (101.7
    )%Total cost and expenses
    
    
    1,167,710
    
    
    
    105.9
    
    
    
    1,127,418
    
    
    
    105.9
    
    
    $
    40,292
    
    
    
    3.6
    %Loss from operations
    
    
    (65,266
    )
    
    
    (5.9
    )
    
    
    (62,449
    )
    
    
    (5.9
    )
    
    $
    2,817
    
    
    
    4.5
    %Interest and other income
    
    
    3,783
    
    
    
    0.3
    
    
    
    8,001
    
    
    
    0.8
    
    
    $
    (4,218
    )
    
    
    (52.7
    )%Interest expense, net
    
    
    (22,135
    )
    
    
    (2.0
    )
    
    
    (27,730
    )
    
    
    (2.6
    )
    
    $
    (5,595
    )
    
    
    (20.2
    )%Investment
(loss) gain, net
    
    
    (11,302
    )
    
    
    (1.0
    )
    
    
    21,518
    
    
    
    2.0
    
    
    $
    (32,820
    )
    
    
    (152.5
    )%Net loss before income taxes
    
    
    (94,920
    )
    
    
    (8.6
    )
    
    
    (60,660
    )
    
    
    (5.7
    )
    
    $
    34,260
    
    
    
    56.5
    %Income tax expense
    
    
    (983
    )
    
    
    (0.1
    )
    
    
    (805
    )
    
    
    (0.1
    )
    
    $
    178
    
    
    
    22.1
    %Net loss
    
    
    (95,903
    )
    
    
    (8.7
    )
    
    
    (61,465
    )
    
    
    (5.8
    )
    
    $
    34,438
    
    
    
    56.0
    %Preferred stock accretion
    
    
    (22,478
    )
    
    
    (2.0
    )
    
    
    (10,622
    )
    
    
    (1.0
    )
    
    $
    11,856
    
    
    
    111.6
    %Net loss allocable to common
shareholders
    
    $
    (118,381
    )
    
    
    (10.7
    )%
    
    $
    (72,087
    )
    
    
    (6.8
    )%
    
    $
    46,294
    
    
    
    64.2
    %
 
 *
    
    exclusive of depreciation and amortization Revenue
   Three Months Ended September 30% of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentCore servicesData and IP
    
    $
    173,398
    
    
    
    46.4
    %
    
    $
    138,922
    
    
    
    38.5
    %
    
    $
    34,476
    
    
    
    24.8
    %Integrated/Voice
    
    
    77,799
    
    
    
    20.8
    
    
    
    83,751
    
    
    
    23.2
    
    
    $
    (5,952
    )
    
    
    (7.1
    )%Total core services
    
    
    251,197
    
    
    
    67.2
    
    
    
    222,673
    
    
    
    61.7
    
    
    $
    28,524
    
    
    
    12.8
    %Legacy/TDM services
    
    
    122,728
    
    
    
    32.8
    
    
    
    138,009
    
    
    
    38.3
    
    
    $
    (15,281
    )
    
    
    (11.1
    )%Total revenue
    
    $
    373,925
    
    
    
    100.0
    %
    
    $
    360,682
    
    
    
    100.0
    %
    
    $
    13,243
    
    
    
    3.7
    %
 Nine Months Ended September 30% of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentCore servicesData and IP
    
    $
    490,629
    
    
    
    44.5
    %
    
    $
    382,581
    
    
    
    35.9
    %
    
    $
    108,048
    
    
    
    28.2
    %Integrated/Voice
    
    
    245,764
    
    
    
    22.3
    
    
    
    253,028
    
    
    
    23.8
    
    
    $
    (7,264
    )
    
    
    (2.9
    )%Total core services
    
    
    736,393
    
    
    
    66.8
    
    
    
    635,609
    
    
    
    59.7
    
    
    $
    100,784
    
    
    
    15.9
    %Legacy/TDM services
    
    
    366,051
    
    
    
    33.2
    
    
    
    429,360
    
    
    
    40.3
    
    
    $
    (63,309
    )
    
    
    (14.7
    )%Total revenue
    
    $
    1,102,444
    
    
    
    100.0
    %
    
    $
    1,064,969
    
    
    
