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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

Commission file number: 0-30900

XO Communications, Inc.

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(Exact name of registrant as specified in its charter)


Delaware
    
    54-1983517(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)


11111 Sunset Hills Road, Reston, VA
    
    20190(Address of principal executive offices)
    
    (Zip Code)




(703) 547-2000  (Registrants telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [X] NO [ ]

As of August 6, 2003, the number of shares of common stock of XO
Communications, Inc. issued and outstanding was 96,049,026.





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XO Communications, Inc. and Subsidiaries
Index to Form 10-Q

PagePart I
    
    Financial InformationItem 1.
    
    XO Communications, Inc. and Subsidiaries Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets for Reorganized XO as of June 30, 2003 and January 1, 2003
      and for Predecessor XO as of December 31, 2002
    
    1Condensed Consolidated Statements of Operations for Reorganized XO for the Three Months
      Ended June 30, 2003 and for Predecessor XO for the Three Months Ended June 30, 2002
    
    2Condensed Consolidated Statements of Operations for Reorganized XO for
the Six Months Ended       June 30, 2003 and for Predecessor XO for January 1, 2003 and for the Six Months Ended June 30, 2002
    
    3Condensed Consolidated Statements of Cash Flows for Reorganized XO for the Six Months
      Ended June 30, 2003 and for Predecessor XO for January 1, 2003 and for the Six Months
      Ended June 30, 2002
    
    4Notes to Condensed Consolidated Financial Statements
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    36Item 4.
    
    Controls and Procedures
    
    36Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    37Item 2.
    
    Changes in Securities and Use of Proceeds
    
    37Item 3.
    
    Defaults Upon Securities
    
    37Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    37Item 5.
    
    Other Information
    
    37Item 6.
    
    Exhibits and Reports on Form 8-K
    
    37Signatures
    
    39Certifications
    
    40






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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

Reorganized
XO
    

Reorganized
XO
    

Predecessor
XOJune 30,
    
    January 1,
    
    December 31,2003
    
    2003
    
    2002(Unaudited)
    
    (Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    361,161
    
    
    $
    314,038
    
    
    $
    314,038Marketable securities
    
    
    2,247
    
    
    
    246,945
    
    
    
    246,945Investment in debt securities
    
    
    158,516
    
    
    
    
    
    
    
    Accounts receivable, net of allowance for doubtful
accounts of $39,804 at June 30, 2003; and $37,030, at
January 1, 2003 and at December 31, 2002, respectively
    
    
    109,415
    
    
    
    116,541
    
    
    
    116,541Other current assets
    
    
    18,884
    
    
    
    35,192
    
    
    
    83,480Total current assets
    
    
    650,223
    
    
    
    712,716
    
    
    
    761,004Property and equipment, net
    
    
    475,288
    
    
    
    476,588
    
    
    
    2,780,589Fixed wireless licenses and other intangibles, net
    
    
    122,596
    
    
    
    135,678
    
    
    
    984,614Other assets, net
    
    
    45,924
    
    
    
    23,108
    
    
    
    59,289Total assets
    
    $
    1,294,031
    
    
    $
    1,348,090
    
    
    $
    4,585,496LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    62,747
    
    
    $
    67,268
    
    
    $
    63,729Accrued liabilities
    
    
    200,713
    
    
    
    235,192
    
    
    
    266,102Current liabilities subject to compromise
    
    
    
    
    
    
    
    
    
    
    5,497,207Total current liabilities
    
    
    263,460
    
    
    
    302,460
    
    
    
    5,827,038Long-term liabilities not subject to compromise
    
    
    
    
    
    
    
    
    
    
    75,242Long-term liabilities subject to compromise
    
    
    
    
    
    
    
    
    
    
    7,182Long-term debt
    
    
    517,274
    
    
    
    500,000
    
    
    
    Other long-term liabilities
    
    
    74,645
    
    
    
    70,630
    
    
    
    Total liabilities
    
    
    855,379
    
    
    
    873,090
    
    
    
    5,909,462Predecessor XO redeemable preferred stock: par value
$0.01 per share, 25,000,000 shares authorized: 7,856,918
shares issued and outstanding, aggregate liquidation
preference of $1,693,293, subject to compromise
    
    
    
    
    
    
    
    
    
    
    1,708,316Commitments and contingenciesStockholders equity (deficit):Reorganized XO preferred stock: par value $0.01 per
share, 200,000,000 shares authorized: none issued
    
    
    
    
    
    
    
    
    
    
    Reorganized XO common stock, par value $0.01 per
share, 1,000,000,000 shares authorized: 95,740,826 and
95,000,001 shares issued and outstanding on June 30,
2003 and January 1, 2003, respectively
    
    
    478,957
    
    
    
    475,000
    
    
    
    Predecessor XO common stock, par value $0.02 per
share, Class A, 1,000,000,000 shares authorized:331,033,219 shares issued and outstanding, Class B,
120,000,000 shares authorized: 104,423,158 shares
issued and outstanding
    
    
    
    
    
    
    
    
    
    
    4,628,139Deferred compensation
    
    
    
    
    
    
    
    
    
    
    (8,500
    )Accumulated other comprehensive income
    
    
    19
    
    
    
    
    
    
    
    2,512Accumulated deficit
    
    
    (40,324
    )
    
    
    
    
    
    
    (7,654,433
    )Total stockholders equity (deficit)
    
    
    438,652
    
    
    
    475,000
    
    
    
    (3,032,282
    )Total liabilities and stockholders equity (deficit)
    
    $
    1,294,031
    
    
    $
    1,348,090
    
    
    $
    4,585,496


See accompanying notes to the unaudited condensed consolidated financial statements.

1



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XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)

Reorganized XO
    
    Predecessor XOThree months ended
    
    Three months endedJune 30,
    
    June 30,2003
    
    2002Revenue
    
    $
    283,918
    
    
    $
    325,480Costs and expenses:Cost of service
    
    
    104,898
    
    
    
    134,346Selling, operating, and general
    
    
    165,042
    
    
    
    188,253Stock-based compensation
    
    
    
    
    
    
    8,891Depreciation and amortization
    
    
    27,238
    
    
    
    167,843Restructuring and asset write-downs
    
    
    
    
    
    
    2,918Total costs and expenses
    
    
    297,178
    
    
    
    502,251Loss from operations
    
    
    (13,260
    )
    
    
    (176,771
    )Interest income
    
    
    4,671
    
    
    
    4,225Interest
expense, net (contractual interest was $121,512 for the three
months ended June 30, 2002)
    
    
    (11,687
    )
    
    
    (104,419
    )Other income, net
    
    
    440
    
    
    
    2Reorganization expense, net
    
    
    
    
    
    
    (69,170
    )Net loss
    
    
    (19,836
    )
    
    
    (346,133
    )Recognition of preferred stock modification fee, net  reorganization item
    
    
    
    
    
    
    78,703Preferred stock dividends and accretion of preferred stock redemption
obligation, net
    
    
    
    
    
    
    (19,421
    )Net loss applicable to common shares
    
    $
    (19,836
    )
    
    $
    (286,851
    )Net loss per common share, basic and diluted:Net loss
    
    
    (0.21
    )
    
    
    (0.78
    )Recognition of preferred stock modification fee, net  reorganization
item
    
    
    
    
    
    
    0.17Preferred stock dividends and accretion of preferred stock redemption
obligation, net
    
    
    
    
    
    
    (0.04
    )Net loss per common share, basic and diluted
    
    $
    (0.21
    )
    
    $
    (0.65
    )Weighted average shares, basic and diluted
    
    
    95,129,610
    
    
    
    442,219,619


See accompanying notes to the unaudited condensed consolidated financial statements.

2



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##### 



XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)

Reorganized XO
    
    Predecessor XOSix months ended
    
    Six months ended
    
    Predecessor XOJune 30,
    
    June 30,
    
    January 1,2003
    
    2002
    
    2003Revenue
    
    $
    570,011
    
    
    $
    658,885
    
    
    $
    Costs and expenses:Cost of service
    
    
    212,404
    
    
    
    274,713
    
    
    
    Selling, operating, and general
    
    
    331,277
    
    
    
    393,503
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    17,986
    
    
    
    Depreciation and amortization
    
    
    53,605
    
    
    
    329,199
    
    
    
    Restructuring and asset write-downs
    
    
    
    
    
    
    2,918
    
    
    
    Total costs and expenses
    
    
    597,286
    
    
    
    1,018,319
    
    
    
    Loss from operations
    
    
    (27,275
    )
    
    
    (359,434
    )
    
    
    Interest income
    
    
    7,881
    
    
    
    9,765
    
    
    
    Interest
expense, net (contractual interest was $241,115 for
the six months ended June 30, 2002)
    
    
    (21,370
    )
    
    
    (225,145
    )
    
    
    Other income (loss), net
    
    
    440
    
    
    
    (200
    )
    
    
    Reorganization gain (expense), net
    
    
    
    
    
    
    (70,146
    )
    
    
    3,032,282Net income (loss) before cumulative effect of accounting change
    
    
    (40,324
    )
    
    
    (645,160
    )
    
    
    3,032,282Cumulative effect of accounting change
    
    
    
    
    
    
    (1,876,626
    )
    
    
    Net income (loss)
    
    
    (40,324
    )
    
    
    (2,521,786
    )
    
    
    3,032,282Recognition of preferred stock modification fee, net 
reorganization item
    
    
    
    
    
    
    78,703
    
    
    
    Preferred stock dividends and accretion of preferred stock
redemption obligation, net
    
    
    
    
    
    
    (42,247
    )
    
    
    Net income (loss) applicable to common shares
    
    $
    (40,324
    )
    
    $
    (2,485,330
    )
    
    $
    3,032,282Net income (loss) per common share, basic and diluted:Net income (loss) before cumulative effect of accounting change
    
    $
    (0.42
    )
    
    $
    (1.46
    )
    
    $
    6.86Cumulative effect of accounting change
    
    
    
    
    
    
    (4.24
    )
    
    
    Net income (loss)
    
    
    (0.42
    )
    
    
    (5.70
    )
    
    
    6.86Recognition of preferred stock modification fee, net 
reorganization item
    
    
    
    
    
    
    0.17
    
    
    
    Preferred stock dividends and accretion of preferred stock
redemption obligation, net
    
    
    
    
    
    
    (0.09
    )
    
    
    Net income (loss) per common share, basic and diluted
    
    $
    (0.42
    )
    
    $
    (5.62
    )
    
    $
    6.86Weighted average shares, basic and diluted
    
    
    95,071,784
    
    
    
    442,212,843
    
    
    
    441,964,342


See accompanying notes to the unaudited condensed consolidated financial statements.

3



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XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)

Reorganized XO
    
    Predecessor XOSix months ended
    
    Six months ended
    
    Predecessor XOJune 30,
    
    June 30,
    
    January 1,2003
    
    2002
    
    2003OPERATING ACTIVITIES:Net income (loss)
    
    $
    (40,324
    )
    
    $
    (2,521,786
    )
    
    $
    3,032,282Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Non-cash reorganization items
    
    
    
    
    
    
    57,189
    
    
    
    (3,032,282
    )Depreciation and amortization
    
    
    53,605
    
    
    
    329,199
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    17,986
    
    
    
    Cumulative effect of accounting change
    
    
    
    
    
    
    1,876,626
    
    
    
    Accretion of interest
    
    
    21,234
    
    
    
    
    
    
    
    Changes in assets and liabilities:Accounts receivable
    
    
    11,310
    
    
    
    42,617
    
    
    
    Other assets
    
    
    6,057
    
    
    
    (17,845
    )
    
    
    Accounts payable
    
    
    (120
    )
    
    
    
    
    
    
    Accrued liabilities
    
    
    (30,010
    )
    
    
    
    
    
    
    Other liabilities subject to compromise
    
    
    
    
    
    
    197,572
    
    
    
    Other liabilities not subject to compromise
    
    
    
    
    
    
    (45,733
    )
    
    
    Net cash provided by (used in) operating activities
    
    
    21,752
    
    
    
    (64,175
    )
    
    
    INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (38,994
    )
    
    
    (149,467
    )
    
    
    Sales of marketable securities
    
    
    312,232
    
    
    
    317,643
    
    
    
    Purchases of marketable securities and debt securities
    
    
    (226,030
    )
    
    
    (15,786
    )
    
    
    Purchases of escrowed/pledged securities
    
    
    (25,000
    )
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    22,208
    
    
    
    152,390
    
    
    
    FINANCING ACTIVITIES:Repayments of capital leases
    
    
    (541
    )
    
    
    (5,096
    )Proceeds from issuance of common stock
    
    
    3,704
    
    
    
    
    
    
    
    Net cash provided by (used in) financing activities
    
    
    3,163
    
    
    
    (5,096
    )
    
    
    Effect of exchange rate changes on cash
    
    
    
    
    
    
    (1,256
    )
    
    
    Net increase in cash and cash equivalents
    
    
    47,123
    
    
    
    81,863
    
    
    
    Cash and cash equivalents, beginning of period
    
    
    314,038
    
    
    
    246,189
    
    
    
    314,038Cash and cash equivalents, end of period
    
    $
    361,161
    
    
    $
    328,052
    
    
    $
    314,038SUPPLEMENTAL DATA:Non-cash financing and investing activities:Accrued redeemable preferred stock dividends,
payable in shares of redeemable preferred stock
    
    $
    
    
    
    $
    45,683
    
    
    $
    Cash paid for interest
    
    $
    292
    
    
    $
    30,452
    
    
    $
    


See accompanying notes to the unaudited condensed consolidated financial
statements.

4



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XO Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. BASIS OF PRESENTATION

The condensed consolidated financial statements of XO Communications, Inc.
(XO Parent) and its subsidiaries (together with its predecessors,
collectively referred to as the Company or XO) are unaudited and have been
prepared in accordance with generally accepted accounting principles in the
United States for interim financial statements and the Securities and Exchange
Commission (the Commission) instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles in the United
States for complete financial statements. As discussed further in note 2, the
condensed consolidated statements of operations and cash flows for reorganized
XO for the three and six months ended June 30, 2003, show the operations of the
reorganized Company from and including January 1, 2003, the date that the
reorganized Company applied fresh start accounting, through June 30, 2003.
Predecessor XOs January 1, 2003 statements of operations and cash flows
reflect only the effect of the reorganization and the application of fresh
start as of such date and do not reflect any operating results. Operating
results for the three and six month period ended June 30, 2003 are not
necessarily indicative of the results that may be expected for any subsequent
quarterly period, or for the year ending December 31, 2003. In the opinion of
management, the unaudited condensed consolidated financial statements contain
all the adjustments (consisting of those of a normal recurring nature)
considered necessary to present fairly the financial position and the results
of operations and cash flows for the periods presented in conformity with
accounting principles generally accepted in the United States applicable to
interim periods. The accompanying financial statements should be read in
conjunction with the audited consolidated financial statements of XO, included
in its Annual Report on Form 10-K for the year ended December 31, 2002 (the
2002 Annual Report).

As
further discussed in the 2002 Annual Report, on June 17, 2002 (the
Petition Date), XO Parent filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code (the Bankruptcy Code) with the United
States Bankruptcy Court for the Southern District of New York (the Bankruptcy
Court). XO Parent emerged from the Bankruptcy Court proceedings pursuant to
the terms of its third amended plan of reorganization (the Plan of
Reorganization) on January 16, 2003 (the Effective Date). As discussed in
note 2, the Company implemented the fresh start accounting provisions (fresh
start) of the American Institute of Certified Public Accountants Statement of
Position 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code, (SOP 90-7) as of January 1, 2003. Under fresh start, the
fair value of the reorganized Company was allocated among its assets and
liabilities, and its accumulated deficit as of January 1, 2003 was eliminated.
As discussed in note 2, the implementation of fresh start has resulted in a
substantial reduction in the carrying value of the Companys long-lived assets,
including property and equipment, fixed wireless licenses, other intangible
assets and other noncurrent assets. As a result, the predecessor financial
statements are not comparable to financial statements of the reorganized
Company.

2. REORGANIZATION AND FRESH START ACCOUNTING

On the Effective Date, XO Parent consummated its Plan of Reorganization
and emerged from its Chapter 11 reorganization proceedings with a significantly
restructured balance sheet. As described in more detail in the 2002 Annual
Report, the consummation of the Plan of Reorganization resulted in the
following changes in XO Parents capital structure:



| |  |  | The conversion of $1.0 billion of loans under its pre-petition
secured credit facility into $500.0 million of outstanding principal
amount under a new credit agreement (the New Credit Agreement);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The extinguishment of all amounts due under its pre-petition
unsecured senior and subordinated notes and certain general unsecured
obligations;                                                      
|
| |  |  | The cancellation of all outstanding shares and interests in its
pre-petition preferred stock and pre-petition common stock; and                                                                      

5



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##### 





| |  |  | The issuance of approximately 95.0 million shares of common stock
of the reorganized Company (New Common Stock) and warrants to
purchase up to an additional 23.75 million shares of New Common Stock
of the reorganized Company. As part of the distribution process, XO
Parent is holding approximately 1.0 million shares of New Common Stock
and warrants to purchase approximately 6.2 million shares of New Common
Stock in a reserve for distribution to holders of XO Parents
pre-petition unsecured senior notes and pre-petition general unsecured
claims after the resolution of disputed bankruptcy claims.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with the Plan of Reorganization, XO Parent intends to issue
to certain holders of claims of interest in XO Parent, who held such claims
and/or interests as of the November 15, 2002 record date, rights to subscribe
for up to 40.0 million shares of New Common Stock, at $5.00 per share, through
a rights offering, (the Rights Offering). In addition, pursuant to a
stipulation relating to the settlement of a claim made against XO Parent
purportedly on behalf of its shareholders (the Stockholder Stipulation),
holders of shares of pre-petition class A common stock of XO Parent will
receive additional nontransferable rights exercisable for up to 3.3 million
shares of New Common Stock to the extent that the rights otherwise allocable to
such holders in the Rights Offering are exercisable for less than 3.3 million
shares of New Common Stock, at $5.00 per share. Accordingly, not less than
40.0 million shares and not more than 43.3 million shares will be offered in
the Rights Offering. XO Parent filed a registration statement with the
Commission on July 22, 2003 with respect to the shares of New Common Stock
issuable upon exercise of these rights.

