##### 



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, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-30900
 
 XO Holdings, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    54-1983517
(I.R.S. employer
identification no.)
 11111 Sunset Hills Road
Reston, Virginia 20190
(Address of principal executive offices, including zip code)
(703) 547-2000
(Registrants telephone number, including area code)
 þ o
  o þ o
 o þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
 þ o




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##### 



XO Holdings, Inc. and Subsidiaries
Index to Form 10-Q
 PagePart I. Financial InformationItem 1.
    
    XO Holdings, Inc. and Subsidiaries Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005
    
    1Condensed
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2006 and September 30, 2005 (unaudited)
    
    2Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2006 and September 30, 2005 (unaudited)
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    34Item 4.
    
    Controls and Procedures
    
    35Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    35Item 1A.
    
    Risk Factors
    
    38Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    45Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    45Item 5.
    
    Other Information
    
    45Item 6.
    
    Exhibits
    
    45Signatures
    
    47




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements.
 XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
 September 30, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    164,556
    
    
    $
    176,838Marketable securities and other investments
    
    
    7,190
    
    
    
    7,150Accounts receivable, net of allowance for doubtful accounts of $27,931 at
September 30, 2006, and $36,061 at December 31, 2005, respectively
    
    
    126,137
    
    
    
    137,564Other current assets
    
    
    32,486
    
    
    
    34,106Total current assets
    
    
    330,369
    
    
    
    355,658Property and equipment, net
    
    
    681,230
    
    
    
    717,627Broadband wireless licenses, net
    
    
    35,782
    
    
    
    40,527Other intangibles, net
    
    
    33,586
    
    
    
    51,252Other assets, net
    
    
    38,926
    
    
    
    37,661Total assets
    
    $
    1,119,893
    
    
    $
    1,202,725LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    85,139
    
    
    $
    79,935Other current liabilities
    
    
    205,641
    
    
    
    216,278Total current liabilities
    
    
    290,780
    
    
    
    296,213Long-term debt and accrued interest payable
    
    
    327,098
    
    
    
    301,113Other long-term liabilities
    
    
    62,987
    
    
    
    65,755Total liabilities
    
    
    680,865
    
    
    
    663,0816% Class A convertible preferred stock
    
    
    227,105
    
    
    
    217,056Commitments and contingencies (Note 9)
    
    
    
    
    
    
    Stockholders equityPreferred stock: par value $0.01 per share, 200,000,000 shares
authorized: 4,000,000 shares of 6% Class A convertible preferred stock
issued and outstanding on September 30, 2006 and December 31, 2005
    
    
    
    
    
    
    Warrants and common stock, par value $0.01 per share, 1,000,000,000
shares authorized: 182,001,285 and 181,933,035 shares issued and
outstanding on September 30, 2006 and December 31, 2005, respectively
    
    
    968,377
    
    
    
    976,447Deferred compensation
    
    
    
    
    
    
    (77
    )Accumulated other comprehensive income
    
    
    860
    
    
    
    820Accumulated deficit
    
    
    (757,314
    )
    
    
    (654,602
    )Total stockholders equity
    
    
    211,923
    
    
    
    322,588Total liabilities, convertible preferred stock and stockholders equity
    
    $
    1,119,893
    
    
    $
    1,202,725
  1




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##### 



XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)
 Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2005
    
    
    September 30, 2006
    
    
    September 30, 2005Revenue
    
    $
    352,334
    
    
    $
    358,672
    
    
    $
    1,056,307
    
    
    $
    1,082,341Cost and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    141,840
    
    
    
    147,009
    
    
    
    449,310
    
    
    
    432,955Selling, operating, and general
    
    
    176,930
    
    
    
    177,712
    
    
    
    537,147
    
    
    
    557,179Depreciation and amortization
    
    
    50,103
    
    
    
    57,269
    
    
    
    154,837
    
    
    
    176,731Loss on sale of property and equipment
    
    
    31
    
    
    
    
    
    
    
    31
    
    
    
    Total costs and expenses
    
    
    368,904
    
    
    
    381,990
    
    
    
    1,141,325
    
    
    
    1,166,865Loss from operations
    
    
    (16,570
    )
    
    
    (23,318
    )
    
    
    (85,018
    )
    
    
    (84,524
    )Interest income
    
    
    2,111
    
    
    
    2,488
    
    
    
    6,207
    
    
    
    6,308Investment gain (loss), net
    
    
    37
    
    
    
    (676
    )
    
    
    37
    
    
    
    936Interest expense, net
    
    
    (8,550
    )
    
    
    (9,128
    )
    
    
    (23,938
    )
    
    
    (25,720
    )Net loss
    
    
    (22,972
    )
    
    
    (30,634
    )
    
    
    (102,712
    )
    
    
    (103,000
    )Preferred stock accretion
    
    
    (3,387
    )
    
    
    (3,221
    )
    
    
    (10,048
    )
    
    
    (9,464
    )Net loss attributable to common shares
    
    $
    (26,359
    )
    
    $
    (33,855
    )
    
    $
    (112,760
    )
    
    $
    (112,464
    )Net loss attributable to common shares,
basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.19
    )
    
    $
    (0.62
    )
    
    $
    (0.62
    )Weighted average shares, basic and diluted
    
    
    182,001,285
    
    
    
    181,933,035
    
    
    
    181,960,722
    
    
    
    181,933,035
  2




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##### 



XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 Nine Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2005OPERATING ACTIVITIESNet loss
    
    $
    (102,712
    )
    
    $
    (103,000
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    154,837
    
    
    
    176,731Accrual of interest expense
    
    
    25,985
    
    
    
    25,640Stock-based compensation
    
    
    1,714
    
    
    
    131Realized gain on investments
    
    
    
    
    
    
    (936
    )Changes in assets and liabilities:Accounts receivable
    
    
    11,427
    
    
    
    11,369Other assets
    
    
    (7,207
    )
    
    
    (1,993
    )Accounts payable
    
    
    (9,213
    )
    
    
    1,466Accrued and other liabilities
    
    
    (11,314
    )
    
