Xo (XOHO) S-1 IPO registration

As filed with the Securities and Exchange Commission on July 22, 2003

Registration Statement No. 333-               

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

XO Communications, Inc.

(Exact name of Registrant as specified in its charter)

Delaware	4813	54-1983517
(State or other jurisdiction of incorporation or organization of each)	(Primary Standard Industrial Classification Code Number of the registrant) 11111 Sunset Hills Road Reston, Virginia 20190 (703) 547-2000	(I.R.S. Employer Identification No.)

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Wayne M. Rehberger

Executive Vice President, Chief Financial Officer

XO Communications, Inc.

11111 Sunset Hills Drive

Reston, Virginia 20190

(703) 547-2000

(Name, address, including zip code, and telephone number,

including area code, of agent for service of the registrant)

Copy to:

Bruce R. Kraus, Esq.

Willkie Farr & Gallagher

787 Seventh Avenue

New York, NY 10019

(212) 728-8000

    Approximate date of commencement of proposed sale to public: Approximately 45 days after the effective date of this Registration Statement

    If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

    If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. o

    If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

    If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

    If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

CALCULATION OF REGISTRATION FEE

		Proposed	Proposed
		Maximum	Maximum	Amount of
Title of Each Class Of	Amount to be	Offering Price	Aggregate	Registration
Securities To Be Registered	Registered	Per Unit	Offering Price(2)	Fee(2)
Common Stock, $.01 par value per share	43,333,333(1)	$5.00(1)	$216,666,665	$17,528.33
Total				$17,528.33

(1)	43,333,333 shares of New Common Stock will be reserved for issuance upon exercise of the Subscription Rights at $5.00 per share (if fully exercised, for an aggregate of $216,666,665) in the Rights Offering.
(2)	Estimated solely for purposes of determining the registration fee pursuant to Rule 457(f) under the Securities Act of 1933, as amended (the “Securities Act”).

    The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 22, 2003

PROSPECTUS

XO Communications, Inc.

Rights Offering

43,333,333 Shares of Common Stock, $0.01 par value,

at $5.00 per share

       We are offering up to 43,333,333 shares of our common stock, $0.01 par value, in a rights offering, which we refer to as the “Rights Offering”. We recently emerged from Chapter 11 reorganization proceedings, and have granted non-transferable rights to participate in this offering to certain of our former creditors and equity security holders as part of our plan of reorganization. The rights entitle these holders to purchase shares of our common stock for $5.00 per share.

     We refer to our common stock, par value $0.01, as the “New Common Stock.” We refer to the non-transferable subscription rights to buy our New Common Stock at $5.00 per share in this offering as “Subscription Rights”. We refer to this offering of shares of New Common Stock upon exercise of Subscription Rights as the “Rights Offering”.

     Our New Common Stock is quoted on the Nasdaq over-the-counter bulletin board at www.otcbb.com, or OTCBB, and in the Pink Sheets at www.pinksheets.com, under the symbol “XOCM,” but is not listed on any national or regional securities exchange or quoted through NASDAQ. On [                    , 2003], the last reported sale price for our New Common Stock on the OTCBB was $           per share, with a bid price of $                    for up to                                shares of New Common Stock and an ask price of $                    for up to                                shares of New Common Stock at the close of the market.

     The Rights Offering will begin on the date of this prospectus and continue until                     , 2003 (29 days after the date of this Prospectus) at 5 p.m., New York City time, the Subscription Rights Expiration Date.

     The net proceeds of this offering will be used to repay and reduce our outstanding secured debt.

     The information contained in this information prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus.

     In this prospectus, “XO Parent”, “we”, “us” and “our” each refers to XO Communications, Inc., a Delaware corporation, and not to its current or future subsidiaries unless the context otherwise requires or as expressly stated. The “Company” refers to XO Parent and its current subsidiaries, unless the context otherwise requires or as expressly stated.

     NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

     INVESTING IN OUR COMMON STOCK INVOLVES RISKS. WE URGE YOU TO CAREFULLY READ THE “RISK FACTORS” SECTION BEGINNING ON PAGE [     ] BEFORE YOU MAKE ANY INVESTMENT DECISION.

The date of this prospectus is [                      ], 2003

TABLE OF CONTENTS

FORM OF RIGHTS CERTIFICATE

CONSENT OF ERNST & YOUNG LLP

NOTICE RE LACK OF CONSENT OF ARTHUR ANDERSEN

FORM OF LETTER OF INSTRUCTIONS FROM NOMINEE TO BO

TABLE OF CONTENTS

	Page
QUESTIONS AND ANSWERS		1
PROSPECTUS SUMMARY		6
RISK FACTORS		16
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION		25
THE OFFERING		27
USE OF PROCEEDS		36
DETERMINATION OF OFFERING PRICE		36
PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES		36
DIVIDEND POLICY		37
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA		37
FRESH START ACCOUNTING INFORMATION		40
THE BUSINESS		42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		68
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		88
EXECUTIVE COMPENSATION		91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		96
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		99
SHARES ELIGIBLE FOR FUTURE SALE		101
DESCRIPTION OF OUTSTANDING INDEBTEDNESS		101
DESCRIPTION OF OUTSTANDING EQUITY SECURITIES		103
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS		104
PLAN OF DISTRIBUTION		104
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS		105
LEGAL MATTERS		106
EXPERTS		106
WHERE YOU CAN FIND MORE INFORMATION		107
INDEX TO FINANCIAL STATEMENTS		F-1

QUESTIONS AND ANSWERS

Q:	What rights have I received in this Rights Offering?
A:	If you are an eligible participant, we have issued you a rights certificate entitling you to subscribe for shares of XO Parent New Common Stock for $5.00 per share. Your rights are not transferable.
Q:	Why is XO Parent making this Rights Offering?
A:	We are required to make this Rights Offering as part of our Chapter 11 reorganization plan.
Q:	How will you use the proceeds of the Rights Offering?
A:	We intend to use all of the proceeds of the Rights Offering to repay our outstanding senior secured debt.
Q:	How long do I have to decide whether to exercise my rights?
A:	The Subscription Rights expire on                     , 2003 [29 days after the date of this prospectus]                               at 5:00 p.m., New York City time, which we refer to as the Subscription Rights Expiration Date. The Rights Agent must receive all required documents and payments before that date and time for your exercise to be valid.
Q:	Where is my rights certificate?
A:	If, as of November 15, 2002, you held pre-petition securities of XO Parent in your own name, or had a pre-petition general unsecured claim against XO Parent in its reorganization proceeding, your rights certificate is enclosed with this prospectus. If, as of November 15, 2002, you held pre-petition securities of XO Parent in street name through a broker, your broker should have received the rights certificate, and will exercise your Subscription Rights as you direct.
Q:	Who else is receiving Subscription Rights in this offering?
A:	We have issued non-transferable Subscription Rights to XO Parent’s pre-petition general unsecured creditors as of November 15, 2002, holders as of that date of XO Parent’s pre-petition senior notes, pre-petition subordinated notes, pre-petition preferred stock, pre-petition class A common stock, pre-petition class B common stock, and legal counsel for the pre-petition class A common stock.

We, however, are not issuing Subscription Rights to security holders who have previously waived in writing their rights to participate in this Rights Offering, including holders of certain series of XO Parent’s pre-petition preferred stock and certain holders of pre-petition common stock.

Q:	Are all holders of general unsecured claims entitled to Subscription Rights?
A:	No. You are only entitled to Subscription Rights in this offering as a holder of a general unsecured claim if you:

•  were a general unsecured creditor of XO Parent on November 15, 2002;

•  properly filed a claim with the bankruptcy court which was not disputed or was approved by or allowed by the bankruptcy court; and

•  did not elect to have your claim paid in part as a convenience claim under the Plan of Reorganization;

If you do not meet these requirements, you are not a holder of a pre-petition general unsecured claim and you are not entitled to Subscription Rights.

In this prospectus, when we refer to pre-petition holders of general unsecured claims, we are only referring to holders of general unsecured claims that meet these requirements.

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Q:

How big is the total Rights Offering?

A:

We are initially offering 40,000,000 shares of our New Common Stock. We have guaranteed that holders of pre-petition class A common stock and their legal counsel will receive the opportunity to purchase, in the aggregate, at least 3,333,333 shares, of New Common Stock in the Rights Offering. Thus, it is possible that the Rights Offering will be expanded by up to 3,333,333 additional shares, if and to the extent the Rights Offering is subscribed by the holders of pre-petition senior notes and general unsecured creditors on a pro rata basis in amounts that would not leave at least 3,333,333 shares available in the rights offer to holders of pre-petition Class A common stock and their legal counsel.

Q:     How much is that on a percentage basis?

A:	As of March 31, 2003, XO Parent had 95,000,001 shares of New Common Stock outstanding including shares held for distribution upon final determination of disputed claims in our reorganization proceeding. If the Rights Offering were fully subscribed, the 43,333,333 shares issued would represent approximately 30% of our outstanding shares of New Common Stock, subject to dilution by outstanding warrants and employee stock options, each with exercise prices that range from $5.00 to $10.00.
Q:	How many shares of New Common Stock are you offering to me?
A:	You can request as many shares of New Common Stock as you would like to purchase in the Rights Offering, up to the full 40,000,000 share amount of the offering, or any smaller number. If the offering is not fully subscribed, you will receive all the shares of New Common Stock you request. If it is over-subscribed, shares of New Common Stock will be allocated among the requesting Subscription Rights holders according the pro ration procedures described below.
Q:	When is payment for the shares due?
A:	You must send payment for the full number of shares of New Common Stock requested at the time you make your request, recognizing that your request might not be fulfilled completely. If you receive less than all the shares you requested because of pro ration, we will refund the excess payment to you without interest.
Q:	If the Rights Offering is oversubscribed, how will you determine how many shares of New Common Stock I will receive in the offering?
A:	The number of shares of New Common Stock you receive will depend on the classification under the chapter 11 reorganization plan of the pre-petition claims or interests of XO Parent that you hold, the number of shares of New Common Stock you requested, and the number of shares requested by other eligible participants participating in the Rights Offering. We will make the computations required by the pro ration procedures described on pages      -      of this Prospectus following the conclusion of the Rights Offering, and then will notify you of the number of shares you have purchased. Our determinations will be final and binding, absent manifest error.
Q:	When and how will I receive the shares of New Common Stock I have purchased?
A:	We estimate that the shares purchased will be issued within two weeks of the Subscription Rights Expiration Date. We will mail certificates representing the shares of New Common Stock to you, or deposit them in your brokerage account, as you request.
Q:	If I subscribe for shares of New Common Stock, is there any guaranteed minimum amount of shares I will be entitled to buy?
A:	That depends on the class of pre-petition claims or interests of XO Parent that you hold. Holders of XO Parent’s pre-petition senior notes, pre-petition general unsecured claims and pre-petition class A common stock will receive Subscription Rights to purchase at least a defined minimum amount of shares of New Common Stock. The minimum number of shares available to these holders will vary depending on the size of their holdings. There is no guaranteed minimum for holders of pre-petition preferred stock or pre-petition subordinated notes.

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Q:	What is the guaranteed minimum for senior noteholders and general unsecured creditors?
A:	Each holder of a pre-petition senior note and pre-petition general unsecured claim will have the right to subscribe for and receive its pro rata share of the initial 40,000,000 shares of New Common Stock offered in the Rights Offering. We call this number their basic subscription privilege. This pro rata share is a percentage equal to the amount of the holder’s claim divided by the total amount of all such claims.
Q:	Where can senior noteholders and unsecured creditors find out the amount of their basic subscription privileges?
A:	On the upper right hand corner of your rights certificate is the amount of shares of New Common Stock available pursuant to the basic subscription privileges, if any. If you hold your shares through a broker, your broker should have supplied you with this information. If your broker did not do so, please contact your broker.
Q:	Do holders of pre-petition class A common stock also have a minimum guaranteed right to subscribe?
A:	Yes. Each holder of pre-petition class A common stock will have the right to subscribe for and receive its pro rata share of at least 2,500,000 shares of New Common Stock offered in the Rights Offering. We call this number their minimum over subscription privilege. This pro rata share is a percentage equal to the number of shares of pre-petition class A common stock the holder holds divided by the total number of eligible shares of pre-petition XO Parent class A stock outstanding on the record date. Certain holders of pre-petition class A common stock, including certain investment funds affiliated with Forstmann Little & Co., have declined and waived any opportunity they might have been entitled to, or offered, to exercise or receive Subscription Rights in the Rights Offering. Therefore, the actual number of guaranteed rights to subscribe to be distributed to other holders will be increased accordingly.
Q:	Do any other classes of creditors and stockholders have a guaranteed minimum right to subscribe?
A.	No. If all holders of pre-petition senior notes and general unsecured creditors exercise all their basic subscription privilege in full, holders of pre-petition preferred stock, pre-petition subordinated notes and pre-petition class B common stock will not receive any New Common Stock in the Rights Offering.
Q:	Can senior noteholders subscribe for less than their basic subscription privileges?
A.	Yes. They, like all other participants in the Rights Offering, may decline to participate in the Rights Offering or request any number of shares of New Common Stock from one share of New Common Stock up to 40,000,000 shares of New Common Stock. We will not permit subscriptions for fractional shares, and none will be issued in the Rights Offering.
Q:	What will happen if I do not exercise my Subscription Rights?
A.	If you do not exercise your rights, you will not receive any New Common Stock in this offering. Your pre-petition XO Parent claims and securities have been cancelled through the Plan of Reorganization and have no value. If you are currently a holder of New Common Stock, you will retain your current number of shares of New Common Stock whether or not you exercise your Subscription Rights. However, if you are currently a holder of New Common Stock and do not exercise your Subscription Rights and other eligible participants do, the percentage of the outstanding shares of New Common Stock of XO Parent that you own will diminish.
Q:	Are my Subscription Rights transferable?
A.	No. Your Subscription Rights are not transferable.
Q:	What will happen to the leftover Subscription Rights if the Rights Offering is not fully subscribed?
A.	Our Plan of Reorganization requires that they will be converted into transferable rights and awarded to XO Parent’s senior secured lenders as of the record date. Those rights will have an exercise period of an additional 30 days, and may be exercised by those lenders or by their transferees.

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Q:	How do I exercise my Subscription Rights if I elect to purchase shares?
A.	If you are a record holder and your rights certificate is enclosed with this prospectus, you should:

     (a) complete and sign the original rights certificate (copies will not be accepted) and

     (b) return the signed original rights certificate in the envelope provided, together with payment for all shares of New Common Stock subscribed for at the subscription price of $5.00 per share in the form of either:

     (i) a check, bank draft, cashier’s check or money order in United States dollars for the full number of shares subscribed, including any over-subscription shares, payable to: American Stock Transfer & Trust Company as Rights Agent – XO Communications or

     (ii) a wire transfer of payment and notification that payment for the shares was sent prior to the final due date via wire transfer directly to a bank account maintained by American Stock Transfer & Trust Company at Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for credit to Account #: 323053785, Contact: XO Communications Rights Offering.

In any event, for your rights exercise to be valid you must deliver your subscription request before                               , the Subscription Rights Expiration Date.

Q:	What should I do if I want to participate in this Rights Offering, but my pre-petition XO Parent securities are held in the name of my broker, dealer or other nominee?
A.	If you hold your pre-petition XO Parent securities through a broker, dealer or other nominee, for example, through a custodian bank, then your broker, dealer or other nominee is the record holder of the pre-petition XO Parent securities you beneficially own. This record holder must exercise the Subscription Rights on your behalf for the shares of New Common Stock you wish to purchase. Therefore, you will need to have your record holder act for you.
Q:	What fees or charges apply if I purchase shares of New Common Stock?
A:	We are not charging any fee or sales commission to issue rights to you or to issue shares of New Common Stock to you if you exercise Subscription Rights. If you exercise Subscription Rights through a record holder of your shares, you are responsible for paying any fees that person may charge.
Q:	May I change or cancel my exercise of Subscription Rights after I send in the required forms?
A:	No. Once you send in your rights certificate and payment, or your broker, dealer or other nominee sends in a rights certificate and such payment on your behalf you cannot revoke the exercise of your Subscription Rights.
Q:	What happens if my payment does not correspond to the number of shares or New Common Stock that I have requested?
A:	If you do not indicate on your rights certificate the number shares of New Common Stock you wish to purchase, or do not forward sufficient payment for the number of shares of New Common Stock that you indicate you wish to purchase, then we will accept the rights certificate and payment only for the maximum number of shares of New Common Stock that may be exercised based on the actual payment delivered.
Q:	I noticed that some Subscription Rights will be allocated “Pro Rata By Holdings”. What does this mean?
A:	“Pro rata by holdings” means that the number of Subscription Rights exercisable by any holder in the tier in question will equal the total number of Subscription Rights allocated to that tier multiplied by A/ B where:

A = the total amount of the holder’s holdings in that tier, and

B = the total amount of all holders’ holdings in that tier.

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Q:	I noticed that some Subscription Rights will be allocated “Pro Rata By Subscription”. What does this mean?
A:	“Pro rata by subscription” means that the number of Subscription Rights exercisable by any holder in the tier in question will equal the total number of Subscription Rights allocated to that tier multiplied by A/ B where:

A = the total number of shares of New Common Stock theretofore requested by the holder, and

B = the total amount of all shares of New Common Stock theretofore requested by all holders in that tier.

Q:	How many shares of New Common Stock will be outstanding after the Rights Offering?
A:	If we sell all of the shares of New Common Stock offered by this prospectus, then we will issue approximately 43.3 million shares of New Common Stock and then we will have approximately 138.3 million shares of New Common Stock outstanding (based on the number of shares of New Common Stock outstanding as of March 31, 2003).
Q:	Is this a good investment? Should I subscribe to purchase New Common Stock in this offering? Has the board of directors made a recommendation regarding this offering?
A:	We and our board of directors are making no recommendation to holders of Subscription Rights as to whether or not they should subscribe for shares of New Common Stock in the Rights Offering. You should consult with your own financial advisor, refer to current prices for our New Common Stock on the OTCBB and in the Pink Sheets (Symbol: XOCM) and read this prospectus carefully before considering such an investment.
Q:	What risk factors should I consider in respect to this offering?
A:	We urge you to carefully read the “Risk Factor” Section beginning on page [     ] before you make any investment decision.
Q:	Who can answer my other questions about the offering?
A:	If you have any questions about (1) the procedure for exercising the Subscription Rights in the Rights Offering, (2) the number of shares of New Common Stock available to you, or (3) a lost rights certificate or a damaged rights certificate, please contact the Information Agent:

MacKenzie Partners, Inc.

105 Madison Avenue, 14th Floor

New York, NY 10016

Attn: Robert Marese

(212) 929-5500

Toll-Free (800) 322-2885

proxy@mackenziepartners.com

If you have any questions as to whether your completed rights certificate or payment has been received, please contact the Rights Agent:

XO Communications, Inc.

c/o American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

Attn: Shareholder Relations Department

Phone: (800) 937-5449

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PROSPECTUS SUMMARY

     This summary highlights information contained elsewhere in this prospectus. We urge you to read the entire prospectus, including “Risk Factors,” and the information contained in the public documents that we have filed with the Securities and Exchange Commission.

Our Company

     We provide a comprehensive array of voice and data communications services to business customers. Our voice services include local and long distance services, both bundled and stand-alone, other voice-related services such as conferencing, interactive voice response, 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 businesses, 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 of transmissions capacity on fiber optic cables, which we refer to as an intercity network. By integrating these networks with advanced communications technologies, we are able to provide a comprehensive array of communications services primarily or entirely over a network that we own or control, from the initiation of the voice or data transmission to the point of termination, which we refer to as end-to-end service. This capability enables us to provide communication services between customers connected to our network and among customers with multiple locations primarily or entirely over our network.

     To develop these networks, we have assembled a collection of metro and inter-city network assets in the United States, substantially all of which we own or control, making us a facilities-based carrier. These network assets incorporate state-of-the-art fiber optic cable, dedicated wavelengths 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 fiber networks in 22 states and the District of Columbia, include 25 of the 30 largest metropolitan areas in the U.S. We have constructed or acquired many of these metro fiber networks, which consist of up to 432 strands of fiber optic cable and, in some cases, additional empty conduits through which fiber optic cable can be deployed. For our inter-city network, we have acquired dedicated, high-capacity wavelengths of transmission capacity on fiber optic cables, onto which we have deployed our own switching, routing and optical equipment, which gives us greater control over how voice and data information is transmitted. 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.

     We conduct our business primarily through the more than 60 subsidiaries we own and manage. Our principal executive and administrative offices are located at 11111 Sunset Hills Road, Reston, Virginia 20190, our telephone number is (703) 547-2000, and our Internet address is www.xo.com.

Our Chapter 11 Reorganization

     On June 17, 2002, XO Parent filed for protection under the Bankruptcy Code. On November 15, 2002, the Bankruptcy Court confirmed XO Parent’s plan of reorganization, and, on January 16, 2003, XO Parent consummated the plan of reorganization and emerged from its Chapter 11 reorganization proceedings with a significantly restructured balance sheet.

     During the period preceding and immediately after the filing of XO Parent’s Chapter 11 petition, we met with a committee of lenders under XO Parent’s $1.0 billion senior secured credit facility, which we refer to as the Pre-Petition Credit Facility, an informal committee of unsecured creditors that represented holders of our unsecured notes (and following the filing of the Chapter 11 petition, the official committee of unsecured creditors appointed in the Chapter 11 proceedings) and potential investors to discuss potential transactions that could be implemented to reorganize our capital structure. These discussions led to an agreement with

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certain of our creditors regarding the terms of a plan of reorganization that envisioned two reorganization structures, the first of which was based on, among other things, a proposed cash investment in XO Parent by third parties (which was ultimately abandoned), and the second of which contemplated a stand-alone restructuring with no new cash infusion committed in advance. The plan of reorganization, as supplemented, was filed with the Bankruptcy Court on July 22, 2002 and distributed to creditors of XO Parent eligible to vote in the reorganization. We refer to the stand-alone alternative under the plan of reorganization that ultimately was confirmed by the Bankruptcy Court as the Plan of Reorganization.

     On August 21, 2002, High River Limited Partnership, a limited partnership controlled by Mr. Carl Icahn, commenced an offer to purchase loans under the Pre-Petition Credit Facility at a purchase price of $0.50 for each $1.00 in principal amount thereof. Purchases made under this offer, together with the loans under the Pre-Petition Credit Facility that High River previously had acquired, resulted in High River holding approximately 85% of the loans outstanding under the Pre-Petition Credit Facility.

     On November 15, 2002, the Bankruptcy Court confirmed the Plan of Reorganization. On January 16, 2003, XO Parent consummated the Plan of Reorganization and emerged from its Chapter 11 reorganization proceedings.

     Distributions Under the Plan of Reorganization

     After the consummation of the Plan of Reorganization, and giving effect to the implementation of fresh start accounting, our capital structure consisted of the following:

•  $500.0 million in outstanding principal amount of loans under a restructured secured credit and guaranty agreement, which we refer to as the New Credit Agreement.

•  approximately $70.6 million of other long-term liabilities, which include various capital lease obligations; and

•  95.0 million outstanding shares of common stock, par value $0.01 per share, which we refer to as New Common Stock.

     We are not required to pay cash interest accrued on the principal amount under the New Credit Agreement until we meet certain financial ratios.

     The consummation of the Plan of Reorganization resulted in the $1.0 billion of loans under the Pre-Petition Credit Facility being converted into the following:

•  90.25 million shares of New Common Stock; and

•  $500.0 million of outstanding principal amount of loans under the New Credit Agreement.

     The Plan of Reorganization also resulted in the cancellation of all of XO Parent’s pre-petition senior unsecured notes and general unsecured claims in exchange for the following:

•  4.75 million shares of New Common Stock;

•  warrants to purchase up to an additional 23.75 million shares of New Common Stock;

•  rights to purchase shares of New Common Stock at $5.00 per share in the Rights Offering; and

•  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, which we refer to as the Investment Termination Payment.

     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;

•  Series B Warrants to purchase approximately 7.1 million shares of New Common Stock at an exercise price of $7.50 per share; and

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•  Series C Warrants to purchase approximately 7.1 million shares of New Common Stock at an exercise price of $10.00 per share.

     The warrants will expire on January 16, 2010. Each series of warrants is identical, except as to the applicable exercise price. The exercise price applicable to each respective series of warrants is subject to adjustment in certain events.

     In addition, under the Plan of Reorganization:

•  Holders of pre-petition subordinated notes of XO Parent had their securities cancelled, and received a cash payment from High River based upon the amount of the Investment Termination Payment that High River would have been entitled to receive as holder of the loans under the New Credit Agreement and the right to participate in the Rights Offering;

•  Holders of pre-petition class A common stock of XO Parent had their securities cancelled, and received the right to a portion of the cash consideration pursuant to the Stockholder Stipulation and have the right to participate in the Rights Offering; and

•  Holders of pre-petition class B common stock and holders of all series of pre-petition preferred stock of XO Parent had their securities cancelled and received only the right to participate in the Rights Offering;

in each case, subject to the pro ration procedures described on pages      -     of this Prospectus. If holders of pre-petition senior notes and pre-petition general unsecured claims exercise all their basic subscription privilege in full, holders of pre-petition preferred stock, pre-petition subordinated notes and pre-petition class B common stock will not receive any New Common Stock in the Rights Offering.

     Post-Bankruptcy Interests Held by Entities Owned by Carl Icahn

     Of the 90.25 million shares of New Common Stock distributed to the lenders under the Pre-Petition Credit Facility, approximately 76.6 million shares were issued to High River, as owner of approximately 85% of the loans outstanding under the Pre-Petition Credit Facility, upon consummation of the stand-alone restructuring under the Plan of Reorganization. Immediately following this distribution, High River transferred all such shares of New Common Stock to Cardiff Holding LLC, a Delaware limited liability company owned by Mr. Icahn.

     Meadow Walk Limited Partnership, a limited partnership owned by Mr. Icahn, owned over $1.5 billion in principal amount of various tranches of XO Parent’s pre-petition senior unsecured notes, representing approximately 33% in principal amount of such notes. Meadow Walk has transferred beneficial ownership to all distributions with respect to such notes under the Plan of Reorganization to Cardiff.

     Giving effect to these transactions and the distributions of New Common Stock pursuant to the Plan of Reorganization, Cardiff holds over 80% of the outstanding shares of the New Common Stock. In addition, affiliates of Mr. Icahn are entitled to participate in the Rights Offering, based on their ownership of pre-petition XO Parent securities and may receive additional shares of New Common Stock or warrants as a result of the resolution of disputed claims of certain creditors in favor of XO Parent.

     Of the warrants distributed under the Plan of Reorganization to holders of the pre-petition senior unsecured notes, we estimate Cardiff received 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 connection with the Plan of Reorganization, High River became the holder of approximately 85% of the loans outstanding under the New Credit Agreement. In January 2003, High River assigned all of its rights in the loans outstanding under the New Credit Agreement to Chelonian Corp., a corporation owned by Mr. Icahn. Subsequently, these loans were assigned to Arnos Corp., a corporation owned by Mr. Icahn. As a result, Arnos now holds approximately 85% of the loans outstanding under the New Credit Agreement.

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THE RIGHTS OFFERING

Eligible Participants	Holders, as of November 15, 2002, of XO Parent’s pre-petition general unsecured claims, pre-petition senior notes, pre-petition subordinated notes, pre-petition preferred stock and pre-petition common stock.
Participant Eligibility Date; Non-Transferability of Subscription Rights	Only holders of pre-petition XO Parent claims and securities as of November 15, 2002 are entitled to participate in the Rights Offering. Subscription Rights are not transferable and will not be admitted for trading on any exchange.
Subscription Rights	Subscription Rights to purchase up to 43,333,333 shares of New Common Stock shall be issued to the Eligible Participants. Fractional shares will not be issued upon exercise of any Subscription Rights.
Subscription Rights Expiration Date	(1).
Optional Exercise	You may exercise your Subscription Rights to purchase up to 40,000,000 shares of New Common Stock until the Subscription Rights Expiration Date. The Rights Agent will determine allocations of any over-subscribed shares after the Subscription Rights Expiration Date in accordance with the allocation procedures discussed in this Prospectus. Any Subscription Rights not exercised prior to 5:00 PM on the Subscription Rights Expiration Date will be cancelled.
Rights Exercise Price	$5.00 per share.
Payment	To exercise any Subscription Rights you or your broker must:
	(a) complete and sign the original rights certificate (copies will not be accepted) and
	(b) return the signed, original rights certificate in the envelope provided, together with payment for all shares of New Common Stock subscribed for, including any oversubcription shares, in the form of either:
	(i)  a check, bank draft, cashier’s check or money order in United States dollars for the full number of shares of New Common Stock subscribed, including any over-subscription shares, payable to: American Stock Transfer & Trust Company as Rights Agent — XO Communications or
	(ii) a wire transfer of payment and notification that payment for the shares of New Common Stock was sent prior to the final due date via wire transfer directly to a bank account maintained by American Stock Transfer & Trust Company at Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for credit to Account #: 323053785, Contact: XO Communications Rights Offering.

(1) 29 days after the date of this Prospectus.

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Other Terms of the Rights Offering
No Interest on Payments	No interest will be paid with respect to any amounts received by the Rights Agent.
Overpayments	The Rights Agent will return to you or your broker, as applicable, by check or wire transfer any amount which you or your broker have overpaid in the Rights Offering, within 30 business days after the Subscription Rights Expiration Date.
Rights Agent	American Stock Transfer & Trust Company
Information Agent	MacKenzie Partners, Inc.
Use of Proceeds	The net proceeds of this offering will be used to repay and reduce our outstanding secured debt.
OTCBB and Pink Sheets symbol	“XOCM”

INFORMATION AGENT

The Information Agent for the Rights Offering is:

MacKenzie Partners, Inc.

105 Madison Avenue, 14th Floor

New York, NY 10016

Attn: Robert Marese

(212) 929-5500

Toll-Free (800) 322-2885

proxy@mackenziepartners.com

RIGHTS AGENT

The Rights Agent for the Rights Offering is:

XO Communications, Inc.

c/o American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

Shareholder Relations Department

Toll Free: (800) 937-5449

IMPORTANT DATES TO REMEMBER

Event	Date
Record Date	November 15, 2002
Subscription Period	, 2003 to           2003
Subscription Rights Expiration Date*	, 2003
Estimated Distribution Date	, 2003

*  Eligible Participants exercising rights or brokers exercising rights on their behalf must deliver to the Rights Agent by the expiration date (i) the completed original rights certificates and (ii) payment as discussed above.

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SUMMARY ALLOCATION TABLE

     The following categories of holders of the following XO Parent claims and securities as of November 15, 2002 will have the opportunity to exercise the Subscription Rights: (i) holders of pre-petition general unsecured claims and pre-petition senior notes, (ii) holders of pre-petition subordinated notes, (iii) holders of pre-petition preferred stock and (iv) holders of pre-petition common stock. We refer collectively to these holders as the “Eligible Participants”. Holders of pre-petition general unsecured claims, pre-petition senior notes and Class A common stock will receive basic subscription privileges and oversubscription privileges. All other Eligible Participants will only receive oversubscription privileges. Each Eligible Participant will have the opportunity to specify on its rights certificate the total number of shares of New Common Stock it wishes to purchase (up to the full amount of the offering), subject to allocation and pro ration as set forth below:

First:	to the holders of pre-petition general unsecured claims and pre-petition senior notes, pro rata by holdings;
Second:	one-third of any remaining Subscription Rights to each of the following groups of holders:
	(i) holders of pre-petition subordinated notes,
	(ii) holders of pre-petition preferred stock, and
	(iii) holders of pre-petition class A common stock (with 25% of the Subscription Rights allocated to holders of pre-petition class A common stock reallocated to legal counsel to the class of pre-petition class A common stockholders as part of their attorney’s fees in the stockholder class action suit). See “The Offering — Fees and Expenses” on page   .],
	allocated within each of those groups pro rata by holdings. However, if, but only to the extent, that the category of holders of pre-petition class A common stock receive less than 3,333,333 Subscription Rights, additional Subscription Rights will be issued so that holders of pre-petition class A common stock are entitled to purchase at least 3,333,333 shares of New Common Stock (with at least 2,500,000 of those shares available for purchase by the holders of pre-petition class A common stock with the remaining 833,333 shares in the Rights Offering allocated to legal counsel for the class of pre-petition class A common stockholders).
	Any remaining Subscription Rights from such initial allocation to the holders of pre-petition class A common stock shall subsequently be reallocated to the holders of pre-petition class A common stock and the legal counsel for the class of pre-petition class A common stockholders, pro rata by subscription. Notwithstanding anything herein to the contrary, on the Subscription Rights Expiration Date any unexercised additional Subscription Rights added to the offering to ensure that the holders of pre-petition class A common stock receive Subscription Rights for at least 3,333,333 shares of New Common Stock will be deemed cancelled and will not be allocated beyond this Second allocation tier;
Third:	any remaining Subscription Rights to the holders of pre-petition general unsecured claims and pre-petition senior notes, pro rata by subscriptions; and
Fourth:	any remaining Subscription Rights to the holders of pre-petition subordinated notes, pre-petition preferred stock and pre-petition common stock (including legal counsel for the class of pre-petition class A common stockholders), pro rata by subscriptions.