The Company adopted fresh start as of January 1, 2003. Although the
Effective Date of the Plan of Reorganization was January 16, 2003, due to the
immateriality of the results of operations for the period between January 1,
2003 and the Effective Date, the Company has accounted for the consummation of
the Plan of Reorganization as if it had occurred on January 1, 2003 and
implemented fresh start as of that date. Fresh start required that the Company
adjust the historical cost of its assets and liabilities to their fair values
as determined by the reorganization value of the Company and that the
reorganization value be allocated among the reorganized entitys net assets in
conformity with procedures specified by SFAS No. 141, Business Combinations,
(SFAS No. 141). The Company engaged an independent appraiser to assist in the
allocation of the reorganization value to the reorganized Companys assets and
liabilities by determining the fair market value of its property and equipment,
intangible assets and certain obligations related to its facility leases. The
accompanying January 1, 2003 statement of operations and balance sheet show the
impact of this valuation, but do not reflect any of the Companys operating
results as attributable to that date. A reconciliation of the adjustments
recorded in connection with the reorganization and the adoption of fresh start
is presented below (in thousands):

|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |         |           | 
|-------------------------------------------------- | ----------------------------------------- | -------------------- | --------- | -------------- | --------- | -------------- | ---------- | ---------- | - |  |  | --------------- | - | ----------- | ---------- | ------- | ---------- | -------------- | ------- | ------- | --------- | 
|                                                   |                                           |                      |           | Predecessor XO |           |                |            |            |   |  |  |                 |   |             |            |         |            | Reorganized XO
|                                                   |                                           |                      |           | December 31,   |           |                |            |            |   |  |  |                 |   |             |            |         |            | January 1,    
|                                                   |                                           |                      |           | 2002           |           |                |            |            |   |  |  |                 |   | Fresh Start |            | 2003   
|                                                   |                                           |                      |           | (Audited)      |           | Reorganization |            |            |   |  |  | Adjustments (d) |   | (Unaudited)
|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |            
|ASSETS                                             |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|Current assets:                                    |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|                                                   | Cash and cash equivalents                 |                      | $         | 314,038        |           |                | $          |           |   |  |  |                 |   |             | $          |        |            |                | $       | 314,038 |          
|                                                   | Marketable securities                     |                      |           | 246,945        |           |                |            |           |   |  |  |                 |   |             |            |        |            |                |         | 246,945 |          
|                                                   | Accounts receivable, net                  |                      |           | 116,541        |           |                |            |           |   |  |  |                 |   |             |            |        |            |                |         | 116,541 |          
|                                                   | Other current assets                      |                      |           | 83,480         |           |                |            |           |   |  |  |                 |   |             |            | (48,288 | )          |                |         | 35,192  |          
|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|                                                   |                                           | Total current assets |           |                | 761,004   |                |            |            |  |  |  |                 |   |             |            |         | (48,288    | )              |         |         | 712,716   | 
|Property and equipment, net                        |                                           |                      | 2,780,589 |                |           |                |           |            |   |  |  |                 |   |             | (2,304,001 | )       |            |                | 476,588 |        
|Fixed wireless licenses and other intangibles, net |                                           |                      | 984,614   |                |           |                |           |            |   |  |  |                 |   |             | (848,936   | )       |            |                | 135,678 |        
|Other assets, net                                  |                                           |                      | 59,289    |                |           |                |           |            |   |  |  |                 |   |             | (36,181    | )       |            |                | 23,108  |        
|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|                                                   |                                           | Total assets         |           | $              | 4,585,496 |                |            | $          |  |  |  |                 |   |             |            | $       | (3,237,406 | )              |         | $       | 1,348,090 | 
|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|LIABILITIES AND STOCKHOLDERS (DEFICIT) EQUITY     |                                           |                      |           |                |           |                |            |            |   |  | 
|Current liabilities:                               |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|                                                   | Accounts payable                          |                      | $         | 63,729         |           |                | $          |           |   |  |  |                 |   |             | $          | 3,539   |            |                | $       | 67,268  |          
|                                                   | Accrued liabilities                       |                      |           | 266,102        |           |                |            |           |   |  |  |                 |   |             |            | (30,910 | )          |                |         | 235,192 |          
|                                                   | Current liabilities subject to compromise |                      |           | 5,497,207      |           |                |            | (5,466,667 | ) |  |  | (a              | ) |             |            | (30,540 | )          |                |         |        |          
|                                                   |                                           |                      |           |                |           |                |            |            |   |  |  |                 |   |             |            |         |            |                |         |        
|Total current liabilities                          |                                           |                      | 5,827,038 |                |           |                | (5,466,667 | )          |   |  |  |                 |   |             | (57,911    | )       |            |                | 302,460 |        

6



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##### 



|                                                                  |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |         |           | 
|----------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------------- | --------- | ---------- | ---------- | - | ---------- | --------- | ---------- | - | -- | -- | - |  | ------ | ---------- | ---------- | - | ------- | ------- | --------- | 
|Long-term debt                                                    |                                          |                                                      |          |            |            |   | 500,000    |           |            |   | (b | )  |   |  |       |            |            |   | 500,000 |        
|Other long-term liabilities                                       |                                          |                                                      | 75,242    |            |            |   |           |           |            |   |    |    |   |  | (4,612 | )          |            |   | 70,630  |        
|Long-term liabilities subject to compromise                       |                                          |                                                      | 7,182     |            |            |   |           |           |            |   |    |    |   |  | (7,182 | )          |            |   |        |        
|                                                                  |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |        
|                                                                  |                                          | Total liabilities                                    |           |            | 5,909,462  |   |            |           | (4,966,667 | ) |    |    |   |  |        |            | (69,705    | ) |         |         | 873,090   | 
|Predecessor XO redeemable preferred stock 
subject to compromise |                                          |                                                      | 1,708,316 |            |            |   | (1,708,316 | )         |            |   | (a | )  |   |  |       |            |            |   |        |        
|Stockholders (deficit) equity:                                   |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |        
|                                                                  | Predecessor XO common stock              |                                                      |           | 4,628,139  |            |   |            |          |            |   |    |    |   |  |        | (4,628,139 | )          |   |         |        |          
|                                                                  | Reorganized XO common stock and warrants |                                                      |           |           |            |   |            | 475,000   |            |   |    | (c | ) |  |        |           |            |   |         | 475,000 |          
|                                                                  | Deferred compensation                    |                                                      |           | (8,500     | )          |   |            |          |            |   |    |    |   |  |        | 8,500      |            |   |         |        |          
|                                                                  | Accumulated other comprehensive income   |                                                      |           | 2,512      |            |   |            |          |            |   |    |    |   |  |        | (2,512     | )          |   |         |        |          
|                                                                  | Accumulated deficit                      |                                                      |           | (7,654,433 | )          |   |            | 6,199,983 |            |   |    |    |   |  |        | 1,454,450  |            |   |         |        |          
|                                                                  |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |        
|                                                                  |                                          | Total stockholders (deficit) equity                 |           |            | (3,032,282 | ) |            |           | 6,674,983  |   |    |    |   |  |        |            | (3,167,701 | ) |         |         | 475,000   | 
|                                                                  |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |        
|                                                                  |                                          | Total liabilities and stockholders
(deficit) equity |           | $          | 4,585,496  |   |            | $         |           |   |    |    |   |  |        | $          | (3,237,406 | ) |         | $       | 1,348,090 | 
|                                                                  |                                          |                                                      |           |            |            |   |            |           |            |   |    |    |   |  |        |            |            |   |         |        



| | (a) |  | To record the discharge of pre-petition indebtedness, including a
$1.0 billion credit facility, $4.2 billion of senior and convertible
subordinated notes, $245.2 million of accrued interest, the elimination
of $1.7 billion of pre-petition redeemable preferred stock and $50.6
million of accrued dividends all in accordance with the Plan of
Reorganization.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | To record the outstanding principal under the New Credit Agreement,
in accordance with the Plan of Reorganization.                                                                                                                                                                                                                                                 
|
| | (c) |  | To record the issuance of New Common Stock and warrants in
accordance with the Plan of Reorganization.                                                                                                                                                                                                                                                             
|
| | (d) |  | To adjust the carrying value of assets, liabilities and
stockholders equity to fair value, in accordance with fresh start.                                                                                                                                                                                                                                        

Reorganization gain, net on January 1, 2003 consisted of the following
(dollars in thousands):

|                                                                                     |                                |   |            |           | 
|------------------------------------------------------------------------------------ | ------------------------------ | - | ---------- | --------- | 
|Net gain resulting from reorganization of debt, preferred
stock and equity           |                                | $ | 6,199,983  |          
|Net loss resulting from fresh start fair value
adjustments to assets and liabilities |                                |   | (3,167,701 | )        
|                                                                                     |                                |   |            |          
|                                                                                     | Total reorganization gain, net |   | $          | 3,032,282 | 
|                                                                                     |                                |   |            |          

As of December 31, 2002, the Company had incurred $91.1 million in net
reorganization expenses which included the write-off of deferred financing fees
associated with the issuance of XOs pre-petition debt and professional fees
incurred in conjunction with the Companys recapitalization.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Review of Significant Accounting Policies

As discussed in note 2, the Company adopted fresh start as of January 1,
2003, creating, in substance, per SOP 90-7, a new reporting entity. The
reorganized Company has adopted the policy of expensing customer installation
costs and internal labor directly associated with network construction in the
period in which the costs are incurred. The predecessor Company capitalized and
amortized these costs. In accordance with SOP 90-7, the reorganized Company was
also required to implement newly issued accounting pronouncements that would
require adoption within twelve months of applying fresh start.

Principles of Consolidation

The Companys condensed consolidated financial statements include all of
the assets, liabilities and results of operations of subsidiaries in which the
Company has a controlling interest. All inter-company accounts and transactions
among consolidated entities have been eliminated.

Preparation of Condensed Consolidated Financial Statements

The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements and
the reported amounts of revenue and expenses during the reporting

7



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period. Management periodically assesses the accuracy of these estimates
and assumptions. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents. Cash
equivalents consist primarily of money market accounts that are available on
demand. The carrying amount of these instruments approximates fair value due to
their short maturities.

Marketable Securities

Substantially all of the Companys marketable securities currently consist
of U.S. government agency issued and other high-grade and highly-liquid
securities with original maturities beyond three months. The Company classifies
investments in debt and equity securities as available-for-sale and records
such investments at fair value. The fair values are based on quoted market
prices. Unrealized gains and losses on available-for-sale marketable securities
are reported as a separate component of comprehensive income. Realized gains
and losses for available-for-sale securities are recognized in interest income.

Investment in Debt Securities

Investment in debt securities at June 30, 2003 consists of investments in
senior secured bank debt of Global Crossing Ltd. and Global Crossing Holdings
Ltd. (collectively Global Crossing), a telecommunications company which is
currently in Chapter 11 reorganization proceedings, see also note 12. The debt
trades in a thin market primarily between dealers but is neither listed on any
exchange nor on any over-the-counter NASDAQ or National Quotation Bureau
systems. Accordingly, XO is currently reporting all Global Crossing debt
securities at cost and has not accrued any interest income on this investment.

Long-Lived Assets

Long-lived assets includes property and equipment, fixed wireless
licenses, and intangible assets to be held and used. Long-lived assets,
excluding intangible assets with indefinite useful lives, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount should be addressed pursuant to SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, (SFAS No. 144). The
criteria for determining impairment for such long-lived assets to be held and
used is determined by comparing the carrying value of these long-lived assets
to managements best estimate of future undiscounted cash flows expected to
result from the use of the assets. The Company believes that no impairment
existed under SFAS No. 144 as of June 30, 2003. In the event that there are
changes in the planned use of the Companys long-lived assets or its expected
future undiscounted cash flows are reduced significantly, the Companys
assessment of its ability to recover the carrying value of these assets under
SFAS No. 144 could change.

Intangible assets with indefinite useful lives are tested for impairment
annually or more frequently if an event indicates that the asset might be
impaired. In accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, (SFAS No. 142), the fair value of these intangible assets is
determined based on a discounted cash flow methodology.

Property and Equipment

Property and equipment acquired prior to December 31, 2002 is stated at
its fair value at January 1, 2003, as required by fresh start, net of
subsequent depreciation. Additions to property and equipment during 2003 are
stated at cost, net of accumulated depreciation. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the assets beginning
in the month telecommunications networks and acquired bandwidth are
substantially complete and available for use and in the month equipment and
furniture are acquired. Telecommunications networks and bandwidth include the
deployment of fiber optic cable and telecommunications hardware and software
for the expressed purpose of delivering telecommunications services. Costs of
additions and improvements are capitalized, and repairs and maintenance are
charged to expense as incurred. Direct external costs of constructing property
and equipment are capitalized including interest costs related to construction.
The reorganized Company has adopted the policy of expensing internal labor
directly associated with network construction in the period in which the costs
are incurred.

Equipment held under capital leases is stated at the lower of the fair
value of the asset or the net present value of the minimum lease payments at
the inception of the lease. For equipment held under capital leases,
depreciation is

8



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##### 



provided using the straight-line method over the shorter of the estimated
useful lives of the leased assets or the related lease term.

The estimated useful lives of property and equipment are as follows:

|                                                   |  |                                                                      |  | 
|-------------------------------------------------- |  | -------------------------------------------------------------------- |  | 
|Telecommunications networks and acquired bandwidth |  | 3-20 years                                                          
|Furniture, fixtures, equipment, and other          |  | 5-7 years                                                           
|Leasehold improvements                             |  | the shorter of the estimated useful lives or the terms of the leases

These useful lives are determined based on historical usage with
consideration given to technological changes and trends in the industry, which
could impact the network architecture and asset utilization. Accordingly, in
making this assessment, the Company considers its planned use of the assets,
the views of experts within the Company and outside sources regarding the
impact of technological advances and trends in the industry on the value and
useful lives of its network assets.

Fixed Wireless Licenses and Other Intangibles

Fixed wireless licenses acquired prior to December 31, 2002 are stated at
their fair values at January 1, 2003, as required by fresh start, net of
subsequent amortization. The reorganized Company is amortizing these licenses
over an estimated useful life of 10 years based on the initial license term
granted by the Federal Communications Commission. Amortization commences when
commercial service using fixed wireless technology is deployed in the licenses
geographic area.

Other intangibles of the Company are valued at fair value as required by
the provisions of fresh start and SFAS No. 141 and consist of customer
relationships, internally developed technology and XOs trade name. The
customer relationships and internally developed technology are being amortized
using the straight-line method over their estimated useful lives of three
years. The XO trade name was determined to have an indefinite life.
Accordingly, it is not subject to amortization; however, it is reviewed at
least annually for impairment as required under SFAS No. 142.

Other Assets

Other assets consist primarily of escrow and security deposits,
investments in publicly traded companies and pledged securities. The escrow and
security deposits and pledged securities are stated at cost, and their fair
value approximates their carrying value. Investments in publicly traded
companies are stated at fair value.

Income Taxes

The Company accounts for income taxes in accordance with the provisions of
SFAS No.109, Accounting for Income Taxes, (SFAS No. 109) which requires
that deferred income taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws. Valuation
allowances are used to reduce deferred tax assets to the amount considered
likely to be realized.

As of December 31, 2002, the Company had net operating loss carryforwards
of approximately $4.0 billion and capital loss carryforwards of approximately
$0.5 billion. As of the Effective Date, the Company recognized a substantial
amount of taxable income from the cancellation of indebtedness, eliminating a
substantial portion of these capital and net operating loss carryforwards.
Other tax attributes, including property bases, have also been reduced. Any
surviving capital or net operating loss carryforwards will be subject to
limitations imposed under the ownership change rules in the U.S. Internal
Revenue Code. As discussed in more detail in note 10, the Company will join
with the affiliated group of corporations controlled by Mr. Carl C. Icahn in
filing a consolidated federal income tax return for periods following the
Effective Date.

Revenue Recognition

Revenues from telecommunications services are recognized when the services
are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. In circumstances when these
criteria are not met, revenue recognition is deferred until resolution occurs.

9



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##### 



Service discounts and incentives related to telecommunication services are
recorded as a reduction of revenue when granted or ratably over a contract
period. Fees billed in connection with service installations and other
non-recurring charges are deferred and recognized ratably over the estimated
customer life.

The Company establishes allowances for collection of doubtful accounts and
other sales credit adjustments. Allowances for sales credits are established
through a charge to revenue, while allowances for doubtful accounts are
established through a charge to selling, operating and general expense. The
Company assesses the adequacy of these reserves monthly by considering general
factors, such as the length of time individual receivables are past due,
historical collection experience, the economic and competitive environment, and
changes in the creditworthiness of its customers. The Company believes that the
established valuation allowances were adequate as of June 30, 2003 and December
31, 2002. If circumstances relating to specific customers change or economic
conditions worsen such that the Companys past collection experience and
assessment of the economic environment are no longer relevant, XOs estimate of
the recoverability of its trade receivables could be further reduced.

Revenue from the sale or lease of unlit network capacity is recognized
upon consummation of the transaction and the acquirers acceptance of the
capacity in instances when the Company receives upfront cash payments and is
contractually obligated to transfer title to the specified capacity at the end
of the contract term. If the transaction does not meet these criteria, revenue
is recognized ratably over the contract term. There were no sales of unlit
capacity during the reported periods.