    
    (37,844
    )Net cash provided by operating activities
    
    
    63,517
    
    
    
    71,564INVESTING ACTIVITIESCapital expenditures
    
    
    (81,611
    )
    
    
    (63,309
    )Proceeds from sale of marketable securities, investments and other assets
    
    
    7,562
    
    
    
    6,145Proceeds from release of escrow account
    
    
    
    
    
    
    25,430Net cash used in investing activities
    
    
    (74,049
    )
    
    
    (31,734
    )FINANCING ACTIVITIESRepayments of capital leases
    
    
    (2,091
    )
    
    
    (2,176
    )Proceeds from exercise of stock options
    
    
    341
    
    
    
    Net cash used in financing activities
    
    
    (1,750
    )
    
    
    (2,176
    )Net (decrease) increase in cash and cash equivalents
    
    
    (12,282
    )
    
    
    37,654Cash and cash equivalents, beginning of period
    
    
    176,838
    
    
    
    233,989Cash and cash equivalents, end of period
    
    $
    164,556
    
    
    $
    271,643SUPPLEMENTAL DATACash paid for interest
    
    $
    1,399
    
    
    $
    2,270Accrued interest converted to long-term debt
    
    $
    25,985
    
    
    $
    25,640
  3




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##### 



XO Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Basis of Presentation
   Significant Accounting Policies
  Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109
 Fair
Value Measurements
 4




---



##### 



Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements
  Share-Based Payments
  Principles of Consolidation
  Use of Estimates and Assumptions
   Changes in Accounting Estimates
  Reclassifications
  5




---



##### 



2. NET LOSS PER SHARE AND COMPREHENSIVE LOSS
 Net Loss Per Share
  Comprehensive Loss
  Three Months EndedSeptember 30,2006
    
    
    2005Net loss
    
    $
    (22,972
    )
    
    $
    (30,634
    )Other comprehensive lossNet unrealized loss on investments
    
    
    (240
    )
    
    
    (220
    )Comprehensive loss
    
    $
    (23,212
    )
    
    $
    (30,854
    )
 Nine Months EndedSeptember 30,2006
    
    
    2005Net loss
    
    $
    (102,712
    )
    
    $
    (103,000
    )Other comprehensive lossNet unrealized gain (loss) on investments
    
    
    40
    
    
    
    (3,000
    )Reclassification adjustment for gain included in net income
    
    
    
    
    
    
    (532
    )Comprehensive loss
    
    $
    (102,672
    )
    
    $
    (106,532
    )
 3. SEGMENT INFORMATION
 Overview
  XOC
   6




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##### 



Nextlink
    Three Months Ended
    
    
    Three Months EndedSeptember 30, 2006
    
    
    September 30, 2005Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    351,799
    
    
    $
    751
    
    
    $
    (216
    )
    
    $
    352,334
    
    
    $
    358,583
    
    
    $
    89
    
    
    $
    
    
    
    $
    358,672Depreciation and
amortization
    
    
    48,454
    
    
    
    1,649
    
    
    
    
    
    
    
    50,103
    
    
    
    55,621
    
    
    
    1,648
    
    
    
    
    
    
    
    57,269Loss from operations
    
    
    (13,000
    )
    
    
    (3,570
    )
    
    
    
    
    
    
    (16,570
    )
    
    
    (21,194
    )
    
    
    (2,124
    )
    
    
    
    
    
    
    (23,318
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,488Investment gain
(loss), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (676
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,550
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,128
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (22,972
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (30,634
    )Capital expenditures
    
    $
    31,681
    
    
    $
    371
    
    
    $
    
    
    
    $
    32,052
    
    
    $
    23,585
    
    
    $
    195
    
    
    $
    
    
    
    $
    23,780
 Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2006
    
    
    September 30, 2005Intercompany
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    IntercompanyXOC
    
    
    Nextlink
    
    
    Elimination
    
    
    Consolidated
    
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedRevenue
    
    $
    1,055,545
    
    
    $
    978
    
    
    $
    (216
    )
    
    $
    1,056,307
    
    
    $
    1,082,252
    
    
    $
    89
    
    
    $
    
    
    
    $
    1,082,341Depreciation and
amortization
    
    
    149,886
    
    
    
    4,951
    
    
    
    
    
    
    
    154,837
    
    
    
    172,351
    
    
    
    4,380
    
    
    
    
    
    
    
    176,731Operating loss
    
    
    (70,978
    )
    
    
    (14,040
    )
    
    
    
    
    
    
    (85,018
    )
    
    
    (78,841
    )
    
    
    (5,683
    )
    
    
    
    
    
    
    (84,524
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,207
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,308Investment gain
(loss), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936Interest expense, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,938
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,720
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (102,712
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (103,000
    )Capital expenditures
    
    $
    79,082
    
    
    $
    2,529
    
    
    $
    
    
    
    $
    81,611
    
    
    $
    63,029
    
    
    $
    280
    
    
    $
    
    
    
    $
    63,309
 IntercompanyTotal Assets
    
    XOC
    
    
    Nextlink
    
    
    Elimination
    
    
    ConsolidatedSeptember 30, 2006
    
    $
    1,078,357
    
    
    $
    41,649
    
    
    $
    (113
    )
    
    $
    1,119,893December 31, 2005
    
    $
    1,159,256
    
    
    $
    43,469
    
    
    $
    
    
    
    $
    1,202,725
 7




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##### 



4. MARKETABLE SECURITIES AND OTHER INVESTMENTS
  Gross UnrealizedBook Value
    
    
    Cost Basis
    
    
    Holding GainsAs of September 30, 2006Marketable securities
    
    $
    2,400
    
    
    $
    1,540
    
    
    $
    860Other investments
    
    
    4,790
    
    
    
    4,790
    
    
    
    Total marketable securities and other investments
    
    $
    7,190
    
    
    $
    6,330
    
    
    $
    860As of December 31, 2005Marketable securities
    
    $
    2,360
    
    
    $
    1,540
    
    
    $
    820Other investments
    
    
    4,790
    
    
    