     As soon as practicable after the Subscription Rights Expiration Date, if and to the extent that any outstanding Subscription Rights have not been exercised, XO Parent will issue and the Rights Agent will deliver to the holders of senior secured lenders claims an equivalent number of transferable rights on a pro rata basis, based upon the amount of each such holder’s claims in a non-registered, supplemental rights offering. Please refer to page      for a full description of the Rights Offering and how you may exercise your Subscription Rights.

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     The following flow chart graphically sets forth how the Rights are allocated in the Rights Offering:

(1) “Pro Rata by Holdings” means that the number of rights exercisable by any holder in the tier in question will equal the total number of rights allocated to that tier multiplied by A/B where:

A = the total amount of the holder’s holdings in that tier, and

B = the total amount of all holders’ holdings in that tier.

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(2)

XO has agreed to add additional rights to the rights offering to ensure that holders of Pre-Petition Class A Common Stock Interests receive the opportunity to subscribe for at least 2,500,000 shares of New Common Stock and the class action attorneys will receive the opportunity to subscribe for at least 833,333 shares of New Common Stock as part of their attorney’s fees. On the Subscription Rights Expiration Date any unexercised additional Subscription Rights added to the offering to ensure that the holders of pre-petition class A common stock receive Subscription Rights for at least 3,333,333 shares of New Common Stock will be deemed cancelled and will not be allocated further in this chart. Thus, the holders of pre-petition General Unsecured Claims and pre-petition Senior Note Claims will never receive such unexercised additional Subscription Rights.

(3)

“Pro Rata by Subscriptions” means that the number of rights exercisable by any holder in the tier in question will equal the total number of rights allocated to that tier multiplied by A/B where:

A = the total number of shares theretofore duly requested by such holder, and

B = the total amount of all shares therefore duly requested by all holders in that tier.

     HOLDERS WHO ACQUIRED PRE-PETITION SECURITIES AND PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT AFTER NOVEMBER 15, 2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE RIGHTS OFFERING. ONLY HOLDERS OF PRE-PETITION SECURITIES AND PRE-PETITION GENERAL UNSECURED CLAIMS OF XO PARENT ON NOVEMBER 15, 2002 ARE ELIGIBLE TO PARTICIPATE IN THE RIGHTS OFFERING.

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Summary Consolidated Financial Data

     Because the Plan of Reorganization was not consummated and effective until January 16, 2003, the summary consolidated financial data below as of and for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and the financial data as of and for the three months ended March 31, 2002 does not include the effects of the “fresh start” accounting provisions of AICPA Statement of Position, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code,” or SOP 90-7, but the financial data as of and for the three months ended March 31, 2003 does reflect the impact of adopting fresh start. 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, XO 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. Reorganized XO’s financial statements issued for periods beginning after consummating our Plan of Reorganization and adopting fresh start accounting are not comparable to that of predecessor XO.

     Fresh start required that XO adjust the historical cost of its assets and liabilities to their fair values as determined by the reorganization value of XO Parent and that the reorganization value be allocated among the reorganized entity’s net assets in conformity with procedures specified by Statement of Financial Accounting Standards No. 141, “Business Combinations,” or SFAS No. 141. We engaged an independent appraiser to assist in the allocation of the reorganization value to Reorganized XO’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 following table summarizes our audited predecessor company financial results as of and for the fiscal years ended December 31, 1998 through December 31, 2002 and our unaudited results for predecessor XO and reorganized XO, respectively, for the three months ended March 31, 2002 and 2003. The consolidated balance sheet data and the consolidated statement of operations data presented below as of December 31, 1998, 1999, 2000 and 2001, and for each of the years in the four-year period ended December 31, 2001, have been derived from our consolidated financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The consolidated balance sheet data and the consolidated statement of operations data presented below as of December 31, 2002 and for the year ended December 31, 2002, have been derived from our consolidated financial statements which have been audited by Ernst & Young LLP, independent auditors. You should also read the section in this prospectus captioned “Selected Financial Data,” our audited and unaudited financial statements and their accompanying notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operation,” all of which are included elsewhere in this prospectus. The consolidated financial statements of Reorganized XO are not comparable to that of the predecessor company.

																Predecessor XO(a)			Reorganized XO(a)
																Three Months
	Predecessor XO(a)															Ended
	Year Ended December 31,															March 31,
	1998			1999			2000(b)			2001			2002			2002			2003(a)
	(Dollars in thousands, except per share data)
																(unaudited)			(unaudited)
Statement of Operations Data:
Revenue	$	139,667		$	274,324		$	723,826		$	1,258,567		$	1,259,853		$	333,405		$	286,093
Loss from operations(c)		(206,184	)		(366,530	)		(1,011,652	)		(1,949,891	)		(1,208,898	)		(182,663	)		(14,015	)
Net loss(d)		(278,340	)		(558,692	)		(1,101,299	)		(2,086,125	)		(3,386,818	)		(2,175,654	)		(20,488	)
Net loss applicable to common shares(d)(e)		(337,113	)		(627,881	)		(1,247,655	)		(1,838,917	)		(3,350,362	)		(2,198,480	)		(20,488	)
Net loss per common share, basic and diluted(f)		(1.57	)		(2.51	)		(3.87	)		(4.55	)		(7.58	)		(4.97	)		(0.22	)
Statement of Cash Flow Data:
Net cash provided by (used in) operating activities	$	(174,484	)	$	(349,192	)	$	(559,414	)	$	(560,877	)	$	17,602		$	(47,408	)	$	24,190
Net cash provided by (used in) investing activities		(1,276,747	)		(1,050,344	)		(1,464,495	)		(708,598	)		57,582			159,914			(49,245	)
Net cash (used in) provided by financing activities		1,381,653			1,948,503			1,648,663			1,019,647			(6,079	)		(4,848	)		(219	)

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														Predecessor XO(a)			Reorganized XO(a)
														Three Months
	Predecessor XO(a)													Ended
	Year Ended December 31,													March 31,
	1998			1999			2000(b)		2001		2002			2002			2003(a)
	(Dollars in thousands, except per share data)
														(unaudited)			(unaudited)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	1,478,062		$	1,881,764		$	1,860,963	$	755,167	$	560,983		$	588,972		$	538,380
Property and equipment, net		594,408			1,180,021			2,794,105		3,742,577		2,780,589			3,633,380			476,509
Investment in fixed wireless licenses, net		67,352			926,389			997,333		947,545		911,832			939,603			57,926
Total assets(d)		2,483,106			4,597,108			9,085,375		7,930,465		4,585,496			5,704,497			1,323,943
Total long-term debt		2,013,192			3,733,342			4,396,596		5,109,503		5,165,718			5,144,851			507,868
Redeemable preferred stock, net of issuance costs(e)		556,168			612,352			2,097,016		1,781,990		1,708,316			1,785,960			0
Total stockholders’ equity (deficit)		(246,463	)		(13,122	)		1,838,401		297,416		(3,032,282	)		(1,900,899	)		454,314

a.	On June 17, 2002, XO Parent filed for protection under Chapter 11 of the United States Code. On November 15, 2002, the Bankruptcy Court confirmed XO Parent’s Plan of Reorganization, and, on January 16, 2003, XO Parent consummated the Plan of Reorganization. See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
b.	The selected financial data includes the accounts and activities of Concentric Network Corporation since June 16, 2000, the date that we merged with Concentric.
c.	In 2002, loss from operations includes a non-cash asset write down totaling $477.3 million resulting from the return of previously acquired inter-city fiber in exchange for reduced maintenance expenses beginning in 2003. In 2001, loss from operations includes restructuring charges totaling $509.2 million associated with plans to restructure certain aspects of our business operations. In 2000, loss from operations includes a $36.2 million charge in connection with the June 2000 acquisition of Concentric resulting from the allocation of the purchase price to in-process research and development. Loss from operations in 1999 includes restructuring charges totaling $30.9 million associated with relocating our Bellevue, Washington headquarters to Northern Virginia.
d.	In 2002, net loss and total assets reflects a $1,876.6 million impairment charge to write-off all of our goodwill as a cumulative effect of accounting change, pursuant to Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” or SFAS No. 142. In 2002, net loss also includes $91.1 million in net reorganization expenses which includes the write-off, in accordance with SOP 90-7, of deferred financing fees associated with the issuance of XO’s pre-petition debt and professional fees incurred in conjunction with XO’s recapitalization. During 2002, we ceased accruing interest and penalties on our pre-petition senior unsecured notes, subordinated notes and Pre-Petition Credit Facility, and we ceased accruing dividends and accreting the redemption obligation on all of our outstanding preferred stock as of the Petition Date, in accordance with SOP 90-7. In 2001, net loss includes a gain of $345.0 million resulting from the repurchase of certain of our senior notes and a write-down of $89.0 million for an other than temporary decline in the value of certain investments. In 2000, net loss includes a $57.7 million write-down for an other than temporary decline in the value of certain investments and a $225.1 million net gain from the sale of an equity investment.
e.	The comparability of net loss applicable to common shares is impacted by the transactions disclosed in d. above. In addition, in 2002, net loss applicable to common shares includes a net gain of $78.7 million resulting from the recognition of our deferred modification fee less the write off our unamortized discounts and issuance costs. In 2001, net loss applicable to common shares includes a gain of $376.9 million resulting from the repurchase of certain of our preferred stock.
f.	The net loss per share data for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and the three months ended March 31, 2002 has been calculated based on the shares outstanding of our class A and class B common stock prior to the consummation of our Plan of Reorganization. Effective January 16, 2003, the effective date of the Plan of Reorganization, all interests in our class A and class B common stock were terminated and all outstanding shares were cancelled. For further discussion of our Plan of Reorganization, see “Business — Our Chapter 11 Reorganization”. The net loss per share data for the years ended December 31, 1998, 1999 and 2000 has been adjusted for the splits of our class A and class B common stock effected in 2000 and in prior periods.

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RISK FACTORS

     You should carefully consider the following risk factors and other information included in this prospectus. Certain of these risks could materially and adversely affect our business, financial condition, results or operations and prospects which could in turn materially and adversely affect the price of the New Common Stock issuable under the Plan of Reorganization and in the Rights Offering.

Risks Related to this Offering

If you elect to exercise your oversubscription privilege, you will have to make an advance deposit of the full amount of the purchase price for all the New Common Stock you request, without any assurance as to whether you will receive any shares, or any further guidance as to the amounts requested by other participants in the offering.

     The offerings of New Common Stock at $5.00 per share upon exercise of both the basic subscription privilege and the oversubscription privilege will be simultaneous. Only those participants who deliver completed Subscription Rights Certificates and payment in full by the Subscription Rights Expiration Date will be entitled to participate. We will not be in a position to make any announcements during the offering period of the subscription requests received. Therefore, if you wish to exercise an oversubscription privilege, you will have to do so without any further information as to whether and to what extent the offering will be fully-subscribed. In that case, you would be advancing funds, subject to refund, without knowing whether you will receive all the shares you requested, or any shares at all.

You will not receive interest on subscription funds returned to you.

     If your participation in the Rights Offering is cut back because the Rights Offering is oversubscribed, neither we nor the Rights Agent will have any obligation with respect to the Subscription Rights except to return to you, without interest, any subscription payments to you that you have made for shares you requested but did not receive.

The price of our common stock may decline before or after the Subscription Rights expire.

     The public trading market price of our New Common Stock may decline after you exercise your Subscription Rights. If that occurs, you will have committed to buy New Common Stock at a price above the prevailing market price and you will have an immediate unrealized loss. Moreover, you may not be able to sell any New Common Stock you purchase at a price equal to or greater than the subscription price. New Common Stock issued in this offering will be delivered following the Subscription Rights Expiration Date, after the Rights Agent has examined and tabulated all Rights Certificates received.

     Even if the public trading market price of our New Common Stock is above $5.00 on the date you exercise your subscription rights, you might not be able to realize a profit on your investment. The small existing public float of the New Common Stock makes it impracticable to sell our stock short in connection with a Rights exercise, and, therefore, it is very difficult, if not impossible, to hedge your investment. Therefore, until the New Common Stock is delivered upon expiration of this offering, you may not be able to sell the New Common Stock you purchase in this offering. In the five trading days preceding                     , 2003, closing bid prices were quoted for an average of only                        shares. If the market for our New Common Stock remains small and illiquid after the Rights Offering, your ability sell shares of New Common Stock at a price at or above $5.00 in substantial amounts may remain severely limited.

Once you exercise your Subscription Rights, you may not revoke your commitment.

     Once you exercise your Subscription Rights, you may not revoke your commitment. Therefore, even if circumstances arise after you have subscribed in the offering that change your mind about investing in our New Common Stock, you will nonetheless be legally bound to proceed.

You will need to act promptly and follow instructions carefully if you want to exercise your Subscription Rights.

     Eligible participants and, if applicable, brokers acting on their behalf, who desire to purchase New Common Stock in this Rights Offering must act promptly to ensure that all required certificates and payments

16

are actually received by the Rights Agent, American Stock Transfer & Trust Company, before the Subscription Rights Expiration Date. If you or your broker fail to complete and sign the required rights certificate, send an incorrect payment amount, or otherwise fail to follow the subscription procedures that apply to your desired transaction, we may, depending on the circumstances, reject your subscription or accept it to the extent of the payment received. Neither we nor the Rights Agent undertake to contact you concerning, or attempt to correct, an incomplete or incorrect rights certificate or payment or contact you concerning whether a broker holds Subscription Rights on your behalf. We have the sole discretion to determine whether a subscription exercise properly follows the subscription procedures. Any personal check used to pay for New Common Stock must clear before the Subscription Rights Expiration Date, and the clearing process may require five or more business days.

You should not consider the subscription price as an indication of the value of our company or our New Common Stock.

     The Plan of Reorganization sets forth all the terms and conditions of the Rights Offering, including the subscription price. The subscription price was negotiated with holders of loans under the Pre-Petition Credit Facility in 2002 and does not necessarily bear any relationship to our past or future operations, cash flows, current financial condition, or any other established criteria for value including market value of New Common Stock. As a result, you should not consider the subscription price as an indication of our value or that of our New Common Stock.

The Rights Offering could result in a dilution to your percentage ownership of XO Parent.

     If you currently hold shares of New Common Stock and do not exercise any of your rights, then your percentage ownership in XO Parent will be reduced if other eligible participants exercise their rights. Even if you participate in the Rights Offering, your percentage ownership of XO Parent may be reduced depending on the number of shares for which you subscribe relative to the subscriptions of other participants.

Risks Related to Our Operations

The wave of bankruptcies in the Internet and communications-related industries has diminished our marketing prospects and may have an adverse effect on the results of our operations in future periods.

     We historically have provided services to, and generated significant revenues from, customers that conduct business in the Internet and communications-related segments. Many businesses that operated in those segments, particularly start-ups in the Internet service provider segment, have liquidated, otherwise gone out of business, or modified their business plans in ways that have significantly reduced their need for communications services. These developments have decreased the size of the potential market for many of our wholesale and carrier-related services, particularly data transport services. Those of our Internet and communications-related customers that remain in business and have not sought bankruptcy protection nevertheless have been adversely affected by recent business trends in the sectors. To the extent the credit quality of these customers deteriorates or these customers seek bankruptcy protection, we may not be able to collect all amounts due from them and our ability to generate revenue in future periods from them could be adversely affected.

The failure of our operations support systems to perform as we expect could impair our ability to retain customers and obtain new customers, or provision their services, or result in increased capital expenditures, which would adversely affect our revenues or capital resources.

     Our operations support systems are an important factor in our success. Critical information systems used in daily operations perform sales and order entry, provisioning, billing and accounts receivable functions, and cost of service verification and payment functions, particularly with respect to facilities leased from incumbent carriers. If any of these systems fail or do not perform as expected, it would impact our ability to process orders and provision sales, and to bill for services efficiently and accurately, which could cause us to suffer customer dissatisfaction, loss of business or the inability to add customers on a timely basis, any of which would adversely affect our revenues. In additional, system failure or performance issues could impact our ability to effectively audit and dispute invoicing and provisioning data provided by service providers from whom we lease

17

facilities. Furthermore, problems may arise with higher processing volumes or with additional automation features, which could potentially result in system breakdowns and delays and additional unanticipated expense to remedy the defect or to replace the defective system with an alternative system.

     We are in the process of updating and replacing software and related systems for sales tracking, order entry and provisioning and plan to implement changes to our billing systems later this year to support our growth and improve the order and provisioning processes. We have experienced, and may continue to experience, delays and related problems in processing orders, provisioning sales and billing in connection with the transition to these new systems. Our ability to efficiently and accurately provision new orders for services on a timely basis is necessary for us to begin to generate revenue related to those services. If the delays or related problems continue, or if any unforeseen problems emerge in connection with our migration to the new provisioning software and systems, delays and errors may occur in the provisioning process, which could significantly increase the time until an order for new service can begin to generate revenue, which could have a material adverse effect on our operations.

It is expensive and difficult to switch new customers to our network, and lack of cooperation of the incumbent carrier can slow the new customer connection process, which could impact our ability to compete.

     It is expensive and difficult for us to switch a new customer to our network because:

•  we charge the potential customer certain one-time installation fees, and, although the fees are less than the cost to install a new customer, they may act as a deterrent to become our customer, and

•  we require cooperation from the incumbent carrier in instances where there is no direct connection between the customer and our network, which can complicate and add to the time that it takes to provision a new customer’s service.

     Our principal competitors, the incumbent carriers, are already established providers of local telephone services to all or virtually all telephone subscribers within their respective service areas. Their physical connections from their premises to those of their customers are expensive and difficult to duplicate. To complete the new customer provisioning process, we rely on the incumbent carrier to process certain information. The incumbent carriers have a financial interest in retaining their customers, which could reduce their willingness to cooperate with our new customer provisioning requests.

We depend on our key personnel and qualified technical staff and, if we lose their services, our ability to manage the day-to-day aspects of our complex network will be weakened. We may not be able to hire and retain qualified personnel, which could adversely affect our operating results.

     We are highly dependent on the services of our management and other key personnel. The loss of the services of our senior executive management team or other key personnel could cause us to make less successful strategic decisions, which could hinder the introduction of new services or make us less prepared for technological or marketing problems, which could reduce our ability to serve our customers or lower the quality of our services.

     We believe that a critical component for our success will be the attraction and retention of qualified, professional technical and sales personnel. We have experienced intense competition for qualified personnel in our business with the sales, technical and other skill sets that we seek. We may not be able to attract, develop, motivate and retain experienced and innovative personnel. If we fail to do so, there will be an adverse effect on our ability to generate revenue and operate our business.

Our rights to the use of the dark fiber that make up our network may be affected by the financial health of our fiber providers.

     We hold some of the fiber that makes up the foundation of our network, particularly in our inter-city network, through long-term leases or indefeasible right of use agreements. A bankruptcy or financial collapse of one of these fiber providers could result in a loss of our rights under such leases and agreements with the

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provider, which in turn could have a negative impact on the integrity of our network and ultimately on our results of operations. Since early 2001, there has been increasing financial pressure on some of our fiber providers as part of the overall weakening of the telecommunications market. Several such providers have sought bankruptcy protection. To our knowledge, the rights of the holder of such rights in strands of fiber have never been addressed by the judiciary at the state or federal level in bankruptcy and, therefore, under such circumstances, our rights under dark fiber agreements would be unclear.

We may not be able to continue to connect our network to the incumbent carrier’s network or maintain Internet peering arrangements on favorable terms, which would impair our growth and performance.

     We must be a party to interconnection agreements with the incumbent carrier and certain independent carriers in order to connect our customers to the public telephone network. If we are unable to renegotiate or maintain interconnection agreements in all of our markets on favorable terms, it could adversely affect our ability to provide services in the affected markets.

     Peering agreements with Internet service providers allow us to access the Internet and exchange transit for free with these providers. Depending on the relative size of the carriers involved, these exchanges may be made without settlement charge. Recently, many Internet service providers that previously offered peering have reduced or eliminated peering relationships or are establishing new, more restrictive criteria for peering and an increasing number of these service providers are seeking to impose charges for transit. Increases in costs associated with Internet and exchange transit could have a material adverse effect on our margins for our products that require Internet access. We may not be able to renegotiate or maintain peering arrangements on favorable terms, which would impair our growth and performance.

If our selection of IP technology is incorrect, ineffective or unacceptably costly, implementation of our business strategy could be delayed, which would adversely affect our growth and operating results.

     We rely on IP technology as the basis for our metro and intercity networks. Integrating this technology into our network may prove difficult and may be subject to delays. In addition, affordable IP customer premise equipment may not become available in a timely fashion, if at all. If the technology choices we make prove to be incorrect, ineffective or unacceptably costly, our strategy of meeting our customer’s demand for existing and future telecommunications services using IP technology could fail, which would adversely affect our growth and operating results.

Physical space limitations in office buildings and landlord demands for fees or revenue sharing could limit our ability to connect customers to our networks and increase our costs, which would adversely impact our results.

     In some circumstances, connecting a customer who is a tenant in an office building to our network requires installation of in-building cabling through the building’s risers from the customer’s office to our fiber in the street or building equipment room, or our antenna on the roof. In some office buildings, particularly the premier buildings in the largest markets, the risers are already close to their maximum physical capacity due to the entry of other competitive carriers into the market. Fixed wireless direct connections require us to obtain access to rooftops from building owners. Moreover, the owners of these buildings are increasingly requiring competitive telecommunications service providers like us to pay fees or otherwise share revenue as a condition of access to risers and rooftops. Although we generally do not agree to revenue sharing arrangements, we may continue to be required to pay fees to access buildings, particularly for building located in larger markets, which would reduce our operating margins.

Our reliance on third-party DSL service providers could affect adversely our ability to provide service to our DSL customers.

     We provide a significant portion of our DSL service through wholesale arrangements with incumbent carriers and other DSL service providers. To the extent that such DSL service providers are unable to provide wholesale DSL service to us, we in turn may be unable to provide that service to our customers if we cannot

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provide service on our own DSL equipment or obtain wholesale service from another DSL service provider. In addition, the transition of our DSL customers’ services to another source of DSL service may cause potential disruptions for the affected DSL customers’ services. If we are unable to serve these customers, we will lose the related revenues.

Risks Related to Competition and Our Industry

Technological advances and regulatory changes are eroding traditional barriers between formerly distinct telecommunications markets, which could increase the competition we face and put downward pressure on prices, which could impair our results.

     New technologies, such as voice-over-IP, and regulatory changes — particularly those permitting incumbent local telephone companies to provide long distance services — are blurring the distinctions between traditional and emerging telecommunications markets. In addition, the increasing importance of data services has focused the attention of most telecommunications companies on this growing sector. As a result, a competitor in any of our business areas is potentially a competitor in our other business areas, which could impair our prospects, put downward pressure on prices and adversely affect our operating results.

     We face competition in each of our markets principally from the incumbent carrier in that market, but also from recent and potential market entrants, including long distance carriers seeking to enter, reenter or expand entry into the local exchange marketplace and incumbent carriers seeking to enter into the long distance market as they are granted the regulatory authority to do so. This competition places downward pressure on prices for local and long distance telephone service and data services, which can adversely affect our operating results. In addition, we could face competition from other companies, such as other competitive carriers, cable television companies, microwave carriers, wireless telephone system operators and private networks built by large end-users. If we are not able to compete effectively with these industry participants, our operating results could be adversely affected.

Many of our competitors have superior resources, which could place us at a cost and price disadvantage.

     Many of our current and potential competitors have market presence, engineering, technical and marketing capabilities and financial, personnel and other resources substantially greater than ours. As a result, some of our competitors can raise capital at a lower cost than we can, and they may be able to adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition and other opportunities more readily, and devote greater resources to the development, marketing and sale of products and services than we can. Also, our competitors’ greater brand name recognition may require us to price our services at lower levels in order to win business. Finally, our competitors’ cost advantages give them the ability to reduce their prices for an extended period of time if they so choose.

The technologies we use may become obsolete, which would limit our ability to compete effectively and adversely impact our results.

     The telecommunications industry is subject to rapid and significant changes in technology. Most technologies and equipment that we use or will use, including wireline and wireless transmission technologies, circuit and packet switching technologies, multiplexing technologies, data transmission technologies, including the DSL, ATM and IP technologies, and server and storage technologies may become obsolete. If we do not replace or upgrade technology and equipment that becomes obsolete, we will be unable to compete effectively because we will not be able to meet the expectations of our customers, which could cause our results to suffer.

     The introduction of new technologies may reduce the cost of services similar to those that we plan to provide. As a result, our most significant competitors in the future may be new entrants to the telecommunications industry. These new entrants may not be burdened by an installed base of outdated equipment and, therefore, may be able to more quickly respond to customer demands.

     Additionally, the markets for data and Internet-related services are characterized by rapidly changing technology, evolving industry standards, changing customer needs, emerging competition and frequent new

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product and service introductions. The future success of our data services business will depend, in part, on our ability to accomplish the following in a timely and cost-effective manner:

•  effectively use leading technologies and update or convert from existing technologies and equipment;

•  continue to develop technical expertise;

•  develop new services that meet changing customer needs; and

•  influence and respond to emerging industry standards and other technological changes.

     Our pursuit of necessary technological advances may require substantial time and expense.

Our company and industry are highly regulated, which restricts our ability to compete in our target markets and imposes substantial compliance costs on us that adversely impact our results.

     We are subject to varying degrees of regulation from federal, state and local authorities. This regulation imposes substantial compliance costs on us. It also restricts our ability to compete. For example, in each state in which we desire to offer our services, we are required to obtain authorization from the appropriate state commission. If any required authorization for any of our markets or services is revoked or otherwise terminated, our ability to operate in the affected markets would be adversely affected.

Attempts to limit the basic competitive framework of the Telecom Act could interfere with the successful implementation of our business plan.

     Successful implementation of our business plan is predicated on the assumption that the basic framework for competition in the local exchange services market established by the Telecom Act will remain in place. We expect that there will be attempts to limit or eliminate this basic framework through a combination of federal legislation, new rulemaking by the FCC and challenges to existing and proposed regulations by the RBOCs. It is not possible to predict the nature of any such action or its impact on our business and operations.

The requirement that we obtain permits and rights-of-way to develop our network increases our cost of doing business and could adversely affect our performance and results.

     In order for us to acquire and develop our fiber networks, we must obtain local franchises and other permits, as well as rights-of-way and fiber capacity from entities such as incumbent carriers and other utilities, railroads, long distance companies, state highway authorities, local governments and transit authorities. The process of obtaining these permits and rights-of-way is time-consuming and burdensome and increases our cost of doing business.

     We may not be able to maintain our existing franchises, permits and rights-of-way that we need for our business. We may also be unable to obtain and maintain the other franchises, permits and rights that we require. A sustained and material failure to obtain or maintain these rights could materially adversely affect our performance and operating results in the affected metropolitan area.

Risks Related to Liquidity and Financial Resources

We incurred a substantial net loss in 2002 and, in the near term, will not generate funds from operations sufficient to meet all of our cash requirements.

     For each period since inception, we have incurred substantial net losses. For 2002, we posted a net loss attributable to common stockholders of approximately $3.4 billion and a loss from operations of $1.2 billion. In the near term, our existing and projected operations are not expected to generate cash flows sufficient to pay our expected operating expenses, fund our capital expenditure requirements.

The covenants in our New Credit Agreement restrict our financial and operational flexibility, which could have an adverse affect on our results of operations.

     Our New Credit Agreement contains covenants that require us to maintain certain amounts of unrestricted cash, require us to achieve specified operating results, and restrict, among other things, the amount of our capital expenditures, our ability to borrow money, grant additional liens on our assets, make

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particular types of investments or other restricted payments, sell assets or merge or consolidate. Arnos Corp., a company owned by Mr. Icahn, holds approximately 85% of the principal amount of the loans outstanding under the New Credit Agreement. Because amendments to or waivers of covenants under the New Credit Agreement generally require the approval or consent of holders of only a majority of the outstanding principal amount under the New Credit Agreement, decisions whether to amend or waive compliance with such covenants by the holders of loans under the New Credit Agreement can be made by Arnos Corp., and ultimately Mr. Icahn, whether or not the other holders consent.

     The security for the New Credit Agreement consists of substantially all of the assets of XO Parent and our subsidiaries. A default under the New Credit Agreement could adversely affect our rights under other commercial agreements.

     The net proceeds of this offering will be used to repay our outstanding secured debt under the New Credit Agreement.

     The New Credit Agreement and the existence of the loans under the New Credit Agreement also could affect our financial and operational flexibility, as follows:

•  they may impair our ability to obtain additional financing in the future;

•  they may limit our flexibility in planning for or reacting to changes in market conditions; and

•  they may cause us to be more vulnerable in the event of a downturn in our business.

Our investment in Global Crossing has reduced our cash available for operating needs, and we cannot assure you that we will recover the value of that investment.

     We paid approximately $160.7 million to purchase $766.6 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. As a result, we hold approximately 34.63% of the $2.214 billion principal amount of such debt outstanding. We made an offer to acquire any and all of the outstanding senior secured bank debt of Global Crossing in connection with an attempt to purchase a controlling interest in those debtors, or their assets and business. We may in the future make additional offers to acquire control of, or otherwise invest in, lend to or otherwise do business with Global Crossing. If we do so, we do not know what the terms of any such offers would be, or whether any such offers will be accepted. Any such future offers, if made for cash consideration, could significantly and adversely affect our liquidity.

     The Global Crossing bankruptcy process remains subject to significant uncertainties and could continue for a substantial period of time. If we elect to liquidate our investment in Global Crossing senior secured debt, we cannot assure you that we will be able to dispose of that investment for an amount greater than or equal to the amount we paid for it, or that any distribution be receive in respect of it upon consummation of Global Crossing’s bankruptcy case will have a value greater than the amount of our investment.

As a result of the recent investment history of the telecommunications sector, the access of telecommunications service providers like us to capital for growth or acquisitions is likely to be limited.

     Telecommunications companies, including us, have experienced massive defaults on debt securities and bank loans in recent years, as well as the elimination of equity positions in the ensuing bankruptcy reorganizations. This experience has made the industry one of the worst-performing investment sectors in recent years. We expect that this history has led to extremely limited, if any, access to the capital markets by companies in our industry, and that this situation may continue for some time. As a result, we may have to rely entirely on cash on hand and internally generated funds from operations to finance our business in the future, which would diminish our financial and operational flexibility, and diminish our ability to take advantage of opportunities for expansion of our network and for growth through business acquisitions.

We may be required to make cash payments in respect of certain disputed administrative claims in our bankruptcy proceedings.

     Houlihan, Lokey, Howard & Zuchin has submitted a claim for professional fees in connection with our reorganization of approximately $18 million, to which we have filed an objection. If our objection is overruled, we could be required to pay some or all of the claimed amount in cash.

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     In addition, several alleged creditors have presented claims in our reorganization proceeding whose amounts we are disputing in whole or in part or which are indeterminate on their face.