    100.0
    %
    
    $
    37,475
    
    
    
    3.5
    %
 30




---



##### 



Core Services.
   Legacy/TDM Services.
 Cost of Service
 Three Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTelecommunications
services
    
    $
    150,021
    
    
    
    40.1
    %
    
    $
    140,911
    
    
    
    39.1
    %
    
    $
    9,110
    
    
    
    6.5
    %Network operations
    
    
    47,617
    
    
    
    12.7
    
    
    
    46,086
    
    
    
    12.8
    
    
    $
    1,531
    
    
    
    3.3
    %Pass-through taxes
    
    
    13,287
    
    
    
    3.6
    
    
    
    12,401
    
    
    
    3.4
    
    
    $
    886
    
    
    
    7.1
    %Total cost of service
    
    $
    210,925
    
    
    
    56.4
    %
    
    $
    199,398
    
    
    
    55.3
    %
    
    $
    11,527
    
    
    
    5.8
    %
 31




---



##### 



Nine Months Ended September 30,% of
    
    
    
    
    
    
    % of
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentTelecommunications
services
    
    
    468,474
    
    
    
    42.5
    
    
    $
    427,345
    
    
    
    40.1
    %
    
    $
    41,129
    
    
    
    9.6
    %Network operations
    
    
    143,045
    
    
    
    13.0
    
    
    
    132,872
    
    
    
    12.5
    
    
    $
    10,173
    
    
    
    7.7
    %Pass-through taxes
    
    
    41,021
    
    
    
    3.7
    
    
    
    37,664
    
    
    
    3.5
    
    
    $
    3,357
    
    
    
    8.9
    %Total cost of service
    
    $
    652,540
    
    
    
    59.2
    %
    
    $
    597,881
    
    
    
    56.1
    %
    
    $
    54,659
    
    
    
    9.1
    %
    32




---



##### 



Selling, General and Administrative
    Depreciation and Amortization
  Investment (loss) gain, net
  33




---



##### 



Comparison of Segment Financial Results
 Overview
  XO Communications
    Three Months Ended September 30,% of
    
    
    
    
    
    
    % ofXOC
    
    
    
    
    
    
    XOC
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue from external customers
    
    $
    373,519
    
    
    
    99.9
    %
    
    $
    360,493
    
    
    
    99.9
    %
    
    $
    13,026
    
    
    
    3.6
    %Inter-segment revenue
    
    
    153
    
    
    
    0.1
    
    
    
    63
    
    
    
    0.1
    
    
    $
    90
    
    
    
    142.9
    %Total revenue
    
    
    373,672
    
    
    
    100.0
    %
    
    $
    360,556
    
    
    
    100.0
    %
    
    $
    13,116
    
    
    
    3.6
    %Cost and expensesCost of service*
    
    
    209,874
    
    
    
    56.2
    
    
    
    198,502
    
    
    
    55.1
    
    
    $
    11,372
    
    
    
    5.7
    %Selling, general and administrative
    
    
    117,394
    
    
    
    31.4
    
    
    
    130,300
    
    
    
    36.1
    
    
    $
    (12,906
    )
    
    
    (9.9
    )%Depreciation and amortization
    
    
    47,675
    
    
    
    12.8
    
    
    
    44,656
    
    
    
    12.4
    
    
    $
    3,019
    
    
    
    6.8
    %(Gain) loss on disposition of assets
    
    
    796
    
    
    
    0.2
    
    
    
    1,063
    
    
    
    0.3
    
    
    $
    (267
    )
    
    
    (25.1
    )%Total cost and expenses
    
    
    375,739
    
    
    
    100.6
    
    
    
    374,521
    
    
    
    103.9
    
    
    $
    1,218
    
    
    
    0.3
    %Segment loss
    
    $
    (2,067
    )
    
    
    (0.6
    )%
    
    $
    (13,965
    )
    
    
    (3.9
    )%
    
    $
    (11,898
    )
    
    
    (85.2
    )%Capital expenditures
    
    $
    55,062
    
    
    
    14.7
    %
    
    $
    63,840
    
    
    
    17.7
    %
    
    $
    (8,778
    )
    