    4,790
    
    
    
    Total marketable securities and other investments
    
    $
    7,150
    
    
    $
    6,330
    
    
    $
    820
  5. LONG-LIVED ASSETS
  Property and Equipment
  September 30, 2006
    
    
    December 31, 2005Telecommunications networks and acquired bandwidth
    
    $
    828,406
    
    
    $
    751,487Furniture, fixtures, equipment, leasehold improvements and other
    
    
    288,078
    
    
    
    258,0341,116,484
    
    
    
    1,009,521Less: accumulated depreciation
    
    
    (515,395
    )
    
    
    (387,334
    )601,089
    
    
    
    622,187Construction-in-progress and undeployed assets
    
    
    80,141
    
    
    
    95,440Property and equipment, net
    
    $
    681,230
    
    
    $
    717,627
  Broadband Wireless Licenses
  September 30, 2006
    
    
    December 31, 2005Broadband wireless licenses
    
    $
    59,508
    
    
    $
    59,508Less: accumulated amortization
    
    
    (23,726
    )
    
    
    (18,981
    )Broadband wireless licenses, net
    
    $
    35,782
    
    
    $
    40,527
  8




---



##### 



Other Intangibles
  September 30,2006
    
    
    December 31, 2005Customer relationships
    
    $
    112,366
    
    
    $
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired trade names
    
    
    5,673
    
    
    
    5,673127,560
    
    
    
    127,560Less accumulated amortization
    
    
    (111,707
    )
    
    
    (94,041
    )15,853
    
    
    
    33,519Goodwill  indefinite life asset
    
    
    1,071
    
    
    
    1,071XO Trade name  indefinite life asset
    
    
    16,662
    
    
    
    16,662Other intangibles, net
    
    $
    33,586
    
    
    $
    51,252
  Estimated Amortization Expense
  Period
    
    Estimated Amortization ExpenseOctober  December 2006
    
    $
    7,4432007
    
    
    16,3192008
    
    
    4,2252009
    
    
    1082010
    
    
    81
 6. LONG-TERM DEBT
  9




---



##### 



7. RELATED PARTY TRANSACTIONS
  Outstanding
    
    Series A, B and CCommon Stock
    
    Warrants
    
    Credit Facility
    
    Preferred StockAt December 31, 2005
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %At September 30, 2006 (1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %
 
 (1)
    
    According to Amendment No. 8 to the Schedule 13D of Cardiff Holding LLC (Cardiff), filed
with the Securities and Exchange Commission on May 1, 2006, on April 28, 2006, Cardiff, an
Icahn affiliated entity, sold in a private sale to qualified institutional buyers an aggregate
of 1,725,000 shares of the Companys 6% Class A Convertible Preferred Stock (the Preferred
Stock).    10




---



##### 



8. SHARE-BASED PAYMENTS
 Share-based payment arrangements
 XO Holdings, Inc. 2002 Stock Incentive Plan
    Adoption of SFAS 123(R)
 Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 11




---



##### 



Stock-Based Compensation Expense
  Stock-Based Compensation Activity
  Weighted AverageWeighted Average
    
    
    Remaining
    
    
    AggregateNumber of Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding at December 31, 2005
    
    
    9,296,457
    
    
    $
    5.06Granted
    
    
    1,578,000
    
    
    
    5.10Forfeited
    
    
    (251,399
    )
    
    
    5.15Expired
    
    
    (402,396
    )
    
    
    5.14Exercised
    
    
    (68,250
    )
    
    
    5.38Outstanding at September 30, 2006
    
    
    10,152,412
    
    
    $
    5.06
    
    
    7.9 years
    
    
    Exercisable at September 30, 2006
    
    
    7,103,422
    
    
    $
    5.03
    
    
    6.7 years
    
    
    Expected to
vest at September 30, 2006
    
    
    2,704,454
    
    
    $
    5.12
    
    
    8.7 years
    
    
    
    Fair Value Determination
   12




---



##### 



Three Months Ended September 30,2006
    
    2005Weighted average grant date price per share of Company stock
    
    $
    4.24
    
    
    $
    2.61Weighted average exercise price
    
    $
    5.00
    
    
    $
    5.00Range of expected volatility
    
    
    64.2065.26
    %
    
    
    61.00
    %Range of risk free interest rate
    
    
    4.515.04
    %
    
    
    4.00
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected term (in years)
    
    
    6.25
    
    
    
    4.00
 Nine Months Ended September 30,2006
    
    2005Weighted average grant date price per share of Company stock
    
    $
    4.50
    
    
    $
    2.77Weighted average exercise price
    
    $
    5.10
    
    
    $
    5.00Range of expected volatility
    
    
    62.0066.09
    %
    
    
    61.00
    %Range of risk free interest rate
    
    
    4.335.04
    %
    
    
    3.70
    %Dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Expected term (in years)
    
    
    6.25
    
    
    
    4.00
 Prior Period Pro Forma Disclosures
  Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss applicable to common shares, as reported
    
    $
    (33,855
    )
    
    $
    (112,464
    )Add: Stock-based employee compensation expense included in
net loss, as reported
    
    
    20
    
    
    
    131Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all stock
awards
    
    
    (1,452
    )
    
    
    (4,877
    )Pro forma net loss applicable to common shares
    
    $
    (35,287
    )
    
    $
    (117,210
    )Net loss per common share, basic and diluted  as reported
    
    $
    (0.19
    )
    
    $
    (0.62
    )Net loss per common share, basic and diluted  pro forma
    
    $
    (0.19
    )
    
    $
    (0.64
    )
 9. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
 Accounting for
Contingencies
 Allegiance Telecom Liquidating Trust Litigation
  13




---



##### 



Litigation Relating to the Wireline Sale
 R(2) Investments v. Carl C. Icahn, et al.
 Allegiance Telecom
Liquidating Trust v. Carl C. Icahn, et al.
 14




---



##### 



Donald
J. Hillenmeyer, Jr. v. XO Communications, Inc., et al.
  Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
   Verizon Indemnification Notice
 Aerotel, LTD v. Verizon Company et al
 15