Risks Related to Our New Common Stock

A company owned and controlled by Mr. Carl Icahn is our majority stockholder.

     Cardiff, a company owned and controlled by Mr. Carl Icahn, beneficially owns over 80% of our outstanding New Common Stock. As a result, Mr. Icahn has the power to elect all of our directors. Under applicable law and our certificate of incorporation and by-laws, certain actions can not be taken without the approval of holders of a majority of our voting stock including, without limitation, mergers and the sale of substantially all of our assets and amendments to our certificate of incorporation and by-laws.

We could be liable for the funding and termination liabilities of certain pension plans sponsored by affiliates of Mr. Carl Icahn.

     As discussed above, 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) jointly and severally liable for certain pension plan obligations of a plan sponsor that is a member of the controlled group. 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, or 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 LLC, 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.

     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 we remain a member of the ACF controlled group, certain other “reportable events,” including certain extraordinary dividends and stock redemptions, must be reported to the PBGC.

Because our New Common Stock is not listed for quotation on either the Nasdaq National or Small Cap Market, we are not subject to certain reporting and corporate governance provisions.

     The New Common Stock is not quoted on the Nasdaq National or SmallCap Markets. Companies whose shares are quoted on the Nasdaq National Market and the Nasdaq SmallCap Market are required to comply with the Nasdaq Marketplace Rules, which, as required by the Sarbanes-Oxley Act of 2002, contain or will contain corporate governance requirements in addition to those contemplated by the Delaware General Corporation Law and the federal securities laws, including requirements related to:

•  Distribution of interim reports

•  Solicitation of proxies

•  Independent directors

•  Audit committees

•  Stockholder approval

•  Stockholder voting rights

•  Auditor peer review

     As our New Common Stock is not so quoted, we are not subject to these requirements. As a result, for example, we are not required to comply with recently adopted rules that will require listed companies to have increased independent director representation on their boards of directors or an audit committee composed

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solely of independent directors. We do not currently intend to seek a listing on any exchange or the Nasdaq National Market or the Nasdaq SmallCap Market.

Limited liquidity of our New Common Stock may result in delays in your ability to sell your common stock or lower your returns; you should be prepared to hold your investment indefinitely.

     Although, there currently is a limited trading market for our New Common Stock on the OTCBB and in the Pink Sheets, we cannot assure that an active trading market for our stock will exist in the future. Unlike the Nasdaq National Market and Small Cap Market where the issuer applies for listing of its securities, an active and orderly trading market on the OTCBB and in the Pink Sheets depends on the existence, and individual decisions, of willing buyers and sellers at any given time. We will not have any control over the willingness of any such parties to create a trading market.

     As of the date of this prospectus, there were proposals pending at the OTCBB which would eliminate the OTCBB. If such proposals are adopted, the only trading market for your securities would be in the Pink Sheets. If the OTCBB and/or in the Pink Sheets’ trading market does not continue or becomes more sporadic, the market value of our New Common Stock could be affected adversely and it would become difficult to buy or sell shares on short notice. Consequently, you should be prepared to hold your New Common Stock indefinitely. We currently have no plans to apply or qualify for listing on any other market or exchange.

     If shares of New Common Stock trade at less than $5.00 per share on the OTCBB or in the Pink Sheets, under SEC regulations the New Common Stock may be defined as “penny stock,” which could adversely affect the market liquidity of our New Common Stock during such period. These rules impose additional sales practice requirements on broker-dealers that sell low priced securities to persons other than established customers and institutional accredited investors and required the delivery of a disclosure schedule explaining the nature and risks of the penny stock market. As a result, the ability or willingness of broker-dealers to sell or make a market in our New Common Stock may decline.

Future sales of our New Common Stock could adversely affect its price and/or our ability to raise capital.

     Future sales of substantial amounts of New Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the New Common Stock and our ability to raise capital.

     As of March 31, 2003, there were approximately 95.0 million shares of New Common Stock outstanding. The shares of New Common Stock owned by Cardiff, an entity owned and controlled by Mr. Icahn, are restricted shares that may be sold only under a registration statement or an exemption from federal securities registration requirements. Although Cardiff holds restricted stock, it may cause us to register sales of that stock at any time, whether pursuant to its contractual registration rights or otherwise.

     Pursuant to our Plan of Reorganization, we have issued three series of warrants to purchase up to an aggregate of approximately 9.5 million, 7.1 million and 7.1 million additional shares of New Common Stock, at exercise prices of $6.25, $7.50 and $10.00 per share, respectively. The warrants will expire on January 16, 2010. In addition, if the eligible participants exercise all the rights in the Rights Offering, up to an additional approximately 43.3 million shares of New Common Stock will be issued to such eligible holders.

     We have options outstanding to purchase approximately 11.4 million shares of New Common Stock outstanding under our stock incentive plan as of March 31, 2003, with an exercise price of $5.00 per share. Unless surrendered or cancelled earlier under the terms of the stock incentive plan, those options will expire in 2013. In addition, our stock incentive plan authorizes future grants of options to purchase New Common Stock, or awards of restricted New Common Stock, with respect to an additional 6.2 million shares of New Common Stock in the aggregate.

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Other Risks

Our adoption of fresh start accounting makes comparisons of our financial position and results of operations with those of prior periods more difficult.

     Due to our emergence from bankruptcy pursuant to the Plan of Reorganization, we implemented fresh start accounting for periods following the restructuring. Fresh start accounting required us to restate all our assets and liabilities to reflect their respective fair values. As a result, the consolidated financial statements for periods after our emergence from bankruptcy are not comparable to our consolidated financial statements for the periods prior to our emergence from bankruptcy, which were prepared on an historical basis. The application of fresh start accounting may make it more difficult to compare our post-emergence operations and results to those in pre-emergence periods.

There may be risks related to our use of Arthur Andersen as our independent auditors for the year ended December 31, 2001 and prior periods.

     Arthur Andersen, LLP, our former independent public accountants, which audited our financial statements for the years ended December 31, 2001 and 2000, was found guilty on June 15, 2002 of federal obstruction of justice charges in connection with the federal government’s investigation of Enron Corp. Arthur Andersen ceased practicing before the SEC effective August 31, 2002. Based on our understanding of Arthur Andersen’s financial condition, it may be unable to satisfy any claims that arise out of its provision of auditing and other services to us, including claims that may arise out of Arthur Andersen’s audits of our consolidated financial statements in years prior to 2002. The SEC has said that it will continue to accept financial statements audited or reviewed by Arthur Andersen in compliance with applicable rules and orders issued by the SEC in March 2002 in connection therewith.

     When we seek to access the capital markets in an offering that requires registration of securities under the Securities Act of 1933, as will be the case in the Rights Offering, current SEC rules require that three years of audited financial statements be included or incorporated by reference into the related prospectus. These rules would require that we present financial statements for one or more fiscal years that were audited by Arthur Andersen, until our audited financial statements for the year ending December 31, 2004 become available. The SEC recently adopted rules that exempt certain issuers that file registration statements under the Securities Act that contain financial statements audited by Arthur Andersen from having to comply with regulations that require such issuers to present manually signed accountants’ reports and written consents of Arthur Andersen to include such financial statements in the registration statement. If the SEC ceases accepting financial statements audited by Arthur Andersen without such reports and consents, we could be precluded from filing such a registration statement, unless our current independent auditors, Ernst & Young LLP, or another independent accounting firm, audits the financial statements for the years ended December 31, 2001 and 2000, which originally were audited by Arthur Andersen. The time to complete such an audit would delay, and could prevent, us from accessing the capital markets.

SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION

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

•  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;

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•  liquidity and financial resources, including anticipated capital expenditures, funding of capital expenditures and anticipated levels of indebtedness; and

•  trends related to and expectations regarding the results of operations in future periods, including but not limited to those statements set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below.

     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 “Risk Factors” section and elsewhere in this annual report and in the documents incorporated by reference in this 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.

     Many factors mentioned in our discussion in this prospectus will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

     We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any additional disclosures we make in our Forms 10-K, 10-Q and 8-K reports to the SEC. Also note that we provide a cautionary discussion of risks and uncertainties under “Risk Factors” on page [     ] of this prospectus. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could also adversely affect us.

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THE OFFERING

     Before exercising any rights, you should read carefully the information set forth under the “Risk Factors” beginning on page                               .

The Rights

     We are offering up to 43,333,333 shares of our common stock, $0.01 par value, which we refer to as New Common Stock, in a Rights Offering. Certain of our pre-petition unsecured creditors and equity security holders as of November 15, 2002, whose claims and interests were discharged or cancelled by the confirmation of our Plan of Reorganization, are entitled to participate in the Rights Offering pursuant to the terms of our Plan of Reorganization. Each Subscription Right entitles a holder to purchase one share of New Common Stock for a subscription price of $5.00 per share. On [                    , 2003] the last reported sale price for our New Common Stock on the OTCBB was $[          ] per share, with a bid price of $          for up to                       shares of New Common Stock and an ask price of $          for up to                       shares of New Common Stock at the close of the market.

     Subscription Rights may be exercised at any time during the subscription period, which commences on the date of this Prospectus and ends at 5:00 p.m., New York City Time, on                     , 2003.

     Subscription Rights are evidenced by rights certificates. As explained in “Subscription Rights” below, certain eligible participants are entitled to Subscription Rights that include both basic subscription privileges and oversubscription privileges while Subscription Rights available to others include only oversubscription privileges. If you are entitled to basic subscription privileges, your rights certificate specifies the number of shares of New Common Stock you are entitled to purchase pursuant to those privileges. All eligible participants electing to purchase New Common Stock in the Rights Offering are asked to indicate the total number of shares of New Common Stock they wish to purchase on their rights certificate. The method by which Subscription Rights may be exercised and shares of New Common Stock paid for is explained in the sections below entitled “Procedure.”

     Subscription Rights are non-transferable. Shares of New Common Stock issued in the Rights Offering are not listed or quoted on any exchange, but there currently is a limited trading market for the New Common Stock on the OTCBB and in the Pink Sheets. Fractional shares will not be issued upon exercise of Subscription Rights.

     The net proceeds of this offering will be used to repay our outstanding senior secured debt.

Record Date and Eligible Participants

     The record date of the Rights Offering is November 15, 2002. Only holders of pre-petition senior notes, general unsecured claims, pre-petition subordinated notes, pre-petition preferred stock and pre-petition common stock on November 15, 2002 will have the opportunity to exercise Subscription Rights to subscribe for any or all of the New Common Stock in the Rights Offering, subject to the priority and allocation rules described below.

     The following series of pre-petition senior notes of XO Parent were outstanding as of November 15, 2002:

•  12 1/2% Senior Notes due 2006 (CUSIP Nos. 65333A AC 2, 65333A AA 6 and 65333A AB 4);

•  9 5/8% Senior Notes due 2007 (CUSIP No. 65333H AA 1);

•  9% Senior Notes due 2008 (CUSIP Nos. 65333H AB 9, 65333H AC 7 and 65333H AD 5);

•  9.45% Senior Discount Notes due 2008 (CUSIP Nos. 65333H AE 3, 65333H AF 0 and 65333H AG 8);

•  10 3/4% Senior Notes due 2008 (CUSIP Nos. 65333H AH 6 and 65333H AJ 2);

•  12 1/4% Senior Discount Notes due 2009 (CUSIP No. 65333H AL 7);

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•  10 3/4% Senior Notes due 2009 (CUSIP No. 65333H AK 9);

•  12 1/8% Senior Discount Notes due 2009 (CUSIP Nos. 65333H AN 3 and 65333H AQ 6);

•  10 1/2% Senior Notes due 2009 (CUSIP Nos. 65333H AP 8 and 65333H AM 5); and

•  12 3/4% Senior Notes due 2007 (CUSIP Nos. 65333H AR 4 and 20589R AC 1).

     The following series of pre-petition subordinated notes of XO Parent was outstanding as of November 15, 2002:

•  5 3/4% Convertible Subordinated Notes due 2009 (CUSIP Nos. 983764 AC 5, 983764 AA9 and 983764 AB5)

     The following series of pre-petition preferred stock of XO Parent were outstanding as of November 15, 2002 and are eligible to participate in the Rights Offering:

•  14% Series A Senior Exchangeable Preferred Stock (CUSIP Nos. 983764 20 0, 983764 30 9 and 983764 40 8, 983764 86 1 and 983764 87 9);

•  6 1/2% Series B Convertible Preferred Stock (CUSIP Nos. 983764 80 4 and 983764 85 3);

•  13 1/2% Series E Senior Exchangeable Preferred Stock Due 2010 (CUSIP Nos. 983764 50 7, 983764 60 6 and 983764 70 5);

•  7% Series F Convertible Redeemable Preferred Stock Due 2010;

     Certain investment funds affiliated with Forstmann Little & Co., which collectively held all outstanding shares of XO Parent’s pre-petition Series C Cumulative Convertible Participating Preferred Stock, Series D Convertible Participating Preferred Stock, Series G Cumulative Convertible Participating Preferred Stock and Series H Convertible Participating Preferred Stock, have declined and waived any opportunity they might have been entitled to, or offered, to exercise or receive Subscription Rights in the Rights Offering.

     The following series of pre-petition common stock of XO Parent were outstanding as of November 15, 2002:

•  class A common stock, par value $0.02 per share (CUSIP Nos. 983764 10 1 and 983764 88 7); and

•  class B common stock, par value $0.02 per share.

     Certain holders of pre-petition class A common stock, including certain investment funds affiliated with Forstmann Little & Co., have declined and waived any opportunity they might have been entitled to, or offered, to exercise or receive Subscription Rights in the Rights Offering. Therefore, the actual amount of guaranteed rights to subscribe to be distributed to other holders will be increased accordingly.

Subscription Price

     The subscription price is $5.00 per share, payable in United Stated dollars by personal check, cashier’s check, money order or wire transfer. All payments must be delivered to the Rights Agent and cleared on or before the Subscription Rights Expiration Date.

Subscription Rights

     If you are an eligible participant in the Rights Offering you will receive Subscription Rights with either (a) a basic subscription privilege and an oversubscription privilege or (b) an oversubscription privilege.

     Basic Subscription Privilege

     A basic subscription privilege in a Subscription Right entitles eligible participants have their Subscription Right exercisable into a fixed minimum number of shares of New Common Stock in the initial allocation of the Rights Offering. Only eligible participants who, as of November 15, 2002, held claims in our Chapter 11

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reorganization proceedings as holders of general unsecured claims and holders of pre-petition senior notes will be allocated Subscription Rights with basic subscription privileges.

     Oversubscription Privilege

     All Subscription Rights have oversubscription privileges, which entitle the holder to a portion of the shares remaining after exercise of the basic subscription privilege.

     If any eligible participant does not exercise its basic subscription privileges in full (by non-payment, failing to timely return the rights certificate or otherwise), other eligible participants will have the opportunity to exercise their oversubscription privileges in accordance with their position in the pro ration procedures described on pages   -  .

     Holders of pre-petition class A common stock will receive Subscription Rights with oversubscription privileges exercisable for at least 2,500,000 shares of New Common Stock. Legal counsel for the class of pre-petition class A common stockholders will receive Subscription Rights of 25% of such initial distribution to the category of pre-petition class A common stock as part of their attorney’s fees in the settlement of certain stockholder class action litigation. See “The Offering — Fees and Expenses” on page   .

     In exercising your oversubscription privileges, you must specify the number of shares of New Common Stock that you elect to purchase pursuant to the oversubscription privilege and must pay the full subscription price for all the shares of New Common Stock you are electing to purchase. If we do not allocate to you all of the shares of New Common Stock you have subscribed for under your oversubscription privileges, we expect to refund by mail to you any payment you have made for shares which are not available to issue to you within fifteen business days after the Subscription Rights Expiration Date. Interest will not be payable on amounts refunded.

Expiration Time and Date.

     The Subscription Rights expire on                               at 5:00 p.m. New York City time, the Subscription Rights Expiration Date. Subscription Rights (including the basic subscription privileges and/or oversubscription privileges contained therein) must be exercised prior to the Subscription Rights Expiration Date to be valid. Any Subscription Right not exercised by the Subscription Rights Expiration Date will be null and void.

     In order to exercise Subscription Rights in a timely manner, you must ensure that the Rights Agent actually receives, prior to Subscription Rights Expiration Date, the properly executed and completed rights certificate together with full payment for all New Common Stock you wish to purchase.

No Revocation

     You will not be allowed to revoke or change your exercise of Subscription Rights after you send in your subscription forms and payment, even if you later learn new or additional information about us that you consider to be unfavorable.

Not Transferable

     Your rights certificates are not transferable and are only exercisable by the record holder of such certificate.

Mailing of Rights Certificates and Record Holders

     The Rights Agent will be sending a rights certificate to each eligible participant or record holder, as applicable, along with this prospectus and related instructions to evidence the Subscription Rights. To exercise Subscription Rights, you must fill out and sign the rights certificate and timely deliver it with full payment for the shares of New Common Stock to be purchased.

     If you own pre-petition XO Parent securities held in a brokerage, bank or other custodial or nominee account, to exercise your Subscription Rights you must promptly send the proper instruction form to the

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person holding your securities. Your broker, dealer, depository or custodian bank or other person holding your securities is the record holder of your securities and will have to act on your behalf in order for you to exercise your Subscription Rights. We have asked your broker, dealer or other nominee holders of certain categories of our pre-petition securities to contact the beneficial owners to obtain instructions concerning Subscription Rights the beneficial owners it represents are entitled to exercise.

     If you are a holder of a claim or security entitled to receive Subscription Rights in the Plan of Reorganization and did not receive a Rights Certificate, received a damaged Rights Certificate or lost your Rights Certificate, or if you have any questions concerning the procedures for exercising your Rights, please call the Information Agent at (212) 929-5500 or Toll-Free (800) 322-2885.

Foreign and Unknown Addresses

     We are not mailing rights certificates to stockholders whose addresses are outside the United States or who have an APO or FPO address. In those cases, the rights certificates will be held by the Rights Agent for those eligible participants. To exercise their Subscription Rights, these eligible participants must notify the Rights Agent prior to 11:00 a.m., New York City time, on the third business day prior to the Subscription Rights Expiration Date.

Right to Block Exercise Due to Regulatory Issues

     We reserve the right to refuse the exercise of Subscription Rights by any holder of Subscription Rights who would, in our opinion, be required to obtain prior clearance or approval from any U.S. state or federal or regulatory authorities for the exercise of rights or ownership of additional shares of New Common Stock if, at the Subscription Rights Expiration Date, this clearance or approval has not been obtained. We are not undertaking to pay any expenses incurred in seeking such clearance or approval.

     We are not offering or selling, or soliciting any purchase of, shares in any state or other jurisdiction in which this offering is not permitted. We reserve the right to delay the commencement of this offering in certain states or other jurisdictions if necessary to comply with local laws. However, we may elect not to offer Subscription Rights to residents of any state or other jurisdiction whose law would require a change in this offering in order to carry out this offering in such state or jurisdiction.

Procedure

     Please do not send rights certificates or related forms to us. Please send the properly completed and executed form of rights certificate with full payment to the Rights Agent for this offering, American Transfer & Trust Company.

     You should read carefully the rights certificate and related instructions and forms which accompany this prospectus. You should call MacKenzie Partners, Inc., the Information Agent for this offering, at the address and telephone number listed below under the caption “Questions; Additional Information” promptly with any questions you may have.

     All shares of New Common Stock issuable upon exercise of the Subscription Rights will be offered simultaneously throughout the thirty day period ending on the Subscription Rights Expiration Date on a contingent basis for all Subscription Rights other than the first allocation to the holders of pre-petition general unsecured claims and pre-petition senior notes pursuant to the basic subscription privilege described above.

     Method of Exercise of Rights.

     If you are entitled to purchase shares of New Common Stock pursuant to the Rights Offering, you must

     (a) complete and sign your original rights certificate (copies will not be accepted) and

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     (b) return the signed original rights certificate in the envelope provided, together with payment for all shares of New Common Stock subscribed for in the form of either:

     (i) a check, bank draft, cashier’s check or money order for the full number of shares of New Common Stock subscribed, including any over-subscription shares, payable to: American Stock Transfer & Trust Company as Rights Agent-XO Communications or

     (ii) a wire transfer of payment and notification that payment for the shares of New Common Stock was sent prior to the final due date via wire transfer directly to a bank account maintained by American Stock Transfer & Trust Company at Chase Manhattan Bank, ABA ROUTING #: 021-000-021, for credit to Account #: 323053785, Contact: XO Communications Rights Offering.

     To have a valid request to subscribe for any shares of New Common Stock in the Rights Offering you must have both requested the shares in a Rights Certificate and paid $5.00 per such requested share. Only valid requests will receive shares in the Rights Offering.

     The Rights Agent will deposit all share purchase funds it receives prior to the final due date into a segregated account pending proration and distribution of shares of New Common Stock. The Rights Agent will not accept cash as a means of payment for shares of New Common Stock.

     Any payment required from a holder of Subscription Rights must be received by the Rights Agent on or prior to the Subscription Rights Expiration Date. Any excess payment to be refunded by the Rights Agent to a holder of Subscription Rights will be mailed by the Rights Agent to the holder within fifteen business days after the Subscription Rights Expiration Date.

     IN ORDER FOR YOU TO EXERCISE YOUR SUBSCRIPTION RIGHTS, YOUR RIGHTS CERTIFICATE MUST BE PROPERLY COMPLETED AS SET FORTH ABOVE AND IN ACCORDANCE WITH THE INSTRUCTIONS THEREON. ALL RIGHTS CERTIFICATES AND PAYMENT FOR SHARES MUST BE RECEIVED BY AMERICAN STOCK TRANSFER & TRUST COMPANY, THE RIGHTS AGENT, NO LATER THAN 5:00 P.M. (EASTERN TIME) ON                               , THE SUBSCRIPTION RIGHTS EXPIRATION DATE.

Incomplete Forms; Insufficient Payment

     If you do not or incorrectly indicate on your rights certificate the number of shares of New Common Stock you wish to purchase, or do not forward sufficient payment for the number of shares of New Common Stock that you indicate you wish to purchase, then we will accept the rights certificate and payment only for the maximum number of shares of New Common Stock that may be exercised based on the actual payment delivered. We will make this determination as follows: (1) you will be deemed to have exercised your basic subscription privileges, if any, to the full extent of the payment received, and (2) if any funds remain, you will be deemed to have exercised your oversubscription privileges to the extent of the remaining funds. We will return any payment not applied to the purchase of New Common Stock under this offering within fifteen business days after the Subscription Rights Expiration Date. Interest will not be paid on amounts refunded.

No Fractional Shares

     Each Subscription Right entitles you to purchase one share of New Common Stock at the subscription price. We will accept any inadvertent subscription indicating a purchase of fractional common stock by rounding down to the nearest whole share and refunding without interest any payment received for a fractional share within fifteen business days after the Subscription Rights Expiration Date.

Instructions to Banks, Brokers and other Nominees

     If you are a broker, trustee or depository for securities or other nominee holder for any eligible participant, we are requesting that you contact such eligible participants as soon as possible to obtain instructions and related certifications concerning their Subscription Rights. Our request to you is further

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explained in the suggested form of letter of instructions from nominee holders to beneficial owners accompanying this prospectus.

     To the extent so instructed, nominee holders should complete appropriate rights certificates on behalf of beneficial owners and submit them on a timely basis to the Rights Agent with the proper payment.

     Banks, brokers and other nominees who exercise the Subscription Rights on behalf of beneficial owners of pre-petition XO Parent securities must report certain information to the Rights Agent and us and record certain other information received from each beneficial owner exercising rights. Generally, banks, brokers and other nominees must report with specificity:

•  the number and type of pre-petition XO Parent security held on the record date on behalf of each beneficial owner;

•  the number of Subscription Rights as to which the basic subscription privileges, if any, has been exercised on behalf of each beneficial owner;

•  that each beneficial owner’s basic subscription privileges held in the same capacity has been exercised in full; and

•  the number of shares of New Common Stock subscribed for under the oversubscription privileges by each beneficial owner.

Risk of Loss on Delivery of Rights certificate Forms and Payments

     THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE PURCHASE PRICE FOR SHARES OF NEW COMMON STOCK TO THE RIGHTS AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT THE CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE RIGHTS AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., EASTERN TIME, ON THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF A CERTIFIED OR CASHIER’S CHECK OR MONEY ORDER. PERSONAL CHECKS DRAWN UPON NON-U.S. BANKS WILL NOT BE ACCEPTED.

How Procedural and Other Questions are Resolved

     We are entitled to resolve all questions concerning the timeliness, validity, form and eligibility of any exercise of Subscription Rights. Our determination of such questions will be final and binding. We, in our reasonable discretion, may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as we may determine, or reject the purported exercise of any Subscription Right because of any defect or irregularity.

     Rights certificates will not be considered received or accepted until all irregularities have been waived or cured within such time as we determine in our reasonable discretion. Neither we nor the Rights Agent have any duty to give notification of any defect or irregularity in connection with the submission of rights certificates or any other required document. Neither we nor the Rights Agent will incur any liability for failure to give such notification.

     We reserve the right to reject any exercise of Subscription Rights if the exercise does not comply with the terms of this offering or is not in proper form or if the exercise of Subscription Rights would be unlawful or materially burdensome. See also “Right to Block Exercise Due to Regulatory Issues.”

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Issuance of New Common Stock

     New Common Stock purchased in this Rights Offering will be issued as soon as practicable after the Subscription Rights Expiration Date and the Rights Agent’s examination and tabulation of the Rights Certificates received. The Rights Agent will deliver subscription payments to us only after consummation of the Rights Offering and the issuance of certificates to eligible participants that exercised Subscription Rights. New Common Stock purchased by the exercise of Subscription Rights will be registered in the name of the person exercising the Subscription Rights.

Common Stock Outstanding After the Rights Offering

     Assuming we issue all of the New Common Stock available in the Rights Offering, based on the number of shares of New Common Stock outstanding as of March 31, 2003, approximately 138.3 million shares of New Common Stock will be issued and outstanding after the Rights Offering. Such newly issued shares would represent approximately 30% of the number of shares of New Common Stock outstanding thereafter, without giving effect to any exercise of warrants or options currently outstanding.

Fees and Expenses

General

     We will pay all fees charged by the Rights Agent. You will be responsible for paying any other commissions, fees, taxes or other expenses incurred in connection with the exercise of the Subscription Rights. Neither we nor the Rights Agent will pay these expenses.

Fees and Expenses of Stockholder Settlement

     In December 2001 and January 2002, three state law complaints were filed against XO and/or its directors, among others, by alleged stockholders of XO, purportedly on behalf of themselves and others similarly situated in the New York State Supreme Court for Nassau County. These New York actions were consolidated by order dated April 5, 2002 with the matter styled asIrving Schoenfeld et al v. XO Communications, Inc. et al., Index No. 01-018358.

     Pursuant to a Stipulation of Compromise and Settlement dated July 11, 2002, which we refer to as the Stockholder Settlement, the Schoenfeld action was settled and the plaintiff class dismissed and released all claims and causes of action against the defendants in that action and their respective affiliates and current and former officers, partners, directors, employees, agents, members, stockholders, advisors, including any attorneys, financial advisors, investment bankers and other professionals retained by such persons, based upon or relating to XO or any of the facts or events alleged in the action.

     As part of their compensation for legal fees and expenses incurred pursuant to theSchoenfeld action and the Stockholder Settlement, counsel for the plaintiffs in theSchoenfeld action will receive, pursuant to the Shareholder Settlement, Subscription Rights with basic subscription privileges for 833,333 shares of New Common Stock (representing 25% of the basic subscription privileges allocated to the holders of class A common stock) and the same oversubscription rights as holders of Common Stock.

Priority and Allocation of Subscription Rights

     The following categories of holders as of November 15, 2002 will have the opportunity to exercise the Subscription Rights: (i) holders of pre-petition general unsecured claims and pre-petition senior notes, (ii) holders of pre-petition subordinated notes, (iii) holders of pre-petition preferred stock and (iv) holders of pre-petition common stock. Holders of pre-petition general unsecured claims and pre-petition senior notes will receive basic subscription privileges and oversubscription privileges. All other eligible participants will only receive oversubscription privileges.

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     Allocations of New Common Stock within any tier and/or category of the priority and allocation table below will be made either “pro rata by holdings” or “pro rata by subscription”:

•  “Pro rata by holdings” means that the number of rights exercisable by any holder in the tier in question will equal the total number of rights allocated to that tier multiplied by A/B where:

A = the total amount of the holder’s holdings in that tier, and

B = the total amount of the holder’s holdings in that tier.

•  “Pro rata by subscription” means that the number of rights exercisable by any holder in the tier in question will equal the total number of rights allocated to that tier multiplied by A/B where:

A = the total number of shares of New Common Stock theretofore requested by the holder, and

B = the total amount of all shares of New Common Stock theretofore requested by all holders in that tier.

     Each eligible participant will have the opportunity to specify on its rights certificate the total number of shares of New Common Stock it wishes to purchase (up to the full amount of the offering), subject to allocation and pro ration as set forth below:

First:	to the holders of pre-petition general unsecured claims and pre-petition senior notes, pro rata by holdings;
Second:	one-third of any remaining Subscription Rights to each of the following groups of holders:
	(i)  holders of pre-petition subordinated notes,
	(ii)  holders of pre-petition preferred stock, and
	(iii)  holders of pre-petition class A common stock (with 25% of the Subscription Rights allocated to holders of pre-petition class A common stock reallocated to legal counsel to the class of pre-petition class A common stockholders as part of their attorney’s fees in the stockholder class action suit). See “The Offering — Fees and Expenses” on page   .,
	allocated within each of those groups pro rata by holdings. However, if, but only to the extent, that the category of holders of pre-petition class A common stock receive less than 3,333,333 Subscription Rights, additional Subscription Rights will be issued so that holders of pre-petition class A common stock are entitled to purchase at least 3,333,333 shares of New Common Stock (with at least 2,500,000 of those shares available for purchase by the holders of pre-petition class A common stock with the remaining 833,333 shares in the Rights Offering allocated to legal counsel for the class of pre-petition class A common stockholders).
	Any remaining Subscription Rights from such initial allocation to the holders of pre-petition class A common stock shall subsequently be reallocated to the holders of pre-petition class A common stock and the legal counsel for the class of pre-petition class A common stockholders, pro rata by subscription. Notwithstanding anything herein to the contrary, on the Subscription Rights Expiration Date any unexercised additional Subscription Rights added to the offering to ensure that the holders of pre-petition class A common stock receive Subscription Rights for at least 3,333,333 shares of New Common Stock will be deemed cancelled and will not be allocated beyond this Second allocation tier;
Third:	any remaining Subscription Rights to the holders of pre-petition general unsecured claims and pre-petition senior notes, pro rata by subscriptions; and
Fourth:	any remaining Subscription Rights to the holders of pre-petition subordinated notes, pre-petition preferred stock and pre-petition common stock (including legal counsel for the class of pre-petition class A common stockholders), pro rata by subscriptions.

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Supplemental offering

     As soon as practicable after the Subscription Rights Expiration Date, if and to the extent that any outstanding Subscription Rights have not been exercised, we will issue and the Rights Agent will deliver to the holders of senior secured lenders claims an equivalent number of transferable rights on a pro rata basis, based upon the amount of each such holder’s claims in a non-registered, supplemental rights offering. These transferable rights will be exercisable for a thirty day period after their issuance.

     PERSONS WHO ACQUIRED PRE-PETITION SECURITIES OF OR GENERAL UNSECURED CLAIMS AGAINST XO PARENT AFTER NOVEMBER 15, 2002 ARE NOT ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL OFFERING. ONLY SUCH HOLDERS OF AND CLAIMANTS AS OF NOVEMBER 15, 2002 ARE ELIGIBLE TO PARTICIPATE IN THE SUPPLEMENTAL OFFERING.

The Board Makes No Investment Recommendations to Eligible Participants.

     Our board of directors has approved the registration statement of which this prospectus is a part, but has and does not make any recommendation to you about whether you should exercise any Subscription Rights. In making the decision to exercise or not exercise your Subscription Rights, you must consider your own best interests.