    
    (13.8
    )%
 34




---



##### 



Nine Months Ended September 30,% of
    
    
    
    
    
    
    % ofXOC
    
    
    
    
    
    
    XOC
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue from external customers
    
    $
    1,100,907
    
    
    
    99.9
    %
    
    $
    1,064,614
    
    
    
    99.9
    %
    
    $
    36,293
    
    
    
    3.4
    %Inter-segment revenue
    
    
    347
    
    
    
    0.1
    
    
    
    188
    
    
    
    0.1
    
    
    $
    159
    
    
    
    84.6
    %Total revenue
    
    
    1,101,254
    
    
    
    100.0
    
    
    $
    1,064,802
    
    
    
    100.0
    %
    
    $
    36,452
    
    
    
    3.4
    %Cost and expensesCost of service*
    
    
    649,017
    
    
    
    58.9
    
    
    
    596,190
    
    
    
    56.0
    
    
    $
    52,827
    
    
    
    8.9
    %Selling, general and administrative
    
    
    367,604
    
    
    
    33.4
    
    
    
    373,937
    
    
    
    35.1
    
    
    $
    (6,333
    )
    
    
    (1.7
    )%Depreciation and amortization
    
    
    139,954
    
    
    
    12.7
    
    
    
    146,533
    
    
    
    13.8
    
    
    $
    (6,579
    )
    
    
    (4.5
    )%(Gain) loss on disposition of assets
    
    
    (37
    )
    
    
    
    
    
    
    2,169
    
    
    
    0.2
    
    
    $
    (2,206
    )
    
    
    (101.7
    )%Total cost and expenses
    
    
    1,156,538
    
    
    
    105.0
    
    
    
    1,118,829
    
    
    
    105.1
    
    
    $
    37,709
    
    
    
    3.4
    %Segment loss
    
    $
    (55,284
    )
    
    
    (5.0
    )%
    
    $
    (54,027
    )
    
    
    (5.1
    )%
    
    $
    1,257
    
    
    
    2.3
    %Capital expenditures
    
    $
    169,948
    
    
    
    15.4
    %
    
    $
    170,439
    
    
    
    16.0
    %
    
    $
    (491
    )
    
    
    (0.3
    )%
 
 *
    
    exclusive of depreciation and amortization  Capital Expenditures .
 Nextlink
  LMDS License Renewals.
 35




---



##### 



Demonstrations of Substantial Service.
  Three Months Ended September 30% of
    
    
    
    
    
    
    % ofNextlink
    
    
    
    
    
    
    Nextlink
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue from external customers
    
    $
    406
    
    
    
    47.5
    %
    
    $
    189
    
    
    
    42.4
    %
    
    $
    217
    
    
    
    114.8
    %Inter-segment revenue
    
    
    449
    
    
    
    52.5
    
    
    
    257
    
    
    
    57.6
    
    
    $
    192
    
    
    
    74.7
    %Total revenue
    
    
    855
    
    
    
    100.0
    
    
    
    446
    
    
    
    100.0
    
    
    $
    409
    
    
    
    91.7
    %Cost and expensesCost of service*
    
    
    1,635
    
    
    
    191.2
    
    
    
    1,216
    
    
    
    272.7
    
    
    $
    419
    
    
    
    34.5
    %Selling, general and administrative
    
    
    2,545
    
    
    
    297.7
    
    
    
    2,416
    
    
    
    541.7
    
    
    $
    129
    
    
    
    5.3
    %Depreciation and amortization
    
    
    172
    
    
    
    20.1
    
    
    
    178
    
    
    
    39.9
    
    
    $
    (6
    )
    
    
    (3.4
    )%Total cost and expenses
    
    
    4,352
    
    
    
    509.0
    
    
    
    3,810
    
    
    
    854.3
    
    
    $
    542
    
    
    
    14.2
    %Segment loss
    
    $
    (3,497
    )
    
    
    (409.0
    )%
    
    $
    (3,364
    )
    
    
    (754.3
    )%
    
    $
    133
    
    
    
    4.0
    %Capital expenditures
    
    $
    1,412
    
    
    
    165.1
    %
    
    $
    1,539
    
    
    
    345.1
    %
    
    $
    (127
    )
    