---



##### 



Verizon Indemnification Notice II
 TGIP, Inc. v. AT&T Corp, Verizon Communications et al
 Indemnification
  10. SUBSEQUENT EVENTS
  16




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Introduction
  
    
    Overview of the Business;
    
    Results of Operations;
    
    Liquidity and Capital Resources;
    
    Comparison of Segment Financial Results;
    
    Critical Accounting Policies and Estimates; 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, including with respect to the
development of IPs;
    
    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, including but not limited to those statements set forth in Managements Discussion
and Analysis of Financial Condition and Results of Operations below; and
    
    the impact of judicial decisions, legislation, and regulatory developments on our cost
structure, services, and marketing initiatives.
  
    
    the inherent uncertainties in projecting future results for any business;
    
    the inability to predict the outcome of future judicial decisions,
telecommunications-related legislation or regulatory decisions, or the reaction by incumbent carriers to such
developments;
    
    general economic conditions in the geographic areas that we are targeting for the sale
of telecommunications services;
    
    the ability to achieve and maintain market penetration and revenue levels sufficient to
provide financial viability to our business;
    
    the quality and price of similar or comparable telecommunications services offered, or
to be offered, by our current or future competitors; and
    
    future telecommunications-related legislation or regulatory developments and the conduct
of incumbent carriers in reaction to such developments.
 17




---



##### 



Overview of the Business
  XOC Business
    Nextlink Business
 Business
   18




---



##### 



Recent Events
    Results of Operations
 Overview and Comparison of Consolidated Financial Results
  % of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedThree Months Ended
    
    September 30, 2006
    
    
    Revenue
    
    
    September 30, 2005
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    352,334
    
    
    
    100.0
    %
    
    $
    358,672
    
    
    
    100.0
    %
    
    $
    (6,338
    )
    
    
    (1.8
    %)Cost and expensesCost of service
(exclusive of
depreciation and
amortization)
    
    
    (141,840
    )
    
    
    (40.3
    %)
    
    
    (147,009
    )
    
    
    (41.0
    %)
    
    
    5,169
    
    
    
    (3.5
    %)Selling, operating, and
general
    
    
    (176,930
    )
    
    
    (50.2
    %)
    
    
    (177,712
    )
    
    
    (49.5
    %)
    
    
    782
    
    
    
    (0.4
    %)Depreciation and
amortization
    
    
    (50,103
    )
    
    
    (14.2
    %)
    
    
    (57,269
    )
    
    
    (16.0
    %)
    
    
    7,166
    
    
    
    (12.5
    %)Loss on sale of property
and equipment
    
    
    (31
    )
    
    
    (0.0
    %)
    
    
    
    
    
    
    0.0
    %
    
    
    (31
    )
    
    NMTotal cost and expenses
    
    
    (368,904
    )
    
    
    (104.7
    %)
    
    
    (381,990
    )
    
    
    (106.5
    %)
    
    
    13,086
    
    
    
    (3.4
    %)Loss from operations
    
    
    (16,570
    )
    
    
    (4.7
    %)
    
    
    (23,318
    )
    
    
    (6.5
    %)
    
    
    6,748
    
    
    
    (28.9
    %)Interest income
    
    
    2,111
    
    
    
    0.6
    %
    
    
    2,488
    
    
    
    0.7
    %
    
    
    (377
    )
    
    
    (15.2
    %)Investment gain (loss)
    
    
    37
    
    
    
    0.0
    %
    
    
    (676
    )
    
    
    (0.2
    %)
    
    
    713
    
    
    
    (105.5
    %)Interest expense, net
    
    
    (8,550
    )
    
    
    (2.4
    %)
    
    
    (9,128
    )
    
    
    (2.5
    %)
    
    
    578
    
    
    
    (6.3
    %)Net loss
    
    
    (22,972
    )
    
    
    (6.5
    %)
    
    
    (30,634
    )
    
    
    (8.5
    %)
    
    
    7,662
    
    
    
    (25.0
    %)Preferred stock accretion
    
    
    (3,387
    )
    
    
    (1.0
    %)
    
    
    (3,221
    )
    
    
    (0.9
    %)
    
    
    (166
    )
    
    
    5.2
    %Net loss applicable to
common shares
    
    $
    (26,359
    )
    
    
    (7.5
    %)
    
    $
    (33,855
    )
    
    
    (9.4
    %)
    
    $
    7,496
    
    
    
    (22.1
    %)Net loss per common
share, basic and diluted
    
    $
    (0.14
    )
    
    
    
    
    
    $
    (0.19
    )Weighted average shares,
basic and diluted
    
    
    182,001,285
    
    
    
    
    
    
    
    181,933,035Gross margin (1)
    
    $
    210,494
    
    
    
    59.7
    %
    
    $
    211,663
    
    
    
    59.0
    %
    
    $
    (1,169
    )
    
    
    (0.6
    %)
 19




---



##### 



% of
    
    
    
    
    
    
    % ofConsolidated
    
    
    
    
    
    
    ConsolidatedNine Months Ended
    
    September 30, 2006
    
    
    Revenue
    
    
    September 30, 2005
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    1,056,307
    
    
    
    100.0
    %
    
    $
    1,082,341
    
    
    
    100.0
    %
    
    $
    (26,034
    )
    
    
    (2.4
    %)Cost and expensesCost of service
(exclusive of
depreciation and
amortization)
    
    
    (449,310
    )
    
    
    (42.5
    %)
    
    
    (432,955
    )
    
    
    (40.0
    %)
    
    
    (16,355
    )
    
    
    3.8
    %Selling, operating, and
general
    
    
    (537,147
    )
    
    
    (50.9
    %)
    
    
    (557,179
    )
    
    
    (51.5
    %)
    
    
    20,032
    
    
    
    (3.6
    %)Depreciation and
amortization
    
    
    (154,837
    )
    
    
    (14.7
    %)
    
    
    (176,731
    )
    
    
    (16.3
    %)
    
    
    21,894
    
    
    