     If you choose not to exercise your Subscription Rights in full and you currently hold New Common Stock, your relative ownership interest in us will be diluted. If you exercise Subscription Rights, you risk investment loss on new money invested. The trading price of our New Common Stock may decline below the subscription price. We cannot assure you that the subscription price will remain below any trading price for our New Common Stock or that its trading price will not decline to below the subscription price during or after this Rights Offering. For a summary of some of the risks a new investment would entail, see “Risk Factors” beginning on page      .

IMPORTANT

PLEASE CAREFULLY READ THE INSTRUCTIONS ACCOMPANYING THE RIGHTS CERTIFICATE AND FOLLOW THOSE INSTRUCTIONS IN DETAIL. DO NOT SEND RIGHTS CERTIFICATES DIRECTLY TO US. YOU ARE RESPONSIBLE FOR CHOOSING THE PAYMENT AND DELIVERY METHOD FOR YOUR RIGHTS CERTIFICATE, AND YOU BEAR THE RISKS ASSOCIATED WITH SUCH DELIVERY. IF YOU CHOOSE TO DELIVER YOUR RIGHTS CERTIFICATE AND PAYMENT BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED. WE ALSO RECOMMEND THAT YOU ALLOW A SUFFICIENT NUMBER OF DAYS PRIOR TO                     , THE SUBSCRIPTION RIGHTS EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE TO TEN BUSINESS DAYS TO CLEAR, WE STRONGLY URGE YOU TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER’S CHECK OR BANK DRAFT DRAWN UPON A U.S. BANK, OR A U.S. POSTAL MONEY ORDER.

Questions; Additional Information

     If you have any questions about (1) the procedure for exercising the Subscription Rights in the Rights Offering, (2) the number of shares of New Common Stock available to you, (3) a lost or damaged rights certificate, please contact the Information Agent:

MacKenzie Partners, Inc.

105 Madison Avenue, 14th Floor

New York, NY 10016

Attn: Robert Marese

(212) 929-5500

Toll-Free (800) 322-2885

proxy@mackenziepartners.com

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     If you have any questions as to whether your completed rights certificate or payment has been received, please contact the Rights Agent:

XO Communications, Inc.

c/o American Stock Transfer & Trust Company

59 Maiden Lane

New York, NY 10038

Attn: Shareholder Relations Department

Phone: (800) 937-5449

USE OF PROCEEDS

     We estimate that our net proceeds from this offering will be approximately $216.7 million if all holders of Subscription Rights exercise their rights in full. The net proceeds of this offering will be used to repay and reduce our outstanding secured debt.

DETERMINATION OF OFFERING PRICE

     The Subscription Rights are being issued pursuant to the Plan of Reorganization. The exercise price of the Subscription Rights, like all other aspects of our Plan of Reorganization, was determined through arm’s length negotiations between us and our various creditor constituencies and approved by the bankruptcy court. This price represents the same price per share attributed to the shares of New Common Stock issued under the Plan of Reorganization to our former senior secured lenders.

PRICE AND RELATED INFORMATION CONCERNING REGISTERED SHARES

Predecessor Market Information

     Our pre-petition class A common stock was traded on the Nasdaq National Market under the symbol “XOXO” until December 2001, at which time we voluntarily delisted it from that market. On December 17, 2001, our pre-petition class A common stock began trading on the Nasdaq Over-the-Counter Bulletin Board or OTCBB until January 16, 2003, the effective date of our Plan of Reorganization, at which time trading was halted on the Nasdaq OTCBB.

     The following table shows, for the periods indicated, the high and low closing bid prices for our pre-petition class A common stock as reported by the Nasdaq National Market or Nasdaq Over-the-Counter Bulletin Board, as applicable.

	2002				2001
	High		Low		High		Low
First Quarter	$	0.19	$	0.04	$	27.81	$	6.25
Second Quarter	$	0.07	$	0.02	$	5.22	$	1.63
Third Quarter	$	0.08	$	0.02	$	1.97	$	0.33
Fourth Quarter	$	0.15	$	0.02	$	1.72	$	0.08

     All interests in our pre-petition class A common stock were cancelled effective as of January 16, 2003, pursuant to our Plan of Reorganization.

Successor Market Information

     Our New Common Stock trades on the OTCBB and in the Pink Sheets under the symbol “XOCM”. It began trading shortly after the first distribution of New Common Stock pursuant to our Plan of Reorganization. On [                    , 2003], the last reported sale price for our New Common Stock was $[                              ] per share, with a bid price of $                    for up to  shares of New Common Stock and an ask

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price of $                    for up to  shares of New Common Stock at the close of the market. See also “Risks Related to Our Common Stock” on page [ ] of this prospectus.

     As of [March 1, 2003], the approximate number of stockholders of record of our New Common Stock was [                              ].

     The following table shows, for the periods indicated, the high and low closing bid prices for our New Common Stock as reported by the Nasdaq Over-the-Counter Bulletin Board.

	2003
	High		Low
First Quarter	$	4.00	$	0.25
Second Quarter	$	7.80	$	3.95

DIVIDEND POLICY

     We have never declared or paid any cash dividends on our pre-petition class A common stock or our New Common Stock and do not intend to declare or pay any cash dividends on our New Common Stock. Covenants within the New Credit Agreement restrict our ability to pay cash dividends on our capital stock.

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

     Because the Plan of Reorganization was not consummated and effective until January 16, 2003, the summary consolidated financial data below as of and for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and the summary consolidated financial information for the three months ended March 31, 2002 does not include the effects of the fresh start accounting provisions of SOP 90-7, but the financial data as of and for the three months ended March 31, 2003 does reflect the impact of adopting fresh start. 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, XO 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 XO 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. We 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. Reorganized XO’s consolidated financial statements issued for

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periods beginning after consummating our Plan of Reorganization and adopting fresh start accounting are not comparable to that of predecessor XO.

																Predecessor XO(a)			Reorganized XO(a)
																Three Months
	Predecessor XO(a)															Ended
	Year Ended December 31,															March 31,
	1998			1999			2000(b)			2001			2002			2002			2003(a)
	(Dollars in thousands, except per share data)
																(unaudited)			(unaudited)
Statement of Operations Data:
Revenue	$	139,667		$	274,324		$	723,826		$	1,258,567		$	1,259,853		$	333,405		$	286,093
Loss from operations(c)		(206,184	)		(366,530	)		(1,011,652	)		(1,949,891	)		(1,208,898	)		(182,663	)		(14,015	)
Net loss(d)		(278,340	)		(558,692	)		(1,101,299	)		(2,086,125	)		(3,386,818	)		(2,175,654	)		(20,488	)
Net loss applicable to common shares(d)(e)		(337,113	)		(627,881	)		(1,247,655	)		(1,838,917	)		(3,350,362	)		(2,198,480	)		(20,488	)
Net loss per common share, basic and diluted(f)		(1.57	)		(2.51	)		(3.87	)		(4.55	)		(7.58	)		(4.97	)		(0.22	)
Statement of Cash Flow Data:
Net cash provided by (used in) operating activities	$	(174,484	)	$	(349,192	)	$	(559,414	)	$	(560,877	)	$	17,602		$	(47,408	)	$	24,190
Net cash provided by (used in) investing activities		(1,276,747	)		(1,050,344	)		(1,464,495	)		(708,598	)		57,582			159,914			(49,245	)
Net cash (used in) provided by financing activities		1,381,653			1,948,503			1,648,663			1,019,647			(6,079	)		(4,848	)		(219	)
Balance Sheet Data:
Cash, cash equivalents and marketable securities	$	1,478,062		$	1,881,764		$	1,860,963		$	755,167		$	560,983		$	588,972		$	538,380
Property and equipment, net		594,408			1,180,021			2,794,105			3,742,577			2,780,589			3,633,380			476,509
Investment in fixed wireless licenses, net		67,352			926,389			997,333			947,545			911,832			939,603			57,926
Total assets(d)		2,483,106			4,597,108			9,085,375			7,930,465			4,585,496			5,704,497			1,323,943
Total long-term debt		2,013,192			3,733,342			4,396,596			5,109,503			5,165,718			5,144,851			507,868
Redeemable preferred stock, net of issuance costs(e)		556,168			612,352			2,097,016			1,781,990			1,708,316			1,785,960			—
Total stockholders’ equity (deficit)		(246,463	)		(13,122	)		1,838,401			297,416			(3,032,282	)		(1,900,899	)		454,314

a.	On June 17, 2002, XO Parent filed for protection under Chapter 11 of the United States Code. On November 15, 2002, the Bankruptcy Court confirmed XO Parent’s Plan of Reorganization, and, on January 16, 2003, XO Parent consummated the Plan of Reorganization. See further discussion in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
b.	The selected financial data includes the accounts and activities of Concentric Network Corporation since June 16, 2000, the date that we merged with Concentric.
c.	In 2002, loss from operations includes a non-cash asset write down totaling $477.3 million resulting from the return of previously acquired inter-city fiber in exchange for reduced maintenance expenses beginning in 2003. In 2001, loss from operations includes restructuring charges totaling $509.2 million associated with plans to restructure certain aspects of our business operations. In 2000, loss from operations includes a $36.2 million charge in connection with the June 2000 acquisition of Concentric resulting from the allocation of the purchase price to in-process research and development. Loss from operations in 1999 includes restructuring charges totaling $30.9 million associated with relocating our Bellevue, Washington headquarters to Northern Virginia.
d.	In 2002, net loss and total assets reflects a $1,876.6 million impairment charge to write-off all of our goodwill as a cumulative effect of accounting change, pursuant to SFAS No. 142. In 2002, net loss also includes $91.1 million in net reorganization expenses which includes the write-off, in accordance with SOP 90-7, of deferred financing fees associated with the issuance of XO’s pre-petition debt and professional fees incurred in conjunction with XO’s

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	recapitalization. During 2002, we ceased accruing interest and penalties on our pre-petition senior unsecured notes, subordinated notes and Pre-Petition Credit Facility, and we ceased accruing dividends and accreting the redemption obligation on all of our outstanding preferred stock as of the Petition Date, in accordance with SOP 90-7. In 2001, net loss includes a gain of $345.0 million resulting from the repurchase of certain of our senior notes and a write-down of $89.0 million for an other than temporary decline in the value of certain investments. In 2000, net loss includes a $57.7 million write-down for an other than temporary decline in the value of certain investments and a $225.1 million net gain from the sale of an equity investment.
e.	The comparability of net loss applicable to common shares is impacted by the transactions discussed in d. above. In addition, in 2002, net loss applicable to common shares includes a net gain of $78.7 million resulting from the recognition of our deferred modification fee less the write off our unamortized discounts and issuance costs. In 2001, net loss applicable to common shares includes a gain of $376.9 million resulting from the repurchase of certain of our preferred stock.
f.	The net loss per share data for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and the three months ended March 31, 2002 has been calculated based on the shares outstanding of our class A and class B common stock prior to the consummation of our Plan of Reorganization. Effective January 16, 2003, the effective date of the Plan of Reorganization, all interests in our class A and class B common stock were terminated and all outstanding shares were cancelled. For further discussion of our Plan of Reorganization, see “Business — Our Chapter 11 Reorganization”. The net loss per share data for the years ended December 31, 1998, 1999 and 2000 has been adjusted for the splits of our class A and class B common stock effected in 2000 and in prior periods.

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FRESH START ACCOUNTING INFORMATION

     XO 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, XO 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 XO adjust the historical cost of its assets and liabilities to their fair values as determined by the reorganization value of XO Parent and that the reorganization value be allocated among the reorganized entity’s net assets in conformity with procedures specified by SFAS No. 141. We engaged an independent appraiser to assist in the allocation of the reorganization value to reorganized XO’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. A reconciliation of the adjustments recorded in connection with our reorganization and the adoption of fresh start is presented below (in thousands):

			Predecessor									Reorganized
			XO									XO
			December 31,						Fresh Start			January 1,
			2002			Reorganization			Adjustments(d)			2003
			(Audited)									(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
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

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(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, and 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.

    Net reorganization gain 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, we 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.

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THE BUSINESS

     The following description of our business should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Introduction

     XO Communications, Inc., a Delaware corporation, through its predecessor entities, was formed in 1994. XO Parent was originally organized as a Washington limited partnership and in 1995 merged into a Washington limited liability company, which following several name changes became known as NEXTLINK Communications, L.L.C. In January 1997, NEXTLINK Communications, L.L.C. merged into NEXTLINK Communications, Inc., a Washington corporation, which in June 1998 reincorporated in Delaware under the same name. On June 16, 2000, in connection with XO Parent’s merger with Concentric Network Corporation, NEXTLINK Communications, Inc. merged with XO Parent and XO Parent, as the surviving corporation in the merger, changed its name to NEXTLINK Communications, Inc. On September 25, 2000, XO Parent began doing business as “XO Communications” and, on October 25, 2000, XO Parent changed its name to XO Communications, Inc. We conduct our business primarily through the more than 50 subsidiaries that XO Parent owns and manages.

     On June 17, 2002, XO Parent filed for protection under Title 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, XO Parent consummated the plan of reorganization and emerged from its Chapter 11 reorganization proceedings with a significantly restructured balance sheet.

     In December 2001, XO Parent voluntarily delisted its pre-petition class A common stock from the Nasdaq National Market, which was traded under the symbol “XOXO”, and, on December 17, 2001, began trading on the OTCBB. XO Parent’s pre-petition class A common stock stopped trading on the OTCBB as of January 16, 2003, the effective date of XO Parent’s plan of reorganization, at which time all interests in XO Parent’s pre-petition class A common stock were terminated pursuant to the plan of reorganization. The New Common Stock of reorganized XO Parent issued pursuant to its plan of reorganization began trading on the OTCBB and in the Pink Sheets under the symbol “XOCM” shortly after the first distribution of common stock pursuant to the plan.

     Our principal executive and administrative offices are located at 11111 Sunset Hills Road, Reston, Virginia 20190 and our telephone number is (703) 547-2000. Our Internet address is www.xo.com, where, under “About XO-Investor Center”, you can find copies of our annual report as of and for the year ended December 31, 2002 on Form 10-K, and XO Parent’s quarterly reports on Form 10-Q and current reports on Form 8-K, all of which we make available as soon as reasonably practicable after the report is filed with the Securities and Exchange Commission, or SEC.

Overview of Our Company

     We provide business customers with a comprehensive array of communications services, which include voice, Internet access, private data networking and hosting services. Our services are designed to take advantage of our network assets, which are capable of carrying high volumes of all types of communications traffic, and to meet the needs of all sizes of business customers, from small and medium businesses to large enterprise and carrier and wholesale customers. Although these services are of significant benefit to businesses of all sizes, we believe them to be of particular benefit to multi-location businesses that desire to improve

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communications among their locations, whether within a single metropolitan area or across the country. These services include the following:

•  Voice services:

•  Local and long distance services, both bundled and stand-alone, other voice-related services such as conferencing, domestic and international toll free services and voicemail, and transaction processing services for prepaid calling cards; and

•  Interactive voice response, or IVR, systems that we develop, host and manage that enable our customers’ end-users to order products and services, collect and receive information, seek assistance, facilitate bill payment and a host of other capabilities over the telephone using natural language speech recognition and systems that enable persons to access web-based information over the telephone;

•  Internet access:

•  Dedicated Internet access for customers with large, high-speed Internet access requirements;

•  Digital subscriber line, or DSL, services for businesses that require high-speed Internet access over existing copper wire telephone lines; and

•  Dial access, which allows remote users to connect to a customer’s network;

•  Private data networking:

•  Dedicated transmission capacity on our networks, including dedicated circuits and the lease of one or more dedicated wavelengths on a fiber optic cable, to customers that desire high-bandwidth links between locations;

•  Virtual private network, or VPN, services, which provide customers with a managed, private data service over the public Internet, designed for medium and large businesses that want to create secure, wide-area networks for users at various and remote locations; and

•  Ethernet services, which are designed to connect the local area networks, or LANs, of medium and large customers within and between metropolitan areas at speeds of up to one gigabit per second; and

•  Hosting services:

•  Web site services, which allow a customer to establish a Web presence;

•  Web hosting, including hosting and web site traffic management tools, for Internet-centric businesses, and streamed media services designed for small and medium-sized businesses; and

•  Server collocation and management and customer support to manage a customer’s hosting needs.

     We also combine many of these services in integrated, flat rate service packages, known as XOptions that are tailored to the communications needs of small and medium-sized businesses and larger businesses with multiple locations. These packages eliminate the separation between local and long-distance communications services, and combine this “all distance” telephone service with high-speed Internet access and web hosting services, all for one flat monthly rate. We also offer shared tenant services, which consist of telecommunications management services provided to groups of small and medium-sized businesses located in the same office building.

     We believe that one of the significant factors used by business customers in making purchase decisions relating to communications services is the quality of service and customer support offered by the service provider. Our customer care representatives offer customer support 24 hours a day, seven days a week. We focus on proactive resolution of customer issues by training our customer care representatives extensively on the services that we offer and promoting accountability of the customer care team. We also have developed a secure, on-line Business Center, through which many customers can access information about their accounts and track requests, review services, analyze trends, make decisions and pay bills.

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     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 of transmission capacity on fiber optic cables, which we refer to as an inter-city network. By integrating these networks with advanced communications technologies, we are able to provide a comprehensive array of communications services primarily or entirely over a network that we own or control, from the initiation of the voice or data transmission to the point of termination, which we refer to as end-to-end service. This capability enables us to provide communication services between customers connected to our network, and among a customer’s multiple locations, primarily or entirely over our network.

     To develop these networks, we have assembled a collection of metro and inter-city network assets in the United States, substantially all of which we own or control, making us a facilities-based carrier. These network assets incorporate state-of-the-art fiber optic cable, dedicated wavelengths of transmission capacity on fiber optic networks and transmission equipment (including switches and routers that direct voice and data traffic to their destinations) capable of carrying high volumes of data, voice, video and Internet traffic. We operate 37 metro fiber 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 fiber networks, which consist of up to 432 strands of fiber optic cable and, in some cases, additional empty conduits through which fiber optic cable can be deployed. For our inter-city network, we have acquired dedicated, high-capacity wavelengths of transmission capacity on fiber optic cables, onto which we have deployed our own switching, routing and optical equipment, thereby giving us greater control over the transmission of voice and data information. We also hold indefeasible exclusive rights to use unlit fiber optic strands on the routes served by our existing inter-city network.

     From time to time we consider merger and acquisition opportunities in the telecommunications industry and may use available cash to acquire the securities of entities in which we have a strategic interest before any public announcement of our interest.

     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. (collectively, “Global Crossing”), a telecommunications company which is currently in reorganization proceedings. Thereafter, we made several modifications to, and enhancements of, our initial offer, and on June 24, 2003, commenced an offer to purchase any all of the senior secured bank debt of Global Crossing Holdings Ltd. and Global Crossing North America, Inc. that we did not already own for an aggregate maximum purchase price of $472.5 million. As a result of this offer and our previous purchases, we now own approximately $766.6 million of the approximately $2.214 billion principal amount of such debt outstanding. We may in the future make additional offers to acquire control of, or otherwise invest in, lend to or otherwise do business with Global Crossing. If we do so, we do not know what the terms of any such offers would be, or whether any such offers will be accepted.

     On July 1, 2003, the U.S. 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 purchase agreement with Singapore Technologies Telemedia PTE. We believe that the purchase agreement nonetheless permits Global Crossing to consider unsolicited superior offers such as ours pursuant to the applicable “fiduciary out” provisions of the agreement.

     We intend to actively monitor Global Crossing’s reorganization and the regulatory proceedings that are conditions to any closing under the Singapore Technologies Telemedia PTE agreement.

Our Chapter 11 Reorganization

     On June 17, 2002, XO Parent filed for protection under the Bankruptcy Code. On November 15, 2002, the Bankruptcy Court confirmed XO Parent’s plan of reorganization, and, on January 16, 2003, XO Parent consummated the plan of reorganization and emerged from its Chapter 11 reorganization proceedings with a significantly restructured balance sheet.

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Events Leading Up to the Chapter 11 Reorganization

     From 1996 through 2001, we financed the construction and acquisition of our networks, our growth and our working capital requirements through public and private offerings of senior and subordinated unsecured notes and common and preferred equity securities. In addition, in 2000, we financed certain network acquisitions and some of our working capital requirements through secured borrowings under XO Parent’s $1.0 billion senior secured credit facility, which we refer to as the Pre-Petition Credit Facility. As of December 31, 2001, we had approximately $5.2 billion in secured and unsecured long term debt obligations and approximately $1.8 billion in liquidation preference of preferred stock.

     In 2001, market valuations of debt and equity securities of telecommunications companies, especially emerging providers such as us, experienced significant declines, leading to a wave of bankruptcies in the industry. As a result, the capital markets were largely closed to emerging telecommunications companies which made it difficult or impossible for companies like us to obtain additional funding. In response to these conditions, we implemented stringent measures in 2001 that were designed to conserve cash and reduce operating expenses and capital expenditures. Despite these efforts, we concluded that our cash on hand would not be sufficient to fund operations, capital expenditures and debt service until such time as we expected our operations to become profitable and we determined that a restructuring of our balance sheet was necessary.

The Chapter 11 Petition and Plan of Reorganization

     During the period preceding and immediately after the filing of XO Parent’s Chapter 11 petition, we met with a committee of lenders under the Pre-Petition Credit Facility, an informal committee of unsecured creditors that represented holders of our unsecured notes (and following the filing of the Chapter 11 petition, the official committee of unsecured creditors appointed in the Chapter 11 proceedings) and potential investors to discuss potential transactions that could be implemented to reorganize our capital structure. These discussions led to an agreement with certain of our creditors regarding the terms of a plan of reorganization that envisioned two reorganization structures, the first of which was based on, among other things, a proposed cash investment in XO Parent by third parties (which was ultimately abandoned), and the second of which contemplated a stand-alone restructuring with no new cash infusion committed in advance. The plan of reorganization, as supplemented, was filed with the Bankruptcy Court on July 22, 2002 and distributed to creditors of XO Parent eligible to vote in the reorganization. We refer to the stand-alone alternative under the plan of reorganization that ultimately was confirmed by the Bankruptcy Court as the Plan of Reorganization.

     On August 21, 2002, High River Limited Partnership, a limited partnership owned by Mr. Carl Icahn, commenced an offer to purchase loans under the Pre-Petition Credit Facility at a purchase price of $0.50 for each $1.00 in principal amount thereof. Purchases made under this offer, together with the loans under the Pre-Petition Credit Facility that High River previously had acquired, resulted in High River holding approximately 85% of the loans outstanding under the Pre-Petition Credit Facility.

     On November 15, 2002, the Bankruptcy Court confirmed the Plan of Reorganization. On January 16, 2003, XO Parent consummated the Plan of Reorganization and emerged from its Chapter 11 reorganization proceedings.

Distributions Under the Plan of Reorganization

     After the consummation of the Plan of Reorganization, and giving effect to the implementation of fresh start accounting, our capital structure consists of the following:

•  $500.0 million in outstanding principal amount of loans under a restructured secured credit and guaranty agreement, which we refer to as the New Credit Agreement;

•  approximately $70.6 million of other long-term liabilities, which include various capital lease obligations; and

•  95.0 million outstanding shares of common stock, par value $0.01 per share, which we refer to as New Common Stock.

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     We are not required to pay cash interest accrued on the principal amount under the New Credit Agreement until we meet certain financial ratios.

     The consummation of the Plan of Reorganization resulted in the $1.0 billion of loans under the Pre-Petition Credit Facility being converted into the following:

•  90.25 million shares of New Common Stock; and

•  $500.0 million of outstanding principal amount of loans under the New Credit Agreement.

     The Plan of Reorganization also resulted in the cancellation of all of XO Parent’s pre-petition senior unsecured notes and general unsecured claims in exchange for the following:

•  4.75 million shares of New Common Stock;

•  warrants to purchase up to an additional 23.75 million shares of New Common Stock;

•  rights to purchase shares of New Common Stock at $5.00 per share in this Rights Offering; and

•  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, which we refer to as the Investment Termination Payment.

     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;

•  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.

     The warrants will expire on January 16, 2010. Each series of warrants is identical, except as to the applicable exercise price. The exercise price applicable to each respective series of warrants is subject to adjustment in certain events.

     In addition, under the Plan of Reorganization:

•  Holders of pre-petition subordinated notes of XO Parent had their securities cancelled, and received a cash payment from High River based upon the amount of the Investment Termination Payment that High River would have been entitled to receive as holder of the loans under the New Credit Agreement and the right to participate in the Rights Offering;

•  Holders of pre-petition class A common stock of XO Parent had their securities cancelled, and received the right to a portion of the cash consideration pursuant to the Stockholder Stipulation and have the right to participate in the Rights Offering; and

•  Holders of pre-petition class B common stock and holders of all series of pre-petition preferred stock of XO Parent had their securities cancelled and received only the right to participate in the Rights Offering.

Post-Bankruptcy Interests Held by Entities Owned by Mr. Carl Icahn

     Of the 90.25 million shares of New Common Stock distributed to the lenders under the Pre-Petition Credit Facility, approximately 76.6 million shares were issued to High River upon consummation of the stand-alone restructuring under the Plan of Reorganization. Immediately following this distribution, High River transferred all such shares of New Common Stock to Cardiff Holding LLC, a Delaware limited liability company owned by Mr. Icahn.

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     Meadow Walk Limited Partnership, a limited partnership owned by Mr. Icahn, owned over $1.5 billion in principal amount of various tranches of XO Parent’s pre-petition senior unsecured notes, representing approximately 33% in principal amount of such notes. Meadow Walk has transferred beneficial ownership to all distributions with respect to such notes under the Plan of Reorganization to Cardiff.

     Giving effect to these transactions and the distributions of New Common Stock pursuant to the Plan of Reorganization, Cardiff holds over 80% of the outstanding shares of the New Common Stock.

     Of the warrants distributed under the Plan of Reorganization to holders of the pre-petition senior unsecured notes, we estimate Cardiff received 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 connection with the Plan of Reorganization, High River became the holder of approximately 85% of the loans outstanding under the New Credit Agreement. In January 2003, High River assigned all of its rights in the loans outstanding under the New Credit Agreement to Chelonian Corp., a corporation owned by Mr. Icahn. Subsequently, these loans were assigned to Arnos Corp., a corporation owned by Mr. Icahn. As a result, Arnos now holds approximately 85% of the loans outstanding under the New Credit Agreement.

Accounting for Consummation of Plan of Reorganization

     As a result of the consummation of the Plan of Reorganization, XO Parent was required to implement the fresh start accounting provisions of SOP 90-7 to its financial statements. The fresh start accounting provisions required that we establish a “fair value” basis for the carrying value of the assets and liabilities for Reorganized XO, the implementation of which resulted in a substantial reduction in the carrying value of our long-lived assets, including property and equipment, fixed wireless licenses, other intangible assets and other noncurrent assets.

     Under SOP 90-7, the implementation of fresh start accounting was triggered by the emergence of XO Parent from its Chapter 11 proceedings. 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 have 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.

     For further discussion of the effects of our implementation of the Plan of Reorganization on our financial condition and results of operations, see “Our Chapter 11 Reorganization” and “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

2002 Capital Conservation Initiatives

     During 2002, in conjunction with the actions taken in connection with our Chapter 11 reorganization, we took a number of steps in an effort to conserve our available funding, including some modest workforce reductions in addition to those initiated in 2001, and to reduce our long-term obligations.

     Amendment to Level 3 Inter-city Network Agreement. In August 2002, we entered into a Master Agreement with Level 3 Communications, Inc., which amends various agreements related to our acquisition of fiber networks in the United States from Level 3 and the recurring maintenance charges relating to those networks. Beginning on January 1, 2003 and continuing over the remaining term of the initial agreement, Level 3 has reduced the operating and maintenance fees as well as fiber relocation charges from approximately $17.0 million annually to a fixed rate of $5.0 million annually. In exchange for this reduction and certain other concessions, we surrendered our indefeasible right to use an empty conduit and our indefeasible right to use six of the 24 fibers previously acquired from Level 3.

     Sale of European Business. In February 2002, we completed the sale of the European Internet service provider business that we acquired as part of the 2000 acquisition of Concentric Network Corporation.

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Applications and Services

     We provide business customers with a comprehensive array of data and voice communications services, which include voice, Internet access, private data networking and hosting services. We have designed these communications services to meet the needs of all sizes of business customers, from small and medium businesses to multi-location businesses, and large enterprise, and carrier and wholesale customers.

Voice Applications and Services

Local and Long Distance Voice Services

     We offer a variety of voice applications and services, generally to businesses at prices significantly lower than for comparable local services from the incumbent carrier. These voice services include:

•  local standard dial tone, including touch-tone dialing, 911 access and operator assisted calling;

•  local multi-trunk dial tone services, including direct inward dialing, and direct outward dialing;

•  long distance services, including 1+, toll free, calling card and operator services;

•  voice messaging with personalized greetings, send, transfer, reply and remote retrieval capabilities;

•  conferencing services, including voice and web conferencing services; and

•  directory listings and assistance.

     In each of our markets, we have negotiated and entered into interconnection agreements with the incumbent carrier and certain independent carriers, and implemented permanent local number portability, which allows customers to retain their telephone numbers when changing telephone service providers.

Hosted Interactive Voice Response

     We develop and manage hosted interactive voice response, or IVR, systems for customers that enable end users to order products and services, collect and receive information, seek assistance, facilitate bill payments, and a host of other capabilities over the telephone. Our hosted IVR capabilities utilize a wide range of technologies, from standard touch-tone/ push-button dialing to natural language speech recognition and extensible markup language, or XML, and VoiceXML technologies, which are sophisticated systems that enable persons to access Web-based information over the telephone. We customize for our clients’ particular needs telephony-based software applications and technologies developed by third parties to create IVR systems. We integrate these IVR systems with our clients’ other business systems, such as information databases and customer relationship management systems. We host and maintain the IVR systems in data centers and deploy them to clients across a network, thereby alleviating the need for our clients to purchase, own, install, or maintain these applications. Clients pay for the use of these customized solutions through a combination of “upfront” payments for development and recurring fees based on transaction volume. We also host and manage personal-identification number, or PIN, management systems, primarily pre-paid calling card systems for customers, which includes providing transaction processing services relating to prepaid calling card services provided by other telecommunications carriers.

Data Applications and Services

Internet Access

     Our Internet access offerings include dedicated access services targeted at businesses that desire single or multipoint high-speed, dedicated connections to the Internet, at speeds ranging from 56 kilobits per second, or kbps, to 155 megabits per second, or mbps, and digital subscriber line, or DSL, services that include a wide range of dedicated access speeds. We are a tier-1 Internet backbone provider in the U.S., with over 200 public and private peering arrangements with other Internet backbones.

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Private Data Networking

     We provide dedicated transmission capacity on our networks to customers that desire high-bandwidth links between locations. We offer special access and point-to-point circuits to long distance carriers and other high volume customers, which are used as both primary and back-up circuits. In addition, fiber optic technology that enables signals to be transmitted at different wavelengths on a single fiber allows us to lease one or more dedicated wavelengths to customers that desire high-bandwidth links between locations. We currently offer these services with connections of up to 9.6 gigabits per second, or what our industry refers to as OC-192. This service supports a variety of transmission protocols, including ATM, Frame Relay and SONET.

     Our virtual private network, or VPN, services enable customers to deploy tailored, Internet Protocol-based mission-critical business applications for secure internal enterprise, business-to-business and business-to-customer data communications among geographically dispersed locations, while also affording high-speed access to the Internet. VPN services also provide secure access for remote users, such as traveling employees and employees working from home or a remote location, which is not possible using private line and frame relay services. We also offer managed firewall services.

     Finally, we offer a suite of Ethernet services, including Gigabit Ethernet, or GigE, in most of our U.S. markets, as well as inter-city Ethernet services between our markets. Our Ethernet services are designed to provide high-speed, high-capacity connections between customers’ local area networks, or LANs, within and between metropolitan areas, while eliminating the need for ongoing configuration, management and acquisition of equipment by the customer. These services are designed to provide private networking data speeds ranging from 10 or 100 megabits per second to one gigabit per second connections, to simplify customers’ network connections, and to significantly reduce their costs.