Cost of Service

Cost of service includes expenses directly associated with providing
telecommunications services to customers, including, among other items, the
cost of connecting customers to the Companys networks via leased facilities,
the costs of leasing components of our network facilities and costs paid to
third party providers for interconnect access and transport services. All such
costs are expensed as incurred. The Company accrues for the expected costs of
services received from third party telecommunications providers during the
period the services are rendered. Invoices received from the third party
telecommunications providers are often disputed due to billing discrepancies.
The Company accrues for all invoiced amounts, even amounts in dispute, as these
amounts represent contingent liabilities that are considered probable and
measurable. Disputes resolved in the Companys favor may reduce cost of service
in the period the dispute is settled and typically reflect costs paid in the
prior periods. Because the period of time required to resolve these types of
disputes often lapses over several quarters, the benefits associated with the
favorable resolution of such disputes normally are realized in periods
subsequent to the accrual of the disputed invoice. During the first half of
2003, the settlements resulted in approximately $12.4 million of net benefit to
cost of service.

Net Income (Loss) Per Share

Net income (loss) per common share, basic and diluted, is computed by
dividing net income (loss) applicable to common shares by the weighted average
number of common shares outstanding for the period. In periods of net loss, the
assumed common share equivalents for options and warrants are anti-dilutive.

Stock-Based Compensation

Effective January 1, 2003, the Company adopted the disclosure provisions
of SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure, (SFAS No. 148). This statement amends SFAS No. 123, Accounting
for Stock-Based Compensation, (SFAS No. 123), to provide for alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this statement
amends the disclosure provisions of SFAS No. 123 and Accounting Principles
Board Opinion (APB) No. 28, Interim Financial Reporting, (APB No. 28) to
require disclosure in the summary of significant accounting policies of the
effects of an entitys accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and
interim financial statements.

As allowed by SFAS No. 148, the Company has chosen to continue to account
for compensation cost associated with its employee stock plan in accordance
with the intrinsic value method prescribed by APB No. 25, Accounting for Stock
Issued to Employees, (APB No. 25) adopting the disclosure-only provisions of
SFAS No. 123. Under this method, no compensation expense is recorded if stock
options are granted at an exercise price equal to the fair market value of the
Companys stock on the grant date. If the Company had adopted the fair value
method of accounting for its stock awards, stock-based compensation would have
been determined based on the fair value for all stock awards at the grant date
using a Black-Scholes pricing model and the assumptions noted below. The

10



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##### 



Companys pro forma net loss applicable to common shares, and pro forma
net loss per common share, basic and diluted, under the fair value method would
have been as follows (dollars in thousands, except per share data):

|                                                  |                                                                                                                                                    |   |                    |        |                    |   |          |       |  
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | ------ | ------------------ | - | -------- | ----- | -
|                                                  |                                                                                                                                                    |   | Reorganized XO     |        | Predecessor XO    
|                                                  |                                                                                                                                                    |   | Three months ended |        | Three months ended
|                                                  |                                                                                                                                                    |   | June 30, 2003      |        | June 30, 2002     
|                                                  |                                                                                                                                                    |   |                    |        |                   
|Net loss applicable to common shares, as reported |                                                                                                                                                    | $ | (19,836            | )      |                    | $ | (286,851 | )    
|                                                  | Add: Stock-based employee compensation expense included in net loss applicable
to common shares, as reported                                       |   |                    |       |                    |   |          | 8,891 |  
|                                                  | Deduct: Total stock-based employee compensation expense determined under fair
value based methods for all stock awards, net of related tax effects |   |                    | (3,957 | )                  |   |          | (366  | )
|                                                  |                                                                                                                                                    |   |                    |        |                    |   |          |      
|Pro forma net loss                                |                                                                                                                                                    | $ | (23,793            | )      |                    | $ | (278,326 | )    
|                                                  |                                                                                                                                                    |   |                    |        |                    |   |          |      
|Net loss per common share, basic and diluted:     |                                                                                                                                                    |   |                    |        |                    |   |          |      
|                                                  | Net loss per common share, basic and diluted  as reported                                                                                         |   | $                  | (0.21  | )                  |   | $        | (0.65 | )
|                                                  |                                                                                                                                                    |   |                    |        |                    |   |          |      
|                                                  | Net loss per common share, basic and diluted  pro forma                                                                                           |   | $                  | (0.25  | )                  |   | $        | (0.63 | )
|                                                  |                                                                                                                                                    |   |                    |        |                    |   |          |      
|Black Scholes Assumptions:                        |                                                                                                                                                    |   |                    |        |                    |   |          |      
|                                                  | Expected volatility                                                                                                                                |   |                    | 75.0   | %                  |   |          | 125.0 | %
|                                                  | Risk free interest rate                                                                                                                            |   |                    | 2.4    | %                  |   |          | 4.0   | %
|                                                  | Dividend yield                                                                                                                                     |   |                    | 0.0    | %                  |   |          | 0.0   | %
|                                                  | Expected life (range in years)                                                                                                                     |   |                    | 4.0    |                    |   |          | 4.0   |  
|                                                  | Weighted average fair value per share at grant date                                                                                                |   | $                  | 2.73   |                    |   | $        | 0.11  |  

|                                                  |                                                                                                                                                    |   |                  |        |                  |   |            |        |  
|------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | - | ---------------- | ------ | ---------------- | - | ---------- | ------ | -
|                                                  |                                                                                                                                                    |   | Reorganized XO   |        | Predecessor XO  
|                                                  |                                                                                                                                                    |   | Six months ended |        | Six months ended
|                                                  |                                                                                                                                                    |   | June 30, 2003    |        | June 30, 2002   
|                                                  |                                                                                                                                                    |   |                  |        |                 
|Net loss applicable to common shares, as reported |                                                                                                                                                    | $ | (40,324          | )      |                  | $ | (2,485,330 | )     
|                                                  | Add: Stock-based employee compensation expense included in net loss applicable
to common shares, as reported                                       |   |                  |       |                  |   |            | 17,986 |  
|                                                  | Deduct: Total stock-based employee compensation expense determined under fair
value based methods for all stock awards, net of related tax effects |   |                  | (7,995 | )                |   |            | (732   | )
|                                                  |                                                                                                                                                    |   |                  |        |                  |   |            |       
|Pro forma net loss                                |                                                                                                                                                    | $ | (48,319          | )      |                  | $ | (2,468,076 | )     
|                                                  |                                                                                                                                                    |   |                  |        |                  |   |            |       
|Net loss per common share, basic and diluted:     |                                                                                                                                                    |   |                  |        |                  |   |            |       
|                                                  | Net loss per common share, basic and diluted  as reported                                                                                         |   | $                | (0.42  | )                |   | $          | (5.62  | )
|                                                  |                                                                                                                                                    |   |                  |        |                  |   |            |       
|                                                  | Net loss per common share, basic and diluted  pro forma                                                                                           |   | $                | (0.51  | )                |   | $          | (5.58  | )
|                                                  |                                                                                                                                                    |   |                  |        |                  |   |            |       
|Black Scholes Assumptions:                        |                                                                                                                                                    |   |                  |        |                  |   |            |       
|                                                  | Expected volatility                                                                                                                                |   |                  | 75.0   | %                |   |            | 125.0  | %
|                                                  | Risk free interest rate                                                                                                                            |   |                  | 2.6    | %                |   |            | 4.0    | %
|                                                  | Dividend yield                                                                                                                                     |   |                  | 0.0    | %                |   |            | 0.0    | %
|                                                  | Expected life (range in years)                                                                                                                     |   |                  | 4.0    |                  |   |            | 4.0    |  
|                                                  | Weighted average fair value per share at grant date                                                                                                |   | $                | 2.83   |                  |   | $          | 0.11   |  

Comprehensive Loss

Comprehensive loss includes the Companys net loss applicable to common
shares, as well as net unrealized gains and losses on available-for-sale
investments and, for any periods prior to second quarter 2002, foreign currency
translation adjustments relating to the Companys European operations, which
were disposed of in February 2002.

Concentration of Credit Risk

During the second quarter of 2003, XO liquidated its entire portfolio of
marketable securities which consisted of an investment portfolio containing
U.S. government agency issued and other securities with a duration of less than
one year. The Company invested a portion of the proceeds, $158.5 million, in
$761.1 million principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in reorganization proceedings.
The debt trades in a thin market primarily between dealers but is neither
listed on any exchange nor on

11



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any over-the-counter NASDAQ or National Quotation Bureau systems. If the
Company chooses to liquidate its investment in this debt, it may not be able to
locate a buyer that would allow it to liquidate the debt in a timely fashion to
recover the amount paid. Accordingly, it cannot be assured that the Company
will be able to dispose of the investment for an amount equal to or greater
than the amount it paid for it, or that any distribution that may be received
upon consummation of Global Crossings bankruptcy case will have a value equal
to or greater than this investment.

Other financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. Although
the Companys trade receivables are geographically dispersed and include
customers in many different industries, a portion of the Companys revenue is
generated from services provided to other telecommunications service providers.
Several of these companies have filed for protection under Chapter 11 of the
Bankruptcy Code. The Company believes that its established valuation and credit
allowances are adequate as of June 30, 2003 to cover these risks.

Fair Value of Financial Instruments

SFAS No. 107, Disclosure about Fair Value of Financial Instruments
(SFAS No. 107), requires disclosure of fair value information about financial
instruments, for which it is practicable to estimate the value. The carrying
amounts for the Companys financial instruments classified as current assets
and liabilities approximate their fair value due to their short maturities with
the exception of the investment in debt securities which consists primarily of
senior secured bank debt of Global Crossing, a telecommunications company which
is currently in reorganization proceedings. The Global Crossing debt trades in
a thin market primarily between dealers but is neither listed on any exchange
nor on any over-the-counter NASDAQ or National Quotation Bureau systems and is
therefore recorded at cost. Management believes that fair market value
approximates cost for this investment.

Recent Accounting Pronouncements

In June
2001, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 143, Accounting for Asset Retirement
Obligations, (SFAS No. 143),
which requires an entity to recognize the fair value of a liability for an
asset retirement obligation in the period in which a legal or contractual
removal obligation is incurred if a reasonable estimate of fair value can be
made. If a reasonable estimate of fair value cannot be made in the period the
asset retirement obligation is incurred, SFAS No. 143 requires the liability to
be recognized when a reasonable estimate of the fair value can be made. As
required by SOP 90-7, we implemented SFAS No. 143 on January 1, 2003, in
conjunction with the implementation of fresh start and recorded an estimated
asset retirement obligation of $12.0 million, as disclosed in note 5 to the
accompanying condensed consolidated financial statements.

Effective January 1, 2003, the Company adopted SFAS No. 145, Rescission
of the Financial Accounting Standards Board (the FASB) Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of
April 2002 (SFAS No. 145), which eliminates the requirement to report
material gains or losses from debt extinguishments as an extraordinary item,
net of any applicable income tax effect, in an entitys statement of
operations. SFAS No. 145 instead requires that a gain or loss recognized from a
debt extinguishment be classified as an extraordinary item only when the
extinguishment meets the criteria of both unusual in nature and infrequent
in occurrence as prescribed under APB Opinion No. 30, Reporting the Results
of Operations  Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions
(APB No. 30). The adoption of SFAS No. 145 had no effect on the Companys
financial position or results of operations for the reported periods. The
Company recognized extraordinary gains from debt repurchases in the third and
fourth quarters of 2001. In the future, such gains will be reclassified in the
respective consolidated statements of operations in accordance with SFAS No.
145.

Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities (SFAS No. 146), which
requires that costs, including severance costs, associated with exit or
disposal activities be recorded at their fair value when a liability has been
incurred. Under previous guidance, certain exit costs, including severance
costs, were accrued upon managements commitment to an exit plan, which is
generally before an actual liability has been incurred. In the six
months ended June 30, 2003, the Company did not have any exit or disposal activities after December
31, 2002; however, the provisions of SFAS No. 146 were implemented in
conjunction with the Companys implementation of fresh start. Accordingly, as
discussed in note 6, the Companys remaining restructuring accrual has been
reduced to its net present value.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, (SFAS
No. 148) which amends
SFAS No. 123, Accounting for Stock-Based Compensation,

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(SFAS No. 123), to provide alternative methods of transition to SFAS No. 123s
fair value method of accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB No. 28,
Interim Financial Reporting, or APB No. 28, to require disclosure in the
summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While SFAS No. 148 does not amend SFAS No. 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of SFAS No. 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of SFAS No. 123 or the intrinsic value method of
APB No. 28. Effective January 1, 2003, we adopted the disclosure provisions of
SFAS No. 148. As allowed by SFAS No. 148, we have chosen to continue to account
for compensation cost associated with our employee stock plans in accordance
with the intrinsic value method prescribed by APB No. 25, Accounting for Stock
Issued to Employees, or APB No. 25.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, (SFAS
No. 149), which amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. We do not believe that the adoption of SFAS No. 149 will have a
material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity, (SFAS No. 150), which establishes standards for how companies classify and
measure certain financial instruments with characteristics of both liabilities
and equity. It requires companies to classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective beginning with the second quarter of fiscal 2004. We do not
believe the adoption of SFAS No. 150 will have a material impact on our
consolidated financial statements.

4. LONG-LIVED ASSETS

As
discussed in note 2, the Company applied fresh start on January 1,
2003. Accordingly its property and equipment, fixed wireless licenses and other
intangible assets as of January 1, 2003, have been recorded at their then fair
values. Purchases of long-lived assets during 2003 have been recorded at cost.

As of June 30, 2003, the Company had approximately $598 million of
long-lived assets, including approximately $98 million of
construction-in-progress and certain fixed wireless licenses that are not
currently ready for their intended use or placed into service. Accordingly,
these long-lived assets are not being depreciated or amortized.

Property and Equipment

Property and equipment consisted of the following components (dollars in
thousands):

|                                                   |  |                |         |                |  |                |         |  |  |   |            |  
|-------------------------------------------------- |  | -------------- | ------- | -------------- |  | -------------- | ------- |  |  | - | ---------- | -
|                                                   |  | Reorganized XO |         | Reorganized XO |  | Predecessor XO
|                                                   |  | June 30,       |         | January 1,     |  | December 31,  
|                                                   |  | 2003           |         | 2003           |  | 2002          
|                                                   |  |                |         |                |  |               
|Telecommunications networks and acquired
bandwidth |  | $              | 368,727 |                |  | $              | 359,247 |  |  | $ | 2,920,819  |  
|Furniture, fixtures, equipment, and other          |  |                | 72,161  |                |  |                | 61,501  |  |  |   | 656,994    |  
|                                                   |  |                |         |                |  |                |         |  |  |   |            |  
|                                                   |  |                | 440,888 |                |  |                | 420,748 |  |  |   | 3,577,813  |  
|Less accumulated depreciation                      |  |                | (40,274 | )              |  |                |        |  |  |   | (1,165,216 | )
|                                                   |  |                |         |                |  |                |         |  |  |   |            |  
|                                                   |  |                | 400,614 |                |  |                | 420,748 |  |  |   | 2,412,597  |  
|Network construction-in-progress                   |  |                | 74,674  |                |  |                | 55,840  |  |  |   | 367,992    |  
|                                                   |  |                |         |                |  |                |         |  |  |   |            |  
|                                                   |  | $              | 475,288 |                |  | $              | 476,588 |  |  | $ | 2,780,589  |  
|                                                   |  |                |         |                |  |                |         |  |  |   |            |  

Depreciation expense related to property and equipment for the reorganized
Companys three and six months ended June 30, 2003 was $20.7 million and $40.5
million, respectively, and for the predecessor Companys three and six months
ended June 30, 2002 was $141.5 million and $276.5 million, respectively.

Fixed Wireless Licenses and Other Intangibles

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Fixed wireless licenses and other intangible assets consisted of the
following components (dollars in thousands):

|                                      |  |                |         |                |  |                |         |  |  |   |           |  
|------------------------------------- |  | -------------- | ------- | -------------- |  | -------------- | ------- |  |  | - | --------- | -
|                                      |  | Reorganized XO |         | Reorganized XO |  | Predecessor XO
|                                      |  | June 30,       |         | January 1,     |  | December 31,  
|                                      |  | 2003           |         | 2003           |  | 2002          
|                                      |  |                |         |                |  |               
|Fixed wireless licenses               |  | $              | 59,508  |                |  | $              | 59,508  |  |  | $ | 997,942   |  
|Customer relationships                |  |                | 49,987  |                |  |                | 49,987  |  |  |   | 123,745   |  
|Internally developed technology       |  |                | 9,521   |                |  |                | 9,521   |  |  |   |          |  
|Acquired technology                   |  |                |        |                |  |                |        |  |  |   | 130,515   |  
|Other                                 |  |                |        |                |  |                |        |  |  |   | 35,413    |  
|                                      |  |                |         |                |  |                |         |  |  |   |           |  
|                                      |  |                | 119,016 |                |  |                | 119,016 |  |  |   | 1,287,615 |  
|Less accumulated amortization         |  |                | (13,082 | )              |  |                |        |  |  |   | (303,001  | )
|                                      |  |                |         |                |  |                |         |  |  |   |           |  
|                                      |  |                | 105,934 |                |  |                | 119,016 |  |  |   | 984,614   |  
|XO Trade name  indefinite life asset |  |                | 16,662  |                |  |                | 16,662  |  |  |   |          |  
|                                      |  |                |         |                |  |                |         |  |  |   |           |  
|                                      |  | $              | 122,596 |                |  | $              | 135,678 |  |  | $ | 984,614   |  
|                                      |  |                |         |                |  |                |         |  |  |   |           |  

Amortization expense related to intangible assets for the reorganized
Companys three and six months ended June 30, 2003 was $6.5 million and $13.1
million, respectively, and for the predecessor Companys three and six months
ended June 30, 2002 was $26.4 million and $52.7 million, respectively.

Goodwill

In July 2001, SFAS No. 142 was issued and revised the accounting for
purchased goodwill and intangible assets and superseded APB Opinion No. 17,
Intangible Assets (APB No. 17). As described in greater detail in the 2002
Annual Report, the predecessor Company performed the required impairment tests
of goodwill as of January 1, 2002, and as a result, during the first quarter of
2002, the predecessor Company recorded a $1,876.6 million adjustment as a
cumulative effect of accounting change to write-off all of its goodwill.

5. ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

In June 2001, SFAS No. 143, Accounting for Asset Retirement Obligations,
(SFAS No. 143) was issued which requires an entity to recognize the fair
value of a liability for an asset retirement obligation in the period in which
the entity makes the legal or contractual commitment related to the removal
obligation if a reasonable estimate of fair value can be made. The Company
implemented SFAS No. 143 on January 1, 2003 in conjunction with its
implementation of fresh start.

The Company leases Internet data center facilities and various technical
sites. Terminating and decommissioning these locations would require the
removal of any XO assets and restoration of the leased space to its original
condition. Accordingly, upon adoption of SFAS No. 143, the Company recorded an
estimated asset retirement obligation of $12.0 million, which was estimated
using managements best estimate of the expected cash flows. The present value
of the asset retirement obligation was calculated using a discount rate of 8.0%
over a period of 5-20 years, which is representative of the estimated remaining
period XO will occupy its data centers and technical facilities.

6. RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS

During the second half of 2001, and the first half of 2002, the Company
implemented a plan to restructure certain of its business operations. The
restructuring plan included reducing the Companys discretionary spending,
capital expenditures and workforce based on its assessment at that time of
current and expected future market conditions and the divestiture of its
European operations. As of June 30, 2003, the remaining restructuring accrual
was $36.2 million, which relates primarily to payments due to landlords on
exited leased facilities. The restructuring accrual has decreased from $79.0
million as of December 31, 2002, primarily due to payments associated with
exited leased facilities and adjustments made in conjunction with the Companys
implementation of fresh start to appropriately reflect the remaining accrual at
its net present value in accordance with the provisions of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.

14



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7. LONG-TERM DEBT

As discussed in the 2002 Annual Report and in note 2, upon the Effective
Date, the $1.0 billion of loans under the pre-petition senior secured credit
facility were converted into 90.25 million shares of New Common Stock of the
reorganized Company and $500.0 million of outstanding principal amount of loans
under the New Credit Agreement. The maturity date of the outstanding principal
under the New Credit Agreement is July 15, 2009 and automatic and permanent
quarterly reductions of the principal amount commence on October 15, 2007. The
security for the New Credit Agreement consists of all assets of XO Parent,
including stock of its direct and indirect subsidiaries, and all assets of
virtually all of those subsidiaries. The New Credit Agreement limits additional
indebtedness, liens, dividend payments and certain investments and
transactions, and contains certain covenants with respect to minimum cash
balance and EBITDA (earnings before interest, taxes, depreciation and
amortization) requirements and maximum capital expenditures. Under certain
circumstances, the New Credit Agreement permits the Company to obtain a senior
secured facility of up to $200.0 million, subject to reduction in an amount
equal to any proceeds received from the exercise of rights in the Rights
Offering. At June 30, 2003, long-term debt of $517.3 million including $500.0
million principal amount outstanding on the New Credit Agreement and $17.3
million of accrued interest thereon. Approximately 85% of the underlying loans
of the New Credit Agreement are held by Arnos Corp., an entity controlled by
Mr. Carl C. Icahn, (Mr. Icahn) Chairman and controlling shareholder of XO.

The Company is not required to pay cash interest accrued on the principal
amount under the New Credit Agreement until it meets certain financial ratios;
however the Company can elect to begin paying interest in cash prior to the
required date. Loans under the New Credit Agreement bear interest, at the
Companys option, at an alternate base rate, as defined, or a Eurodollar rate,
plus in each case, applicable margins. Once the Company begins to pay accrued
interest in cash, the applicable margins are reduced. At June 30, 2003, the
annualized weighted average interest rate applicable to outstanding borrowings
under the New Credit Agreement was 7.54%.

Also upon the Effective Date, all of XO Parents pre-petition unsecured
senior notes and pre-petition general unsecured claims were cancelled in
exchange for (i) 4.75 million shares of New Common Stock of the reorganized
Company, (ii) warrants to purchase shares up to an additional 23.75 million
shares of New Common Stock of the reorganized Company (iii) rights to purchase
shares of New Common Stock in accordance with the terms of the Rights Offering
and (iv) a portion of the cash consideration received by XO Parent in
connection with the settlement and termination of the proposed investment
transaction that was the basis for the first restructuring alternative
contemplated by the Plan of Reorganization. As part of the distribution
process, XO Parent is holding approximately 1.0 million shares of New Common
Stock and warrants to purchase approximately 6.2 million shares of New Common
Stock in a reserve for distribution to holders of XO Parents pre-petition
unsecured senior notes and pre-petition general unsecured claims. These
securities will be distributed upon final resolution of disputed XO Parent
bankruptcy claims. Holders of pre-petition subordinated notes of XO Parent had
their securities cancelled, and received a cash payment under certain terms as
defined by the Plan of Reorganization and are entitled to participate in the
Rights Offering.

8. STOCKHOLDERS EQUITY

Pursuant to the Companys Certificate of Incorporation that was adopted in
connection with the Plan of Reorganization, the Company has the authority to
issue 1,000.0 million shares of New Common Stock and 200.0 million shares of
new undesignated preferred stock. As of June 30, 2003, approximately 95.7
million shares of New Common Stock had been issued, more than 80% of which were
owned and controlled by Cardiff Holding LLC (Cardiff), a Delaware limited
liability company controlled by Mr. Icahn. As part of the distribution process,
XO Parent is holding approximately 1.0 million shares of New Common Stock for
distribution to XO Parents pre-petition unsecured senior notes and
pre-petition unsecured general claims after the resolution of disputed
bankruptcy claims.

As a result of the cancellation of the pre-petition senior notes and
pre-petition general unsecured claims, discussed in note 2, pursuant to the
Plan of Reorganization on January 16, 2003, such holders were granted, among
other consideration, warrants to purchase shares up to an additional 23.75
million shares of New Common Stock.

The warrants consist of:



| |  |  | Series A Warrants to purchase 9.5 million shares of New
Common Stock at an exercise price of $6.25 per share;
| | - |  | -------------------------------------------------------------------------------------------------------------

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| |  |  | Series B Warrants to purchase approximately 7.1 million
shares of New Common Stock at an exercise price of $7.50 per share;
and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Series C Warrants to purchase approximately 7.1 million
shares of New Common Stock at an exercise price of $10.00 per share.   

As part of the distribution process, XO Parent is holding Series A
Warrants to purchase approximately 2.5 million shares of New Common Stock,
Series B Warrants to purchase approximately 1.8 million shares of New Common
Stock and Series C Warrants to purchase approximately 1.8 million shares of New
Common Stock in a reserve for distribution to holders of XO Parents
pre-petition unsecured senior notes and pre-petition general unsecured claims
after the resolution of disputed bankruptcy claims. The warrants are included
in reorganized XOs common stock in the accompanying condensed consolidated
balance sheet. The warrants will expire 7 years after the date of issuance. The
exercise price applicable to each respective series of warrants is subject to
adjustment in certain events. Upon final distribution of warrants under the
Plan of Reorganization, XO estimates Cardiff will own Series A Warrants to
purchase approximately 3.0 million shares of New Common Stock, Series B
Warrants to purchase approximately 2.3 million shares of New Common Stock, and
Series C Warrants to purchase approximately 2.3 million shares of New Common
Stock.

In accordance with the Plan of Reorganization, XO Parent intends to issue
to certain holders of claims of interest in XO Parent, who held such claims
and/or interests as of the November 15, 2002 record date, rights to subscribe
up to 40.0 million shares of New Common Stock, at $5.00 per share, through the
Rights Offering. In addition, pursuant to the Stockholder Stipulation, holders
of shares of pre-petition class A common stock of XO Parent will receive
additional nontransferable rights exercisable for up to 3.3 million shares of
New Common Stock to the extent that the rights otherwise allocable to such
holders in the Rights Offering are exercisable for less than 3.3 million shares
of New Common Stock at $5.00 per share. Accordingly, not less than 40.0
million shares and not more than 43.3 million shares will be offered in the
Rights Offering. XO Parent filed a registration statement with the Commission
on July 22, 2003 with respect to the shares of New Common Stock issuable upon
exercise of these rights. The Rights Offering is not expected to
commence prior to final disposition by the Bankruptcy
Court of pending general unsecured claims. Any proceeds will be used to pay
down principal outstanding under the New Credit Agreement.

The Companys pre-petition Class A common stock stopped trading on the
National Association of Securities Dealers, Inc. Over-the-Counter Bulletin
Board (the OTCBB) as of the Effective Date, and the Companys New Common
Stock began trading on the OTCBB and the pink sheets (www.pinksheets.com) under
the symbol XOCM shortly thereafter. Pursuant to the Plan of Reorganization,
all interests in the Companys pre-petition Class A and Class B common stock
were terminated as of the Effective Date. As discussed in note 2, the Companys
pre-petition redeemable preferred stock was cancelled and discharged and the
holders of such securities received no distribution under the Plan of
Reorganization, but are entitled to participate in the Rights Offering.

The Company has a stock option plan that can further dilute investors if
exercised. This plan is discussed further in note 11. On June 30, 2003, there
were 9.5 million in-the-money warrants and 2.6 million exercisable in-the-money
stock options, which, if exercised, would have resulted in an additional 12.1
million shares of New Common Stock being issued.

9. OPERATING SEGMENTS

The Company operates its business as one telecommunications segment and
classifies its products and services revenues offered by its telecommunications
services segment into voice services, data services and integrated voice and
data services (dollars in thousands):

|                          |  |                    |         |                    |  |                  |         |                  |  |   |         |  |  |   |         | 
|------------------------- |  | ------------------ | ------- | ------------------ |  | ---------------- | ------- | ---------------- |  | - | ------- |  |  | - | ------- | 
|                          |  | Reorganized XO     |         | Predecessor XO     |  | Reorganized XO   |         | Predecessor XO  
|                          |  | Three months ended |         | Three months ended |  | Six months ended |         | Six months ended
|                          |  | June 30,           |         | June 30,           |  | June 30,         |         | June 30,        
|                          |  | 2003               |         | 2002               |  | 2003             |         | 2002            
|                          |  |                    |         |                    |  |                  |         |                 
|Voice services            |  | $                  | 150,020 |                    |  | $                | 175,321 |                  |  | $ | 300,743 |  |  | $ | 344,155 | 
|Data services             |  |                    | 97,321  |                    |  |                  | 118,630 |                  |  |   | 199,298 |  |  |   | 254,391 | 
|Integrated voice and data |  |                    | 36,577  |                    |  |                  | 31,529  |                  |  |   | 69,970  |  |  |   | 60,339  | 
|                          |  |                    |         |                    |  |                  |         |                  |  |   |         |  |  |   |         | 

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|              |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 
|------------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|Total revenue |  | $ | 283,918 |  |  | $ | 325,480 |  |  | $ | 570,011 |  |  | $ | 658,885 | 
|              |  |   |         |  |  |   |         |  |  |   |         |  |  |   |         | 

10. RELATED PARTY TRANSACTIONS

After the initial distribution of New Common Stock pursuant to the Plan of
Reorganization, Cardiff Holding LLC, a Delaware limited liability company
controlled by Mr. Icahn, holds more than 80% of the outstanding shares of New
Common Stock. Of the warrants to be distributed under the Plan of
Reorganization to holders of the pre-petition senior unsecured notes, it is
estimated Cardiff will receive Series A Warrants to purchase approximately 3.0
million shares of New Common Stock, Series B Warrants to purchase approximately
2.3 million shares of New Common Stock, and Series C Warrants to purchase
approximately 2.3 million shares of New Common Stock. As companies controlled
by Mr. Icahn owned portions of XOs predecessor unsecured
debt, they are
claimants in the Companys bankruptcy reorganization and will receive
approximately 30% of the rights to participate in its Rights Offering. If the
Icahn affiliates elect to exercise these rights they could acquire additional
shares of New Common Stock. In addition, approximately 85% of the $500.0
million in loans outstanding under the New Credit Agreement are held by Arnos
Corp., an entity which is also controlled by Mr. Icahn.

Mr. Icahn, through various entities that he owns or controls, has the
right to require XO to register, under the Securities Act of 1933, shares of
New Common Stock held by such entities and to include shares of New Common
Stock held by them in certain registration statements filed by XO, pursuant to
a Registration Rights Agreement approved by the Bankruptcy Court in connection
with the Companys Chapter 11 proceedings.

In February 2003, Dixon Properties, LLC (Dixon), which is controlled by
Mr. Icahn, acquired ownership of the building in which XO headquarters is
located in a transaction that was approved by the Bankruptcy Court. XO
currently leases approximately 170,000 square feet of space in that building.
In connection with Dixons purchase of the building, it assumed the Companys
existing lease agreement and amended the lease to include certain terms that
are more favorable to the Company. Pursuant to the assumed lease agreement, XO
has paid $1.6 million in lease expense to Dixon through June 30, 2003 and XO is
obligated to pay approximately $17.0 million in the aggregate to Dixon through
the expiration of the initial term of the lease, which is November 30, 2007.

XO Parent has entered into a Tax Allocation Agreement, dated January 16,
2003, between XO Parent and Starfire Holding Corporation (Starfire), the
parent entity of the affiliated group of corporations controlled by Mr. Icahn,
which in turn indirectly controls Cardiff, because it is contemplated that
these entities will be filing consolidated federal income tax returns, and
possibly combined returns for state tax purposes. The Tax Allocation Agreement,
which was approved by the Bankruptcy Court in connection with XO Parents
Chapter 11 proceedings, establishes the methodology for the calculation and
payment of income taxes in connection with the consolidation of the Company
with Starfire for income tax purposes. Generally, the Tax Allocation Agreement
provides that Starfire will pay all consolidated federal income taxes on behalf
of the consolidated group that includes the Company, and the Company will make
payments to Starfire in an amount equal to the tax liability, if any, that it
would have if it were to file as a consolidated group separate and apart from
Starfire.

The Company provides certain telecommunications services to companies
affiliated with Mr. Icahn. For the three and six months ended June 30, 2003,
the total revenue recognized and contracted on such services was less than $0.3
million.

11. STOCK-BASED COMPENSATION

Upon the Effective Date of the Plan of Reorganization, all options under
the predecessor XO stock option plans were cancelled and the plans were
terminated. Upon the Effective Date of the Plan of Reorganization, the XO
Communications, Inc. 2002 Stock Incentive Plan (the 2002 Stock Incentive
Plan) was adopted. Under the 2002 Stock Incentive Plan, the Company is
authorized to issue awards for up to 17.6 million shares of New Common Stock in
the form of restricted stock or options to purchase stock. Non-qualified
options to purchase 10.0 million shares of New Common Stock have been granted
and are outstanding as of June 30, 2003.

On June 20, 2003, XO filed a
registration statement covering the offer and
sale of stock options and stock appreciation rights
(SARs) to be granted in conjunction with the
2003 Employee Retention and Incentive Plan (the Retention Plan) for an
aggregate award of 1.9 million shares of New Common Stock. (the Retention Plan
Awards). Approximately 200,000 options and approximately
10,500, SARs will be granted in the third quarter of 2003, fifty
percent of which will be vested and exercisable on the date of grant, with the remaining fifty
percent vesting ratably every month for twenty four months following the month
of grant. Additional grants may be made in 2004 if the Company attains certain
financial goals in the second half of 2003. The financial goals and the terms
of the Retention Plan

17



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were established by the Companys Board of Directors. The per share
exercise price for the Retention Plan Awards was set at eighty percent of the
fair market value of one share of Common Stock on the effective date of the
Retention Plan, or $5.84. Any compensation expense will be recorded based on
the associated vesting period.

12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

The Company is not currently a party to any legal proceedings, other than
regulatory and other proceedings that are in the normal course of business.
However, as discussed above, although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter 11 proceedings, disputes with
respect to the amount of allowed claims owed by XO Parent to certain of its
general unsecured creditors, and claims of certain professionals remain
outstanding. In addition, a party has filed a complaint in the Bankruptcy Court
seeking relief from the courts order confirming the Plan of Reorganization and
a declaratory judgment that such partys derivative suit for the benefit of the
Company against a former director of XO Parent and an affiliate of that
director should not be released by the confirmation order. While the outcome of
these matters, or any other relief that may be granted, is currently not
determinable, management does not expect that the ultimate costs to resolve
these matters will have a material adverse effect on the Companys consolidated
financial position, results of operations, or cash flows.

Investment in Debt Securities

During the second quarter of 2003, XO liquidated its entire portfolio of
marketable securities which consisted of an investment portfolio containing
U.S. government agency issued and other securities with a duration of less than
one year. The Company invested a portion of the proceeds, $158.5 million, in
$761.1 million principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in reorganization proceedings.
The debt trades in a thin market primarily between dealers but is neither
listed on any exchange nor on any over-the-counter NASDAQ or National Quotation
Bureau systems. If the Company chooses to liquidate its investment in this
debt, it may not be able to locate a buyer that would allow it to liquidate the
debt in a timely fashion to recover the amount paid. Accordingly, it cannot be
assured that the Company will be able to dispose of the investment for an
amount equal to or greater than the amount it paid for it, or that any
distribution that may be received upon consummation of Global Crossings
bankruptcy case will have a value equal to or greater than this investment.

Bid
to Purchase Assets

In
August 2003, XO bid at a Bankruptcy Court auction on certain
of the assets and business of Touch America, Inc. (Touch
America), a facilities-based telecommunications provider
serving enterprise and carrier customers in the Western, Central and
Southern United States. XOs final bid of approximately $42.5
million, less $5.6 million of pass through revenue, was the
second-highest bid received in the auction. As a
result, under the rules governing the auction, if the winning bidder
fails to close its proposed purchase, Touch America will have the
right, but not the obligation, to accept XOs final bid.
XOs final bid was subject to a number of contractual terms
including, without limitation, Touch Americas compliance with
representations and warranties, the absence of any material adverse
change in Touch Americas business, additional covenants,
regulatory approval, and other conditions.