    (12.4
    %)Loss on sale of property
and equipment
    
    
    (31
    )
    
    
    (0.0
    %)
    
    
    
    
    
    
    0.0
    %
    
    
    (31
    )
    
    NMTotal cost and expenses
    
    
    (1,141,325
    )
    
    
    (108.0
    %)
    
    
    (1,166,865
    )
    
    
    (107.8
    %)
    
    
    25,540
    
    
    
    (2.2
    %)Loss from operations
    
    
    (85,018
    )
    
    
    (8.0
    %)
    
    
    (84,524
    )
    
    
    (7.8
    %)
    
    
    (494
    )
    
    
    0.6
    %Interest income
    
    
    6,207
    
    
    
    0.6
    %
    
    
    6,308
    
    
    
    0.6
    %
    
    
    (101
    )
    
    
    (1.6
    %)Investment gain
    
    
    37
    
    
    
    0.0
    %
    
    
    936
    
    
    
    0.1
    %
    
    
    (899
    )
    
    
    (96.0
    %)Interest expense, net
    
    
    (23,938
    )
    
    
    (2.3
    %)
    
    
    (25,720
    )
    
    
    (2.4
    %)
    
    
    1,782
    
    
    
    (6.9
    %)Net loss
    
    
    (102,712
    )
    
    
    (9.7
    %)
    
    
    (103,000
    )
    
    
    (9.5
    %)
    
    
    288
    
    
    
    (0.3
    %)Preferred stock accretion
    
    
    (10,048
    )
    
    
    (1.0
    %)
    
    
    (9,464
    )
    
    
    (0.9
    %)
    
    
    (584
    )
    
    
    6.2
    %Net loss applicable to
common shares
    
    $
    (112,760
    )
    
    
    (10.7
    %)
    
    $
    (112,464
    )
    
    
    (10.4
    %)
    
    $
    (296
    )
    
    
    0.3
    %Net loss per common
share, basic and diluted
    
    $
    (0.62
    )
    
    
    
    
    
    $
    (0.62
    )Weighted average shares,
basic and diluted
    
    
    181,960,722
    
    
    
    
    
    
    
    181,933,035Gross margin (1)
    
    $
    606,997
    
    
    
    57.5
    %
    
    $
    649,386
    
    
    
    60.0
    %
    
    $
    (42,389
    )
    
    
    (6.5
    %)
 
 NM= Not meaningful(1)
    
    Gross margin is a non-GAAP financial measure, which we define as revenue less cost of
service, and excludes depreciation and amortization expenses. Gross margin is not intended to
replace operating income (loss), net income (loss), cash flow or other measures of financial
performance reported in accordance with generally accepted accounting principles in the United
States. Rather, we consider gross margin to be an important financial measure of our operating
performance related solely to providing telecommunications services to our customers without taking
into account expenditures that are not directly related to providing such services. We believe that
gross margin allows management to further assess (i) our operating performance, (ii) profitability
across our customer base and (iii) trends in our competitive and regulatory environments.
Additionally, we believe that gross margin is a standard measure of operating performance that is
commonly reported and widely used by analysts, investors, and other interested parties in the
telecommunications industry. We believe gross margin provides investors with an alternative means
to evaluate the results of our operations. Gross margin as used in this document may not be
comparable to similarly titled measures reported by other companies due to differences in
accounting policies and differences in definition of gross margin. Therefore, we provide additional
information on the components of gross margin throughout this report and provide the
reconciliations to the most comparable GAAP financial measure. The following tables reconcile
reported net loss to gross margin, as defined above, for the respective periods presented (amounts
in thousands): Three Months Ended September 30,2006
    
    
    2005Net loss
    
    $
    (22,972
    )
    
    $
    (30,634
    )Selling, operating and general
    
    
    176,930
    
    
    
    177,712Interest income
    
    
    (2,111
    )
    
    
    (2,488
    )Investment (gain) loss, net
    
    
    (37
    )
    
    
    676Interest expense, net
    
    
    8,550
    
    
    
    9,128Loss on sale of property and equipment
    
    
    31
    
    
    
    Depreciation and amortization
    
    
    50,103
    
    
    
    57,269Gross margin
    
    $
    210,494
    
    
    $
    211,663
 Nine Months Ended September 30,2006
    
    
    2005Net loss
    
    $
    (102,712
    )
    
    $
    (103,000
    )Selling, operating and general
    
    
    537,147
    
    
    
    557,179Interest income
    
    
    (6,207
    )
    
    
    (6,308
    )Investment gains, net
    
    
    (37
    )
    
    
    (936
    )Interest expense, net
    
    
    23,938
    
    
    
    25,720Loss on sale of property and equipment
    
    
    31
    
    
    
    Depreciation and amortization
    
    
    154,837
    
    
    
    176,731Gross margin
    
    $
    606,997
    
    
    $
    649,386
 20




---



##### 



Revenue
  Three months ended September 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    % ChangeVoice services
    
    $
    179,261
    
    
    
    50.9
    %
    
    $
    182,026
    
    
    
    50.8
    %
    
    
    (1.5
    %)Data services
    
    
    107,178
    
    
    
    30.4
    %
    
    
    108,785
    
    
    
    30.3
    %
    
    
    (1.5
    %)Integrated voice and data services
    
    
    65,895
    
    
    
    18.7
    %
    
    
    67,861
    
    
    
    18.9
    %
    
    
    (2.9
    %)Total revenue
    
    $
    352,334
    
    
    
    100.0
    %
    
    $
    358,672
    
    
    
    100.0
    %
    
    
    (1.8
    %)
 Nine months ended September 30,% of
    
    
    
    
    
    
    % of2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    % ChangeVoice services
    
    $
    538,978
    
    
    
    51.0
    %
    
    $
    556,824
    
    
    
    51.5
    %
    
    
    (3.2
    %)Data services
    
    
    317,981
    
    
    
    30.1
    %
    
    
    324,955
    
    
    
    30.0
    %
    
    
    (2.1
    %)Integrated voice and data services
    
    
    199,348
    
    
    