Hosting Services

     We offer a range of applications hosting services, which can manage a customer’s web-based infrastructure and operational needs allowing customers to focus on their web-based content. In addition, we provide server management tools and services to manage customers’ larger computers (which are known as servers) for them.

     To provide this service, we have equipped our data centers and have configured the central offices of our network backbone with electrical and environmental controls and 24-hour maintenance and technical support, to provide an attractive location for our customers to locate their servers or from which they can run important applications on servers that we maintain.

     Our hosting services include:

•  Web Hosting:support for customers’ websites, including design, maintenance and telecommunications services;

•  Server Collocation:collocation of customers’ servers in our data centers; and

•  Application Hosting:running our customers’ enterprise-wide applications at our data centers and distributing them as needed over our network or servers to ensure uniformity, reduce costs and implement upgrades on a continuous and immediate basis.

     As part of some of our XOptions integrated packages of communications services, we offer web hosting with Microsoft’s bCentral web-based tools and applications, which enables customers to conduct targeted email marketing, register their web site with hundreds of Internet search engines and directories, build catalogues and sell products over the web, and coordinate meetings and appointments online. We also offer a suite of hosting outsourcing services that provide customers web-based access to email, group distribution lists, calendaring, contacts databases management and file sharing. Hosting can be “shared”, in which we own the equipment and provide the underlying services, or “dedicated,” in which we provide some or all of the hosting and services from our data centers using the customer’s own equipment.

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Integrated Voice and Data Services

     We offer bundled packages of voice and data products, known as XOptions, to small and medium-sized businesses, that include integrated, flat-rate packages for specified amounts of certain services, including local and long distance voice services, Internet access and web hosting services. These services include a variety of service packages designed to accommodate different sized customers with anywhere from 10 to 100 employees per location. XOptions eliminates the complexity of working with multiple service providers for installation, maintenance and billing, and also can result in significant savings over the average cost of buying these services from separate competitive voice and data providers. We also offer Integrated Access Services, which can reduce telecom costs by combining local voice, long distance, and dedicated Internet access on a single facility.

     In 2002, we introduced a number of new XOptions packages designed to meet the needs of larger customers, specifically, those with small offices at multiple locations, those desiring to pool hosting and email accounts across multiple locations under a single account, and those that rely heavily on voice communications services. We also introduced XOptions packages that combine the benefits of XOptions’ local and long distance voice, Internet access and web hosting with Microsoft’s bCentral web-based tools and applications.

     Our integrated services also include shared tenant services, which are telecommunications management services provided to groups of small and medium-sized businesses located in the same office building. This service enables businesses too small to justify hiring their own telecommunications managers to benefit from the efficiencies, including volume discounts, normally available only to larger enterprises. We install an advanced telecommunications system throughout each building we serve, leasing space for on-site sales and service, and offer tenants products and services such as telephones, voice mail, local calling lines, discounted long distance and high-speed Internet connections, all on a single, detailed invoice.

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XO’s Networks

     We have built fiber optic networks with robust capacity in urban centers in North America. Our IP-optimized inter-city network in North America connects these local networks to one another.

     The following diagram depicts the physical components of our nationwide networks.

Metro Fiber Optic Networks

     The core of each of our metro fiber networks is a ring of fiber optic cable in a city’s central business district that connects to our central offices. These central offices contain the switches and routers that direct data and voice traffic to their destinations, and also have the space to house the additional equipment necessary for future telecommunications services. Whenever we can, we build and own these metro fiber

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networks ourselves or obtain indefeasible rights to use fiber so that we can control the design and technology used to best meet our customers’ needs. We operate 37 metro fiber networks serving the cities noted below.

State	Market
Arizona	Phoenix
California	Los Angeles Orange County: Anaheim; Costa   Mesa; Fullerton; Garden   Grove; Huntington Beach;   Inglewood; Irvine;   Long Beach; Orange;   and Santa Ana Sacramento San Diego San Francisco Bay Area:   Fremont; Milpitas;   Mountain View; Oakland;   Palo Alto; San Jose; San   Francisco; Santa Clara and   Sunnyvale
Colorado	Denver
Delaware	Wilmington
District of Columbia	Washington
Florida	Miami Fort Lauderdale Orlando Tampa Bay
Georgia	Atlanta Marietta
Illinois	Chicago
Maryland	Baltimore
Massachusetts	Boston
Michigan	Detroit
Minnesota	Greater Minneapolis/St. Paul
Missouri	St. Louis
Nevada	Las Vegas
New Jersey	Bergen/Passaic Middlesex Newark
New York	Manhattan
Ohio	Cleveland Columbus Akron Canton
Oregon	Portland
Pennsylvania	Central Pennsylvania:   Allentown; Harrisburg;   Lancaster; and Reading     Philadelphia     Scranton/Wilkes Barre
Tennessee	Memphis Nashville
Texas	Austin Dallas Houston San Antonio
Utah	Salt Lake City Orem/Provo
Washington	Seattle Spokane Vancouver

     We built our high capacity metro fiber networks using a backbone density typically ranging between 72 and 432 strands of fiber optic cable. Fiber optic cables have the capacity, or bandwidth, to carry tens of thousands of times the amount of traffic as traditionally-configured copper wire. We believe that installing high-count fiber strands will allow us to offer a higher volume of broadband and voice services without incurring significant additional construction costs. To enhance our ability to economically connect customers to our networks and services, we design our networks to serve both core downtown areas and other metropolitan and suburban areas where business development supports the capital required for the network build.

Inter-City Network

     We have created a single, end-to-end network by linking our metro fiber networks to one another through the use of an inter-city fiber optic network, largely purchased from Level 3, which enables us to offer our customers integrated, end-to-end communications services over facilities we control. All of our metro networks are connected to this inter-city network, either directly or through other connections.

     Although we own rights to multiple fibers primarily on the Level 3 network, to conserve capital, we have delayed “lighting” much of our inter-city fibers and provide inter-city transport primarily by purchasing wavelength capacity from Level 3 along the same routes as our inter-city network assets onto which we have deployed transmission and routing equipment. By using our own transmission and routing equipment, we maximize the capacity and enhance the performance of the network as needed to meet our customers’ current

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and future broadband data and other communications needs, rather than relying on the owners of leased lines to make those upgrades.

     Using Level 3 wavelength services and our own routers and transport equipment, we also operate an OC-192 capacity Internet backbone, onto which a substantial amount of our Internet-related services and customer traffic runs. This backbone provides our customers with improved network redundancy, security and performance, and enables us to offer customers services that take advantage of future Internet Protocol technologies.

     Our inter-city network assets primarily consist of an exclusive interest in 18 unlit fibers in a shared, filled conduit in the Level 3 North American network, which consists of a fiber network that traverses over 16,000 miles and connects more than 60 cities in the United States and Canada, including most of the major metropolitan markets served by our metro networks. We will install optical network equipment to “light” specific segments of this inter-city fiber where the demand for telecommunications capacity makes the related capital expenditures economic in comparison to purchasing wavelength or other capacity. Due to the need for additional, cost-efficient capacity along the segment of this network that runs from Los Angeles to San Diego, we are in the processes of lighting this network segment, which is the only segment that we have current plans to light. Much of the equipment used in connection with our inter-city network is positioned so that we can easily transfer voice and data traffic from the wavelength capacity purchased from Level 3 to servers on our inter-city fiber network as portions of that network are lit.

Connecting Customers to Our Networks

     We attempt to connect our customers directly to our networks where it is economical to do so. We believe that by deploying direct connections to our customers, rather than connecting through the incumbent carriers’ facilities, we will reduce our costs and be better positioned to meet our customers’ communications requirements and to more rapidly deploy our service. We connect customers to our networks by using fiber optic cable and, in limited circumstances, fixed wireless spectrum.

     In many cases, we must lease facilities from an incumbent carrier to connect a customer to our network. By building our metro networks in central business districts, in many cases we have minimized the distance from our network to a potential customer, which results in lower costs associated with these leased facilities because the cost of those facilities is generally based, in part, on the length of the leased connection.

     Fiber Optics. In cases where expected revenues justify the construction cost, we will install a new fiber optic extension from our network to the customer’s premises. Whether it is economical to construct a fiber optic extension depends, among other things, on:

•  the existing and potential revenue base located in the building in question;

•  the building location relative to our network and our ability to access the communications equipment in that building, and

•  local permit requirements.

     Even if we initially determine that it is not economical to construct a fiber connection to a building, we will continually reexamine the costs and benefits of a fiber connection and may at a later date determine that construction of one is justified.

     Broadband Wireless Spectrum. In cases where construction of a fiber optic connection is not practical or economical, in limited cases we have deployed a high-bandwidth wireless connection between an antenna on the roof of the customer’s premises and an antenna attached to our fiber rings. We hold licenses to fixed wireless spectrum in numerous cities, covering areas where 95% of the population of the 30 largest U.S. cities live or work.

     In those limited cases where we decide to install equipment to operate fixed broadband licenses, we must secure roof and other building access rights, including access to conduits and wiring from the owners of each

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building or other structure on which we propose to install our equipment, and may need to obtain construction, zoning, franchise or other governmental permits.

     DSL Technology. We have also deployed DSL technology to meet the high-bandwidth needs of those customers located less than three miles from the incumbent carrier’s central office and whose customer connection remains over copper wire. DSL technology reduces the bottleneck in the transport of information, particularly for data services, by increasing the data carrying capacity of copper telephone lines. We believe that, for many small to medium sized customers within the geographic areas that can be served by DSL technology, existing copper connections using DSL technology from customer buildings to our local fiber optic networks will offer a lower cost solution for providing high-quality broadband services than fiber or fixed wireless connections.

     We offer DSL service in numerous markets in the U.S., mainly through wholesale arrangements with the incumbent carriers and other DSL service providers. We have introduced our own DSL equipment and services at many collocation sites, including central offices of the incumbent carriers that serve a significant number of business customers.

Network Technology

Overview

     The wires, cables and spectrum that comprise the physical layer of our networks can support a variety of communications technologies. We seek to offer customers a set of technology options that can support services that meet their changing needs and introduce new technologies as necessary. Specifically, we believe that a service platform based on Internet Protocol, or IP, will provide us with significant future opportunities, because it will enable data, voice and video to be carried inexpensively over our end-to-end, facilities-based network. Consequently, we have supplemented our current data and voice switching technology with IP equipment.

     Over the past few years, both optical and IP-based networking technologies have undergone rapid innovation. These technological developments enable us to offer our customers numerous high-speed data services. Many of these innovations have the effect of increasing the efficiency of the physical components of our network by increasing the effective capacity of networks for these types of applications. In the future, we expect that IP-based technology will become the preferred technology for voice calls and facsimile transmission as well. We plan to remain flexible in our use of technology, so that, as underlying communications technology changes, we will have the ability to take advantage of and implement new technologies that best meet our network requirements and customers’ needs.

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     The illustration below depicts the configured circuit capacities deployed in the IP network.

Fiber Optic Technology

     To enhance the capacity of our metro networks, we are incorporating dense wavelength division multiplexing technology, which makes it possible to simultaneously transmit data at more than one wavelength, thereby allowing the transmission of multiple signals through the same fiber at different wavelengths. When applied to the state-of-the-art optical fiber deployed in many of our metro networks and in our intercity network, this technology can dramatically increase the capacity of an optical fiber.

Switching Technology

     There are two widely used switching technologies currently deployed in communications networks: circuit-switching systems and packet-switching systems. Circuit switch-based communications systems, which currently dominate the public telephone network, establish a dedicated channel for each communication (such as a telephone call for voice or fax), maintain the channel for the duration of the call, and disconnect the channel at the conclusion of the call.

     Packet switch-based communications systems, which format the information to be transmitted into a series of shorter digital messages called “packets,” are the preferred means of data transmission. Each packet consists of a portion of the complete message plus the addressing information to identify the destination and return address. A key feature that distinguishes Internet architecture from the public telephone network is that on the packet-switched Internet, a single dedicated channel between communication points is not required.

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     Packet switch-based systems offer several advantages over circuit switch-based systems, particularly the ability to commingle packets from several communications sources together simultaneously onto a single channel. For most communications, particularly those with bursts of information followed by periods of “silence,” the ability to commingle packets provides for superior network utilization and efficiency, resulting in more information being transmitted through a given communication channel.

     IP technology, an open protocol that allows unrelated computer networks to exchange data, is the technological basis of the Internet. The Internet’s explosive growth in recent years has focused intensive efforts worldwide on developing IP-based networks and applications. In contrast to protocols like ATM, which was the product of elaborate negotiations between the world’s monopoly telephone companies, IP is an open standard, subject to continuous improvement.

     We believe that a form of IP-based switching will eventually replace both ATM and circuit switched technologies, and will be the foundation of integrated networks that treat all transmissions — including voice, fax and video — simply as forms of data transmission. Although not always the case, voice over IP technology now incorporates the quality of service necessary for commercial deployments, but the pricing of equipment that must be installed at customer locations in order to implement voice over IP applications is not yet cost-effective for widespread application. We expect that over time improved technology and the manufacture of sufficient volumes of equipment will make customer adoption of voice over IP applications more cost-effective.

     We have constructed IP points of presence in all of our major markets using high-capacity IP routers, through which we offer Internet-related services. We currently connect these points of presence with our inter-city fiber network, which serves as our OC-192 IP backbone.

     We have deployed a number of next generation switching technologies, including soft-switch, optical and Ethernet switching technologies. The soft-switch is a distributed computer system that performs the same functions as a circuit switch. It can route and switch information at an extremely fast rate. Initially, we will use soft-switch technology to complement and relieve traffic from our circuit switches. We have deployed optical switching, routing and transmission equipment on our inter-city network to create an all-optical network. This technology is designed to make significant amounts of bandwidth available to our customers. It also is designed to enable us to more effectively and efficiently manage our customers’ transmissions and to enhance our deployment of dense wavelength division multiplexing technology. Optical switching will support all transmission protocols, including IP, ATM, and frame relay. We also are deploying Ethernet switching technology to support and expand our Ethernet services.

     We believe that the deployment of IP and soft-switch technologies in our network will enable us to implement new services based on current IP technology, and position us to adopt future IP technology implementations as they evolve to support fully integrated communications networks.

Fixed Wireless Technology

     We hold licenses for 1,150 to 1,300 MHz of local multipoint distribution services, or LMDS, spectrum in 58 cities, covering areas where 95% of the population of the 30 largest U.S. cities live or work. Our licenses also include 150 MHz of LMDS spectrum in 10 smaller cities and 300 MHz of spectrum in the five boroughs that comprise New York City. We also hold ten fixed wireless licenses in the 39 gigahertz, or GHz, frequency. Eight such licenses provide from 100 to 300 additional MHz in four cities where we hold a 150 MHz LMDS license and two 39 GHz licenses provide us with 200 MHz of fixed wireless capacity in Las Vegas, where we do not hold a LMDS license.

     The spectrum under the licenses we hold is not suitable for mobile telephones, but can transmit voice, data or video signals from one fixed antenna to one or many others. As the word “local” in the local multipoint distribution service name implies, the radio links provided using LMDS frequencies are of limited distance, typically of a few miles or less, due to the degradation of these high-frequency signals over greater distances. The same is true of the 39 GHz spectrum. Although technology to support the multipoint characteristics of this spectrum has not been developed, we use the spectrum for point-to-point connections in those limited

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situations where it is more cost-efficient than installing a fiber cable or leasing facilities from the incumbent carrier.

     A wireless connection typically consists of paired antennas placed at a distance of up to 2.5 miles from one another with a direct, unobstructed line of sight. The antennas are typically installed on rooftops, towers or windows. Because these connections are affected by rain attenuation, in areas of heavy rainfall transmission links are engineered for shorter distances and greater power to maintain transmission quality, which tends to increase the cost of service coverage.

     With the 39 GHz spectrum, because there are existing users of that spectrum, we as a new user of the spectrum will be required to coordinate our use so as not to interfere with an existing user. We do not believe that the coordination process will significantly limit our ability to make use of the spectrum.

     The term of the licenses for our fixed wireless spectrum generally is ten years, and the initial term of a few licenses expires as early as 2006. Although the licenses are renewable for an additional ten year term, renewal is conditioned on us satisfying certain utilization requirements established by the Federal Communications Commission, or FCC. Our current utilization may not be sufficient to satisfy this condition for certain licenses, and, unless we begin to use substantially more fixed wireless spectrum, the FCC may not renew one or more of our licenses.

Sales and Customer Care

Overview

     Our sales organization includes a direct field sales force and alternative sales channels. Our direct sales force for services other than shared tenant services includes two sales organizations. Our market sales organization focuses on small to medium-sized customers and larger or growing businesses within a market and multi-market accounts. Our national sales organization focuses on targeted larger and national accounts, and specific enterprise and carrier channels.

     Our market sales organization focuses on selling our full suite of services to small to medium and larger businesses and multi-market accounts. Our market research indicates that these customers prefer a single source for all of their telecommunications requirements, including products, billing, installation, maintenance, and customer service. By offering these customers our local and long distance services or our XOptions packages, which combine local and long distance voice services, Internet access and web hosting services, we believe we provide our customers a level of convenience that generally is unavailable in the communications marketplace.

     We market and sell services to other telecommunications carriers and large commercial users and national accounts through our national sales team. The expansion of our data service capabilities has enabled our national sales team to expand our targeted customers to include larger national and multi-market accounts customers that can benefit from our broad range of services.

     We market and sell our shared tenant services through a separate direct sales force, which targets high concentrations of business customers in multi-tenant commercial office buildings in the metropolitan areas in which we provide this service.

Direct Sales Force

     We have established highly motivated and experienced direct sales forces. Our strategy is to design the structure of our sales efforts so that our sales personnel are able to establish a direct and personal relationship with our customers. We seek to recruit salespeople with strong sales and telecommunications backgrounds, including salespeople from long distance companies, telecommunications equipment manufacturers, network systems integrators and the incumbent carriers. Salespeople are offered incentives through a commission structure that generally targets 40% to 50% of a salesperson’s total compensation to be based on performance. The size of our sales organization decreased from 2001 to 2002, from approximately 1,750 employees at December 31, 2001 to approximately 1,100 employees at December 31, 2002.

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Other Sales Channels

     We have complemented our direct sales force by developing alternative sales channels to distribute the increasing number of products and services available to our broadening customer base. These channels include numerous third party sales agents. We currently have distribution arrangements with a number of national, regional and local agents and agency firms, whose representatives market a broad range of XO Parent services. We have a staff of approximately 65 employees who manage our agent relationship and the over 500 indirect agents in markets throughout the United States. We also sell and market certain services via our telesales operation and via the Internet at www.xo.com.

Customer Care

     Once a customer’s services have been installed, our customer care operations support customer retention and satisfaction. Our goal is to provide customers with a customer care group that has the ability and resources to respond to and resolve customer questions and issues as they arise, 24 hours a day, seven days a week. In 2002, although we conducted much of our customer care operations from four call centers, we also provided locally-based care for many large customers. Although we believe that a centralized care structure not only takes advantage of economies of scale, but also enables us to provide better customer service, we intend to close one of our care facilities in 2003 and are evaluating whether to place additional customer care resources locally. The size of our customer care organization decreased from 2001 to 2002, from approximately 1,000 employees at December 31, 2001 to approximately 700 employees at December 31, 2002.

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, or 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 initiatives 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 established by the Telecom Act through a combination of federal legislation, new rulemaking by the FCC and challenges to

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existing and proposed regulations by the incumbent carriers. We expect these efforts to limit the benefits of the Telecom Act to continue. Successfully implementing 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 or operation of our wireline network facilities to provide facilities-based international services. In addition, we have obtained FCC authorizations for the operation of our 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 nondiscriminatory. The FCC does authorize 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 service and international long distance service. We, however, still are required to make the terms, conditions and pricing of the detariffed services available to the public on our Company web page.

     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:

•  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 upheld key provisions of the FCC rules implementing the Telecom Act, in a decision that was generally favorable to competitive telephone companies such as us. 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 our operations.

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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.

     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 be of relevance to us 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

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	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 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 would redefine 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 seeing the text of the order, 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 their networks. 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.

     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 will pursue review in courts, 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 interest of competitive carriers. At the same time, we would anticipate that the 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 incumbents themselves to provide this as part of their collocation services. In June, 2002, the D.C. Circuit Court of Appeals affirmed the FCC’s remand order, and the FCC has since clarified that incumbents 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

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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 negotiations in different states. If Verizon is successful, other large incumbent providers 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. We expect that the RBOCs will have received such authority with respect to most of the remaining states in the near term. Although we cannot predict when such approval is likely to occur, it could have an adverse affect on our ability to compete if it is not accompanied by safeguards to ensure that the RBOC continues to comply with the market-opening requirements of Section 271 or if it is granted prematurely before the RBOC has completely satisfied the market-opening requirements.

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 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.

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Universal Service

     In 1997, the FCC established a significantly expanded federal telecommunications subsidy regime known as “universal service”. For example, 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 Fifth Circuit Court of Appeals issued a ruling that had the net effect of somewhat lowering our contribution of revenues to universal service, which stands at 7.28% of end user telecommunications revenues for the first quarter of 2003. Now, the FCC has 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. We cannot be sure that legislation or FCC rulemaking will not 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, communications 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 interstate 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 cost of providing access. In response, the FCC issued a decision in 2001 setting the interstate rates that competitive local carriers charge to long distance carriers at a level that will gradually decrease over three years from a maximum of $0.025 per minute to the rates charged by incumbent carriers. So long as we are in compliance 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 interstate 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 telephony. 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.

     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 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-

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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. Because the traffic we exchange with other local carriers is relatively in balance across our markets, however, we do not expect FCC decisions to restructure reciprocal compensation to have a material impact on our total revenues or financial position vis-à-vis other carriers.

Regulation of Business Combinations

     The FCC, along with the Department of Justice and state commissions, has jurisdiction over business combinations involving telecommunications companies. For example, the FCC’s approval was required to implement certain aspects of our Chapter 11 reorganization. The FCC has reviewed a number of recent and proposed combinations to determine whether the combination would undermine the market-opening incentives of the Telecom Act by permitting the combined company to expand its operations without opening its local markets to competition or have other anti-competitive effects on the telecommunications and Internet access markets. In some cases, the FCC has set conditions for its approval of the proposed business combination. We cannot predict whether any conditions imposed will be effective, nor can we predict whether the FCC will impose similar conditions should it approve future business combinations.

State Regulation

     State regulatory commissions retain jurisdiction over our facilities and services to the extent they are used to provide intrastate communications. We expect that we will be subject to direct state regulation in most, if not all, states in which we operate in the future. Many states require certification before a company can provide intrastate communications services. We are certified in all states where we have operations and certification is required. We cannot be sure that we will retain such certifications or that we will receive authorization for markets in which we expect to operate in the future.

     Most states require us to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate. In some states, our tariff can list a range of prices for particular services. In other states, prices can be set on an individual customer basis. Several states where we do business, however, do not require us to file tariffs. We are not subject to price cap or to rate of return regulation in any state in which we currently provide service.

     Under the regulatory arrangement contemplated by the Telecom Act, state authorities continue to regulate matters related to universal service, public safety and welfare, quality of service and consumer rights. All of these regulations, however, must be competitively neutral and consistent with the Telecom Act, which generally prohibits state regulation that has the effect of prohibiting us from providing telecommunications services in any particular state. State commissions also enforce some of the Telecom Act’s local competition provisions, including those governing the arbitration of interconnection disputes between the incumbent carriers and competitive telephone companies and the setting of rates for unbundled network elements. Finally, the order expected from the FCC’s Triennial Review decision will delegate to the states important authority to decide what unbundled elements must be made available to competitive carriers in each of the states’ local markets over a period three to nine months following the effectiveness of the decision. Consequently, this authority would give the states a key role regarding our continuing access to unbundled elements, such as loops and transport in particular, that are necessary in many cases to connect our customers to our metro networks.

Local Government Regulation

     In certain locations, we must obtain local franchises, licenses or other operating rights and street opening and construction permits to install, expand and operate our fiber-optic networks in the public right-of-way. In some of the areas where we provide network services, our subsidiaries pay license or franchise fees based on a percentage of gross revenues or on a per linear foot basis. Cities that do not currently impose fees might seek to impose them in the future, and after the expiration of existing franchises, fees could increase. Under the Telecom Act, state and local governments retain the right to manage the public rights-of-way and to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and

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nondiscriminatory basis, for use of public rights-of-way. As noted above, these activities must be consistent with the Telecom Act, and may not have the effect of prohibiting us from providing telecommunications services in any particular local jurisdiction.

     If an existing franchise or license agreement were to be terminated prior to its expiration date and we were forced to remove our fiber from the streets or abandon our network in place, our operations in that area would cease, which could have a material adverse effect on our business as a whole. We believe that the provisions of the Telecom Act barring state and local requirements that prohibit or have the effect of prohibiting any entity from providing telecommunications service should be construed to limit any such action. Although none of our existing franchise or license agreements has been terminated, and we have received no threat of such a termination, there can be no assurance that one or more local authorities will not attempt to take such action. Nor is it clear that we would prevail in any judicial or regulatory proceeding to resolve such a dispute.

Environmental Regulation

     Our switch site and customer premise locations are equipped with back-up power sources in the event of an electrical failure. Each of our switch site locations has battery and diesel fuel powered back-up generators, and we use batteries to back-up some of our customer premise equipment. Federal, state and local environmental laws require that we notify certain authorities of the location of hazardous materials and that we implement spill prevention plans. We believe that we currently are in compliance with these requirements in all material respects.

Competition

     The industry environment in which we operate has changed significantly recently. In particular, with the steep decline in the market valuations of debt and equity securities of telecommunications companies, particularly emerging providers, in the last two years the financial condition of many competitive and other carriers has deteriorated, and a number of these competitors have attempted to reorganize, or have completed reorganizations, under Chapter 11 of the Bankruptcy Code. Several competitors who have completed these reorganization efforts, have emerged from bankruptcy with significant improvements to their financial condition or are newly formed entities that have acquired the assets of others at substantial discounts when compared to their original cost basis.

     At the same time, the regulatory environment has changed and continues to change rapidly. Although the Telecom Act and other actions by the FCC and state regulatory authorities have had the general effect of promoting competition in the provision of communications services, it also has allowed the incumbent carriers to begin to provide long distance services in many states. These effects, together with new technologies, such as voice-over-IP, and the importance of data services, have blurred the distinctions among traditional communications markets. As a result, a competitor in any of our business areas potentially is a competitor in our other business areas.

     Many of our existing and potential competitors have greater market presence, including name recognition, engineering and marketing capabilities, and financial, technological and personnel resources, including resources for the development and deployment of new technology and services, than those available to us.

Incumbent Carriers

     In each market that we serve, we face, and expect to continue to face, significant competition from the incumbent carriers, which currently dominate the local telecommunications markets, primarily the RBOCs, which include BellSouth, Verizon, Qwest Communications and SBC Communications. We compete with the incumbent carriers in our markets for local exchange and other services on the basis of product offerings, quality, capacity and reliability of network facilities, state-of-the-art technology, price, route diversity, ease of ordering and customer service. However, the incumbent carriers have long-standing relationships with their customers and provide those customers with various transmission and switching services that we, in many

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cases, do not currently offer. Competition, however, is not based on any proprietary technology. Because our fiber optic networks have been recently installed compared to those of the incumbent carriers, our networks’ dual path architectures and state-of-the-art technology may provide us with cost, capacity, and service quality advantages over some existing incumbent carrier networks. Incumbent carriers also have received regulatory approval to provide and have begun to provide long distance voice service in a number of regions.

Other Voice Service Competitors

     We face, and expect to continue to face, competition for local and long distance telecommunications services from competitors and potential competitors in addition to the incumbent carriers, primarily AT&T, WorldCom, Inc. and Sprint Corporation. With respect to local telecommunications services, we also face, and expect to continue to face, competition from other carriers and competitors, such as Time Warner Telecom, Allegiance Telecom Inc., Focal Communications and McLeodUSA Incorporated. With respect to long distance telecommunications services, although the market is dominated by AT&T, WorldCom, and Sprint, hundreds of other companies, such as Qwest, also compete in the long distance marketplace. In addition, as the RBOCs continue to receive FCC authorization to increase the number of states in which they are authorized to provide long distance telecommunications services, we would expect them to become increasingly significant competitors for those services.

Data Service Competitors

     We face, and expect to continue to face, competition for Internet access and other data services from telecommunications companies, including AT&T, WorldCom, and Sprint, online service providers, DSL service providers, and Internet service providers and web hosting providers.

Other Business Competitors

     Our enhanced communications service offerings are also subject to competition. For example, there are several competitors that offer interactive voice response services similar to those offered by our Interactive division, such as Basis, Interactive Telesis and West Corporation, which we believe focus their sales efforts on large volume interactive voice response service users, live agent call centers and IVR hardware sales.

Employees

     As of March 31, 2003 we employed approximately 4,900 people, including full-time and part-time employees. We consider our employee relations to be good. None of our employees is covered by a collective bargaining agreement.

Properties

     We own or lease, in our operating territories, telephone property which includes: fiber optic backbone and distribution network facilities; point-to-point distribution capacity; central office switching equipment; connecting lines between customers’ premises and the central offices; and customer premise equipment. Our central office switching equipment includes electronic switches and peripheral equipment.

     The fiber optic backbone and distribution network and connecting lines include aerial and underground cable, conduit, and poles and wires. These facilities are located on public streets and highways or on privately-owned land. We have permission to use these lands pursuant to consent or lease, permit, easement, or other agreements.

     We, and our subsidiaries, lease facilities for our and their administrative and sales offices, central switching offices, network nodes and warehouse space. The various leases expire in years ranging from 2003 to 2021. Most have renewal options.

     Our headquarters are located in Reston, Virginia, where we are currently leasing approximately 170,000 square feet of space. In February 2003, Dixon Properties, LLC, which is owned by Mr. Carl Icahn, acquired ownership of the building in which our headquarters is located in a transaction that was approved by the Bankruptcy Court in our Chapter 11 proceedings.

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Legal Proceedings

Chapter 11 Related Disputes

     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. XO has objected to the application of Houlihan Lokey Howard & Zukin Capital for professional fees in the amount of approximately $18 million. 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 claim under section 16b of the Exchange Act 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.

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. Sales from prepaid calling card services that are potentially subject to these taxes accounted for approximately $56 million of the Company’s total revenues from 1999, when the Company began providing these services, through June 30, 2002. The Company believes that its accounting for these potential tax obligations is appropriate and that its accruals of liabilities relating to these obligations are adequate.

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) 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, or 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. or 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.

     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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. The following contains forward-looking statements that involve risks and uncertainties. Our actual results could differ substantially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview of Our Business

     We provide a comprehensive array of voice and data communications services to business customers. Our voice services include local and long distance services, both bundled and stand-alone, other voice-related services such as 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 businesses, 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 of transmission capacity on fiber optic cables, which we refer to as an intercity network. By integrating these networks with advanced communications technologies, we are able to provide a comprehensive array of communications services primarily or entirely over a network that we own or control, from the initiation of the voice or data transmission to the point of termination, which we refer to as end-to-end service. This capability enables us to provide communication services between customers connected to our network and among customers with multiple locations primarily or entirely over our network.

     To develop these networks, we have assembled a collection of metro and inter-city network assets in the United States, substantially all of which we own or control, making us a facilities-based carrier. These network assets incorporate state-of-the-art fiber optic cable, dedicated wavelengths 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 fiber 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 fiber networks, which consist of up to 432 strands of fiber optic cable and, in some cases, additional empty conduits through which fiber optic cable can be deployed. For our inter-city network, we have acquired dedicated, high-capacity wavelengths of transmission capacity on fiber optic cables, onto which we have deployed our own switching, routing and optical equipment, which gives us greater control over how voice and data information is transmitted. 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.