Prepaid Calling Card Tax Matter

On July 26, 2002, the Company was advised by the staff of the Commission
that it was conducting an informal inquiry primarily relating to the Companys
obligations with respect to, and its accrual of liabilities for, specified
federal excise and state sales tax and similar tax obligations arising in
connection with prepaid calling card services and relating to certain other
matters. On July 29, 2003, the Company was notified by the Commission that the
investigation was terminated and no enforcement action has been recommended.

Unfunded Affiliate Pension Obligation

As affiliates of Mr. Icahn hold over 80% of the outstanding New Common
Stock of XO Parent, applicable pension and tax laws make each member of a plan
sponsors controlled group (generally defined as entities in which there is
at least an 80% common ownership interest) is jointly and severally liable for
certain pension plan obligations of the plan sponsor. These pension obligations
include ongoing contributions to fund the plan, as well as liability for any
unfunded liabilities that may exist at the time the plan is terminated. In
addition, the failure to pay these pension obligations when due may result in
the creation of liens in favor of the pension plan or the Pension Benefit
Guaranty Corporation, (the PBGC) against the assets of each member of the
plan sponsors controlled group.

As a result of the more than 80% ownership interest in XO Parent by Mr.
Icahns affiliates, XO Parent and its subsidiaries will be subject to the
pension liabilities of any entities in which Mr. Icahn has a direct or indirect
ownership interest of at least 80%, which includes ACF Industries, Inc.
(ACF), which is the sponsor of certain pension plans. As most recently
determined by the ACF plans actuaries, pension plans maintained by ACF are
underfunded in the aggregate by approximately $14 million on an ongoing
actuarial basis and by approximately $102 million if those plans were
terminated. As a member of the same controlled group, XO Parent and each of its
subsidiaries would be liable for any failure of ACF to make ongoing pension
contributions or to pay the unfunded liabilities upon a termination of the ACF
pension plans.

18



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The current underfunded status of the ACF pension plans requires ACF to
notify the PBGC if XO Parent or its subsidiaries cease to be a member of the
ACF controlled group. In addition, so long as the Company remains a member of
the ACF controlled group, certain other reportable events, including certain
extraordinary dividends and stock redemptions, must be reported to the PBGC.

19



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PART I. FINANCIAL INFORMATION

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking and Cautionary Statements

Some of the statements contained in this filing discuss future
expectations and business strategies or include other forward-looking
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. We undertake no obligation to publicly update or revise any
forward-looking statements.

Overview

We provide a comprehensive array of voice and data telecommunications
services to business customers. Our voice services include local and long
distance, both bundled and standalone, other voice-related services such as
audio conferencing, domestic and international toll free services and
voicemail, and transactions processing services for prepaid calling cards. Our
data services include Internet access, private data networking, including
dedicated transmission capacity on our networks, virtual private network
services and Ethernet services, and hosting services. We also combine many of
these services in flat rate service packages. These services are offered to a
variety of customers, including small, medium and large retail business,
multi-location businesses and carrier or wholesale customers.

To serve our customers broad and expanding telecommunications needs, we
operate a network comprised of a series of rings of fiber optic cables located
in the central business districts of numerous metropolitan areas, which we
refer to as metro fiber networks, that are connected primarily by a network of
numerous dedicated wavelengths on fiber optic cables, which we refer to as an
intercity network. By integrating these networks with advanced
telecommunications technologies, we are able to provide a comprehensive array
of telecommunications services entirely over a network that we own or control,
from the initiation of the voice or data transmission to the point of
termination, which we refer to as end-to-end service. This capability enables
us to provide telecommunication services between customers connected to our
network and among customers with multiple locations entirely over our network.

To develop these networks, we have assembled a collection of metro and
intercity network assets in the United States, substantially all of which we
own or control, making us a facilities-based carrier. These network assets
incorporate state-of-the-art fiber optic cable, dedicated wavelengths of
transmission capacity on fiber optic networks and transmission equipment
capable of carrying high volumes of data, voice, video and Internet traffic. We
operate 37 metro broadband fiber optic networks in 22 states and the District
of Columbia, including 25 of the 30 largest metropolitan areas in the U.S. We
have constructed or acquired many of these metro networks, which consist of up
to 432 strands of fiber optic cable and, in some cases, additional empty fiber
conduits through which fiber optic cable can be deployed. For our inter-city
network, we have acquired dedicated, high-capacity wavelengths on fiber optic
cables, onto which we have deployed our own switching, routing and optical
equipment, thereby giving us greater control over the transmission of voice and
data information. We also hold indefeasible exclusive rights to use 18 unlit
fiber optic strands on the routes served by our intercity networks pursuant to
arrangements with Level 3 Communications, Inc.

Recent Events

Announcement of Offer to
Acquire All of the Assets of Global Crossing Ltd. and Global Crossing Holdings Ltd.


On May 30, 2003, we made the first of
 a series of offers to acquire all of
the assets and business of Global Crossing Ltd. and Global
Crossing Holdings, Ltd. which we collectively refer to as Global Crossing, a
telecommunications company which is currently in Chapter 11 reorganization
proceedings. Thereafter, we made several modifications to, and enhancements of,
our initial offer, and, on June 24, 2003, commenced an offer to purchase all of
the senior secured bank debt of Global Crossing that we did not already own. As
a result of these series of offers, we paid approximately $158.5 million to
acquire approximately $761.1 million principal amount of the approximately
$2,214.0 million principal amount of such debt outstanding.

20



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On July 1, 2003, the United States Bankruptcy Court for the Southern
District of New York approved Global Crossings request to extend until October
28, 2003 the exclusivity period of its existing purchase agreement with
Singapore Technologies PTE. We intend to actively monitor Global Crossings
reorganization and the regulatory proceedings that are conditions to any
closing under the Singapore Technologies PTE agreement.

Bid
to Purchase Assets

In
August 2003, XO bid at a Bankruptcy Court auction on certain of the assets
and business of Touch America, Inc., a facilities-based telecommunications provider
serving enterprise and carrier customers in the Western, Central and
Southern United States. XOs final bid of approximately $42.5
million, less $5.6 million of pass through revenue, was the second-highest bid received in the auction. As a
result, under the rules governing the auction, if the winning bidder
fails to close its proposed purchase, Touch America will have the
right, but not the obligation, to accept XOs final bid.
XOs final bid was subject to a number of contractual terms
including, without limitation, Touch Americas compliance with
representations and warranties, the absence of any material adverse
change in Touch Americas business, additional covenants,
regulatory approval, and other conditions.

Announcement of Chief Executive Officer Appointment

On April 28, 2003, we announced that we had hired Carl J. Grivner as our
new Chief Executive Officer effective May 15, 2003. Effective May 1, 2003, Mr.
Grivner joined XO as a member of the newly created Office of the Chairman. Mr.
Grivners career in the telecommunications and technology industries spans more
than 25 years. He most recently served as Chief Operating Officer of Global
Crossing, Ltd. Prior to joining Global Crossing in June 2000, Mr. Grivner
served as Chief Executive Officer of Worldport Communications and, before that,
he served as Chief Executive Officer, Western Hemisphere, of Cable & Wireless
PLC. Additionally, Mr. Grivner has held various senior executive positions at
Advanced Fiber Communications and Ameritech.

Our Chapter 11 Reorganization and Emergence

The Reorganization Proceedings

On June 17, 2002, XO Parent filed for protection under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Southern District
of New York. On November 15, 2002, the Bankruptcy Court confirmed XO Parents
plan of reorganization, and, on January 16, 2003, the Effective Date, XO Parent
consummated the plan of reorganization and it emerged from its Chapter 11
reorganization proceedings with a significantly restructured balance sheet. As
described in more detail in our annual report on Form 10-K for the year ended
December 31, 2002 as filed with the Securities and Exchange Commission on March
21, 2003, hereinafter referred to as the 2002 Annual Report, the consummation
of the Plan of Reorganization resulted in the following changes in our debt and
equity capital structure:



| |  |  | The conversion of $1.0 billion of loans under XO Parents
pre-petition senior secured credit facility, which we refer to as the
Pre-Petition Credit Facility, into $500.0 million of outstanding
principal amount which we refer to as the New Credit Agreement;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The extinguishment of all amounts due under our pre-petition
unsecured senior and subordinated notes and certain general unsecured
obligations; and                                                                                                             
|
| |  |  | The cancellation of all outstanding shares and interest in our
pre-petition preferred stock and pre-petition common stock.                                                                                                                                      

Under our Plan of Reorganization, the following equity securities have
been or will be distributed to holders of XO Parents Pre-Petition Credit
Facility, pre-petition unsecured senior subordinated notes, and pre-petition
general unsecured claims:



| |  |  | 95.0 million shares of common stock of the reorganized company,
which we refer to as the New Common Stock;                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Series A Warrants to purchase 9.5 million shares of New Common
Stock at an exercise price of $6.25 per share;                  
|
| |  |  | Series B Warrants to purchase approximately 7.1 million shares of
New Common Stock at an exercise price of $7.50 per share; and
|
| |  |  | Series C Warrants to purchase approximately 7.1 million shares of
New Common Stock at an exercise price of $10.00 per share.   

In accordance with the terms of our Plan of Reorganization we filed a
registration statement with the Securities and Exchange Commission on July 22,
2003, under which XO Parent intends to issue to certain holders of claims
and/or interests in XO Parent who held such claims and/or interests as of the
November 15, 2002 record date, rights to subscribe for up to 40.0 million
shares of New Common Stock, at $5.00 per share through a rights offering. In
addition, holders of shares of pre-petition Class A common stock of XO Parent
will receive additional nontransferable rights for up to 3.3 million shares of
New Common Stock at $5.00 per share to the extent that the rights otherwise
allocable to such holders in the Rights Offering are exercisable for less than
3.3 million shares of New Common Stock. Accordingly, not less than 40.0 million
and not more than 43.3 million shares will be offered

21



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in the Rights Offering. The Rights
Offering is not expected to commence prior to
final disposition by the
Bankruptcy Court of pending general unsecured claims. Any proceeds from the
Rights Offering will be used to retire outstanding debt of the New Credit
Agreement discussed further in Liquidity and Capital Resources.

Distributions to and Interests Held by Entities Controlled by Mr. Carl C.
Icahn

After the initial distribution of New Common Stock pursuant to the Plan of
Reorganization, Cardiff Holding LLC, a Delaware limited liability company
controlled by Mr. Carl C. Icahn, Chairman of XO, holds more than 80% of the
outstanding shares of New Common Stock. Upon final distribution of warrants
under the Plan of Reorganization, we estimate Cardiff will receive Series A
Warrants to purchase approximately 3.0 million shares of New Common Stock,
Series B Warrants to purchase approximately 2.3 million shares of New Common
Stock, and Series C Warrants to purchase approximately 2.3 million shares of
New Common Stock. As companies controlled by Mr. Icahn owned portions of our
predecessor unsecured debt, they are claimants in our reorganization and will
receive approximately 30% of the rights to participate in our Rights Offering.
If they elect to exercise these rights they could acquire additional shares of
New Common Stock. In addition, approximately 85% of the $500.0 million in loans
outstanding under the New Credit Agreement are held by Arnos Corp., an entity
which is also controlled by Mr. Icahn.

Accounting Impact of Implementing the Plan of Reorganization

Due to XO Parents emergence from its Chapter 11 proceeding, we have
implemented the fresh start accounting provisions of the American Institute
of Certified Public Accountants, or the AICPA, Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code,
to our financial statements. Fresh start requires that, upon our emergence, we
establish a fair value basis for the carrying value of the assets and
liabilities for reorganized XO. Although the effective date of the Plan of
Reorganization was January 16, 2003, due to the immateriality of the results of
operations for the period between January 1, 2003 and the Effective Date, we
accounted for the consummation of the Plan of Reorganization as if it had
occurred on January 1, 2003 and implemented fresh start as of that date. The
January 1, 2003 balance sheet included in the accompanying condensed
consolidated financial statements set forth in Item 1 above, and in note 2 to
such financial statements, illustrates the impact of applying fresh start.

Comparison of Financial Results

As a consequence of the Chapter 11 reorganization, the financial results
for the three and six months ended June 30, 2003 have been separately presented
under the label Reorganized XO. The results for Predecessor XO for January
1, 2003 reflect solely the impact of the application of fresh start on that
date. The reorganized Company has adopted the policy of expensing customer
installation costs and internal labor directly associated with network
construction in the period in which the costs are incurred. The predecessor
Company capitalized and amortized these costs. In accordance with SOP 90-7, the
reorganized Company was required to implement newly issued accounting
pronouncements that would require adoption within twelve months of applying
fresh start.

The operational results for the three and six months ended June 30, 2003
are discussed below.

Three and Six Months Ended June 30, 2003 versus Three and Six Months Ended
June 30, 2002

Revenue. Total revenue for the three months ended June 30, 2003 decreased
12.8% to $283.9 million from $325.5 million in the same period of 2002 while
total revenue for the six months ended June 30, 2003 decreased 13.5% to $570.0
million from $658.9 million for the same period of 2002. This decline is
primarily due to a high level of customer disconnects due to reduced demand
from other telecommunications companies, customer bankruptcies in the
telecommunication industry, and the weakened economy. In addition, sales
productivity has declined due to fewer direct sales representatives and adverse
public perception that accompanied our Chapter 11 proceedings. To increase
sales activity in 2003, we have hired and continue to hire additional direct
sales personnel. Programs launched in 2002 to decrease customer disconnects
will continue. Given our January 16, 2003 emergence from bankruptcy and
continued uncertainty in the economy and in the telecommunications industry
specifically, we are unable to predict revenue trends in future periods.
Revenue was earned from providing the following services (dollars in
thousands):

22



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##### 



|                          |               |   |                    |         |                    |  |      |       |              |   |          |         |  |  |      |       |   |  |       |       |   
|------------------------- | ------------- | - | ------------------ | ------- | ------------------ |  | ---- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | ----- | --
|                          |               |   | Reorganized XO     |         | Predecessor XO     |  |      |       |             
|                          |               |   | Three Months Ended |         | Three Months Ended |  |      |       |             
|                          |               |   | June 30,           |         | June 30,           |  |      |       |             
|                          |               |   |                    |         |                    |  |     
|                          |               |   | 2003               |         | % of Revenue       |  | 2002 |       | % of Revenue |   | % Change
|                          |               |   |                    |         |                    |  |      |       |              |   |         
|Voice services            |               | $ | 150,020            |         |                    |  | 52.8 | %     |              | $ | 175,321  |         |  |  | 53.9 | %     |   |  | (14.4 | %)   
|Data services             |               |   | 97,321             |         |                    |  | 34.3 | %     |              |   | 118,630  |         |  |  | 36.4 | %     |   |  | (18.0 | %)   
|Integrated voice and data |               |   | 36,577             |         |                    |  | 12.9 | %     |              |   | 31,529   |         |  |  | 9.7  | %     |   |  | 16.0  | %    
|                          |               |   |                    |         |                    |  |      |       |              |   |          |         |  |  |      |       |   |  |       |      
|                          | Total revenue |   | $                  | 283,918 |                    |  |      | 100.0 | %            |   | $        | 325,480 |  |  |      | 100.0 | % |  |       | (12.8 | %)
|                          |               |   |                    |         |                    |  |      |       |              |   |          |         |  |  |      |       |   |  |       |      

|                          |               |   |                  |         |                  |  |      |       |              |   |          |         |  |  |      |       |   |  |       |       |   
|------------------------- | ------------- | - | ---------------- | ------- | ---------------- |  | ---- | ----- | ------------ | - | -------- | ------- |  |  | ---- | ----- | - |  | ----- | ----- | --
|                          |               |   | Reorganized XO   |         | Predecessor XO   |  |      |       |             
|                          |               |   | Six Months Ended |         | Six Months Ended |  |      |       |             
|                          |               |   | June 30,         |         | June 30,         |  |      |       |             
|                          |               |   |                  |         |                  |  |     
|                          |               |   | 2003             |         | % of Revenue     |  | 2002 |       | % of Revenue |   | % Change
|                          |               |   |                  |         |                  |  |      |       |              |   |         
|Voice services            |               | $ | 300,743          |         |                  |  | 52.7 | %     |              | $ | 344,155  |         |  |  | 52.2 | %     |   |  | (12.6 | %)   
|Data services             |               |   | 199,298          |         |                  |  | 35.0 | %     |              |   | 254,391  |         |  |  | 38.6 | %     |   |  | (21.7 | %)   
|Integrated voice and data |               |   | 69,970           |         |                  |  | 12.3 | %     |              |   | 60,339   |         |  |  | 9.2  | %     |   |  | 16.0  | %    
|                          |               |   |                  |         |                  |  |      |       |              |   |          |         |  |  |      |       |   |  |       |      
|                          | Total revenue |   | $                | 570,011 |                  |  |      | 100.0 | %            |   | $        | 658,885 |  |  |      | 100.0 | % |  |       | (13.5 | %)
|                          |               |   |                  |         |                  |  |      |       |              |   |          |         |  |  |      |       |   |  |       |      

Voice services revenue includes revenue from bundled local and long
distance voice services, prepaid calling card processing, and other voice
telecommunications based services, interactive voice response services and
stand-alone long distance services. Voice services revenue for the three months
ended June 30, 2003 decreased to $150.0 million from $175.3 million for the
same period of 2002, and for the six months ended June 30, 2003, decreased to
$300.7 million from $344.2 million in the same period of 2002. The decrease is
primarily attributable to customer disconnects and usage reductions arising
from customers downsizing due to the state of the domestic economy and
reduction in sales productivity while we were in bankruptcy.