    
    (8.3
    )%
 
 *
    
    exclusive of depreciation and amortization Nine Months Ended September 30% of
    
    
    
    
    
    
    % ofNextlink
    
    
    
    
    
    
    Nextlink
    
    
    Change2008
    
    
    Revenue
    
    
    2007
    
    
    Revenue
    
    
    Dollars
    
    
    PercentRevenue from external customers
    
    $
    1,537
    
    
    
    56.9
    %
    
    $
    355
    
    
    
    36.6
    %
    
    $
    1,182
    
    
    
    333.0
    %Inter-segment revenue
    
    
    1,163
    
    
    
    43.1
    
    
    
    616
    
    
    
    63.4
    
    
    $
    547
    
    
    
    88.8
    %Total revenue
    
    
    2,700
    
    
    
    100.0
    
    
    
    971
    
    
    
    100.0
    
    
    $
    1,729
    
    
    
    178.1
    %Cost and expensesCost of service*
    
    
    5,015
    
    
    
    185.7
    
    
    
    2,495
    
    
    
    257.0
    
    
    $
    2,520
    
    
    
    101.0
    %Selling, general and administrative
    
    
    7,106
    
    
    
    263.2
    
    
    
    6,544
    
    
    
    673.9
    
    
    $
    562
    
    
    
    8.6
    %Depreciation and amortization
    
    
    561
    
    
    
    20.8
    
    
    
    354
    
    
    
    36.5
    
    
    $
    207
    
    
    
    58.5
    %Total cost and expenses
    
    
    12,682
    
    
    
    469.7
    
    
    
    9,393
    
    
    
    967.4
    
    
    $
    3,289
    
    
    
    35.0
    %Segment loss
    
    $
    (9,982
    )
    
    
    (369.7
    )%
    
    $
    (8,422
    )
    
    
    (867.4
    )%
    
    $
    1,560
    
    
    
    18.5
    %Capital expenditures
    
    $
    5,050
    
    
    
    187.0
    %
    
    $
    4,369
    
    
    
    449.9
    %
    
    $
    681
    
    
    
    15.6
    %
 
 *
    
    exclusive of depreciation and amortization Revenue.
 36




---



##### 



Cost of Service.
 Depreciation and Amortization.
 Capital Expenditures.
 Recently Issued Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Disclosures about Derivative Instruments and Hedging
Activitiesan amendment of FASB SFAS No. 133
 37




---



##### 



Determination of the Useful Life of Intangible Assets Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles
 Regulatory
  FCC Regulation of Wireless Services
  38




---



##### 



Additional Federal Regulations
 VoIP 911 Regulation.
 Qwest Petition for Forbearance from Unbundling Requirements.
 Intercarrier Compensation Reform and Treatment of VoIP Services.
 39




---



##### 



Additional State and Local Regulation
 XO Complaints Against Verizon.
 Qwest Complaints Against XO
    40




---



##### 



Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  41




---



##### 



PART II  OTHER INFORMATION
   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 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 by the
referee, together with interest accruing at the New York statutory rate of 9% per annum;(b)
    
    the Company must pay to the ATLT the amount of $0.5 million, together with interest
accruing at the New York statutory rate, which amount represents cash received by the
Company after the closing of the Allegiance acquisition, provided there is a corresponding
reduction in accounts receivable included in the Acquired Assets;(c)
    
    the Company must immediately pay or deliver to the ATLT certain checks in the 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 statutory rate;
 42




---



##### 



(d)
    
    with respect to the true-up of certain disputed liabilities, the ATLT shall pay to XOH
$2.8 million, together with interest accruing at the New York statutory rate, which amount
may be increased by the referee;(e)
    
    XOH is fully subrogated to the obligations of $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 must pay to XOH its tax reimbursement
obligations, together with interest accruing at the New York statutory rate.
   Houlihan Lokey Howard and Zukin Capital LLC
 nd nd
 43




---



##### 



Nashville Electric Service
    Risks Related to Liquidity, Financial Resources, and Capitalization
 We have incurred a net loss in the past and may not generate funds from operations or financing
activities sufficient to meet all of our operating or capital cash requirements.
  44