    18.9
    %
    
    
    200,562
    
    
    
    18.5
    %
    
    
    (0.6
    %)Total revenue
    
    $
    1,056,307
    
    
    
    100.0
    %
    
    $
    1,082,341
    
    
    
    100.0
    %
    
    
    (2.4
    %)
 Voice
  Data
  Integrated Voice and Data Services
  21




---



##### 



Cost of service (excluding depreciation and amortization)
    Gross margin.
 Selling, operating and general.
 22




---



##### 



Depreciation and amortization
  Interest income
 Investment gain (loss), net
 Interest expense, net.
 Liquidity and Capital Resources
  Cash Flow
    23




---



##### 



Credit Facility and Borrowing Capacity
     Credit Risk
  Contractual Obligations
  24




---



##### 



OtherLong-Term
    
    
    OperatingCredit
    
    
    Contractual
    
    
    Lease
    
    
    Capital Lease
    
    
    TotalFacility
    
    
    Obligations
    
    
    Obligations
    
    
    Obligations
    
    
    ObligationsOctober  December 2006
    
    $
    
    
    
    $
    28,011
    
    
    $
    17,469
    
    
    $
    3,403
    
    
    $
    48,8832007
    
    
    
    
    
    
    101,444
    
    
    
    66,545
    
    
    
    3,854
    
    
    
    171,8432008
    
    
    
    
    
    
    90,493
    
    
    
    56,290
    
    
    
    2,398
    
    
    
    149,1812009
    
    
    327,098
    
    
    
    64,784
    
    
    
    48,327
    
    
    
    1,770
    
    
    
    441,9792010
    
    
    
    
    
    
    43,835
    
    
    
    42,432
    
    
    
    1,419
    
    
    
    87,686Thereafter
    
    
    
    
    
    
    146,320
    
    
    
    131,726
    
    
    
    12,491
    
    
    
    290,537Total minimum commitments
    
    $
    327,098
    
    
    $
    474,887
    
    
    $
    362,789
    
    
    $
    25,335
    
    
    $
    1,190,109
 Indemnification
  Comparison of Segment Financial Results
 Overview
   Depreciation
    
    
    Loss on Sale ofCost of
    
    
    SO&G
    
    
    and
    
    
    Property and
    
    
    Loss fromThree Months Ended September 30, 2006
    
    Revenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    Equipment
    
    
    OperationsXOC
    
    $
    351,799
    
    
    $
    141,992
    
    
    $
    174,322
    
    
    $
    48,454
    
    
    $
    31
    
    
    $
    (13,000
    )Nextlink
    
    
    751
    
    
    
    64
    
    
    
    2,608
    
    
    
    1,649
    
    
    
    
    
    
    
    (3,570
    )Intercompany eliminations
    
    
    (216
    )
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Consolidated
    
    $
    352,334
    
    
    $
    141,840
    
    
    $
    176,930
    
    
    $
    50,103
    
    
    $
    31
    
    
    
    (16,570
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,111Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,550
    )Investment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (22,972
    )
 Depreciation
    
    
    Loss on Sale ofCost of
    
    
    SO&G
    
    
    and
    
    
    Property and
    
    
    Loss fromThree Months Ended September 30, 2005
    
    Revenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    Equipment
    
    
    OperationsXOC
    
    $
    358,583
    
    
    $
    147,009
    
    
    $
    177,147
    
    
    $
    55,621
    
    
    $
    
    
    
    $
    (21,194
    )Nextlink
    
    
    89
    
    
    
    
    
    
    
    565
    
    
    
    1,648
    
    
    
    
    
    
    
    (2,124
    )Intercompany eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Consolidated
    
    $
    358,672
    
    
    $
    147,009
    
    
    $
    177,712
    
    
    $
    57,269
    
    
    $
    
    
    
    
    (23,318
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,488Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,128
    )Investment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (676
    )Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (30,634
    )
 25




---



##### 



Depreciation
    
    
    Loss on Sale ofCost of
    
    
    SO&G
    
    
    and
    
    
    Property and
    
    
    Loss fromNine Months Ended September 30, 2006
    
    Revenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    Equipment
    
    
    OperationsXOC
    
    $
    1,055,545
    
    
    $
    449,462
    
    
    $
    527,144
    
    
    $
    149,886
    
    
    $
    31
    
    
    $
    (70,978
    )Nextlink
    
    
    978
    
    
    
    64
    
    
    
    10,003
    
    
    
    4,951
    
    
    
    
    
    
    
    (14,040
    )Intercompany eliminations
    
    
    (216
    )
    
    
    (216
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Consolidated
    
    $
    1,056,307
    
    
    $
    449,310
    
    
    $
    537,147
    
    
    $
    154,837
    
    
    $
    31
    
    
    
    (85,018
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,207Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,938
    )Investment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (102,712
    )
 Depreciation
    
    
    Loss on Sale ofCost of
    
    
    SO&G
    
    
    and
    
    
    Property and
    
    
    Loss fromNine Months Ended September 30, 2005
    
    Revenue
    
    
    Service
    
    
    Expenses
    
    
    amortization
    
    
    Equipment
    
    
    OperationsXOC
    
    $
    1,082,252
    
    
    $
    432,955
    
    
    $
    555,787
    
    
    $
    172,351
    
    
    $
    
    
    
    $
    (78,841
    )Nextlink
    
    
    89
    
    
    
    
    
    
    
    1,392
    
    
    
    4,380
    
    
    
    
    
    
    
    (5,683
    )Intercompany eliminations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Consolidated
    
    $
    1,082,341
    
    
    $
    432,955
    
    
    $
    557,179
    
    
    $
    176,731
    
    
    $
    
    
    
    
    (84,524
    )Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,308Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,720
    )Investment gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    936Net loss (consolidated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (103,000
    )
 XOC Segment
  Nextlink Segment
  % of Nextlink
    
    
    
    
    
    
    % of NextlinkThree Months Ended
    
    September 30, 2006
    
    
    Revenue
    
    
    September 30, 2005
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    751
    
    
    
    100.0
    %
    
    $
    89
    
    
    