Data services revenue includes revenue from Internet access, network
access and web applications hosting services. Data services revenue for the
three months ended June 30, 2003 decreased to $97.3 million from $118.6 million
for the same period of 2002, and for the six months ended June 30, 2003, it
decreased to $199.3 million from $254.4 million for the same period of 2002.
The decline was attributable to customer bankruptcies, continued customer
disconnects, and a lower demand from large customers due to reductions in those
customers data capacity needs. The sale of our European operations in February
2002 also partially contributed to this decline.

Integrated voice and data services revenue is generated largely from our
XOptions service offerings, a flat-rate bundled package offering a combination
of voice and data services. Integrated voice and data services revenue for the
three months ended June 30, 2003 increased to $36.6 million from $31.5 million
for the same period in 2002, and for the six months ended June 30, 2003, it
increased to $70.0 million from $60.3 million in the same period of 2002. The
increase is due to the acceptance in the marketplace of our XOptions service
offering.

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

|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |       |   
|------------------- | ----------------------------------- | - | ------------------ | ------- | ------------------ |  | ---- | ---- | ------------ | - | --------- | ------- |  |  |  | ---- | - |  | ----- | ----- | --
|                    |                                     |   | Reorganized XO     |         | Predecessor XO     |  |      |      |             
|                    |                                     |   | Three Months Ended |         | Three Months Ended |  |      |      |             
|                    |                                     |   | June 30,           |         | June 30,           |  |      |      |             
|                    |                                     |   |                    |         |                    |  |      |      |             
|                    |                                     |   | 2003               |         | % of Revenue       |  | 2002 |      | % of Revenue |   | % Change 
|                    |                                     |   |                    |         |                    |  |      |      |              |   |          
|Costs and expenses: |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|                    | Cost of service                     |   | $                  | 104,898 |                    |  |      | 36.9 | %            |   | $         | 134,346 |  |  |  | 41.3 | % |  |       | (21.9 | %)
|                    | Selling, operating and general      |   |                    | 165,042 |                    |  |      | 58.1 | %            |   |           | 188,253 |  |  |  | 57.8 | % |  |       | (12.3 | %)
|                    | Stock-based compensation            |   |                    |        |                    |  |      |     |              |   |           | 8,891   |  |  |  | 2.7  | % |  | NM   
|                    | Depreciation and amortization       |   |                    | 27,238  |                    |  |      | 9.6  | %            |   |           | 167,843 |  |  |  | 51.6 | % |  |       | (83.8 | %)
|                    | Restructuring and asset write-downs |   |                    |        |                    |  |      |     |              |   |           | 2,918   |  |  |  | 0.9  | % |  | NM   
|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|Total               |                                     | $ | 297,178            |         |                    |  |      |      |              | $ | 502,251   |         |  |  |  |      |   |  | (40.8 | %)   
|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |       |   
|                    |                                     |   | Reorganized XO     |         | Predecessor XO     |  |      |      |             
|                    |                                     |   | Six Months Ended   |         | Six Months Ended   |  |      |      |             
|                    |                                     |   | June 30,           |         | June 30,           |  |      |      |             
|                    |                                     |   |                    |         |                    |  |      |      |             
|                    |                                     |   | 2003               |         | % of Revenue       |  | 2002 |      | % of Revenue |   | % Change 
|                    |                                     |   |                    |         |                    |  |      |      |              |   |          
|Costs and expenses: |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|                    | Cost of service                     |   | $                  | 212,404 |                    |  |      | 37.3 | %            |   | $         | 274,713 |  |  |  | 41.7 | % |  |       | (22.7 | %)
|                    | Selling, operating and general      |   |                    | 331,277 |                    |  |      | 58.1 | %            |   |           | 393,503 |  |  |  | 59.7 | % |  |       | (15.8 | %)
|                    | Stock-based compensation            |   |                    |        |                    |  |      |     |              |   |           | 17,986  |  |  |  | 2.7  | % |  | NM   
|                    | Depreciation and amortization       |   |                    | 53,605  |                    |  |      | 9.4  | %            |   |           | 329,199 |  |  |  | 50.0 | % |  |       | (83.7 | %)
|                    | Restructuring and asset write-downs |   |                    |        |                    |  |      |     |              |   |           | 2,918   |  |  |  | 0.4  | % |  | NM   
|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      
|Total               |                                     | $ | 597,286            |         |                    |  |      |      |              | $ | 1,018,319 |         |  |  |  |      |   |  | (41.3 | %)   
|                    |                                     |   |                    |         |                    |  |      |      |              |   |           |         |  |  |  |      |   |  |       |      

NM  Not Meaningful

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Cost of service. Cost of service includes expenses directly associated
with providing telecommunications services to our customers. Cost of service
includes, among other items, the cost of connecting customers to our networks
via leased facilities, the costs of leasing components of our network
facilities and costs paid to third party service providers for interconnect
access and transport services. Cost of service for the three and six months
ended June 30, 2003 decreased in absolute dollars and as a percentage of
revenue compared to the same period in 2002. The year over year decline was due
primarily to cost optimization programs which reduced expenses by transferring
traffic from leased facilities onto our owned or controlled facilities, reduced
costs due to customer disconnects, and $12.4 million of favorable resolution of
disputed third party costs during the first half of 2003. The decline was
partially offset by our adoption of an accounting policy during the first
quarter of 2003 (in connection with the implementation of fresh start
accounting), to cease the deferral of costs associated with the installation of
customer services and instead, to expense such installation costs as incurred.

We anticipate that cost of service will increase to historical levels as a
percentage of revenue in future periods, based on our expectation that the
reduction in expenses resulting from favorable dispute resolutions will be less
than we experienced in the six months ended June 30, 2003. In addition, we
expect cost of service will fluctuate based on trends in revenue, product mix,
the impact of customer bankruptcies, the extension of services into new
markets, and regulatory decisions.

Selling, operating and general.Selling, operating and general expense
includes expenses related to sales and marketing, internal network operations
and engineering, information systems, general corporate office functions and
collection risks. Selling, operating and general expense for the three months
ended June 30, 2003 was $165.0 million versus $188.3 million for the same
period in 2002. For the six months ended June 30, 2003, selling, operating and
general expense was $331.3 million versus $393.5 million for the same period in
2002. Selling, operating and general expense decreased in part due to the
centralization of many functions, cost reduction and restructuring initiatives
that included significant headcount reductions and the February 2002
divestiture of our European operations. In addition, recording our real estate
contracts at their fair value, as required by fresh start, contributed to the
decrease. During June 2003, a new Employee Retention and Incentive Plan,
hereinafter referred to as the 2003 Retention Plan, was implemented which
provides for both cash and equity based awards. Eligible employees were
permitted to elect the Retention Plan in lieu of our existing cash only bonus
plan. As a result, the Company reduced its bonus liability and selling,
operating and general costs by approximately $5.4 million. The reduction was
partially offset by our adoption of the policy of expensing internal labor
costs directly associated with customer installation and the construction of
our network.

We expect selling, operating and general expense to increase in absolute
dollars for the remainder of 2003 due primarily to new sales incentive and
marketing programs.

Stock-based compensation. Stock-based compensation expense represents
non-cash charges recorded in connection with the grant of compensatory stock
options and restricted stock to employees whose compensation is included in
selling, operating and general expense. During the three months and six months
ended June 30, 2003, XO incurred no stock-based compensation expense as its
deferred compensation balance was eliminated in conjunction with fresh start.
XO incurred $8.9 million in deferred compensation expense in the second quarter
of 2002 and $18.0 million in the first half of 2002. The reorganized company
will recognize stock-based compensation with respect to new grants of
compensatory stock options and restricted stock when such awards are granted at
less than fair market value on the grant date.

Depreciation and amortization. As discussed above, we implemented fresh
start on January 1, 2003 which resulted in a reduction of the carrying value of
our property and equipment to its estimated fair value which is significantly
lower than historical cost. Consequently, depreciation expense decreased to
$20.7 million for the three months ended June 30, 2003, versus $141.5 million
for the same period in 2002 and to $40.5 million for the first six months of
2003 versus $276.5 million in the first six months of 2002. Amortization
expense includes the amortization of fixed wireless licenses and other
intangible assets with definite lives. As a result of fresh start accounting,
the carrying value of fixed wireless licenses and intangible assets was
adjusted to their estimated fair

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value. The aggregate estimated fair value of these assets is significantly
lower than their historical cost. Total amortization expense decreased to $6.5
million for the three months ended June 30, 2003 versus $26.4 million for the
same period in 2002 and it decreased to $13.1 million for the first six months
of 2003 versus $52.7 million for the first six months of 2002.

We expect depreciation and amortization expense for the remainder of the
year to continue to track with the first half of 2003. As of June 30, 2003, we
had approximately $598 million of long-lived assets, including approximately
$98 million of construction-in-progress and certain fixed wireless licenses
that are not currently ready for their intended use or placed into service and,
accordingly, are not currently being depreciated or amortized.

Interest income. Interest income for the three months ended June 30, 2003
increased to $4.7 million from $4.2 million for the same period in 2002. The
increase is due to the gain recognized on available-for-sale marketable
securities that were sold to purchase the Global Crossing debt securities
discussed in Recent Events. Prior to selling the marketable securities, the
unrealized gains on these investments were recognized in comprehensive income.
For the six months ended June 30, 2003, interest income decreased to $7.8
million versus $9.8 million for the first six months of 2002. The decrease in
interest income is due primarily to reduced interest rates on lower invested
balances, offset by the gain recognition.

Interest expense, net.Interest expense, net for the reorganized Company
for the three and six months ended June 30, 2003 was $11.7 million and $21.4
million, respectively. For the three and six months ended June 30, 2002,
interest expense was $104.4 million and $225.1 million, respectively. The
significant reduction was caused by the cancellation of our pre-petition senior
notes, pre-petition convertible subordinated notes and the Pre-Petition Credit
Facility upon consummation of our Plan of Reorganization. Interest expense for
the six months ended June 30, 2003 primarily relates to interest on the New
Credit Agreement. Proceeds from the Rights Offering will be used to retire
outstanding debt of the New Credit Agreement, discussed further in Liquidity
and Capital Resources.

Critical Accounting Policies

Our significant accounting policies are more fully described in the notes
to the consolidated financial statements in our 2002 Annual Report. The
preparation of the condensed consolidated financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make judgments, estimates and assumptions regarding uncertainties
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Management uses historical experience and all available information
to make these judgments and estimates and actual results could differ from
those estimates and assumptions that are used to prepare our financial
statements at any given time. Despite these inherent limitations, management
believes that Managements Discussion and Analysis and the accompanying
condensed consolidated financial statements and footnotes provide a meaningful
and fair perspective of our financial condition and our operating results for
the current period. Management believes the following critical accounting
policies represent the more significant judgments and estimates used in the
preparation of our condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q.

Investment in Debt Securities

Investment in debt securities at June 30, 2003 consist primarily of
investments in senior secured bank debt of Global Crossing, a
telecommunications company which is currently in Chapter 11 reorganization
proceedings. The debt trades in a thin market primarily between dealers but is
neither listed on any exchange nor on any over-the-counter NASDAQ or National
Quotation Bureau systems. Accordingly, we currently report all Global Crossing
debt securities at cost, which approximates fair value, and have not accrued any interest income on this
investment.

Long-Lived Assets

Our long-lived assets include property and equipment, fixed wireless
licenses, and identifiable intangible assets to be held and used. Property and
equipment acquired prior to December 31, 2002 is stated at fair value as
required by fresh start, net of accumulated depreciation. Additions to property
and equipment during 2003 are stated at historical cost, net of accumulated
depreciation. Depreciation is calculated on a straight-line basis over the
estimated useful lives of the assets. The estimated useful lives of
telecommunications networks and acquired bandwidth are 3 to 20 years and 5 to 7
years for furniture fixtures, equipment and other. These useful lives are
determined based on historical usage with consideration given to technological
changes and trends in the industry that could impact the network architecture
and asset utilization. This latter assessment is significant because we operate
within an industry in which new technological changes could render some or all
of our network related equipment obsolete requiring

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application of a shorter useful life or, in certain circumstances, a
write-off of the entire value of the asset. Accordingly, in making this
assessment, we consider our planned use of the assets, the views of experts
both from internal and outside sources regarding the impact of technological
advances and trends in the industry on the value and useful lives of our
network assets. Costs of additions and improvements (other than internal labor
costs related to network construction, as discussed below) are capitalized and
repairs and maintenance are charged to expense as incurred. Direct external
costs of constructing property and equipment are capitalized including interest
costs related to construction. The reorganized Company has adopted the policy
of expensing internal labor directly associated with network construction in
the period in which the costs are incurred.

Investments in fixed wireless licenses acquired prior to December 31, 2002
are stated at fair value as required by fresh start, net of accumulated
amortization. We are amortizing these over the license period of 10 years as
determined by the Federal Communications Commission. Other intangibles consist
of customer relationships, internally developed technology and XOs trade name.
The customer relationships and internally developed technology are being
amortized using the straight-line method over the estimated useful lives of
three years. The XO trade name was determined to have an indefinite life and is
not being amortized, but is reviewed at least annually for impairment, as
required under Statement of Financial Accounting Standards, or SFAS, No. 142
Goodwill and Other Intangible Assets, or SFAS No. 142.

Depreciation or amortization of the long-lived asset begins when the asset
is substantially complete or placed into service. At June 30, 2003, our balance
sheet includes approximately $598 million of long-lived assets, including
approximately $98 million of construction-in-process and certain fixed wireless
licenses, that were either not ready for their intended use or not placed into
service, and accordingly are not being depreciated or amortized.

Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount should be addressed pursuant
to SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, or SFAS No. 144. The criteria for determining impairment for
long-lived assets to be held and used is determined by comparing the carrying
value of these long-lived assets to managements best estimate of future
undiscounted cash flows expected to result from the use of the assets and their
eventual disposition. We believe that no impairment existed under SFAS No. 144
as of June 30, 2003. In the event that there are changes in the planned use of
our long-lived assets or our expected future undiscounted cash flows are
reduced significantly, our assessment of our ability to recover the carrying
value of these assets under SFAS No. 144 could change.

Revenue Recognition

Revenues from telecommunications services are recognized when the services
are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. In circumstances when these
criteria are not met, revenue recognition is deferred until resolution occurs.
For example, if a customer files bankruptcy, we believe the probability of
collection is weakened. Consequently, under such circumstances, although we
continue to bill the customer for all services provided, we do not recognize
revenue until cash is received. In addition, telecommunications customers often
dispute the amounts that we invoice them due to regulatory issues, late payment
fees, and early termination charges based on differences of opinion regarding
contract terms or service levels. Accordingly, these billings are not
considered fixed and determinable and collection of such amounts is not
considered probable while these amounts are disputed, revenue recognition is
deferred until the dispute is resolved and the cash is collected.

Service discounts and incentives related to telecommunications services
are recorded as a reduction of revenue when granted or ratably over a contract
period. Fees billed in connection with customer installations and other
non-recurring fees are deferred and recognized ratably over the estimated
customer life. The estimated customer life is calculated by analyzing customer
disconnects as a percentage of revenue. This calculation is reviewed every
quarter.

We establish an allowance for collection of doubtful accounts and other
sales credit adjustments. Allowances for sales credits are established through
a charge to revenue, while allowances for doubtful accounts are established
through a charge to selling, operating and general expenses. We assess the
adequacy of these reserves monthly by considering general factors, such as the
length of time individual receivables are past due, historical collection
experience, the economic and competitive environment, and changes in the credit
worthiness of our customers. As considered necessary, we also assess the
ability of specific customers to meet their financial obligations to us and
establish specific valuation allowances based on the amount we expect to
collect from these customers. We can and have experienced material changes to
our reserve requirements on a month to month basis as significant customers
have in the past unexpectedly filed for bankruptcy or otherwise became
insolvent. We believe that our established

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valuation allowances were adequate as of June 30, 2003. If circumstances
relating to specific customers change or economic conditions worsen such that
our past collection experience and assessment of the economic environment are
no longer valid, our estimate of the recoverability of our trade receivables
could be changed. If this occurs, we would adjust our valuation allowance in
the period the new information is known.

Revenue from the sale or lease of unlit network capacity is recognized
upon consummation of the transaction and the acquirers acceptance of the
capacity in instances when we receive upfront cash payments and are
contractually obligated to transfer title to the specified capacity at the end
of the contract term. If the transaction does not meet these criteria, revenue
is recognized ratably over the contract term.

Cost of Service

Cost of service includes expenses directly associated with providing
telecommunications services to customers, including, among other items, the
cost of connecting customers to our networks via leased facilities, the costs
of leasing components of our network facilities and costs paid to third party
providers for local access and transport services. All such costs are expensed
as incurred. We accrue for the expected costs of services received from third
party telecommunications providers during the period the services are rendered.
Invoices received from the third party telecommunications providers are often
disputed due to billing discrepancies. We accrue for all invoiced amounts, even
amounts in dispute, as these amounts represent contingent liabilities that are
considered probable and measurable. Disputes resolved in our favor may reduce
cost of service in the period the dispute is settled and typically reflect
costs paid in prior periods. Because the period of time required to resolve
these types of disputes often lapses over several quarters, the benefits
associated with the favorable resolution of such disputes normally are realized
in periods subsequent to the accrual of the disputed invoice.

Income Taxes

We account for income taxes in accordance with the provisions of SFAS
No.109, Accounting for Income Taxes, (SFAS No. 109) which requires that
deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws. Valuation allowances
are used to reduce deferred tax assets to the amount considered likely to be
realized.