---



##### 



Risks Related To Long-Term Debt Covenant
 The financial covenants in our
Credit Facility restrict our financial and operational flexibility, which could have an adverse
effect on our results of operations. If we do not receive waivers from our lenders, we expect to be
in non-compliance with the financial covenants in our credit facility, which would likely have an
adverse effect on our business.
    45




---



##### 



Risks Related to our Wireless Operations
 Our spectrum licenses may not be renewed upon expiration, which could harm our business.
  1
 Risks Related to Our Common Stock
 An entity owned and controlled by our Chairman is our majority stockholder.
  Future sales or issuances of our common stock could adversely affect our stock price and/or our
ability to raise capital.
  
 1
    
    An LMDS coalition filed for an extension of named
member companies substantial service requirements on June 14, 2007. In order
to utilize its resources in the most efficient manner possible, Nextlink joined
this coalition and, on October 10, 2007, petitioned the FCC for extension of
its B Band LMDS licenses. Subsequently, Nextlink petitioned the FCC for
extension of its substantial service requirements for 18 of its A Band
licenses. 46




---



##### 



47




---



##### 



48




---



##### 



SIGNATURES
  XO HOLDINGS, INC.November 10, 2008
    /s/ Gregory W. FreibergGregory W. FreibergSenior Vice President and Chief Financial Officer 49




---



##### 



EXHIBIT INDEX
 3.1
    
    Certificate of Incorporation of XO Holdings, Inc., as filed with the Secretary of
State of the State of Delaware on October 25, 2005 (incorporated herein by
reference to Exhibit 3.1 filed with the Current Report on Form 8-K of XO Holdings,
Inc., filed on March 6, 2006)3.2
    
    Certificate of Designation of the Powers, Preferences and Relative, Participating,
Optional and other Special Rights of the 6% Class A Convertible Preferred Stock
and Qualifications, Limitations and Restrictions thereof, as filed with the
Secretary of State of the State of Delaware on February 28, 2006 (incorporated
herein by reference to Exhibit 3.2 filed with the Current Report on Form 8-K of XO
Holdings, Inc., filed on March 6, 2006)3.3
    
    Bylaws of XO Holdings, Inc. (incorporated herein by reference to Exhibit 3.3 filed
with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)4.1
    
    Certificate of Designation of the Powers, Preferences and Relative Participating,
Optional and Other Special Rights of the 7% Class B Convertible Preferred Stock
and Qualifications, Limitations and Restrictions Thereof *4.2
    
    Certificate of Designation of the Powers, Preferences and Relative Participating,
Optional and Other Special Rights of the 9.50% Class C Perpetual Preferred Stock
and Qualifications, Limitations and Restrictions Thereof *10.1
    
    Promissory note, dated as of March 13, 2008, executed by XO Communications, LLC in
favor of Arnos Corp. *10.2
    
    Stipulation and Agreement of Compromise, Settlement and Release, approved by the
Delaware Court of Chancery on March 31, 2008, among XO Holdings, Inc. and certain
minority stockholders *10.3
    
    Amendment No. 2 and Waiver to Amended and Restated Credit and Guaranty Agreement
dated May 9, 2008 between XO Communications, LLC, its subsidiaries and Arnos
Corp., as Requisite Lenders*10.4
    
    Stock Purchase Agreement**10.5
    
    Registration Rights Agreement**10.6
    
    Tax Allocation Agreement**10.7
    
    Undertaking (incorporated herein by reference to exhibit 10.1 filed with the
Current Report on Form 8-K of XO Holdings, Inc., filed on August 29, 2008)10.8
    
    XO Holdings, Inc. 2008 Executive Bonus Plan (filed herewith).10.9
    
    Settlement Agreement and Mutual Release In re Allegiance Telecom, Inc. et al.,
Debtors, dated October 21, 2008 (filed herewith)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act, as amended (filed herewith)31.2
    
    Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a) of the Securities Exchange Act as amended (filed herewith)32.1
    
    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002
(filed herewith)
 
 *
    
    Incorporated herein by reference to Form 10-Q for the quarter ended March 31, 2008.**
    
    Incorporated herein by reference to the Current Report on Form 8-K filed on July
28, 2008. 50