Our Chapter 11 Reorganization

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, XO Parent consummated the Plan of Reorganization and it emerged from its Chapter 11 reorganization proceedings with a significantly restructured balance sheet.

     During the period immediately preceding and after the filing of XO Parent’s Chapter 11 petition, we met with a committee of lenders under the Pre-Petition Credit Facility, an informal committee of unsecured

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creditors that represented holders of our senior unsecured notes (and following the filing of the Chapter 11 petition, the official committee of unsecured creditors appointed in the Chapter 11 proceedings) and potential investors to discuss potential restructuring transactions that could be implemented to reorganize our capital structure. These discussions led to an agreement with the lenders under the Pre-Petition Credit Facility regarding the terms of a Plan of Reorganization that envisioned two potential reorganization structures the first of which was based on, among other things, a proposed cash investment in XO Parent by third parties (which was ultimately abandoned) and the second of which contemplated a stand alone restructuring with no new cash infusion. The Plan of Reorganization, as supplemented, was filed with the Bankruptcy Court on July 22, 2002 and distributed to creditors of XO Parent eligible to vote in the reorganization.

     On August 21, 2002, High River Limited Partnership, a limited partnership owned by Mr. Carl Icahn, commenced an offer to purchase loans under our $1.0 billion secured Pre-Petition Credit Facility at a purchase price of $0.50 for each $1.00 in principal amount thereof. Purchases made under this offer, together with the loans under the Pre-Petition Credit Facility that High River previously had acquired, resulted in High River holding approximately 85% of the loans outstanding under the Pre-Petition Credit Facility.

     On November 15, 2002, the Bankruptcy Court confirmed the Plan of Reorganization. On January 16, 2003, XO Parent consummated the Plan of Reorganization and it emerged from the Chapter 11 reorganization proceedings. The consummation of the Plan of Reorganization resulted in the following changes in our debt and equity capital structure:

•  $1.0 billion of loans under the Pre-Petition Credit Facility were converted into $500.0 million of outstanding principal amount under a 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 class A and class B common stock.

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

•  95.0 million shares of 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.

     For more information concerning the terms of the securities and distributions under our Plan of Reorganization, see “The Business — Our Chapter 11 Reorganization.”

Distributions to and Interests Held by Entities Owned 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 owned by Mr. Carl C. Icahn, holds more than 80% of the outstanding shares. Of the warrants distributed under the Plan of Reorganization to holders of the pre-bankruptcy senior unsecured notes, we estimate Cardiff received 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. High River assigned its 85% interest in the $500.0 million in loans outstanding under the New Credit Agreement to Chelonian Corp., an entity which is owned by Mr. Icahn, which subsequently assigned those loans to Arnos Corp., an entity which is also owned by Mr. Icahn.

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     Accounting Impact of Implementing the Plan of Reorganization

     Due to XO Parent’s Chapter 11 filing, our consolidated financial statements included in our 2002 annual report have been prepared in accordance with SOP 90-7. Pursuant to SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly associated with our reorganization from our ongoing operations.

     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 fresh start accounting provisions required that we establish a “fair value” basis for the carrying value of the assets and liabilities for reorganized XO. As disclosed on the balance sheet included in the accompanying condensed consolidated financial statements as of and for the three months ended March 31, 2003, and in note 2 to such financial statements, the value of our long-lived assets, including property and equipment, fixed wireless licenses, other intangibles and other non-current assets, after implementing SOP 90-7 decreased to $635.4 million from $3.8 billion. Accordingly, depreciation and amortization expense will decline significantly in future periods.

     In addition, as described above and in “The Business — Our Chapter 11 Reorganization,” implementation of the Plan of Reorganization resulted in the cancellation of over $6.9 billion in pre-bankruptcy debt and preferred stock obligations leaving outstanding only the $500.0 million in debt obligations under the New Credit Agreement, and $70.6 million of other long term liabilities including obligations under various capital leases. As a result, our interest expense and preferred stock dividend obligations in future periods will decline significantly in comparison to the interest expense and preferred stock dividend obligations incurred in periods prior to the consummation of the Plan of Reorganization. As a result of the gain resulting from the cancellation of our pre-bankruptcy debt obligations, a substantial portion of our capital and net operating loss carryforwards, which totaled approximately $4.5 billion at December 31, 2002, have been eliminated.

Recent Events in 2003

2003 Employee Retention Plan

     In June of 2003, we replaced the Restructuring Retention Plan with a new Employee Retention and Incentive Plan, which we refer to as the 2003 Retention Plan to provide long-term equity incentives to senior management, based on certain revenue and cash balance performance targets. The 2003 Retention Plan was offered to participants of the Restructuring Retention Plan as an alternative to the EBITDA targets under the Restructuring Retention Plan. Participants in the Restructuring Retention Plan who elected into the 2003 Retention Plan forfeited their rights under the Restructuring Retention Plan in exchange for the opportunity to participate in the 2003 Retention Plan.

     The 2003 Retention Plan provides for a bonus award aligned with each of the Company’s first two and last two quarters of 2003.

     Each participant received a guaranteed Q1/ Q2 bonus award, regardless of the Company’s operating results for that period. The Q1/ Q2 bonus awards were paid in cash and options on or after July 11, 2003.

     For those participants who received options as Q1/ Q2 bonus awards, the options were 50% vested on the date of grant, with the remainder vesting ratably each month over the next 24 months of employment.

     The Q3/ Q4 bonus award under the 2003 Retention Plan will be tied to the achievement of revenue and cash balance performance objectives and will be settled fully in stock options. Under the 2003 Retention Plan, two-thirds of the participant’s Q3/ Q4 bonus award will be based on achievement of the revenue component, with the remaining one-third based on the cash balance component. The Q3/ Q4 bonus awards may be partially earned subject to partial achievement of the revenue and cash balance goals with an additional overachievement bonus for overachievement of the revenue goal.

     Options distributed in settlement of a Q3/ Q4 bonus award will be 25% vested on the date of grant, with the remainder vesting ratably each month over the next 36 months of employment. Bonus awards under the

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2003 Retention Plan may be prorated for partial service during the Q1/ Q2 and/or Q3/ Q4 periods and may be forfeited in certain circumstances following a termination of employment.

     The options granted for both Q1/ Q2 and Q3/ Q4 bonus awards are options to purchase XO’s New Common Stock, par value $0.01 per share. The options were and will be granted under the Company’s 2002 Stock Incentive Plan, with an exercise price equal to $5.84, which represents 80% of the market value of one share of XO’s New Common Stock on the effective date of the 2003 Retention Plan. The stock options issued in conjunction with the Q1/ Q2 bonus payments will result in recognition of compensation expense over the options’ vesting period.

Global Crossing Investment

     On May 30, 2003, we made the first of a series of offers to acquire all of the assets and business of Global Crossing, a telecommunications company which is currently in reorganization proceedings. Thereafter, we made several modifications to, and enhancements of, our initial offer, and on June 24, 2003, commenced an offer to purchase any all of the senior secured bank debt of Global Crossing Holdings Ltd. and Global Crossing North America, Inc. that we did not already own for an aggregate maximum purchase price of $472.5 million. As a result of this offer and our previous purchases, we now own approximately $766.6 million of the approximately $2.214 billion principal amount of such debt outstanding. We may in the future make additional offers to acquire control of, or otherwise invest in, lend to or otherwise do business with Global Crossing. If we do so, we do not know what the terms of any such offers would be, or whether any such offers will be accepted.

     On July 1, 2003, the U.S. 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 purchase agreement with Singapore Technologies Telemedia PTE. We believe that the purchase agreement nonetheless permits Global Crossing to consider unsolicited superior offers such as ours pursuant to the applicable “fiduciary out” provisions of the agreement.

     We intend to actively monitor Global Crossing’s reorganization and the regulatory proceedings that are conditions to any closing under the Singapore Technologies Telemedia PTE agreement.

Significant Transactions and Trends in 2002

Inter-city Network Agreement

     On August 8, 2002, we entered into a Master Agreement with Level 3 Communications, Inc., which amends various agreements related to XO Parent’s acquisition of fiber networks in the United States from Level 3 and the recurring maintenance charges relating to those networks. Beginning on January 1, 2003 and continuing over the remaining term of the initial agreement, Level 3 will reduce the operating and maintenance fees as well as fiber relocation it charges us from approximately $17.0 million annually to a fixed rate of $5.0 million annually. In exchange for this reduction and certain other concessions, effective as of February 11, 2003, the closing date for the transaction, we surrendered our indefeasible right to use an empty conduit and our indefeasible right to use six of the 24 fibers previously acquired from Level 3. Because we had committed to this plan of disposal and believed at the time that we entered into the Master Agreement that consummation of the contemplated transaction was probable, we recorded a $477.3 million non-cash write-down of these assets during the third quarter of 2002. Pursuant to applicable accounting principles, the write-down is based on the book value of the surrendered facilities and does not reflect the future benefits to be received by us under the Master Agreement.

Operational Restructuring

     In the second quarter of 2002, we restructured our operations by reducing our workforce by approximately 350 employees, the majority of whom were employed in network operations, sales and marketing and information technology, and recorded a $2.9 million restructuring charge related to involuntary termination severance liabilities.

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Prepaid Calling Card Tax Matter

     On July 26, 2002, we were advised by the staff of the SEC that it was conducting an informal inquiry primarily relating to our obligations with respect to, and our 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. Sales from prepaid calling card services that are potentially subject to these taxes accounted for approximately $56 million of our total revenues from 1999, when we began providing these services, through June 30, 2002. We believe that our accounting for these potential obligations is appropriate and that our accrual of liabilities relating to these obligations is adequate.

Comparison of Financial Results

Three Months Ended March 31, 2003 versus Three Months Ended March 31, 2002

     As a consequence of our Chapter 11 reorganization, our first quarter financial results have been separately presented under the label “Reorganized XO” for the period January 1, 2003 to March 31, 2003. The results for “Predecessor XO” for January 1, 2003 reflect solely the impact of the application of fresh start on that date. Reorganized XO 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. Predecessor XO capitalized and amortized these costs. In accordance with SOP 90-7, the Reorganized XO was required to implement newly issued accounting pronouncements that would require adoption within twelve months of applying fresh start.

     The operational results for the quarter are discussed below.

     Revenue. Total revenue for the three months ended March 31, 2003 decreased 14.2% to $286.1 million from $333.4 million in the same period of 2002. The 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 was reduced due to fewer direct sales representatives and adverse public perception that accompanied our Chapter 11 proceedings. To increase sales activity in 2003, we are in the process of hiring additional direct sales personnel. Programs launched in 2002 to decrease customer disconnects will continue. New order entry and order processing systems, which are designed to improve speed and efficiency of new customer installations, are partially installed, and we expect to complete installation of these systems in the second half of 2003. We believe that total revenue in the near term will remain relatively stable with first quarter 2003 results. Given our recent emergence from bankruptcy and continued uncertainty in the economy and our industry specifically, we are unable to predict revenue trends in future periods. Revenue was earned from providing the following services (dollars in thousands):

		Reorganized XO				Predecessor XO
		Three Months Ended				Three Months Ended
		March 31,				March 31,
		2003		% of Revenue		2002		% of Revenue		% Change
Voice services		$	150,723		52.7%	$	168,834		50.7%		(10.7	)%
Data services			101,977		35.6%		135,761		40.7%		(24.9	)%
Integrated voice and data			33,393		11.7%		28,810		8.6%		15.9	%
	Total revenue	$	286,093		100.0%	$	333,405		100.0%		(14.2	)%

     Voice services revenue includes revenue from bundled local and long distance voice services, prepaid calling card processing, and other voice communications based services, interactive voice response services and stand-alone long distance services. Voice services revenue in the first quarter of 2003 decreased to $150.7 million from $168.8 million in the first quarter of 2002. The decrease is primarily attributable to customer bankruptcy impacts in the telecommunications industry, continued customer disconnects due to the state of the economy and reduced sales productivity in 2002 due to our bankruptcy filing.

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     Data services revenue includes revenue from Internet access, network access and web applications hosting services. Data services revenue in the first quarter of 2003 decreased to $102.0 million from $135.8 million in the first quarter 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 contributed somewhat 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 in the first quarter of 2003 increased to $33.4 million from $28.8 million in the first quarter of 2002. The increase is due to the success 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
		March 31,				March 31,
		2003		% of Revenue		2002		% of Revenue		% Change
Costs and expenses:
	Cost of service	$	107,506		37.6%	$	140,367		42.1%		(23.4	)%
	Selling, operating and general		166,235		58.1%		205,250		61.6%		(19.0	)%
	Stock-based compensation		—		—		9,095		2.7%		NM
	Depreciation and amortization		26,367		9.2%		161,356		48.4%		NM
Total		$	300,108			$	516,068				(41.9	)%

NM — Not Meaningful

     Cost of service. Cost of service includes expenses directly associated with providing telecommunications services to our customers. Cost of service includes, among other items, the cost of connecting customers to our networks via leased facilities, the costs of leasing components of our network facilities and costs paid to third party providers for interconnect access and transport services. Cost of service for the three months ended March 31, 2003 of $107.5 million decreased in absolute dollars and as a percentage of revenue versus $140.4 million in the period ended March 31, 2002. The year over year 2003 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 approximately $6.4 million of net benefit associated with favorable resolution of disputed third party costs. The decline was somewhat offset by our adoption of an accounting policy during the first quarter of 2003, to cease the deferral of costs associated with the installation of customer services and 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 first quarter of 2003. In addition, we expect cost of service will also fluctuate based on trends in revenue, product mix, the impact of customer bankruptcies 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 in the first quarter of 2003 was $166.2 million versus $205.3 million in the first quarter of 2002. Selling, operating and general expense decreased due to the centralization of many functions, cost reduction and restructuring initiatives that included significant headcount reductions and savings from the planned exit of our European operations. In addition, recording our real estate contracts at their fair value, as required by fresh start, contributed to the decrease. The decline was somewhat offset by our adoption of the policy of expensing internal labor directly associated with the construction of our network, which resulted in a $5.7 million increase in selling, operating and general expense in that period.

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

     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 first quarter of 2003, we incurred no stock-based compensation expense as its deferred compensation balance was eliminated in conjunction with fresh start. We incurred $9.1 million in deferred compensation expense in the first quarter of 2002. The reorganized company will recognize stock-based compensation only with respect to any new grants of compensatory stock options and restricted stock.

     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 $19.9 million in the first quarter of 2003, versus $135.1 million in the first quarter 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 were adjusted to their estimated fair 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 first quarter of 2003 versus $26.3 million in the first quarter of 2002.

     We would expect depreciation and amortization expense for the remainder of the year to continue to track with the first quarter 2003 amount. As of March 31, 2003, we had approximately $606 million of long-lived assets, including approximately $94 million of construction-in-progress and certain fixed wireless licenses that are not currently ready for their intended use and accordingly, are not currently being depreciated or amortized.

     Interest income. Interest income in the first quarter of 2003 decreased to $3.2 million from $5.5 million in the first quarter of 2002. The decrease in interest income is due to reduced interest rates.

     Interest expense, net.Interest expense, net in the first quarter of 2003 decreased to $9.7 million from $120.7 million in the first quarter of 2002. The significant reduction was principally 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 three months ended March 31, 2003 primarily relates to interest accreted on the New Credit Agreement.

     Other income (loss), net.Other income (loss), net was zero in the first quarter of 2003, versus a net loss of $0.2 million in the first quarter of 2002.

     Net income (loss) before cumulative effect of accounting change. Net loss before cumulative effect of accounting change for the reorganized company in the first quarter of 2003 was $20.5 million versus a net loss before cumulative effect of accounting change of $299.0 million for the predecessor company in the first quarter of 2002, due to the foregoing factors.

     Cumulative effect of accounting change.We performed the required impairment tests of goodwill as required by SFAS No. 142 as of January 1, 2002. Based on these tests, we recorded a $1,876.6 million impairment charge to write-off all of our goodwill as a cumulative effect of accounting change during the first quarter of 2002.

     Net income (loss). Net loss for the reorganized company in the first quarter of 2003 was $20.5 million versus a net loss for the predecessor company for the first quarter of 2002 of $2,175.7 million, due to the foregoing factors.

     Preferred stock dividends and accretion of preferred stock redemption obligation, net.As a result of our implementation of fresh start, as discussed above, our pre-petition redeemable preferred stock has been cancelled and discharged. As a result, the reorganized company recorded no preferred stock dividends during the first quarter of 2003 versus $22.8 million net expense for the predecessor company’s first quarter of 2002.

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     Net income (loss) applicable to common shares.Net loss applicable to common shares for the reorganized company in the first quarter of 2003 was $20.5 million. Net loss applicable to common shares for the predecessor company was $2,198.5 million in the first quarter of 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

     Because our Plan of Reorganization was not consummated until January 16, 2003, the results of our operations for 2002 do not include the effects of the resulting cancellations of pre-petition indebtedness and preferred stock or the reduction in the carrying value of our long-lived assets from the implementation of fresh start accounting. As of the Effective Date the cancellation of our pre-petition indebtedness and preferred stock resulted in a significant gain that was partially offset by a loss on the reduction in the carrying value of our long-lived assets as a result of the application of fresh start accounting. The net gain and the adjustment to our financial position are reflected in our financial statements for the first quarter of 2003. The extinguishment of indebtedness and preferred stock will result in interest expense and preferred stock dividends being lower, and the reduction in the carrying value of our long-lived assets will result in depreciation and amortization expense being lower in periods subsequent to the effective date of the Plan of Reorganization.

     Revenue. Total revenue in 2002 of $1,259.9 million was consistent with total revenue in 2001 of $1,258.6 million. The weakened economy and the perceived uncertainties in the market regarding XO Parent’s recently concluded Chapter 11 proceedings had a negative impact on our ability to generate new sources of revenue. Consequently, we were not able to maintain the level of growth that we had historically achieved. We experienced a high level of customer disconnects in 2002 due to reduced demand from other telecommunications companies and increased customer bankruptcies in the telecommunications and dot-com industries. Total revenue declined from $343.0 million in the fourth quarter of 2001 to $299.4 million in the fourth quarter of 2002.

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

		Year Ended December 31,
				% of 2002				% of 2001
		2002		Revenue		2001		Revenue		% Change
Voice services		$	658,453		52.3%	$	606,848		48.2%		8.5%
Data services			472,247		37.5%		596,664		47.5%		(20.9%	)
Integrated voice and data services			128,048		10.2%		52,018		4.1%		146.2%
Other services			1,105		0.0%		3,037		0.2%		(63.6%	)
	Total revenue	$	1,259,853		100.0%	$	1,258,567		100.0%		0.1%

     Voice services revenue includes revenue from bundled local and long distance voice services, prepaid calling card processing, and other voice communications based services, interactive voice response services and stand-alone long distance services. Voice services revenue in 2002 increased to $658.5 million from $606.8 million in 2001. The increase was primarily due to more sales to larger business customers, including the impact of the rollout of our carrier long distance service. Voice revenue declined from $166.5 million in the fourth quarter of 2001 to $157.3 million in the fourth quarter of 2002.

     Data services revenue includes revenue from Internet access, network access and web applications hosting services. Data services revenue in 2002 decreased to $472.2 million from $596.7 million in 2001. This decline was attributable primarily to customer bankruptcies affecting some large network access customers, increased levels of customer disconnects, and a lower demand from large customers due to reductions in those customers’ data and fiber capacity needs. The sale of our European operations in February 2002 also contributed to this decline. Data service revenue declined from $152.8 million in the fourth quarter of 2001 to $108.0 million in the fourth quarter of 2002.

     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 in 2002 increased to $128.0 million from $52.0 million in 2001. The increase is primarily attributed to an increase in the number of customers to whom we provide XOptions service.

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

			Year Ended December 31,
					% of 2002				% of 2001
			2002		Revenue		2001		Revenue			% Change
Costs and expenses:
	Cost of service		$	522,924		41.5%	$	527,698		41.9	%		(0.9%	)
	Selling, operating and general			736,925		58.5%		971,714		77.2	%		(24.2%	)
	Stock-based compensation			28,928		2.3%		37,173		3.0	%		(22.2%	)
	Depreciation and amortization			699,806		55.5%		1,162,671		92.4	%		(39.8%	)
	Restructuring and asset write-downs			480,168		38.1%		509,202		40.5	%		(5.7%	)
		Total	$	2,468,751			$	3,208,458					(23.1%	)

     Cost of service. Cost of service includes expenses directly associated with providing telecommunications services to our customers. Cost of service includes, among other items, the cost of connecting customers to our networks via leased facilities, the costs of leasing components of our network facilities and costs paid to third party providers for interconnect access and transport services. Cost of service in 2002 was $522.9 million compared to $527.7 million in 2001. The 2002 decline was due primarily to cost optimization programs to reduce expenses by transferring traffic from leased facilities onto facilities owned or controlled by us. These cost reductions were offset to some extent by increased costs of service that were attributable to the increase in voice and integrated services revenue as a percentage of our total revenue, which generally carry lower margins when compared to data services because voice and integrated services are more likely to utilize leased versus owned network facilities to terminate calls.

     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 expenses relating to collection risks. Selling, operating and general expense in 2002 was $736.9 million compared to $971.7 million in 2001. Selling, operating and general expense decreased both in absolute dollars and as a percentage of revenue in 2002 when compared to 2001 due to efficiencies resulting from the centralization of and process improvements in many functions and cost reduction and restructuring initiatives that included significant headcount reductions and savings from the planned exit of certain leased facilities, as well as the February 2002 sale of our European operations.

     Stock-based compensation. Stock-based compensation expense represents non-cash charges recorded in connection with the grant of compensatory stock options and restricted stock grants to employees whose compensation is included in selling, operating and general expense. Compensation expense is recognized over the vesting periods of such grants based on the excess of the fair value of the common stock at the date of grant (determined by reference to the market price on that date) over the exercise price. Stock-based compensation in 2002 decreased to $28.9 million from $37.2 million in 2001 primarily due to certain grants becoming fully amortized.

     Depreciation and amortization. We have constructed an integrated facilities-based network in the United States. Primarily in late 2001 and early 2002, we expanded our services in existing markets, placed more assets into service, and increased our obsolescence expense, all of which caused depreciation expense to increase to $598.5 million in 2002 from $447.0 million in 2001.

     Amortization expense includes the amortization of fixed wireless licenses and other intangibles assets with definite lives and, for 2001, also includes the amortization of goodwill. Amortization expense decreased to $101.3 million in 2002 from $715.7 million in 2001. The significant decrease is primarily due to our implementation of SFAS No. 142 and the resulting write-off of all our goodwill as of January 1, 2002.

     As of December 31, 2002, our balance sheet reflected approximately $731.0 million of long-lived assets, including construction-in-progress and certain fixed wireless licenses that had not been placed into service and, accordingly, were not being depreciated or amortized.

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     Restructuring and asset write-downs. Restructuring and asset write-downs were $480.2 million in 2002 and $509.2 million in 2001. During 2001, restructuring charges primarily related to the implementation of our plan to restructure certain of our business operations. The restructuring plan included divesting certain assets and businesses, and reducing our discretionary spending, capital expenditures and workforce, based on our assessment of current and future market conditions. The 2001 restructuring charges include a $366.8 million write-down for the excess of carrying value of assets to be sold or abandoned, including our European business unit and a $134.4 million restructuring charge relating to the consolidation and exiting of domestic facility leases, which was determined based on the future minimum rent commitments for the buildings that management intends to exit less estimated sublease rental streams. The 2001 restructuring charges also included an $8.0 million restructuring charge related to involuntary termination severance costs with respect to 700 persons whose employment was terminated in connection with a workforce reduction, the majority of whom were terminated by December 31, 2001.

     During 2002, we continued to restructure our operations and reduced our workforce by approximately 350 additional employees, the majority of whom were employed in network operations, sales and marketing and information technology, and recorded a $2.9 million restructuring charge related to the involuntary termination severance costs. In addition, we recorded a $477.3 million non-cash asset write-down during the third quarter of 2002 as a result of returning inter-city assets to Level 3 in exchange for reduced future maintenance expenses beginning in 2003.

     Interest income. Interest income in 2002 decreased to $16.5 million from $77.9 million in 2001. The decrease in interest income corresponds to the decrease in our average cash and marketable securities balances and a reduction in interest rates. The amount of interest income attributable to increased cash balances during the bankruptcy proceedings was not material.

     Interest expense, net. Interest expense, net in 2002 decreased to $226.5 million from $465.4 million in 2001, as we ceased accruing interest and penalties on our pre-petition senior unsecured, subordinated notes and Pre-Petition Facility as of the petition date, in accordance with SOP 90-7. The contractual interest amounts of $501.1 million reflected on the consolidated statement of operations represents the interest expense that would have been accrued under the relevant financing agreements had we not ceased accruing interest as described above.

     Other income (loss), net.Other income (loss), net was a loss of $0.2 million in 2002 and a loss of $93.8 million in 2001. The 2001 balance includes an $89.0 million write-down for an other than temporary decline of the value of certain equity method investments.

     Reorganization.Reorganization expenses include adjustments to our financial position and professional service fees that are a direct result of our June 17, 2002 Chapter 11 filing and our application of the accounting required by SOP 90-7. Reorganization expense in 2002 was $91.1 million and included the (i) non-cash charges relating to the write off of issuance costs, discounts and purchase accounting adjustments to adjust the historical carrying amounts of our debt to the allowed claim amount by the Bankruptcy Court, (ii) professional fees associated with our Plan of Reorganization, (iii) the penalties from the rejection of contracts, (iv) adjustments to unpaid pre-petition accounts payable and accrued expenses to the claim amounts allowed by the bankruptcy court, and (v) the net gain resulting from payments 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, less amounts paid to settle certain stockholder claims.

     Net loss before extraordinary gain and cumulative effect of accounting change.Net loss before extraordinary gain and cumulative effect of accounting change during 2002 improved to $1,510.2 million from a net loss of $2,431.1 million in 2001 due to the foregoing factors.

     Extraordinary gain on repurchases of debt, net.During 2001, we recorded an extraordinary gain totaling $345.0 million related to our repurchase of $557.1 million of senior notes at a substantial discount from their respective face values.

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     Cumulative effect of accounting change.We performed the newly required transitional impairment tests of goodwill as required by SFAS No. 142 as of January 1, 2002. Based on these tests, we recorded a $1,876.6 million impairment charge to write-off all of our goodwill as a cumulative effect of accounting change during the first quarter of 2002.

     Net loss. Net loss in 2002 increased to $3,386.8 million from a net loss of $2,086.1 million in 2001 due to the foregoing factors.

     Recognition of preferred stock modification fee, net- reorganization item. In order to adjust the historical carrying amount of our preferred stock to the amount allowed by the Bankruptcy Court, we recognized the unamortized balance of a deferred modification fee with respect to our preferred stock as of the petition date and wrote off certain unamortized issuance costs and recognized certain purchase accounting adjustments related to the preferred stock which netted a $78.7 million gain during 2002.

     Gain on repurchases of preferred stock, net.In 2001, we recorded a net gain totaling $376.9 million related to our repurchase of $472.6 million in liquidation preference of our preferred stock at a substantial discount from the respective carrying amounts.

     Preferred stock dividends and accretion of preferred stock redemption obligation, net.As our preferred stock was deemed subject to compromise under SOP 90-7, we ceased accruing dividends and accreting the redemption obligation on all of our outstanding preferred stock as of our petition date. As a result, we recorded $42.2 million of preferred stock dividends during 2002 as compared to $129.7 million in such dividends in 2001. The contractual dividend amount of $98.8 million reflected on the accompanying condensed consolidated statement of operations represents the dividends that would have been accrued under the terms of our preferred stock had we not ceased accruing such dividends as described above.

     Net loss applicable to common shares.Net loss applicable to common shares in 2002 increased to $3,350.4 million from $1,838.9 million in 2001 due to the foregoing factors.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

     Revenue. Total revenue in 2001 increased to $1,258.6 million from $723.8 million in 2000. The increase was primarily due to the increase in the number of customers and growth in network traffic and average monthly revenue per customer. The growth in our customer base was largely due to our penetration of existing markets, expansion into new markets in 2001 and 2000 and our June 2000 Concentric acquisition. The growth in network traffic and average monthly revenue per customer was primarily due to the expansion of our service offerings and our emphasis on selling to larger business customers.

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

		Year Ended December 31,
				% of 2001				% of 2000
		2001		Revenue		2000		Revenue		% Change
Voice services		$	606,848		48.2%	$	386,796		53.4%		56.9	%
Data services			596,664		47.5%		331,892		45.9%		79.8	%
Integrated voice and data services			52,018		4.1%		2,693		0.4%		NM
Other services			3,037		0.2%		2,445		0.3%		24.2	%
	Total revenue	$	1,258,567		100.0%	$	723,826		100.0%		73.9	%

*  NM — Not Meaningful

    Voice services revenue includes revenue from bundled local and long distance voice services, prepaid calling card processing, and other voice communications based services, including shared tenant services, interactive voice response services and stand-alone long distance services. Voice services revenue in 2001 increased to $606.8 million from $386.8 million in 2000. The increase was primarily due to the growth in the number of our voice services customers and our targeting of larger business customers.

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     Data services revenue includes revenue from Internet access, network access and applications hosting services. Data services revenue in 2001 increased to $596.7 million from $331.9 million in 2000. A primary contributor to this growth was our migration from voice-centric service offerings to a more balanced portfolio of voice and data services, facilitated in large part by our June 2000 acquisition of Concentric and the integration of its data products with our pre-existing services and by our development of new and enhanced data services. Data services revenue increased slightly as a percentage of total revenue for 2001 compared to 2000 due to a full year impact of the integration of data products and the new and enhanced data services we have developed. However, the majority of the impact realized from fully integrating these data products was partially offset by new customers choosing our integrated voice and data services and customer bankruptcies.

     Integrated voice and data services revenue is generated largely from our XOptions product, a flat-rate bundled package offering a combination of voice and data services. Integrated voice and data services revenue in 2001 increased to $52.0 million from $2.7 million in 2000. The increase is primarily attributable to the addition of XOptions to our product portfolio beginning in the fourth quarter of 2000.

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

			Year Ended December 31,
					% of 2001				% of 2000
			2001		Revenue		2000		Revenue			% Change
Costs and expenses:
	Cost of service		$	527,698		41.9%	$	302,666		41.8	%		74.3	%
	Selling, operating and general			971,714		77.2%		730,604		100.9	%		33.0	%
	Stock-based compensation			37,173		3.0%		48,328		6.7	%		(23.1	)%
	Depreciation and amortization			1,162,671		92.4%		617,714		85.3	%		88.2	%
	Restructuring charge			509,202		40.5%		—		—			NM
	In-process research and development			—		—		36,166		5.0	%		NM
		Total	$	3,208,458			$	1,735,478					84.9	%

*  NM — Not Meaningful

    Cost of service. Cost of service includes expenses directly associated with providing telecommunications services to our customers. Cost of service includes, among other items, the cost of connecting customers to our networks via leased facilities, the costs of leasing components of our network facilities and costs paid to third party providers for interconnect access and transport services. Cost of service in 2001 was $527.7 million compared to $302.7 million in 2000. Cost of service for 2001 was consistent as a percentage of revenue as compared to 2000, but increased in absolute dollars on a period-over-period comparison due to the corresponding increase in revenue.

     Selling, operating and general.Selling, operating and general expense includes expenses related to sales and marketing, internal network operations and engineering, information systems, and general corporate office functions. Selling, operating and general expense in 2001 was $971.7 million compared to $730.6 million in 2000. The majority of the period-over-period increase was due to the full year impact of increased sales, network operations and customer support headcount associated with the expansion of our business and the June 2000 Concentric acquisition. Selling, operating and general expense decreased as a percentage of revenue in 2001 compared to the same period in 2000 due to continued efficiencies generated by the centralization of many functions.

     Stock-based compensation. Stock-based compensation in 2001 decreased to $37.2 million from $48.3 million in 2000 primarily due to the vesting of a fixed number of shares of restricted stock issued in 2000 in conjunction with the Concentric acquisition.