    100.0
    %
    
    $
    662
    
    
    
    743.8
    %Costs and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    64
    
    
    
    8.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    64
    
    
    NMSelling, operating, and general
    
    
    2,608
    
    
    
    347.3
    %
    
    
    565
    
    
    
    634.8
    %
    
    
    2,043
    
    
    
    361.6
    %Depreciation and amortization
    
    
    1,649
    
    
    
    219.6
    %
    
    
    1,648
    
    
    
    1,851.7
    %
    
    
    1
    
    
    
    0.1
    %Total costs and expenses
    
    
    4,321
    
    
    
    575.4
    %
    
    
    2,213
    
    
    
    2,486.5
    %
    
    
    2,108
    
    
    
    95.3
    %Segment loss
    
    $
    (3,570
    )
    
    
    (475.4
    %)
    
    $
    (2,124
    )
    
    
    (2,386.5
    %)
    
    $
    (1,446
    )
    
    
    68.1
    %
 % of Nextlink
    
    
    
    
    
    
    % of NextlinkNine Months Ended
    
    September 30, 2006
    
    
    Revenue
    
    
    September 30, 2005
    
    
    Revenue
    
    
    Change
    
    
    % ChangeRevenue
    
    $
    978
    
    
    
    100.0
    %
    
    $
    89
    
    
    
    100.0
    %
    
    $
    889
    
    
    
    998.9
    %Costs and expensesCost of service (exclusive of
depreciation and amortization)
    
    
    64
    
    
    
    6.5
    %
    
    
    
    
    
    
    0.0
    %
    
    
    64
    
    
    NMSelling, operating, and general
    
    
    10,003
    
    
    
    1,022.8
    %
    
    
    1,392
    
    
    
    1,564.0
    %
    
    
    8,611
    
    
    
    618.6
    %Depreciation and amortization
    
    
    4,951
    
    
    
    506.2
    %
    
    
    4,380
    
    
    
    4,921.3
    %
    
    
    571
    
    
    
    13.0
    %Total costs and expenses
    
    
    15,018
    
    
    
    1,535.5
    %
    
    
    5,772
    
    
    
    6,485.3
    %
    
    
    9,246
    
    
    
    160.2
    %Segment loss
    
    $
    (14,040
    )
    
    
    (1,435.6
    %)
    
    $
    (5,683
    )
    
    
    (6,385.4
    %)
    
    $
    (8,357
    )
    
    
    147.1
    %
 26




---



##### 



Revenue
 Cost of service (exclusive of depreciation and amortization)
 Selling, operating and general.
 Depreciation and amortization
 Critical Accounting Policies and Estimates
  Accounting for Stock-based Compensation
   27




---



##### 



Change in Accounting Estimate
  Accounting Affected by Regulatory Matters
 th
 Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of SFAS No. 109
 Fair Value Measurements
 28




---



##### 



Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
  Regulatory Overview
 Overview
     Federal Regulation
    29




---



##### 



FCC Regulation of Wireless Services
   FCC Regulation of LMDS and 39 GHz Services in Particular
 Generally.
 Performance Requirements.
   Auctions.
 Other Issues Affecting our Spectrum Licenses.
 30




---



##### 



Additional Federal Regulations
  Unbundling of Incumbent Network Elements
 United States Telecom Association v. FCC
  Verizon Petitions for Forbearance from Unbundling Requirements
 VoIP
 AT&T Declaratory Ruling Re: VoIP
 31




---



##### 



ILEC Provision of Broadband Telecommunications Services and Information Services e.g
 Intercarrier Compensation Reform
 Cost-based TELRIC Pricing
 VoIP 911 Regulation
 32




---



##### 



CALEA Regulation
 Georgia Public Service Commission Petition for Declaratory Ruling re: 271 Pricing.
 AT&T/BellSouth Consolidation
 State and Local Regulation
  Wireless Services Affected by State Regulations
   Item 3. Quantitative and Qualitative Disclosures about Market Risk.
  33




---



##### 



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   PART II. OTHER INFORMATION
 Item 1. Legal Proceedings.
  Allegiance Telecom Liquidating Trust Litigation
   34




---



##### 



Litigation Relating to the Wireline Sale
 R(2) Investments v. Carl C. Icahn, et al.
 Allegiance Telecom
Liquidating Trust v. Carl C. Icahn, et al.
 Donald
J. Hillenmeyer, Jr. v. XO Communications, Inc., et al.
 35




---



##### 



Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
   Verizon Indemnification Notice
 Aerotel, LTD v Verizon Company et al
 36




---



##### 



Verizon Indemnification Notice II
 TGIP, Inc. v AT&T Corp, Verizon Communications et al
 Item 1A. Risk Factors.
  Risks Related to Liquidity, Financial Resources, and Capitalization
 The covenants in the Credit Facility restrict the Companys financial and operational flexibility,
which could have an adverse affect on its results of operations.
   37




---



##### 




    
    they may impair the Companys ability to obtain additional financing in the future;
    
    they may limit the Companys flexibility in planning for or reacting to changes in
market conditions; and
    
    they may cause the Company to be more vulnerable in the event of a downturn in its
business.
 The Company may not prevail in its $50 million claim against the ATLT, and it may not be successful
in defending against the ATLTs counterclaim.
   The agreement to sell the Companys national wireline telecommunications business was terminated as
was a further exploration of additional sale opportunities, and the Company has now chosen to focus
on its core businesses and review its remaining alternatives for addressing its liquidity and
financing challenges.
   38




---



##### 



The Company incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of its cash requirements.
  Risks Related to the Companys Wireline Operations
 In the event of a substantial failure of the Companys operations support systems, including the
systems for sales tracking, order entry and provisioning, and billing, the Companys Disaster
Recovery System may not permit the recovery of its systems operations and/or perform critical
aspects of its services for an extended period, which would adversely affect the Companys revenues
and/or capital resources.
  The Companys rights to the use of the unlit capacity that makes up its network may be affected by
the financial health of the Companys fiber providers.
  The Company may not be able to continue to connect its network to ILEC networks or to maintain
Internet peering arrangements on favorable terms, which would impair the Companys growth and
performance.
   The Company depends on a limited number of third party service providers for the performance of
several of its business operations, including payroll and billing services.
  39