As of December 31, 2002, we had net operating loss carryforwards of
approximately $4.0 billion and capital loss carryforwards of approximately $0.5
billion. As of the Effective Date, we recognized a substantial amount of
taxable income from the cancellation of indebtedness, eliminating a substantial
portion of these capital and net operating loss carryforwards. Other tax
attributes, including property bases, have also been reduced. Any surviving
capital or net operating loss carryforwards will be subject to limitations
imposed under the ownership change rules in the U.S. Internal Revenue Code. As
discussed in more detail in note 10 to the accompanying Condensed
Consolidated financial statements, we will join with the affiliated group of
corporations controlled by Mr. Carl C. Icahn in filing a consolidated federal
income tax return for periods following the Effective Date.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board, or FASB issued
SFAS No. 143, Accounting for Asset Retirement Obligations, or SFAS No. 143,
which requires an entity to recognize the fair value of a liability for an
asset retirement obligation in the period in which a legal or contractual
removal obligation is incurred if a reasonable estimate of fair value can be
made. If a reasonable estimate of fair value cannot be made in the period the
asset retirement obligation is incurred, SFAS No. 143 requires the liability to
be recognized when a reasonable estimate of the fair value can be made. As
required by SOP 90-7, we implemented SFAS No. 143 on January 1, 2003, in
conjunction with the implementation of fresh start and recorded an estimated
asset retirement obligation of $12.0 million, as disclosed in note 5 to the
accompanying condensed consolidated financial statements.

Effective January 1, 2003, we adopted SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections as of April 2002 or SFAS No. 145, which eliminates the requirement
to report material gains or losses from debt extinguishments as an
extraordinary item, net of any applicable income tax effect, in an entitys
statement of operations. SFAS No. 145 instead requires that a gain or loss
recognized from a debt extinguishment be classified as an extraordinary item
only when the extinguishment meets the criteria of both unusual in nature and
infrequent in occurrence as prescribed under Accounting Principles Board
Opinion, or APB, No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. The

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adoption of SFAS No. 145 had no effect on our financial position or
results of operations for the three and six months ended June 30, 2003 and
2002. We recognized extraordinary gains from debt repurchases in the third and
fourth quarters of 2001. In the future, such gains will be reclassified in the
respective consolidated statements of operations in accordance with SFAS No.
145.

Effective January 1, 2003, we adopted SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities or SFAS No. 146, which requires
that costs, including severance costs, associated with exit or disposal
activities be recorded at their fair value when a liability has been incurred.
Under previous guidance, certain exit costs, including severance costs, were
accrued upon managements commitment to an exit plan, which is generally before
an actual liability has been incurred. In the first half of 2003, we did not
have any exit or disposal activities initiated after December 31, 2002;
however, the provisions of SFAS No. 146 were implemented in conjunction with
our implementation of fresh start accounting. Accordingly, as disclosed in note
5 to the accompanying condensed consolidated financial statements, our
remaining restructuring accrual has been reduced to its net present value.

In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, or SFAS
No. 148 which amends
SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123, to
provide alternative methods of transition to SFAS No. 123s fair value method
of accounting for stock-based employee compensation. SFAS No. 148 also amends
the disclosure provisions of SFAS No. 123 and APB No. 28, Interim Financial
Reporting, or APB No. 28, to require disclosure in the summary of significant
accounting policies of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income and
earnings per share in annual and interim financial statements. While SFAS No.
148 does not amend SFAS No. 123 to require companies to account for employee
stock options using the fair value method, the disclosure provisions of SFAS
No. 148 are applicable to all companies with stock-based employee compensation,
regardless of whether they account for that compensation using the fair value
method of SFAS No. 123 or the intrinsic value method of APB No. 28. Effective
January 1, 2003, we adopted the disclosure provisions of SFAS No. 148. As
allowed by SFAS No. 148, we have chosen to continue to account for compensation
cost associated with our employee stock plans in accordance with the intrinsic
value method prescribed by APB No. 25, Accounting for Stock Issued to
Employees, or APB No. 25.

In May 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, or SFAS No. 149, which amends
and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. We do not believe that the adoption of SFAS No. 149 will have a
material impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity, or
SFAS No. 150, which establishes standards for how companies classify and
measure certain financial instruments with characteristics of both liabilities
and equity. It requires companies to classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS No.
150 is effective beginning with the second quarter of fiscal 2004. We do not
believe the adoption of SFAS No. 150 will have a material impact on our
consolidated financial statements.

Liquidity and Capital Resources

Our goal is to provide our customers complete, integrated, voice and data
network applications and services primarily through networks that we own or
control. We believe that the consummation of our Plan of Reorganization and the
changes in our capital structure as a result of our emergence from Chapter 11
bankruptcy along with the various initiatives we have undertaken to reduce
operating costs and capital expenditures over the past two years, position us
to be able to successfully execute our business plans and generate cash flow
over the long term. However, in the near term we expect to incur net negative
cash flows from operating and investing activities.

Our balance of cash, marketable securities, and investments in debt
securities decreased to $521.9 million at June 30, 2003 from $561.0 million at
December 31, 2002. During the second quarter of 2003 we liquidated our entire
portfolio of marketable securities containing U.S. government agency issued
securities. We made an offer to acquire any and all of the outstanding senior
secured bank debt of Global Crossing. As a result, we paid $158.5 million to
purchase $761.1 million principal amount of secured bank debt of Global
Crossing Holdings Ltd. and Global Crossing North America, Inc.,
telecommunications companies which are currently in reorganization
proceedings. We now hold approximately 34% of the $2.214 billion principal amount of such
debt outstanding.

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These Global Crossing securities are classified as investment in debt
securities, they are significantly higher in risk than our previous marketable
securities as they are thinly traded between dealers, not listed on any
exchange or on the over-the-counter market and may not be recoverable at our
cost should Global Crossings financial condition deteriorate or reorganization
plan be further delayed or not consummated.

Capital Resources and Liquidity Assessment

We expect that, in the near term, our business will use existing cash to
fund capital expenditures and working capital requirements. We expect that the
majority of our planned capital expenditure requirements will be
success-based in that they will be used to purchase and install optical
equipment, channel banks, routers, servers or other customer-related equipment
and electronics in connection with growing revenue by adding new customers or
increasing the amount of services provided to existing customers. Much of the
remaining planned capital expenditures will be for the continued development
and implementation of our information systems to support and enhance the
provisioning and billing of new and existing customers. Part of our working
capital requirements are commitments under lease and contractual obligations
for software licenses and ongoing support of software for IT and network
applications.

There are no additional borrowings available under our New Credit
Agreement, although, under certain circumstances, the New Credit Agreement
permits us to obtain a senior secured facility of up to $200.0 million, less
the amount of any proceeds from the Rights Offering, so long as the terms are
satisfactory to the administrative agent and holders of a majority of the
principal amount of the loans outstanding under the New Credit Agreement. We
have no current debt service requirements since automatic and permanent
quarterly reductions of the principal amount outstanding under the New Credit
Agreement do not commence until October 15, 2007. We are not required to pay
cash for interest accrued on the principal amount under the New Credit
Agreement until we meet certain financial ratios. As previously noted, XO filed
the Rights Offering registration statement with the Commission on July 22,
2003. We cannot predict at this time how much capital will be raised, but all
proceeds will be used to pay down principal outstanding under the New Credit
Agreement and will reduce the amount permissible under the $200.0 million
senior secured facility discussed above.

We
expect that our current cash balance of $361.2 million will be
sufficient to fund our working capital and capital expenditure needs and allow
us to successfully execute our business plans. Current economic conditions of
the telecommunications industry, however, have created potential opportunities
for XO to acquire companies or portions of companies at attractive prices. We
may in the future make offers to acquire additional debt instruments or control
of, or otherwise invest in, lend to or otherwise do business with Global
Crossing, as well as acquire additional telecommunication companies or assets.
If we do so, we do not know what the terms of any such transactions would be.
Such transactions, if any, involving cash consideration could significantly and
adversely affect our liquidity. To support further business expansion,
including investments in or acquisitions of other companies, we may consider
additional equity and debt financings.

Our current financial projections do not assure that we will have
sufficient cash to repay debt amounts due in 2006 under the New
Credit Agreement.
We expect to be able to refinance the
debt outstanding under our New Credit Agreement in or
prior to 2006, and
expect to be in position to do so on commercially reasonable terms,
however no assurance can be given that we will be successful in
refinancing this debt or under terms that are commercially
reasonable. Approximately 85% of the Underlying Loans of the New
Credit Agreement are currently held by an entity controlled by Mr.
Icahn.

Off-Balance Sheet Transactions

We are not currently engaged in the use of off-balance sheet derivative
financial instruments, to hedge or partially hedge interest rate exposure.

Credit Risk

During the second quarter of 2003, XO liquidated its entire portfolio of
marketable securities which consisted of an investment portfolio containing
U.S. government agency issued and other securities with a duration of less than
one year. XO invested a portion of the proceeds, $158.5 million, in
$761.1 million principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in reorganization proceedings.
The debt trades in a thin market primarily between dealers but is neither
listed on any exchange nor on any over-the-counter NASDAQ or National Quotation
Bureau systems. If XO chooses to liquidate its investment in this
debt, it may not be able to locate a buyer that would allow it to liquidate the
debt in a timely fashion to recover the amount paid. Accordingly, it cannot be
assured that XO will be able to dispose of the investment for an
amount equal to or greater than the amount it paid for it, or that any
distribution that may be received upon consummation of Global Crossings
bankruptcy case will have a value equal to or greater than this investment.

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Other financial instruments that potentially subject us to concentrations
of credit risk consist primarily of trade receivables. Although our trade
receivables are geographically dispersed and include customers in many
different industries, a portion of our revenue is generated from services
provided to other telecommunications service providers. Several of these
companies have filed for protection under Chapter 11 of the Bankruptcy Code. We
believe that our established valuation and credit allowances are adequate as of
June 30, 2003 to cover these risks.

Regulatory Overview

Overview

The Telecommunications Act of 1996, or the Telecom Act, which
substantially revised the Communications Act of 1934, has established the
regulatory framework for the introduction of competition for local
telecommunications services throughout the United States by new competitive
entrants such as us. Prior to the passage of the Telecom Act, states typically
granted an exclusive franchise in each local service area to a single dominant
carrier  often a former subsidiary of AT&T known as a Regional Bell Operating
Company (RBOC)  which owned the entire local exchange network and operated a
virtual monopoly in the provision of most local exchange services in most
locations in the United States. The RBOCs, following some recent consolidation,
now consist of the following companies: BellSouth, Verizon, Qwest
Communications and SBC Communications.

Among other things, the Telecom Act preempts state and local governments
from prohibiting any entity from providing telecommunications service, which
has the effect of eliminating prohibitions on entry that existed in almost half
of the states at the time the Telecom Act was enacted. At the same time, the
Telecom Act preserved state and local jurisdiction over many aspects of local
telephone service and, as a result, we are subject to varying degrees of
federal, state and local regulation. Consequently, federal, state and local
regulation, and other legislative and judicial actions relating to the
telecommunications industry could significantly affect our business.

We believe that the Telecom Act provided the opportunity to accelerate the
development of competition at the local level by, among other things, requiring
the incumbent carriers to cooperate with competitors entry into the local
exchange market. We have developed our business and designed and constructed
our networks to take advantage of the features of the Telecom Act that require
cooperation from the incumbent carriers, and believe that the continued
viability of the provisions relating to these matters is critical to the
success of the competitive regime contemplated by the Telecom Act.

Although the Telecom Act and the related rules governing competition
issued by the FCC, as well as pro-competitive policies already developed by
state regulatory commissions, have enabled new entrants like us to capture a
portion of the incumbent carriers market share of local services, there have
been numerous attempts to limit or eliminate the basic framework for
competition in the local exchange services market through a combination of
federal legislation, adoption of new rules by the FCC, and challenges to
existing and proposed regulations by the incumbent carriers. We expect these
efforts to limit the benefits of the Telecom Act to continue. Successful
implementation of our business plan is predicated on the assumption that the
basic competitive framework will remain in place.

Federal Regulation

The FCC exercises jurisdiction over our communication facilities and
services. We have authority from the FCC for the installation, acquisition and
operation of our wireline network facilities to provide facilities-based
domestic and international services. In addition, we have obtained FCC
authorizations for the operation of our Local Multipoint Distribution System
(LMDS) and 39 GHz fixed wireless facilities. Unlike incumbent carriers, we are
not currently subject to price cap or rate of return regulation, which leaves
us free to set our own pricing policies for end user services subject only to
the general federal guidelines that our charges for interstate and
international services be just, reasonable, and non-discriminatory. The FCC
allows us to file interstate tariffs on an ongoing basis for interstate access
(rates charged among carriers for access to their networks). The FCC, however,
has issued a decision that required us (with only minor exceptions) to withdraw
tariffs for interstate domestic long distance services and international long
distance services. We, however, are still required to make the terms,
conditions and rates of the detariffed services available to the public on our
Company web page and such terms, conditions, and rates are located at
http://www.xo.com/legal/.

The following is a summary of the interconnection and other rights granted
by the Telecom Act that are most important for full local competition and our
belief as to the effect of the requirements, if properly implemented:

30



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| |  |  | Interconnection with the networks of incumbents and other
carriers, which permits customers of ours to exchange traffic with
customers connected to other networks;                                                                                                                              
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Local loop unbundling, which allows us to selectively gain access
to incumbent carriers facilities and wires that connect the incumbent
carriers central offices with customer premises, thereby enabling us
to serve customers, on a facilities basis, not directly connected to
our networks;
|
| |  |  | Reciprocal compensation, which mandates arrangements for local
traffic exchange between us and both incumbent and competitive
carriers and compensation for terminating local traffic originating on
other carriers networks, thereby improving our margins for local
service;                  
|
| |  |  | Number portability, which allows customers to change local
carriers without changing telephone numbers, thereby removing a
significant barrier for a potential customer to switch to our local
voice services;                                                                                   
|
| |  |  | Access to phone numbers, which mandates assignment of new
telephone numbers to our customers, thereby enabling us to provide
telephone numbers to new customers on the same basis as the incumbent
carrier; and                                                                                  
|
| |  |  | Collocation of telecommunications equipment in incumbent central
offices, which enables us to have direct access to unbundled loops and
other network elements and facilitates their efficient integration
with our switching and other network facilities.                                      

In January 1999, the U.S. Supreme Court, in a decision that was generally
favorable to competitive telephone companies such as us, upheld key provisions
of the FCC rules implementing the Telecom Act. In finding that the FCC has
general jurisdiction to implement the Telecom Acts local competition
provisions, the Supreme Court confirmed the FCCs role in establishing national
telecommunications policy, and thereby created greater certainty regarding the
rules governing local competition going forward.

Although the rights established in the Telecom Act are a necessary
prerequisite to the introduction of full local competition, they must be
properly implemented and enforced to permit competitive telephone companies
like us to compete effectively with the incumbent carriers. Discussed below are
several FCC and court proceedings relating to the application of certain FCC
rules and policies that are significant to and directly impact our operations
as well as the nature and scope of industry competition.

Unbundling of Incumbent Network Elements

In the January 1999 Supreme Court decision discussed above, the Court
affirmed the FCCs interpretation of matters related to unbundling of incumbent
carriers network elements. It held that the FCC correctly interpreted the
meaning of the term network element, which defines the parts of an incumbent
carriers operations that may be subject to the unbundling requirement of the
Telecom Act. The Court, however, also held that the FCC did not correctly
determine which network elements must be unbundled and made available to
competitive telephone companies such as us. In November 1999, the FCC released
its UNE (unbundled network element) Remand Order, which addressed the
deficiencies in the FCCs original ruling cited by the Supreme Court. The order
generally was viewed as favorable to us and other competitive carriers because
it ensured that incumbent carriers would be required to continue to make
available those network elements, including unbundled loops, that are crucial
to our ability to provide local and other services. The UNE Remand Order
subsequently was appealed by the incumbent carriers.

On May 24, 2002, the United States Court of Appeals for the D.C. Circuit
released an opinion remanding the UNE Remand Order to the FCC for further
consideration. The Court of Appeals stated that it had remanded the order
because it felt that:



| |  |  | the FCC had adopted uniform national rules with respect to
almost every unbundled element for every geographic market without
regard to the state of competition in any particular market; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the FCCs determination of when cost disparities impair a
competitors ability to provide service without unbundled elements
was too broad.                                                   

31



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In response to the Court of Appeals decision, and as part of its
statutorily required periodic review of its list of unbundled elements, the FCC
initiated its Triennial Review proceeding.

On February 20, 2003, the FCC held an open meeting and adopted its
Triennial Review decision. The full text of what is expected to be a voluminous
order is not yet available, so we have only a broad outline of the FCCs
actions without the detail required to clearly understand all of the
ramifications of this important decision. Based on the FCCs press release and
the comments of each FCC Commissioner at the meeting, it appears that, under
that order, our ability to obtain access to certain unbundled network elements
and incumbent network upgrades will be curtailed or more costly in the future.
Also, it appears that the order would delegate to the states the overall
responsibility for deciding what unbundled elements should be available to
competitors like us in local markets of each of the respective states.
Delegation of these determinations creates the risk that some states may decide
to limit or eliminate unbundled elements to which we have access today and that
we will be faced with different sets of rules and costs if states issue
inconsistent decisions.