     Depreciation and amortization. Our net property and equipment increased to $3,742.6 million as of December 31, 2001 versus $2,794.1 million as of December 31, 2000. As we launched and expanded services

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in new and existing markets, more assets were placed into service, which caused depreciation expense to increase to $447.0 million in 2001 from $223.8 million in 2000. Amortization expense increased to $715.7 million in 2001 from $393.9 million in 2000. Of the total 2001 amortization expense, 83.1% relates to goodwill amortization. The significant increase is primarily due to the amortization of additional goodwill and intangible assets recorded as a result of the June 2000 Concentric acquisition, which are being amortized over a period of up to five years. In conjunction with the implementation of SFAS No. 142, we wrote off all of the carrying value of our goodwill in the first quarter of 2002.

     Restructuring charge. During 2001, we recorded $509.2 million of estimated restructuring charges primarily related to implementation of our plan to restructure certain of our business operations. The restructuring plan includes divesting certain assets and businesses, and reducing our discretionary spending, capital expenditures and workforce, based on our assessment of current and future market conditions. The restructuring charges include a $366.8 million write-down for the excess of carrying value of assets that were to be sold or abandoned, including our European business unit. The consolidation and exiting of domestic facility leases accounted for $134.4 million of the restructuring charges and was determined based on the future minimum rent commitments for the buildings management intended to exit less estimated sublease rental streams. We also reduced our workforce by approximately 700 employees and recorded an $8.0 million restructuring charge related to involuntary termination severance. The employment of the majority of the notified employees was terminated by December 31, 2001.

     In-process research and development. As a result of the Concentric merger in June 2000, we incurred a $36.2 million one-time charge in the second quarter of 2000 resulting from an allocation of the purchase price to in-process research and development. The allocation represents the estimated fair value based on risk-adjusted future cash flows of Concentric’s incomplete projects at that time.

     Interest income. Interest income in 2001 decreased to $77.9 million from $180.9 million in 2000. The decrease in interest income corresponds to the decrease in our 2001 average cash and marketable securities balances and a reduction in interest rates.

     Interest expense, net. Interest expense, net in 2001 increased to $465.4 million from $434.1 million in 2000. The increase in interest expense, net was primarily due to an increase in our average outstanding indebtedness over the respective periods resulting from our increased borrowings under our Pre-Petition Credit Facility during 2000 and 2001, the issuance of $517.5 million of 5 3/4% convertible subordinated notes in January 2001, and the assumption of $150.0 million of debt in connection with our June 2000 acquisition of Concentric offset in part by the impact of the repurchase of certain senior notes discussed below, a reduction in interest rates and increased capitalized interest on constructed assets.

     Other income (loss), net.Other income (loss), net decreased from income of $163.6 million in 2000 to a loss of $93.8 million in 2001. The 2001 loss relates primarily to an $89.0 million write down for an other than temporary decline in the value of certain available-for-sale investments. The other income in 2000 relates primarily to a $225.1 million gain on the sale of an equity investment partly offset by a $57.7 million write-down for an other than temporary decline in the value of certain available-for-sale investments.

     Extraordinary gain on repurchases of debt, net.In the second half of 2001, we recorded an extraordinary gain totaling $345.0 million related to our repurchase of $557.1 million of senior notes at a substantial discount from their respective face values.

     Net loss. Net loss in 2001 increased to $2,086.1 million from a net loss of $1,101.3 million in 2000 due to the foregoing factors.

     Gain on repurchases of preferred stock, net.In the second half of 2001, we recorded a net gain totaling $376.9 million related to our repurchase of $472.6 million in liquidation preference of our preferred stock at a substantial discount from their respective carrying amounts.

     Preferred stock dividends and accretion of preferred stock redemption obligation, net.Preferred stock dividends and the accretion of the preferred stock redemption decreased to $129.7 million in 2001 from

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$146.4 million in 2000 due to the impact of the repurchase of the preferred stock discussed above offset in part by the increase in our average outstanding preferred stock balance during the first half of 2001.

     Net loss applicable to common shares.Net loss applicable to common shares in 2001 increased to $1,838.9 million from $1,247.7 million in 2000 due to the foregoing factors.

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. Historically, this strategy has increased our operating losses by requiring us to incur significant costs and to make substantial capital investments before we realize related revenue. We have completed much of the construction relating to our metro fiber networks, which required substantial capital investment. We believe that the implementation of the restructuring of our debt and capital under the Plan of Reorganization and the various initiatives we have undertaken to reduce operating costs and capital expenditures over the past two years, positions 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.

Reorganization Overview — Changes in our Capital Structure

     As described in our 2002 Annual Report, in light of conditions in the capital markets and our funding needs, XO Parent took a number of steps during 2001 to conserve cash on hand and raise additional capital. However, conditions in the capital markets for telecommunications companies continued to deteriorate, and, in late 2001, we determined that, in light of the substantial declines in market valuation suffered by telecommunications service providers throughout the industry in 2001, we would be unable to obtain the additional funding needed to conduct our business plan without a significant balance sheet reorganization.

     In order to complete this reorganization, on June 17, 2002, XO Parent filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court. Concurrent with its Chapter 11 filing, XO Parent submitted a proposed Plan of Reorganization, which is discussed in detail in the Overview section above, in note 2 to our consolidated financial statements as of and for the year ended December 31, 2002 and in “The Business — Our Chapter 11 Reorganization”. On November 15, 2002, the Plan of Reorganization was confirmed by the Bankruptcy Court. On January 16, 2003, XO Parent consummated the transactions contemplated by the Plan of Reorganization and emerged from Chapter 11 bankruptcy protection. Under the Plan of Reorganization, XO Parent has emerged from its Chapter 11 proceedings with:

•  no preferred stock and dividend obligations;

•  significantly reduced debt and interest obligations; only $500 million of long-term indebtedness remains, pursuant to the New Credit Agreement, which includes:

•  financial covenants generally more favorable than those included in the Pre-Petition Credit Facility,

•  amended maturity and principal repayment terms modified so that required principal payments are deferred by two and a half years when compared to the Pre-Petition Credit Facility, and

•  amended interest payment terms modified so that no cash interest payments are required to be made by us until we achieve specified financial targets.

     The maturity date of the outstanding principal under the New Credit Agreement is July 15, 2009. Automatic and permanent quarterly reductions of the principal amount commence on October 15, 2007 with scheduled principal repayments totaling $25 million in 2007, $150 million in 2008 and $325 million in 2009. All of the proceeds from the Rights Offering will be used to prepay a portion of the principal amount outstanding. To that extent future interest payments and scheduled principal repayments would be reduced.

     The security for the New Credit Agreement consists of all of the 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, minimum EBITDA (earnings before interest, taxes, depreciation and amortization) requirements and maximum capital expenditures. Loans under the New Credit Agreement bear interest, at our option, at an alternate base rate, as defined, or reserve-

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adjusted London Interbank Offered Rate plus, in each case, applicable margins. We are not required to pay cash interest accrued on the principal amount under the New Credit Agreement until we meet certain financial ratios. Nevertheless, we may elect to begin paying interest in cash earlier than the required date, but, based on our current funding requirement, we would not anticipate making such an election in the foreseeable future. Once we begin to pay accrued interest in cash, even in the case of an early election, the applicable margins are reduced. Approximately 85% of the underlying loans of the New Credit Agreement are held by Arnos Corp., an entity owned by Mr. Icahn.

Future Funding Needs, Capital Resources and Liquidity Assessment

     Our balance of cash and marketable securities decreased to $538.4 million at March 31, 2003 from $561.0 million at December 31, 2002 and from $755.2 million at December 31, 2001. This decrease from December 31, 2001 primarily resulted from capital expenditures during the early part of 2002 relating to the completion of ongoing network construction projects. The transfer of $25.0 million to an escrow deposit in the first quarter of 2003 in conjunction with an agreement to indemnify certain former directors and executive officers was the main cause of cash reduction from December 31, 2002. We have and will continue to focus on minimizing the rate at which we use our cash to fund operations and capital expenditures. For the past year, the reduction in the rate at which we use our cash has been accomplished by:

•  significantly reducing our capital requirements largely due to the completion of several significant technology and network enhancements projects and decreases in success-based capital spending;

•  ceasing to pay interest on the Pre-Petition Credit Facility and our pre-petition senior and subordinated unsecured notes and dividends on our preferred stock;

•  improving operational results due to initiatives, which have resulted in the reduction of cost of service and selling, operating and general expenses in both absolute dollars and as a percentage of revenue; and

•  improving working capital mainly through aggressive collections of our outstanding accounts receivable, and, to a lesser extent, deferred payment of XO Parent’s pre-petition liabilities.

     As discussed in more detail in Credit Risk, subsequent to March 31, 2003, we liquidated substantially all of our existing marketable securities for $249.6 million in cash, of which we paid $160.7 million to acquire senior secured bank debt of Global Crossing. We may in the future offers make additional offers to acquire control of, or otherwise invest in, lend to or otherwise do business with Global Crossing. If we do so, we do not know what the terms of any such offers would be, or whether any such offers will be accepted. Any such future offers, if made for cash consideration, could significantly and adversely affect our liquidity.

     We expect that, in the near term, our business will use existing cash primarily to fund capital expenditures, working capital requirements and possible acquisitions of businesses or assets, as discussed above. The majority of our planned capital expenditure requirements will be “success-based” in that they will be used to purchase and install optical equipment, channelbanks, routers, servers or other customer-related equipment and electronics in connection with 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 information technology and network applications. As of December 31, 2002, such future minimum commitments were as follows (dollars in thousands):

					Other Long-Term		Total Minimum
	Operating Lease		Capital Lease		Contractual		Long-Term
Year Ending December 31,	Obligations		Obligations		Obligations		Obligations
2003	$	62,733	$	10,031	$	74,126	$	146,890
2004		59,045		2,809		57,612		119,466
2005		55,600		2,668		17,574		75,842
2006		51,458		2,416		14,577		68,451
2007		47,334		1,733		11,780		60,847
Thereafter		232,550		277		107,277		340,104
Total future minimum long-term obligations	$	508,720	$	19,934	$	282,946	$	811,600

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     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. Nevertheless, we may elect to begin paying interest in cash earlier than the required date in order to reduce the effective interest rate, but, based on our current assessment of our funding requirements, we would not anticipate making such an election in the foreseeable future. Arnos Corp., a company owned by Mr. Icahn, holds approximately 85% of the principal amount of the loans outstanding under the New Credit Agreement.

     Although we expect that our balance of cash and marketable securities will decline in the near term to fund capital expenditures and working capital requirements discussed above, given (i) our current assumptions with respect to trends in our business, (ii) our estimates concerning the substantially lower level of capital expenditures that we will incur to support our business plan and (iii) the significant reduction in cash needed to meet our debt service requirements because we are not required to pay interest accrued on the New Credit Agreement until we meet certain financial ratios, we believe that the $538.4 million of cash and marketable securities on hand as of March 31, 2003 will be sufficient to fund our operations until the cash flows generated by our operations are sufficient to fund our capital expenditures and debt service requirements.

Credit Risk

     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 recently filed for protection under Chapter 11 of the Bankruptcy Code. We believe that our established valuation and credit allowances are adequate as of March 31, 2003 to cover these risks.

     We are permitted under the terms of our Credit Agreement to make investments in a broad range of securities, including securities that are not cash equivalents or readily marketable securities, and which therefore may involve significant credit risk. At March 31, 2003, we held investments in marketable securities of $249.6 million, consisting of U.S. government agency issued and other high-grade securities with original maturities beyond three months. Subsequently, we liquidated these marketable securities for cash and invested $160.7 million of the proceeds in $766.6 million principal amount 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. If we choose to liquidate our investment in this debt, we cannot be assured that we will be able to dispose of the investment for an amount greater than or equal to the amount we paid for it, or that any distribution that may be received upon consummation of Global Crossing’s bankruptcy case will have a greater value than that of our investment.

Critical Accounting Policies

     As discussed in note 2 to the consolidated condensed consolidated financial statements for the three months ended March 31, 2003, included in this prospectus, we adopted fresh start accounting as of January 1, 2003, creating, in substance per SOP 90-7, a new reporting entity. SOP 90-7 also requires that changes in accounting principles that will be required in the financial statements of the emerging entity within twelve months following the adoption of fresh start reporting be adopted at the time fresh start reporting is adopted.

     The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make judgments, estimates and assumptions regarding uncertainties that

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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 financial statements and footnotes provide a meaningful and fair perspective of the Company’s financial condition and its operating results. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements included in this prospectus.

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 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 SFAS No. 142.

     Depreciation or amortization of the long-lived asset begins when the asset is substantially complete or placed into service. At March 31, 2003, our balance sheet includes approximately $606 million of long-lived assets, including approximately $94 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 March 31, 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

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these criteria are not met, revenue recognition is deferred until resolution occurs. For example, if a customer files for 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 disconnection penalties 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. Although these disputed amounts are billed, 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 upfront 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.

     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. There were no sales of unlit capacity during 2002 and the three months ended March 31, 2003.

     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 valuation allowances were adequate as of March 31, 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.

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 interconnect 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.

New 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

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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 asset retirement obligation of $12.0 million.

     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 adoption of SFAS No. 145 had no effect on our financial position or results of operations for the three months ended March 31, 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 quarter 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, 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.

Quantitative and Qualitative Disclosure About Market Risk

     On January 16, 2003, the effective date of XO Parent’s emergence from Chapter 11, we amended the $1.0 billion Pre-Petition Credit Facility in accordance with the Plan of Reorganization. As of March 31, 2003, the New Credit Agreement was comprised of $500.0 million junior secured loans with principal amounts payable beginning October 2007, and the rate at which interest accrues under the entire outstanding balance is variable. Currently, we do not pay cash interest on the New Credit Agreement. However, interest accrues

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based on variable rates. Interest expense and future cash flow exposure as of December 31, 2002 are illustrated in the following table (dollars in millions).

							No
	Annual Interest Expense Given						Change in		Annual Interest Expense Given
	an Interest Rate decrease of						Interest		an Interest Rate increase of
	X Basis Points						Rates		X Basis Points
Cash Flow Risk	(150 BPS)		(100 BPS)		(50 BPS)		Fair Value		50 BPS		100 BPS		150 BPS
New Credit Agreement	$	29.2	$	31.7	$	34.2	$	36.7	$	39.2	$	41.7	$	44.2

     Marketable securities at December 31, 2002 and March 31, 2003 consist of U.S. government agency issued and other high-grade securities with original maturities beyond three months. These securities were classified as “available for sale.”

     Subsequent to March 31, 2003, we liquidated these marketable securities for cash and invested a portion of the proceeds, $160.7 million, in $766.6 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 we choose to liquidate our investment in this debt, we cannot be assured that we will be able to dispose of the investment for an amount greater than or equal to the amount we paid for it, or that any distribution that may be received upon consummation of Global Crossing’s bankruptcy case will have a greater value than that of our investment. If interest rates had increased or decreased, it would not have had a material impact on the fair value of these financial instruments or on the interest we would have earned on our as illustrated in the following table as of December 31, 2002 (dollars in millions).

							No
	Valuation of Securities Given						Change in		Valuation of Securities Given
	an Interest Rate decrease of						Interest		an Interest Rate increase of
	X Basis Points						Rates		X Basis Points
Fair Value Risk	(150 BPS)		(100 BPS)		(50 BPS)		Fair Value		50 BPS		100 BPS		150 BPS
Financial Assets:
Marketable securities — over 1 year	$	247.9	$	247.5	$	247.2	$	246.9	$	246.6	$	246.2	$	245.8

     The sensitivity analyses provide only a limited, point-in-time view of the market risk sensitivity of certain of our financial instruments. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in the above sensitivity analyses.

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

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     On May 15, 2002, we dismissed our independent auditors, Arthur Andersen LLP, and appointed Ernst & Young LLP to serve as our new independent auditors for the year ending December 31, 2002. Our Board of Directors approved this decision. We filed a current report on Form 8-K with the SEC on May 16, 2002, which included a notification that the change was effective on May 15, 2002.

     Arthur Andersen’s report on our financial statements for the fiscal year ending December 31, 2000 did not contain an adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principles. Arthur Andersen’s report on the Company’s financial statements for the fiscal year ending December 31, 2001 included an explanatory paragraph that discussed the substantial doubt concerning our ability to continue as a going concern.

     During each of the two fiscal years ending December 31, 2000 and 2001, there were: (i) no disagreements with Arthur Andersen on any matter of accounting principle or practice, financial statement disclosure or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with their report on our financial statements for such years; and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

     During each of our two fiscal years ending December 31, 2000 and 2001 and through the date of their appointment, we did not consult Ernst & Young with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

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DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  ��  Prior to January 16, 2003, the Effective Date of our Plan of Reorganization, our Board of Directors was comprised of the following individuals: Daniel F. Akerson, Nathaniel A. Davis, Nicolas Kauser, Craig O. McCaw, Sharon L. Nelson, Henry R. Nothhaft, Jeffrey S. Raikes, Peter C. Waal, and Dennis M. Weibling. Additional information concerning these former board members is included in our Annual Report on Form 10-K for the year ended December 31, 2001.

     The names, ages and positions with XO Parent of our current directors and executive and other key officers are listed below.

Name	Age		Position
Carl C. Icahn(1)		67	Chairman of the Board of Directors
Carl J. Grivner		49	Chief Executive Officer, President and Director
Andrew R. Cohen(1)		41	Director
Adam Dell(2)		32	Director
Vincent J. Intrieri(2)(3)		46	Director
Keith Meister(1)(3)		30	Director
John H. Jacquay		50	Executive Vice President, National Sales
Wayne M. Rehberger		47	Executive Vice President, Chief Financial Officer
Mark W. Faris		48	Senior Vice President, Network Operations
William Garrahan		46	Vice President, Corporate Development and Strategic Planning
Brian Oliver		47	Executive Vice President, Strategy and Corporate Development
Lee Weiner		46	Senior Vice President and General Counsel
Doug Kelly		54	Executive Vice President, Network Services

(1)	Member of the Executive Committee of the Board of Directors.
(2)	Member of the Audit Committee of the Board of Directors.
(3)	Member of the Compensation Committee of the Board of Directors.

     Brief biographies of our directors are set forth below.

     Carl C. Icahn.Mr. Icahn has served as our Chairman of the Board of Directors since January 2003. Since 1984, he has served as the Chairman of the Board and a Director of Starfire Holding Corporation (formerly Icahn Holding Corporation), a privately-held holding company, and Chairman of the Board and a Director of various subsidiaries of Starfire, including ACF Industries, Incorporated, a privately-held railcar leasing and manufacturing company. Since 1968, he served as the Chairman of the Board and President of Icahn & Co., Inc., a registered broker-dealer and a member of the National Association of Securities Dealers. Since November 1990, Mr. Icahn has been Chairman of the Board of American Property Investors, Inc., the general partner of American Real Estate Partners, L.P., a public limited partnership that invests in real estate. Since 1993, Mr. Icahn has been a Director of Cadus Pharmaceutical Corporation, a firm which holds various biotechnology patents. Since October 1998, Mr. Icahn has been the President and a Director of Stratosphere Corporation which operates the Stratosphere Hotel and Casino. Since September 2000, Mr. Icahn has served as the Chairman of the Board of GB Holdings, a holding company that owns the Sands Hotel and Casino in Atlantic City, New Jersey.

     Carl J. Grivner.Mr. Grivner has served as our Chief Executive Officer and President since May 15, 2003. From May 1, 2003 to May 15, 2003, he served as a member of the Office of the Chairman of the Board of XO. Mr. Grivner has been a member of our Board of Directors since May 1, 2003. From February 2002 to April 2003, he was Chief Operating Officer of Global Crossing, Ltd. From June 2000 to February 2002, he was Executive Vice President, Operations of Global Crossing. On January 28, 2002, Global Crossing and certain of its subsidiaries filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. From July

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1999 to April 2000, Mr. Grivner was Chief Executive Officer of Worldport Communications. From July 1998 to July 1999, he was Chief Executive Officer, Western Hemisphere of Cable & Wireless Plc.

     Andrew R. Cohen.Mr. Cohen has been a member of our Board of Directors since January 2003. Since 2000, he has served as Chief Technology Officer of Icahn Associates Corp. From 1999 to 2000, Mr. Cohen served as senior vice president and chief technology officer of American Greetings & Americangreetings.com. From 1998 to 1999, he served as President of CNS Development, which provides website transaction consulting services. From 1992 to 1998, Mr. Cohen served as vice president of development of Micrografx, Inc., a consumer and business enterprise software company.

     Adam Dell.Mr. Dell has been a member of our Board of Directors since January 2003. Since January 2000, he has served as the Managing General Partner of Impact Venture Partners, a venture capital firm focused on information technology investments. From October 1998 to January 2000, Mr. Dell was a Senior Associate and subsequently a Partner with Crosspoint Venture Partners in Northern California. From July 1997 to August 1998, he was a Senior Associate with Enterprise Partners in Southern California. From January 1996 to June 1997 Mr. Dell was associated with the law firm of Winstead Sechrest & Minick, in Austin, Texas, where he practiced corporate law.

     Vincent J. Intrieri.Mr. Intrieri, has been a member of our Board of Directors since January 2003. Since March 2003, he has been Managing Director of Icahn Associates Corp. From 1998 to March 2003, he served as a portfolio manager of High River Limited Partnership. From 1995 to 1998, Mr. Intrieri served as portfolio manager for distressed investments with Elliot Associates L.P., a New York investment fund. Prior to 1995, Mr. Intrieri was a partner at the Arthur Andersen accounting firm and is a certified public accountant. Mr. Intrieri currently serves on the board of TransTexas Gas Corporation.

     Keith Meister.Mr. Meister has been a member of our Board of Directors since January 2003. Since June 2002, he has served as senior investment analyst of High River Limited Partnership. From March 2000 through 2001, Mr. Meister co-founded and served as co-president of J Net Ventures, a venture capital fund focused on investments in information technology and enterprise software businesses. From 1997 through 1999, Mr. Meister served as an investment professional at Northstar Capital Partners, an opportunistic investment partnership with assets in excess of $2 billion. From 1995 to 1997, Mr. Meister served as an investment analyst in the investment banking group at Lazard Freres.

     John H. Jacquay.Mr. Jacquay has been our Executive Vice President, National Sales since April 2003. From February 2002 to April 2003, he was our Senior Vice President, National Sales. From November 1999 to February 2002, he was Chairman and Chief Executive Officer of Pagoo, Inc. From January 1999 to July 1999, Mr. Jacquay was President and Chief Operating Officer of GRIC Communications. From 1997 to 1999, he was Chief Operating Executive — Regulated Industries unit of MCI Systemhouse. From 1996 to 1997, Mr. Jacquay was President — Network Services of US ONE Communications.

     Wayne M. Rehberger. Mr. Rehberger has served as our Executive Vice President, Chief Financial Officer since April 2003. From December 2000 to April 2003, he was our Senior Vice President, Chief Financial Officer. From August 2000 to October 2000, Mr. Rehberger was our Senior Vice President of Finance. From April 2000 to August 2000, he was Chief Financial Officer of Nettel Communications. On September 28, 2000, Nettel filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. From April 1999 to March 2000, Mr. Rehberger was Senior Vice President of Finance at MCI WorldCom. From June 1986 to March 1999, he held other senior level finance positions at MCI.

     Mark W. Faris. Mr. Faris has been our Senior Vice President, Network Operations since April 2001. From September 2000 to April 2001, he was the Chief Operating Officer of Gemeni Networks. From March 2000 to September 2000, Mr. Faris was President and Chief Operating Officer of BlueStar Communications. Prior to that, he had been employed by Southwestern Bell for over 20 years.

     William Garrahan.Mr. Garrahan has served as our Vice President, Corporate Development and Strategic Planning since July 2001. From September 1996 to February 2001, he was a Senior Vice President with Lehman Brothers, in its equity research department.

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     Brian Oliver.Mr. Oliver has served as our Executive Vice President of Strategy and Corporate Development since May 2003. Prior to joining XO, he was the Founder, Chairman and CEO of Cambrian Communications, a facilities-based metropolitan area network provider, delivering end-to-end, all-optical network solutions between New York and Washington, DC. Prior to forming Cambrian, Mr. Oliver was the founder, President and CEO of Wave International, Inc. He also held various senior positions at Bell Atlantic Corporation including Vice President of Corporate Development and Vice President of Federal Regulatory Relations. In addition, Mr. Oliver was a board member for Pontio Communications.

     Lee Weiner.Mr. Weiner has served as our Senior Vice President and General Counsel since June 2003. Prior to joining XO, Mr. Weiner was Executive Vice President, General Counsel and Secretary at Net2000 Communications, Inc. He also served as Vice President and Acting General Counsel/ Senior Associate Counsel at Qwest Communications International, Inc. after its merger with LCI International, Inc. Prior to that, he was Vice President and General Counsel at LCI International, Inc. Mr. Weiner also held several senior positions at MCI Telecommunications Corporation.

     Doug Kelly.Mr. Kelly is Executive Vice President of Network Services at XO Communications. In this role, he oversees all service delivery, service assurance and network performance functions and is responsible for the end-to-end customer experience, from order entry, through service installation, billing and customer care. Prior to joining XO, Mr. Kelly founded DEK Consulting Services which provided both technical and business analyses to telecommunications companies involved in acquisitions, business development and restructuring strategies. Prior to that, he was President, Network Services for Global Crossing. He also held several senior management positions at MCI including Vice President Network Management, Vice President Central Operations and Director of West Operations. Mr. Kelly also held positions at New York Telephone Company and AT&T.

     Each director will hold office until the first meeting of stockholders immediately following expiration of his one-year term of office and until his successor is qualified and elected, or until his earlier resignation or removal. We do not have a classified or staggered board.

     As discussed above, on June 17, 2002, XO Parent filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York, and emerged from bankruptcy on January 16, 2003. Messrs. Davis, Jacquay, Rehberger, Faris, Salemme and Garrahan and Ms. Gofus each were executive officers of XO Parent during the bankruptcy proceedings.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and any person who owns more than 10% of our common stock, whom were refer to collectively as the Reporting Persons, to file with the Securities and Exchange Commission reports of ownership and reports of changes in ownership of our common stock. Under Securities and Exchange Commission rules, we receive copies of all Section 16(a) forms that these Reporting Persons file. We have reviewed copies of these reports and written representations from the Reporting Persons. We believe all Reporting Persons complied with their Section 16(a) reporting obligations during 2002, except for the following individuals: Messrs Davis, Rehberger, Salemme, Ms. Gofus and Gary Begeman, Doug Carter and Scott Macleod, former executive officers of ours, had a late Form 5 filing with respect to the cancellation of certain options to purchase pre-petition class A common stock in connection with our May 2001 option exchange program; Mr. Faris had a late Form 5 filing with respect to the purchase of shares of pre-petition class A common stock under our employee stock purchase plan; and Jeffrey S. Raikes, a former member of our Board of Directors, had a late Form 4 filing with respect to the sale of shares of our pre-petition class A common stock.

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EXECUTIVE COMPENSATION

Summary Compensation Table

     Predecessor Executive Compensation. The following table sets forth, for the fiscal years ended December 31, 2002, 2001, and 2000, individual compensation information for our former Chief Executive Officer, and each of our four most highly compensated executive officers, each of whom has resigned from their positions and terminated their employment with us and whom we refer to collectively as the Named Executive Officers.

										Long Term
										Compensation Awards
				Annual Compensation						Restricted		Securities		All Other
										Stock Award(s)		Underlying		Compensation
Name and Principal Position		Year		Salary($)			Bonus($)(1)			($)(2)		Options(#)(3)		($)(4)
Daniel F. Akerson (5)			2002		377,303	(6)		—	(6)		—		—		5,606
	Chief Executive Officer		2001		318,006	(6)		—	(6)		—		—		38,331
			2000		500,000			477,950			—		500,000		57,580
Nathaniel A. Davis (7)			2002		382,212			—			—		1,423,750		8,769
	President and Chief Operating Officer		2001		375,000			296,136			432,500		—		194
			2000		375,000			239,524			—		1,975,000		179
R. Gerard Salemme (8)			2002		217,300			85,417			—		59,500		3,224
	Senior Vice President, Regulatory and		2001		213,200			223,655			86,500		—		6,787
	Legislative Affairs		2000		221,400			205,000			—		70,000		8,687
Michael S. Ruley (9)			2002		280,289			—			—		301,665		9,329
	Executive Vice President, Market Sales		2001		268,846			192,653			51,900		—		56,848
	Operations Nancy B. Gofus (10)	2000 2002		244,443 275,000				191,648 —			— —		253,100 212,500		36,324 9,489
	Executive Vice President, Marketing		2001		275,000			178,503			51,900		—		8,950
	and Customer Care		2000		253,846			157,723			—		350,000		3,154

(1)	Includes bonuses earned for the corresponding fiscal years that were paid subsequent to the stated calendar year end. No bonuses were paid to any Named Executive Officer with respect to performance for 2002, other than to Mr. Salemme.
(2)	Represents an award of shares of our pre-petition class A common stock granted on August 20, 2001, which shares were restricted and subject to forfeiture until vested. All such shares were forfeited in 2002, and no shares were outstanding at December 31, 2002.
(3)	Represents options to acquire shares of class A common stock. Share figures have been restated retroactively to reflect stock splits with respect to our class A common stock. Grants in 2002 were made in connection with the Offer to Exchange with respect to outstanding options that we undertook in May 2001. See “Report on Repricing of Options” in our Annual Report on Form 10-K for the year ended December 31, 2001. Pursuant to XO Parent’s Plan of Reorganization, all interests in such stock options and such shares of class A common stock issued upon exercise thereof, were cancelled and terminated effective January 16, 2003, the date that the Plan of Reorganization was consummated.
(4)	For 2002, includes for Mr. Akerson: $5,404 for contributions made by us on behalf of Mr. Akerson under our 401(k) Plan and $202 for premiums for group term life insurance paid by us; for Mr. Davis: $8,558 for contributions made by us on behalf of Mr. Davis under our 401(k) Plan and $211 for premiums for group term life insurance paid by us; for Mr. Salemme: $3,116 for contributions made by us on behalf of Mr. Salemme under our 401(k) Plan and $108 for premiums for group term life insurance paid by us; for Mr. Ruley: $1,216 for reimbursement of relocation expenses; $8,000 for contributions made by us on behalf of Mr. Ruley under our 401(k) Plan and $113 for premiums for group term life insurance paid by

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us; for Ms. Gofus: $9,309 for contributions made by us on behalf of Ms. Gofus under our 401(k) Plan and $180 for premiums for group term life insurance paid by us.

(5)	Effective January 17, 2003, Mr. Akerson resigned from his position as Chief Executive Officer and terminated his employment with us.
(6)	In August 2001, Mr. Akerson elected to forgo all of his salary for the period between August 2001 and April 2002, after which time he elected to receive his salary. For 2001, he elected not to receive a bonus. In January 2003, Mr. Akerson received a payment of $750,000 under the XO Communications, Inc. Employee Retention and Incentive Plan described below.
(7)	Effective in May 2003, Mr. Davis resigned from his position as President and Chief Operating Officer and terminated his employment with us. In January 2003, Mr. Davis received a payment of $140,625 under the XO Communications, Inc. Employee Retention and Incentive Plan described below. Mr. Davis also received a separation payment of $500,000, pursuant to the mutual release and settlement agreement dated as of May 23, 2003, by and among Mr. Davis and the Company (the “Davis Settlement Agreement”). The Davis Settlement Agreement also provides that the vested options that Mr. Davis’ holds on 325,000 shares of our common stock granted to him pursuant to our 2002 Stock Incentive Plan will remain exercisable through November 30, 2003, at which time the options will expire. In consideration of the benefits he will receive under the Davis Settlement Agreement, Mr. Davis agreed to provide certain consulting and transition services to us until January 31, 2004, and agreed not to disclose certain information that was supplied to him by us that is confidential, proprietary or otherwise not generally available to the public.
(8)	Effective in June 2003, Mr. Salemme resigned from his position as Senior Vice President, Regulatory and Legislative Affairs and terminated his employment with us.
(9)	Effective in April 2003, Mr. Ruley resigned from his position as Executive Vice President, Market Sales Operations and terminated his employment with us. In January 2003, Mr. Ruley received a payment of $85,938 under the XO Communications, Inc. Employee Retention and Incentive Plan described below.