---



##### 



The Company may be unable to adequately protect its intellectual property or rights to licenses for
use of third-party intellectual property, and may be subject to claims that the Company infringes
the intellectual property of others, which could substantially harm the Companys business.
  The Company experiences turnover among its experienced and trained employee base, which could
result in the Companys inability to continue performing certain functions and completing certain
initiatives in accordance with its existing budgets and operating plans.
  Several customers account for a significant portion of the Companys revenue, and some of its
customer agreements may not continue due to bankruptcies, acquisitions, non-renewal, or other
factors.
  40




---



##### 



Risks Related to Our Wireless Operations
 The Companys wireless business is in the early stages of development and the Company may not be
able to implement its business strategy or to obtain new customers.
  Two customers, one affiliated, account for nearly all of Nextlinks revenue.
  The Companys licenses may not be renewed upon expiration.
     A key aspect of the Companys business strategy is to provide backhaul services for providers of
cellular wireless mobile telecommunications, and its business will depend to a substantial degree
on the widespread adoption of bandwidth-intensive applications, such as 3G applications. 41
        The Company may not be able to successfully execute the necessary real estate transactions, or to
negotiate acceptable rates in those agreements for placing antennas and having access to necessary
equipment.
  Additional spectrum may become available from the FCC, increasing the number of and/or viability of
the Companys competitors or even allowing the Companys customers or potential customers to obtain
their own spectrum outright, reducing their need to obtain spectrum or services from the Company.
   The Company is dependent on key personnel and its success depends on its ability to attract, train
and retain additional qualified personnel.
  FCC Regulation of radio frequency emissions and radio frequency environments may increase the
Companys costs and/or limit its operations.
  42




---



##### 



Risks Related to Competition and the Companys Industry
 Technological advances and regulatory changes are eroding traditional barriers between formerly
distinct telecommunications markets, which could increase the competition the Company faces and put
downward pressure on prices, which could impair its results.
  The telecommunications industry is highly competitive, and has experienced the consolidation of
many existing competitors and the introduction of significant new competitors.
  The Company is subject to comprehensive and continually evolving regulation.
   Risks Related to the Companys Common Stock
 An entity owned and controlled by Mr. Icahn is the Companys majority stockholder.
  43




---



##### 



Future sales or issuances of the Companys common stock could adversely affect the Companys stock
price and/or its ability to raise capital.
    Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Item 3. Defaults Upon Senior Securities.
  Item 4. Submission of Matters to a Vote of Security Holders.
  Item 5. Other Information.
  44




---



##### 



Item 6. Exhibits.
 2.1
    
    
    Agreement and Plan of Merger, dated as of February 28, 2006, by and
among XO Communications, Inc., XO Holdings, Inc. and XO
Communications, LLC (Incorporated herein by reference to exhibit 2.1
filed with the Current Report on Form 8-K of XO Holdings, Inc., filed
on March 6, 2006)2.2
    
    
    Amendment No. 1 to Equity Purchase Agreement, dated as of March 1,
2006, by and among XO Holdings, Inc., XO Communications, LLC (as
successor by merger to XO Communications, Inc.) and Elk Associates
LLC (Incorporated herein by reference to exhibit 2.2 filed with the
Current Report on Form 8-K of XO Holdings, Inc., filed on March 6,
2006)2.3
    
    
    Letter Agreement, dated March 30, 2006, between XO Holdings, Inc.
and Elk Associates LLC (Incorporated herein by reference to exhibit
2.1 filed with the Current Report on Form 8-K of XO Holdings, Inc.,
filed on September 30, 2006)3.1
    
    
    Certificate of Incorporation of XO Holdings, Inc., as filed with the
Secretary of State of the State of Delaware on October 25, 2005
(Incorporated herein by reference to exhibit 3.1 filed with the
Current Report on Form 8-K of XO Holdings, Inc., filed on March 6,
2006)3.2
    
    
    Certificate of Designation of the Powers, Preferences and Relative,
Participating, Optional and other Special Rights of the 6% Class A
Convertible Preferred Stock and Qualifications, Limitations and
Restrictions thereof, as filed with the Secretary of State of the
State of Delaware on February 28, 2006 (Incorporated herein by
reference to exhibit 3.2 filed with the Current Report on Form 8-K of
XO Holdings, Inc., filed on March 6, 2006)3.3
    
    
    Bylaws of XO Holdings, Inc. (Incorporated herein by reference to
exhibit 3.3 filed with the Current Report on Form 8-K of XO Holdings,
Inc., filed on March 6, 2006)10.4
    
    
    Waiver Agreement, dated as of April 28, 2006, between the Company,
its subsidiaries and Arnos Corp., as Requisite Lenders (Incorporated
herein by reference to exhibit 10.1 filed with the Current Report on
Form 8-K/A of XO Holdings, Inc., filed on May 2, 2006)10.5
    
    
    Amendment No. 1 to Registration Rights Agreement made and enacted by
XO Holdings, Inc. as of April 28, 2006 (Incorporated herein by
reference to exhibit 10.2 filed with the Current Report on Form 8-K/A
of XO Holdings, Inc., filed on May 2, 2006)10.6
    
    
    Waiver Agreement, dated as of November 3, 2006, between the Company,
its subsidiaries and Arnos Corp., as Requisite Lenders (Incorporated
herein)31.1
    
    
    Rule 13a  14(a)/15(d)  14(a) Certifications31.2
    
    
    Rule 13a  14(a)/15(d)  14(a) Certifications32.1
    
    
    Certifications pursuant to 18 U.S.C. Section 1350
 45




---



##### 



Date: November 9, 2006
    XO HOLDINGS, INC.By:
    /s/ Gregory W. FreibergName:
    Gregory W. FreibergTitle:
    Senior Vice President and Chief Financial
Officer
(Principal Financial Officer) 46