Based on the FCCs press release announcing the Triennial Review decision
and related comments of the Commissioners, the following matters may impact us
and many of our competitors once the order is issued:



| |  |  | Curtailed Access to Broadband: It appears that the order will
adopt new rules that would restrict competitive carriers from leasing
as unbundled elements certain upgrades that the incumbent carriers make
to their networks, such as the deployment of new optical fiber or
upgrades from copper to optical fiber. For example, a new fiber loop to
a customer that replaces an existing copper loop could be exempt from
unbundling, except that incumbents must continue to unbundle the
pre-existing copper loop or provide a voice channel for us on the new
fiber loops that is equivalent to the old copper loop. Although the
imposition of any restrictions on our access to the incumbents
broadband networks is not a favorable development for us, we believe
that the adverse impact is partially mitigated by the fact that it
appears that incumbents would be required to continue to provide us
with basic access to those facilities that we currently lease from them
to serve many of our customers.                                                                                                                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Unbundled Local Loops: It appears that the order will make a
general, national finding that competitive carriers should have access
to certain unbundled loops of the incumbent carriers. The states,
however, may remove competitive carriers access to such loops based on
the results of specified competitive analyses. Incumbent carriers will
no longer be required to provide competitive carriers with access to
certain very high-capacity loops. We believe that the net result of
such an order would not have a significant impact on us, as the access
to the vast majority of unbundled loops that we use today would be
preserved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Unbundled Transport: It appears from the FCCs press release
announcing the Triennial Review decision that the order will change the
definition of dedicated transport in such a way that competitive
carriers would have to purchase certain transport facilities at higher
rates than they do today. It appears that the order would maintain
access to many types of transport between incumbent facilities, such as
transport between incumbent central offices, but it redefines transport
to eliminate the unbundling of other transport. It also appears that
the order would set forth a test that the states must follow in
considering whether transport should be available in local markets
within the states. It appears that the order will provide that certain
very high-capacity transport would no longer be available as an
unbundled element and that shared transport would be unavailable as an
unbundled element in most business markets. Although it is not possible
to gauge the full effect of these changes without reviewing the text of
the order and accompanying regulations, we believe that it is likely
that these actions would raise our costs for transport services in the
future.
|
| |  |  | Enhanced Extended Links and Co-Mingling: It appears that the order
will facilitate the ability of competitive carriers like us to obtain a
loop and transport combination of unbundled elements known as enhanced
extended links, provided that the underlying loop and transport
elements are available on an unbundled basis. It also appears that the
order will permit competitive carriers to mix unbundled network
elements with retail services instead of requiring them to artificially
segregate unbundled elements from the remainder of our network. Because
we currently take advantage of both services from the incumbent
carriers, we believe that these developments could result in cost
savings for us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | Calculation of Unbundled Element Rates: It appears that the order
will allow the incumbent carriers to utilize a higher cost of capital
and shorter depreciation lives to establish rates for unbundled
elements. We believe that these modifications could raise our costs for
leasing unbundled elements in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

32



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As indicated above, the text of the Triennial Review decision has not yet
been released. We anticipate that, once the FCCs new unbundling rules are
effective, incumbent carriers and other entities will pursue appellate review,
seek to institute administrative proceedings with the FCC and state regulatory
agencies, and lobby the United States Congress, all in an effort to affect laws
and regulations in a manner even more favorable to them and against the
interests of competitive carriers. At the same time, we anticipate that
competitive carriers will endeavor to improve their positions and access to the
incumbents networks through similar means.

Collocation in Incumbent Central Offices

Collocation regulations promulgated by the FCC specify in greater detail
obligations that the Telecom Act imposes upon the incumbent carriers to open
their local networks to competition by providing competitors space to locate
their equipment in incumbent central offices and remote terminals for the
purpose of interconnection. This allows the competitive carriers to provide
local telephone services and to use portions of the incumbent carriers
existing networks to offer new and innovative services. Over the past four
years, the FCCs collocation regulations have been the subject of very
contentious proceedings at the FCC and litigation before several courts. On
remand from a March 2000 decision by the U.S. Court of Appeals for the D.C.
Circuit, the FCC issued a decision that revised its rules in a manner that
permits incumbent companies to exercise more discretion in determining the
placement of competitors equipment in their central offices, and does not
require the incumbents to allow competitors to install and maintain
cross-connections between other collocated competitors, but requires the
incumbent carriers to provide this as part of their collocation services. In
June, 2002, the U.S. Court of Appeals for the D.C. Circuit affirmed the FCCs
remand order, and the FCC has since clarified that incumbent carriers should
make their cross-connection service available in the physical collocation
tariffs they file with the FCC.

In October 2002, Verizon filed an application with the FCC requesting
authority to discontinue providing federally-tariffed physical collocation
services, as required under current FCC regulations applicable to most
incumbent carriers. Verizon asked the FCC to require its competitors instead to
order collocation services solely pursuant to terms and conditions approved by
state public service commissions. Verizons application remains pending but, if
this authority is granted, such discontinuance would make it more costly and
difficult for competitors such as us to obtain collocation services because the
rates set by state public service commissions are typically significantly
higher than those approved by the FCC, and may require competitors to engage in
costly and lengthy negotiations in different states. If Verizon is successful,
the RBOCs and other large incumbent carriers are likely to seek and receive
comparable relief.

Regulation of the RBOCs
Ability to Provide Long Distance Service

The FCC has primary jurisdiction over the implementation of Section 271 of
the Telecom Act, which provides that the RBOCs cannot offer in-region long
distance services until they have demonstrated that:



| |  |  | they have entered into an approved interconnection agreement with a
facilities-based competitive telephone company or that no such
competitive telephone company has requested interconnection as of a
statutorily determined deadline;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | they have satisfied a 14-element checklist designed to ensure that
the RBOC is offering access and interconnection to all local exchange
carriers on competitive terms; and                                                            
|
| |  |  | the FCC has determined that allowing the RBOC to offer in-region,
long distance services is consistent with the public interest,
convenience and necessity.                                                                            

The FCC has granted each of the RBOCs the authority to provide long
distance service in a number of states. Verizon and BellSouth have been granted
authority to provide long distance service in every state they operate. SBC
has authority to provide long distance service in most of the states where it
operates and is currently seeking authority to provide long distance service in
the five remaining states (Ohio, Wisconsin, Michigan, Illinois, Indiana).
Qwest has been granted authority to provide long distance in every state where
it operates except for Arizona. We expect that the RBOCs will receive authority
with respect to all of the remaining states in the near term. Although we
cannot predict when such approvals are likely to occur, RBOC authorization to
provide in-region long distance services could have an adverse affect on our
ability to compete if not accompanied by effective post-approval safeguards to
ensure that the RBOCs continue to comply with the market-opening requirements.

33



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Provision of Broadband Telecommunications Services and Information Services

Current federal and state regulation places certain restrictions and
conditions on the provision of advanced telecommunications services, or
broadband services, such as data and DSL services, by the RBOCs. Furthermore,
the network elements that RBOCs must make available under the FCCs unbundling
rules to competitors may be used for the provision of broadband services.
However, at the urging of the RBOCs and other incumbent carriers, the FCC, in
its Triennial Review decision, appears to have greatly curtailed the extent to
which the incumbents must unbundle the broadband portion of their networks for
their competitors. Despite this apparent victory, the RBOCs have vowed to
continue to push for further deregulation through federal and state legislative
efforts. For example, broadband deregulation legislation is currently under
consideration in several states, including Georgia, Texas and Missouri. In
addition, it is anticipated that deregulatory legislation will be pursued by
the RBOCs in Congress. In addition to possible legislation, the FCC has
initiated another pending proceeding that could result in a further
diminishment of incumbent carriers requirement to make unbundled network
elements that are used for certain broadband or information services available
to us. The FCC has issued a Notice of Proposed Rulemaking entitled Appropriate
Framework for Broadband Access to the Internet Over Wireline Facilities that
requests comments on the proper classification of broadband access services as
either regulated telecommunications services or unregulated information
services. The Triennial Review decision significantly restricts the
availability on an unbundled basis of certain network elements deploying fiber
or packet-switching technologies. That decision, in conjunction with a decision
in this proceeding, legislative change or a court ruling further broadening the
definition of what constitutes unregulated information services could have the
effect of allowing RBOCs to provide terms, conditions and pricing to their own
affiliates that provide data or information services that are better than those
made available to competitive carriers such as us. Such developments could also
be expected to adversely affect our cost of doing business by increasing the
cost of purchasing or leasing such facilities from the RBOCs.

Universal Service

In 1997, the FCC established a significantly expanded federal
telecommunications subsidy regime known as universal service. Specifically,
the FCC established new subsidies for services provided to qualifying schools
and libraries and rural health care providers, and expanded existing subsidies
to low income consumers. Most telecommunications companies, including us, must
pay for these programs based on their share of interstate and international
telecommunications end user revenues. In a 1999 decision, the U.S. Court of
Appeals for the Fifth Circuit issued a ruling that had the net effect of
lowering our contribution of revenues to universal service, which stands at
7.28% of end user telecommunications revenues for the first quarter of 2003.
The FCC has subsequently taken further steps to modify the system for
assessment and recovery of universal service funds. In a December 2002 Notice
of Proposed Rulemaking, the FCC has asked many broad-ranging questions
regarding universal service, including whether to change its method of
assessing contributions due from carriers by basing it on the number and
capacity of connections they provide, rather than on interstate and
international end user revenues they earn. At this time, we are unable to
predict whether the FCCs rulemaking or legislative initiatives will increase
the size of our subsidy payments, the scope of the subsidy program, or our
costs of calculating, collecting and remitting the universal service related
payments.

Intercarrier Compensation Reform

Currently, telecommunications carriers are required to pay other carriers
for interstate access charges and local reciprocal compensation charges, both
of which are being considered for reform.

Interstate Access Charges.Long distance carriers pay local
facilities-based carriers, including us, interstate access charges for both
originating and terminating the calls of long distance customers on the
local carriers networks. Historically, the RBOCs set access charges higher
than cost and justified this pricing to regulators as a subsidy to the cost
of providing local telephone service to higher cost customers. With the
establishment of an explicit and competitively neutral universal service
subsidy mechanism, however, the FCC is under increasing pressure to revise
the current access charge regime to bring the charges closer to the actual
cost of providing access. In response, the FCC issued a decision in 2001
setting the rates that competitive local carriers charge to long distance
carriers at a level that will gradually decrease over three years from a
current maximum of $0.025 per minute to the rates charged by incumbent
carriers. As long as we are in compliance

34



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with the FCCs rate schedule, the FCCs order forbids long distance
carriers from challenging our interstate access rates. Although this FCC
decision lowering access charges will reduce our access charge revenues
over time, we do not expect that such a reduction will have a material
impact on our total revenues or financial position. The FCC is also
considering, in a declaratory ruling proceeding commenced in November 2002,
the question of whether voice over the Internet services or services
utilizing an Internet protocol should be made subject to interstate access
charges in the same manner as traditional telephone traffic. Like a growing
number of carriers, we utilize an Internet protocol for a portion of our
traffic as do some of our customers. The FCC has indicated on several
occasions that such services are exempt from interstate access charges but,
until the FCC issues its ruling in the current proceeding, it is unclear
how such traffic will be treated for intercarrier compensation purposes.

AT&T Declaratory Ruling Re: VOIP.AT&T has asked the FCC to find that
voice over IP services (VOIP), including phone to phone services, are
exempt from switched access charges. This proceeding has broad
implications for the future of IP-based services, since a positive ruling
will make VOIP extremely attractive. An adverse ruling would place VOIP
services in the same regulatory category as traditional telecommunications
services and therefore subject the services to access charges.

Local Reciprocal Compensation Charges.Local telephone companies such
as us that originate traffic that is terminated on the network of other
carriers typically compensate the other local carriers for terminating that
traffic. These payments flow in both directions between any two carriers.
First, when we terminate traffic for another local carrier to a customer on
our network, we collect compensation. Second, when we send our customers
traffic to another carrier for termination, we pay compensation. Some
competitors, however, have a customer base that generates many more minutes
of terminating traffic from other carriers than originating traffic
destined for other carriers. For example, a competitor that has a customer
base that has many information service providers typically will have a
large amount of compensation being paid to it by other carriers, while it
will owe very little reciprocal compensation to other carriers. The FCC
revamped the local reciprocal compensation structure in 2001 on an interim
basis for three years to eliminate or reduce the opportunity for carriers
to take advantage of an imbalance of originating and terminating traffic
flows due to traffic terminated to information service providers. The FCC
also initiated a rulemaking to examine inter-carrier compensation more
comprehensively. Under the decision, at the election of the incumbent
carrier, terminating traffic that is out-of-balance by a ratio of more than
3 to 1 can be compensated at a lower rate, or in some cases, at no charge.
This ruling allows us to continue to collect reciprocal compensation
payments from other carriers since we have an imbalance in the amount of
traffic we terminate versus the amount we originate. Going forward, an
adverse ruling in the general intercarrier compensation reform proceeding
could end reciprocal compensation payments and eliminate this line of
revenue for us.

TELRIC Proceeding.The FCC is expected to initiate a new proceeding
to consider significantly revamping the current TELRIC costing methodology
applicable to pricing UNEs. We expect a Notice of Proposed Rulemaking to
be released within the next couple of months. An adverse ruling in the new
proceeding will allow the incumbent carriers to increase UNE rates and this
would raise our costs for leasing unbundled elements in the future.

Forward-Looking and Cautionary Statements

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



| |  |  | our services, including the development and deployment of data
products and services based on IP, Ethernet and other technologies and
strategies to expand our targeted customer base and broaden our sales
channels;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the operation of our network, including with respect to the
development of IP protocols;                                                                                                                             
|
| |  |  | liquidity and financial resources, including anticipated capital
expenditures, funding of capital expenditures and anticipated levels of
indebtedness; and                                                           

35



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| |  |  | 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 above.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All such forward-looking statements are qualified by the inherent risks
and uncertainties surrounding expectations generally, and also may materially
differ from our actual experience involving any one or more of these matters
and subject areas. The operation and results of our business also may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified in the above in the Liquidity
Assessment and Risks and Uncertainties discussion and the Risk Factors
section of our 2002 Annual Report, including, but not limited to:



| |  |  | general economic conditions in the geographic areas that we are
targeting for communications services;                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the ability to achieve and maintain market penetration and average
per customer revenue levels sufficient to provide financial viability
to our business;
|
| |  |  | the quality and price of similar or comparable communications
services offered, or to be offered, by our current or future
competitors; and              
|
| |  |  | future telecommunications-related legislation or regulatory actions.                                                                                     

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We had $500.0 million in secured loans as of June 30, 2003. Currently we
do not pay cash interest on the loans under the New Credit Agreement.

During the second quarter of 2003, XO liquidated its entire portfolio of
marketable securities which consisted of an investment portfolio containing
U.S. government agency issued and other securities with a duration of less than
one year. The Company invested a portion of the proceeds, $158.5 million, in
$761.1 million principal amount of senior secured bank debt of Global Crossing,
a telecommunications company which is currently in reorganization proceedings.
The debt trades in a thin market primarily between dealers but is neither
listed on any exchange nor on any over-the-counter NASDAQ or National Quotation
Bureau systems. If the Company chooses to liquidate its investment in this
debt, it may not be able to locate a buyer that would allow it to liquidate the
debt in a timely fashion to recover the amount paid. Accordingly, it cannot be
assured that the Company will be able to dispose of the investment for an
amount equal to or greater than the amount it paid for it, or that any
distribution that may be received upon consummation of Global Crossings
bankruptcy case will have a value equal to or greater than this investment.

We are not currently engaged in the use of off-balance sheet derivative
financial instruments, to hedge or partially hedge interest rate exposure.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The term disclosure controls and procedures is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities Exchange Act of 1934. These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
required time periods. Our Principal Executive Officer and our Principal
Financial Officer have evaluated the effectiveness of our disclosure controls
and procedures as of a date within 90 days before the filing of this quarterly
report which we refer to as the Evaluation Date, and they have concluded that,
as of the Evaluation Date, such controls and procedures were effective at
ensuring that required information was disclosed on a timely basis in our
reports filed under the Exchange Act.

Changes in Internal Controls

We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the six months ended June 30, 2003, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.

PART II. OTHER INFORMATION

36



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Item 1. Legal Proceedings

XO is not currently a party to any other legal proceedings, other than
regulatory and other proceedings that are in the normal course of business.
However, as discussed above, although XO Parent has consummated its Plan of
Reorganization and emerged from its Chapter 11 proceedings, disputes with
respect to the amount of allowed claims owed by XO Parent to certain of its
general unsecured creditors, and claims of certain professionals remain
outstanding. In addition, party has filed a complaint in the Bankruptcy Court
seeking relief from the courts order confirming the Plan of Reorganization and
a declaratory judgment that such partys derivative suit for the benefit of XO
against a former director of XO Parent and an affiliate of that director should
not be released by the confirmation order. While the outcome of these matters,
or any other relief that may be granted, is currently not determinable, we do
not expect that the ultimate costs to resolve these matters, or any other
relief that may be granted, will have a material adverse effect on the our
financial position, results of operations, or cash flows.

Item 2. Changes in Securities and Use of Proceeds

None.

Recent Sales of Unregistered Securities

The following securities were issued by us within the past year pursuant
to the Plan of Reorganization without registration under the Securities Act:

(a)  approximately 95.0 million shares of New Common Stock to our
pre-petition senior secured creditors in exchange for their claims;

(b)  7-year warrants to purchase approximately:



| |                                                                    
| | -------------------------------------------------------------------
| | (i) 9.5 million shares of New Common Stock at $6.25 per share;     
|
| | (ii) 7.1 million shares of New Common Stock at $7.50 per share; and
|
| | (iii) 7.1 million shares of New Common Stock at $10.00 per share.  

Each of the transactions above is exempt from registration under the
Securities Act pursuant to Section 1145 of the Chapter 11 of the United States
Code or, in the case of certain affiliates of XO Parent, Section 4(2) of the
Securities Act.

Item 3. Defaults Upon Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended June 30, 2003.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits

31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification32.1
    
    Certificate pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
    
    Certificate pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


(b)  Reports on Form 8-K



|(1) |  | Current Report on Form 8-K filed on June 3, 2003,
reporting under Item 5, the Companys offer to acquire all of the
assets of Global Crossing LTD., and Global Crossing Holdings LTD.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37



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|(2) |  | Current Report on Form 8-K filed on July 23, 2003,
reporting under Item 4, the Companys filing of its Registration
on Form S-1 for the shares of New Common Stock to be issued in
the Rights Offering
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.

|                      |  |                                                     
|--------------------- |  | ----------------------------------------------------
|                      |  | XO Communications, Inc.                             
|                      |  |                                                     
|                      |  |                                                     
|Date: August 14, 2003 |  | By: _____________________________                   
|                      |  | Wayne M. Rehberger                                  
|                      |  | Executive Vice President and Chief Financial Officer
|                      |  | (Principal Financial Officer)                       

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