(10)  Effective in June 2003, Ms. Gofus resigned from her position as Executive Vice President, Marketing and Customer Care and terminated her employment with us. In January 2003, Ms. Gofus received a payment of $163,282 under the XO Communications, Inc. Employee Retention and Incentive Plan described below.

     Successor Executive Compensation.  The following table sets forth, for the period beginning January 1, 2003 and ending June 30, 2003, individual compensation information for our current Chief Executive Officer, and each of our four most highly compensated executive officers.

											Long Term
				Annual Compensation							Compensation Awards
									Restricted		Securities
				Annual					Stock		Underlying			All Other
Name and Principal Position		Year		Salary($)		Bonus($)(1)			Awards(s)($)		Options(#)			Compensation($)
Carl J. Grivner			2003		700,000		—			—		2,000,000			—
	Chief Executive Officer, President and Director
Brian D. Oliver			2003		288,000		50,400	(2)		—		400,000	(3)		—
	Executive Vice President, Strategy and Corporate Development
John H. Jacquay			2003		288,000		148,438	(4)		—		390,000	(5)		—
	Executive Vice President, National Sales
Wayne M. Rehberger			2003		287,500		148,438	(4)		—		450,000	(5)		—
	Executive Vice President, Chief Financial Officer
Doug Kelly			2003	$	280,000		—			—		350,000	(3)		—
	Executive Vice President, Network Services

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(1)	These numbers include bonuses earned for the period ending June 30, 2003, but do not include any payments which may become due pursuant to the 2003 Employee Retention Plan. For more further information about this plan, please see “Employee Retention Plan” below.
(2)	Mr. Oliver received $50,400 as a signing bonus.
(3)	These options will be issued pending the approval of the Board of Directors of XO Parent.
(4)	Mr. Jacquay and Mr. Rehberger received $78,125 of these payments pursuant to the Restructuring Retention Plan upon emergence from bankruptcy on January 16, 2003. Both Mr. Jacquay and Mr. Rehberger have agreed to withdraw from the Restructuring Retention Plan and are now participants in the 2003 Employee Retention Plan pursuant to which they both earned an additional bonus of $70,313 as of June 30, 2003 or any additional amounts which may be earned in 2003 pursuant to the 2003 Employee Retention Plan.
(5)	The numbers do not include 11,452 in options which will be issued to each of Mr. Jacquay and Mr. Rehberger in 2003 or any additional options which may be earned in 2003 pursuant to the 2003 Employee Retention Plan.

Option Grants in Last Fiscal Year

     Share and per share figures (including exercise or base price figures) have been restated retroactively to reflect stock splits with respect to our pre-petition class A common stock. All option grants in 2002 were made in connection with the Offer to Exchange with respect to outstanding options that we undertook in May 2001. See “Report on Repricing of Options” in our Annual Report on Form 10-K for the year ended December 31, 2001. Pursuant to XO Parent’s Plan of Reorganization, all interests in such stock options and all such shares issuable upon exercise thereof were cancelled and terminated effective January 16, 2003, the date that the Plan of Reorganization was consummated.

	Individual Grants(1)
			% of Total								Potential Realizable Value at
	Number of		Options								Assumed Annual Rates of
	Securities		Granted to				Market Price				Stock Price Appreciation for
	Underlying		Employees		Exercise or		on Date of				Option Terms($)(2)
	Options		in Fiscal		Base Price		Grant
Name	Granted(#)		Year(%)		($/Sh)		($/Sh)		Expiration Date		0%		5%		10%
Daniel F. Akerson		—		—		N/A		N/A		N/A		N/A		N/A		N/A
Nathaniel A. Davis		1,423,750		5.71		0.14		0.14		January 16, 2012		0		125,355		317,673
R. Gerard Salemme		59,500		0.24		0.14		0.14		January 16, 2012		0		5,239		13,276
Michael S. Ruley		301,665		1.21		0.14		0.14		January 16, 2012		0		26,561		67,308
Nancy B. Gofus		212,500		0.86		0.14		0.14		January 16, 2012		0		18,710		47,413

(1)

All options were granted on January 17, 2002, at which time 30% of the shares subject to the option were vested, with the remainder vesting monthly on a ratable basis over the 36-month period commencing on the date of grant.

(2)

The potential realizable value illustrates value that might be realized upon exercise of the options immediately prior to the expiration of their terms, assuming the specified compounded rates of appreciation of the market price per share from the date of grant to the end of the option term. The gains shown are net of the option exercise price, but do not include deductions for taxes and other expenses payable upon the exercise of the option or for sale of underlying shares of pre-petition class A common stock. No Named Executive Officer, however, realized or can realize any value with respect to such grants because, pursuant to XO Parent’s Plan of Reorganization, all interests in such stock options and all such shares issuable upon exercise thereof were cancelled and terminated effective January 16, 2003, the date that the Plan of Reorganization was consummated, and no Named Executive Officer exercised any such option prior to January 16, 2003.

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Aggregated Option Exercises and Fiscal Year-End Option Values

					Number of Securities
					Underlying Unexercised				Value of Unexercised
					Options at Fiscal				In-the-Money Options at
	Shares				Year-End(#)(1)				Fiscal Year-End($)(2)
	Acquired on		Value
Name	Exercise(#)		Realized($)		Exercisable		Unexercisable		Exercisable		Unexercisable
Daniel F. Akerson		—		—		5,200,000		1,000,000		129,600		0
Nathaniel A. Davis		—		—		731,648		892,102		0		9,600
R. Gerald Salemme		—		—		400,876		28,924		0		0
Michael S. Ruley		—		—		561,319		158,646		283		566
Nancy B. Gofus		—		—		159,201		153,299		2,400		2,400

(1)

Pursuant to XO Parent’s Plan of Reorganization, all interests in such stock options, all such shares issued upon exercise thereof, were cancelled and terminated effective January 16, 2003, the date that the Plan of Reorganization was consummated.

(2)

For purposes of these calculations, the value of our pre-petition class A common stock was $0.053 per share, which was derived based on trading on the Nasdaq Over-the-Counter Bulletin Board. Nevertheless, XO Parent’s Plan of Reorganization provided that interests in its pre-petition class A common stock would be cancelled and terminated without any recovery, and none of the Named Executive Officers exercised any exercisable options set forth above prior to the effective date of such plan.

Employment Agreements and Other Arrangements

     Carl J. Grivner.We have entered into an Employment Term Sheet and a Change of Control Agreement with Mr. Grivner. The Employment Term Sheet provides for his employment as President and Chief Executive Officer through April 30, 2004, but renews annually for an additional one year term unless, prior to February 1 of the year in which the term sheet or extension thereof expires, Mr. Grivner notified us, or we notify Mr. Grivner, that the term sheet will not be renewed. It provides for an annual base salary of $700,000, which we may increase annually, and for an annual bonus of up to 100% of base salary, based on certain revenue, earnings before interest, taxes, depreciation and amortization, and cash targets to be mutually agreed upon between us and Mr. Grivner. Pursuant to the term sheet, in connection with Mr. Grivner’s acceptance of employment with us, we granted him options to purchase 2,000,000 shares of our New Common Stock, with an exercise price of $4.80, 25% of which shares are fully vested, and the remainder of such shares vest in equal annual installments on the first, second and third anniversary of the date of grant. The term sheet also provides that we will reimburse Mr. Grivner for certain relocation and related costs and expenses.

     The Change of Control Agreement generally provides that if both (i) a Change in Control occurs and (ii) at any time on or after such Change in Control, but before the end of the 24-month period immediately thereafter, the Mr. Grivner’s employment with us for any reason other than (A) by Mr. Grivner without Good Reason, (B) by us as a result of Mr. Grivner’s disability or with Cause or (C) as a result of the death of Mr. Grivner, we shall pay him an amount equal to Mr. Grivner’s annual base salary, plus his targeted annual bonus, reduced by any cash severance benefits paid to Mr. Grivner. Under such circumstances, we also will provide Mr. Grivner with certain health and life insurance benefits for a period of 12 months. In addition, under certain circumstances, we will make additional payments to Mr. Grivner for taxes due with respect to any payments or benefits under this agreement treated as excise taxes under specified provisions of the Internal Revenue Code.

     Under the Change of Control Agreement, Mr. Grivner will have been deemed to have terminated his employment for Good Reason if there is:

•  a material change in his duties that is inconsistent with his status as one of our key management employees or a substantial adverse alteration in the nature or status of his responsibilities;

•  a reduction in his annual base salary or target annual bonus;

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•  a relocation of his principal place of business of more than 35 miles; or

•  a failure by us to provide him with benefits as favorable in the aggregate in all material respects as those enjoyed by him under applicable plans.

     Under the Change of Control Agreement, a Change of Control means the occurrence of any of the following events:

•  Any person or entity becomes the owners of securities of our that represent 50% or more of the voting power of our then outstanding securities, other than certain persons or entities, including those that owns securities that represent more than 10% of the voting power of us as of April 1, 2003. For purpose of this calculation, securities acquired from us are excluded from the determination of the percentage ownership of a person or entity, but any such securities shall be included in the then total number of securities outstanding.

•  We merge or consolidate with another company, other than a merger or consolidation that would result in our stockholders holding more than 65% of the combined voting power of the company surviving the merger or consolidation;

•  We are liquidated or we sell all or substantially all of our assets to any other company.

     Despite the occurrence of one of the forgoing events, no Change of Control will be deemed to have occurred for purposes of the Change of Control Agreement if Mr. Icahn and/or his affiliates is our largest stockholder and owns in excess of 15% of our outstanding shares.

     Under the Change of Control Agreement, Cause means the occurrence of any of the following events:

•  the failure by Mr. Grivner to substantially perform his duties, other than a failure resulting from his incapacity due to physical or mental illness that continues for a period of 30 days;

•  he engages in misconduct that is demonstrably and materially injurious to us, monetarily or otherwise; and

•  an act or acts by him that constitutes any felony or a misdemeanor involving moral turpitude.

Director Compensation

     Each director is entitled to reimbursement for out-of-pocket expenses incurred for each meeting of the full Board or a committee of the Board attended. Our pre-petition stock option plans permitted, and our 2002 Stock Incentive Plan permits, grants and awards to non-employee directors. We made no such grants in 2002.

Compensation Committee Interlocks and Insider Participation

     During 2002, Messrs. Jeffrey S. Raikes, Peter C. Waal and Dennis M. Weibling served on the Compensation Committee of our Board of Directors. From September 1994 to January 1997, Mr. Weibling was Executive Vice President of XO Parent. Effective January 16, 2003, each of Messrs. Raikes, Waal and Weibling resigned from our Board of Directors and all committees thereof.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth information, as of June 30, 2003, with respect to the beneficial ownership of our New Common Stock by (1) each member of the Board of Directors, (2) all directors and executive officers as a group, and (3) persons known to us to be the beneficial owners of more than five percent of a class of our New Common Stock.

	Shares Beneficially Owned
	Amount and Nature of
Name	Ownership(1)		Percent of Class (%)
Carl Icahn(2)		85,583,827		82.89
Carl J. Grivner(3)		500,000		*
Wayne M. Rehberger		112,500		*
Mark W. Faris		97,500		*
John H. Jacquay		97,500		*
William Garrahan		43,750		*
Andrew R. Cohen		0		—
Adam Dell		0		—
Vincent J. Intrieri		0		—
Keith Meister		0		—
All directors and executive officers as a group (13 persons)(4)		86,435,077		83.03

(1)	Under the rules of the Securities and Exchange Commission, a person is deemed to be the beneficial owner of a security if such person, directly or indirectly, has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities if that person has the right to acquire beneficial ownership within 60 days after June 30, 2003. Accordingly, more than one person may be deemed to be a beneficial owner of the same securities. Unless otherwise indicated by footnote, the named individuals have sole voting and investment power with respect to the shares of our common stock beneficially owned. Share figures do not represent any right to participate in the Rights Offering pursuant to the Plan of Reorganization.
(2)	As reported in the Schedule 13D of Mr. Icahn and other parties to a joint filing agreement filed with the SEC, represents 78,078,993 shares of New Common Stock held by Cardiff Holding LLC, a Delaware limited liability company, and 3,001,936 shares of New Common Stock issuable upon exercise of Series A warrants, 2,251,449 shares of New Common Stock issuable upon exercise of Series B warrants, and 2,251,449 shares of New Common Stock issuable upon exercise of Series C warrants, all held by Cardiff. Cardiff is wholly-owned by ACF Industries Holding Corp., a Delaware corporation, which is wholly-owned by Highcrest Investors Corp., a Delaware corporation, which is approximately 99% owned by Buffalo Investors Corp., a New York corporation, which is wholly-owned by Starfire Holding Corporation, a Delaware corporation, which is wholly-owned by Mr. Icahn. Mr. Icahn is the chairman and sole director of Starfire Holding, and the chairman and a director of each of Cardiff, ACF Industries, Highcrest Investors and Buffalo Investors. Additional shares of New Common Stock and warrants to purchase shares of New Common Stock may be allocated to Cardiff on a pro rata basis under the Plan of Reorganization to the extent that shares and warrants held back in respect of claims of general unsecured creditors of XO Parent ultimately are redistributed under the terms of the Plan of Reorganization.
(3)	Represents shares of New Common Stock obtainable as of June 30, 2003 or 60 days thereafter by Mr. Grivner upon the exercise of nonqualified stock options.
(4)	Represents (a) 78,078,993 shares of New Common Stock held by Cardiff, as described in note 2 above, (b) warrants to purchase 7,504,834 shares of New Common Stock held by Cardiff as described in note 2 above, and (c) 851,250 shares of New Common Stock obtainable as of June 30, 2003 or 60 days thereafter by executive officers as a group upon the exercise of nonqualified stock options. See notes (2) and (3) above.

* Less than 1%

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Equity Compensation Plan Information

Our Pre-Petition Stock Option Plans

     As of December 31, 2002, options to purchase securities had been issued and were outstanding under the following equity compensation plans: XO Communications, Inc. Stock Option Plan; and the following stock options plans assumed in connection with the acquisition of Concentric Network Corporation: Delta Internet Services, Inc. 1996 Stock Option Plan; Concentric Network Corporation 1995 Stock Incentive Plan for Employees and Consultants; Concentric Network Corporation 1996 Stock Plan; Concentric Network Corporation 1997 Stock Plan; Concentric Network Corporation 1999 Nonstatutory Stock Option Plan; and certain grants of stock options to Concentric employees not pursuant to any plan. Pursuant to our Plan of Reorganization, which became effective as of January 16, 2003, interests in each such plan, and rights to securities to be issued upon the exercise of options outstanding under each such plan, were terminated and cancelled, and holders of such interests and options under each such plan were not entitled to any distribution pursuant to the Plan of Reorganization. The table below presents information with respect to the above referenced plans as of December 31, 2002.

Equity Compensation Plan Information
		Number of Securities to be				Number of Securities
		Issued Upon Exercise of		Weighted-Average Exercise		Remaining Available for
		Outstanding Options,		Price of Outstanding Options,		Future Issuance Under Equity
Plan Category		Warrants and Rights(1)		Warrants and Rights(1)		Compensation Plans
Equity compensation plans approved by security holders			41,567,555	$	6.78		43,894,303
Equity compensation plans not approved by security holders			0		N/A		0
	Total		41,567,555	$	6.78		43,894,303

(1)  Excludes options to purchase 2,630,417 shares of our pre-petition class A common stock granted prior to our June 16, 2000 acquisition of Concentric Network Corporation pursuant to various stock option plans of Concentric, which options we assumed in connection with the Concentric acquisition and have a weighted average exercise price of $16.68 per share.

Our 2002 Stock Incentive Plan Under Our Plan of Reorganization

     In connection with the confirmation of our Plan of Reorganization by the Bankruptcy Court, the Bankruptcy Court approved the adoption of the XO Communications, Inc. 2002 Stock Incentive Plan, or the 2002 Stock Incentive Plan, which became effective as of January 16, 2003, the date that we consummated our Plan of Reorganization. Under the 2002 Stock Incentive Plan, we are authorized to issue, in the aggregate, stock awards with respect of up to 17,590,020 of shares of New Common Stock, in the form of options to purchase stock or restricted stock. Of those shares, non-qualified options to purchase 11.4 million shares of New Common Stock have been granted and are outstanding as of March 31, 2003 pursuant to the 2002 Stock Incentive Plan, each at a purchase price of $5.00 per share. With respect to the underlying shares of these options, 25% are fully vested and the remainder vest over a period of three years.

     The primary purpose of the 2002 Stock Incentive Plan is to provide a means through which we may continue to attract, motivate and retain selected employees, officers and independent contractors who can materially contribute to our growth and success, and to encourage stock ownership in us through granting incentive stock options or nonqualified stock options, or both, to purchase our common stock or shares of restricted stock.

     The 2002 Stock Incentive Plan is administered by the Compensation Committee of our Board of Directors, and as such has the discretionary authority to determine all matters relating to awards of stock options and restricted stock, including the selection of eligible participants, the number of shares of common

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stock to be subject to each option or restricted stock award, the exercise price of each option, vesting, and all other terms and conditions of awards.

     Unless the Compensation Committee designates otherwise, all options expire on the earlier of (i) ten years after the date of grant, (ii) twelve months after termination of employment with XO Parent due to death or complete and permanent disability, (iii) immediately upon termination of employment by us for Cause (as defined in the Stock Incentive Plan), or (iv) three months after termination of employment by the employee or by us for other than Cause.

     The Compensation Committee may award shares of restricted stock and may establish terms, conditions and restrictions applicable thereto. Subject to the restrictions on restricted stock, award recipients generally will have all the rights and privileges of a stockholder, including the right to vote such restricted stock. Restricted stock generally is subject to restrictions related to transferability and forfeiture until vested at the expiration of the restricted period

     Upon a merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation of us as a result of which our stockholders receive cash, stock or other property in exchange for or in connection with their shares of common stock, any award granted under the 2002 Stock Incentive Plan will terminate, and, in the case of options, the recipients shall have the right immediately prior to any such event to exercise their vested options. In the event that our stockholders receive capital stock of another corporation in exchange for their shares of common stock in any transaction involving a merger, consolidation, acquisition of property or stock, separation or reorganization, unless otherwise determined by us, all awards granted under the 2002 Stock Incentive Plan shall be converted into awards with respect to shares of such exchange stock.

     Unless otherwise expressly determined by a resolution of our Board of Directors on the date of grant or such later date when the Board of Directors may ratify the award, (i) awards granted to non-affiliated directors will vest in full immediately upon the occurrence of a change in control, as defined in the 2002 Stock Incentive Plan, or (ii) awards granted to employees whose employment is terminated by us without Cause, and awards granted to certain officers whose employment is terminated by us without Cause or by the officer for Good Reason (as defined in the 2002 Stock Incentive Plan), will vest in full if such termination occurs within one year following such change in control. In all other cases, in the event of a change in control, unless otherwise determined by the Board prior to the occurrence of such change in control, any unvested awards shall not become fully vested merely by the occurrence of such change in control. Because the Stock Incentive Plan took effect in connection with the consummation of our Plan of Reorganization, the transactions contemplated thereby were not deemed a change of control for purposes of the Stock Incentive Plan.

Employee Retention and Incentive Plans

     In connection with our Plan of Reorganization, we established the XO Communications, Inc. Employee Retention and Incentive Plan, which we refer to as the Restructuring Retention Plan. In June of 2003, the Restructuring Retention Plan was replaced with a new Employee Retention and Incentive Plan, which we refer to as the 2003 Retention Plan, for all but a few individuals who are no longer employed by us. Thirty five of our former employees are entitled to a partial bonus payment under the Restructuring Retention Plan. Seven hundred and five of our current and former employees who were participants in the Restructuring Retention Plan are now participants in or entitled to partial bonus payments under the 2003 Retention Plan.

     Restructuring Retention Plan

     The Restructuring Retention Plan became effective on October 23, 2002. The primary purposes of the Restructuring Retention Plan were (a) to encourage certain of our key employees (including the Named Executive Officers) to continue their employment with us during the period of our restructuring and (b) to establish incentives for those employees to achieve certain corporate performance goals, including the completion of XO Parent’s Chapter 11 reorganization and certain EBITDA earnings objectives. The maximum amount payable, in the aggregate, to 35 of our former employees under the Restructuring Retention Plan is $256,000. No active employees are participants in this plan and no further bonus awards will be made thereunder.

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     2003 Employee Retention Plan

     In June of 2003, we replaced the Restructuring Retention Plan with the 2003 Retention Plan to provide long-term equity incentives to senior management, based on certain revenue and cash balance performance targets. The 2003 Retention Plan was offered to participants of the Restructuring Retention Plan as an alternative to the EBITDA targets under the Restructuring Retention Plan. Participants in the Restructuring Retention Plan who elected into the 2003 Retention Plan forfeited their rights under the Restructuring Retention Plan in exchange for the opportunity to participate in the 2003 Retention Plan.

     The 2003 Retention Plan provides for a bonus award aligned with each of the Company’s first two and last two quarters of 2003.

     Each participant received a guaranteed Q1/ Q2 bonus award, regardless of the Company’s operating results for that period. The Q1/ Q2 bonus awards were paid in cash and options on or after July 11, 2003.

     For those participants who received options as Q1/ Q2 bonus awards, the options were 50% vested on the date of grant, with the remainder vesting ratably each month over the next 24 months of employment.

     The Q3/ Q4 bonus award under the 2003 Retention Plan will be tied to the achievement of revenue and cash balance performance objectives and will be settled fully in stock options. Under the 2003 Retention Plan, two-thirds of the participant’s Q3/ Q4 bonus award will be based on achievement of the revenue component, with the remaining one-third based on the cash balance component. The Q3/ Q4 bonus awards may be partially earned subject to partial achievement of the revenue and cash balance goals with an additional overachievement bonus for overachievement of the revenue goal.

     Options distributed in settlement of a Q3/ Q4 bonus award will be 25% vested on the date of grant, with the remainder vesting ratably each month over the next 36 months of employment. Bonus awards under the 2003 Retention Plan may be prorated for partial service during the Q1/ Q2 and/or Q3/ Q4 periods and may be forfeited in certain circumstances following a termination of employment.

     The options granted for both Q1/ Q2 and Q3/ Q4 bonus awards are options to purchase XO’s New Common Stock, par value $0.01 per share. The options were and will be granted under the Company’s 2002 Stock Incentive Plan, with an exercise price equal to $5.84, which represents 80% of the market value of one share of XO’s New Common Stock on the effective date of the 2003 Retention Plan. The stock options issued in conjunction with the Q1/ Q2 bonus payments will result in recognition of compensation expense over the options’ vesting period.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pre-Reorganization Relationships and Related Transactions

     Pre-Petition Stockholders.Prior to the effective date of our Plan of Reorganization, certain investment funds affiliated with Forstmann Little & Co. had a significant equity interest in us and had designated certain individuals to serve as members of our board of directors. Such investment funds and other entities affiliated with Forstmann Little & Co. currently hold a significant equity interest in McLeodUSA Incorporated. McLeod provides interconnection and facilities based telecommunications services to us, for which we paid McLeodUSA approximately $2.0 million in 2002 and $8.4 million in 2001. We provide limited telecommunications services to McLeodUSA, for which we received approximately $373,000 in 2002 and $7.1 million in 2001.

     Craig O. McCaw.In January 2002, we retained an entity owned by Craig O. McCaw to act as our agent with respect to the sale of our Falcon 2000 aircraft, for which it received a commission of $161,250. In March 2000, we retained an entity owned by Craig O. McCaw to act as our agent with respect to the sale of our Falcon 50 aircraft, for which it received a commission of $147,500. In March 2000, we also retained this entity to act as our agent with respect to the purchase of a Falcon 900 aircraft, for which it received a commission of $50,000.

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     In June 2000, as part of the reorganization under which we acquired Concentric, we acquired from Craig O. McCaw the 50% interest that we did not already own of XO Intercity Holdings No. 1, LLC, (f/k/a INTERNEXT, L.L.C.), the joint venture formed to hold interests in a national fiber optic network under construction. The purchase price was approximately 6.8 million shares of our pre-petition class A common stock and the assumption of approximately $9.9 million of liabilities.

     Craig O. McCaw owns a 20% interest in Communications Consultants, Inc., which employs Mr. Salemme and from which we retain Mr. Salemme for service as XO’s Senior Vice President, Regulatory and Legislative Affairs.

     Other Transactions and Relationships.In April 2001, we lent $700,000 to Henry R. Nothhaft, a former Vice Chairman of XO Parent, to provide short term bridge financing to Mr. Nothhaft in connection with the retirement of amounts due to third parties that were secured by XO stock. The loan has been paid in full. The loan had a term of 60 days interest accrued at a per annual rate of 5%, and was secured by approximately 650,000 shares of our pre-petition class A common stock owned by Mr. Nothhaft.

Post-Reorganization Relationships and Related Transactions

     Carl C. Icahn.In February 2003, Dixon Properties, LLC, which is owned by Mr. Icahn, acquired ownership of the building in which our headquarters is located and our lease in a transaction that was approved by the Bankruptcy Court in our Chapter 11 proceedings. We currently are leasing approximately 170,000 square feet of space in that building. In connection with the purchase of the building by Dixon Properties, it assumed the lease agreement under which we lease the space we occupy. Pursuant to the lease agreement, we are obligated to pay Dixon Properties lease payments of approximately $19.0 million in the aggregate (excluding certain building-related expenses) through the expiration of the initial term of the lease, which runs through November 30, 2007.

     We have entered into a Tax Allocation Agreement, dated January 16, 2003, between XO Parent and Starfire Holding Corporation, a company owned by Mr. Icahn, which in turn indirectly controls Cardiff, in connection with the fact that 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 our Chapter 11 proceedings, establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of us 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 us, and we will make payments to Starfire in an amount equal to the tax liability, if any, that we would have if we were to file as a consolidated group separate and apart from Starfire.

     Mr. Icahn, through various entities that he owns and controls, has the right to require us 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 us, pursuant to a Registration Rights Agreement approved by the Bankruptcy Court in connection with our Chapter 11 proceedings.

     Arnos Corp., which is owned by Mr. Icahn, holds approximately 85% of the $500 million in loans outstanding under the New Credit Agreement. Under the New Credit Agreement, no cash interest payments are required to be made by us until we achieve specified financial targets.

     We provide certain telecommunications services to affiliates of Mr. Icahn at rates that we believe are comparable to rates charged other customers that purchase similar services and volumes. For the three months ended March 31, 2003, we recognized revenue of approximately $88,000 with respect to these services and had outstanding receivables for such services at March 31, 2003 of approximately $83,000.

     Other Transactions and Relationships.R. Gerard Salemme owns an 80% interest in Communications Consultants, Inc., which employs Mr. Salemme and from which we retain Mr. Salemme for service as XO Parent’s Senior Vice President, Regulatory and Legislative Affairs. See the “Summary Compensation Table” for information regarding payments to Communications Consultants.

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SHARES ELIGIBLE FOR FUTURE SALE

     Future sales of substantial amounts of New Common Stock or the perception that such sales could occur, could adversely affect the prevailing market price of the New Common Stock. As of March 31, 2003, there were approximately 95 million shares of New Common Stock outstanding. The shares of New Common Stock owned by Cardiff, an entity owned by Mr. Icahn, are restricted shares that may be sold only under a registration statement or an exemption from federal securities registration requirements. Although Cardiff holds restricted stock, it may cause us to register sales of that stock at any time, whether pursuant to its contractual registration rights or otherwise.

     All of the shares offered for sale pursuant to this prospectus may be sold pursuant to this prospectus under the Securities Act, and will thereafter be freely tradable so long as they are not held by affiliates or underwriters, as such term is defined by the Securities Act. These shares may be sold under Rule 144 promulgated under the Securities Act. Rule 144 permits sales by a holder within any three-month period of a number of shares that does not exceed the greater of: (1) 1% of the number of shares of New Common Stock then outstanding or (2) the average weekly trading volume of the New Common Stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to those sales. Sales under Rule 144 are also governed by manner of sale provisions and notice requirements, and current public information about XO Parent must be available.

     Pursuant to our Plan of Reorganization, we have issued three series of warrants to purchase up to an aggregate of approximately 9.5 million, 7.1 million and 7.1 million additional shares of New Common Stock, at exercise prices of $6.25, $7.50 and $10.00 per share, respectively. The warrants will expire on January 16, 2010. In addition, if the eligible participants exercise all the rights in the Rights Offering, up to approximately 43.3 million additional shares of New Common Stock will be issued to such eligible holders.

     We have options to purchase approximately 11.4 million shares of New Common Stock outstanding under our stock incentive plan as of March 31, 2003, with an exercise price of $5.00 per share. Unless surrendered or cancelled earlier under the terms of the stock incentive plan, those options will expire in 2013. Subsequent to March 31, 2003, we issued approximately 200,000 additional options under our stock incentive plan pursuant to the 2003 Retention Plan with an exercise price of $5.84 per share in exchange for rights of certain employees under our Restructuring Retention Plan. In addition, our stock incentive plan authorizes future grants of options to purchase New Common Stock, or awards of restricted New Common Stock, with respect to an additional 6.6 million shares of New Common Stock in the aggregate. See also “Risks Related to Our Common Stock” on page [     ] of this prospectus.

DESCRIPTION OF OUTSTANDING INDEBTEDNESS

     We have summarized some of the terms and provisions of our New Credit Agreement in this section. The summary is not complete. You should read the Amended and Restated Credit and Guarantee Agreement before making any investment decision.

New Credit Agreement

     Loans with an outstanding principal amount of $500 million are outstanding under the New Credit Agreement, which we entered into on January 16, 2003 in connection with the consummation of the Plan of Reorganization. XO Parent is the borrower under the New Credit Agreement, and virtually all of its subsidiaries are guarantors of the facility. Mizuho Corporate Bank, Ltd. is the Administrative Agent. Approximately 85% of the underlying loans of the New Credit Agreement are held by Arnos Corp., an entity owned by Mr. Icahn.

     The maturity date of the outstanding principal under the New Credit Agreement is July 15, 2009. Automatic and permanent quarterly reductions of the principal amount commence on October 15, 2007 with scheduled principal repayments totaling $25 million in 2007, $150 million in 2008 and $325 million in 2009. The security for the New Credit Agreement consists of all of the 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

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limits additional indebtedness, liens, dividend payments and certain investments and transactions, and contains certain covenants with respect to minimum cash balance, minimum EBITDA (earnings before interest, taxes, depreciation and amortization) requirements and maximum capital expenditures. The New Credit Agreement permits us to incur new secured debt ranking senior to the amounts outstanding under the New Credit Agreement up to a principal amount equal to $200 million less the proceeds from the Rights Offering, so long as the terms are satisfactory to the administrative agent and lenders of a majority of the principal amount of the loan outstanding under the New Credit Agreement. The New Credit Agreement also requires prepayments of outstanding principal balances from excess cash flows, as defined, and from the proceeds of specified types of transactions. Our ability to comply with the covenants under the New Credit Agreement is subject to the risks of our business, including those discussed in this prospectus under “Risk Factors.”

     Interest on the amounts outstanding under the New Credit Agreement is initially payable-in-kind, that is, it will accrue and be added to principal but not be payable in cash. Interest will accrue quarterly at a rate of Adjusted Eurodollar plus 6% or the base rate announced by the administrative agent from time to time plus 5%, at our election, so long as interest on the outstanding amounts remains payable-in-kind. XO Parent may, at its option at any time, elect to begin paying cash interest on the outstanding amounts and interest on the outstanding amounts will become automatically payable in cash once the interest coverage ratio (EBITDA/ interest, calculated on a trailing 12-month basis) exceeds 4.0. Based on our current funding requirement, we would not anticipate making such an election in the foreseeable future. When interest on the outstanding amounts becomes payable in cash, the applicable interest rate will fall to Adjusted Eurodollar Rate plus 4% or the base rate announced by the administrative agent from time to time plus 3%, payable quarterly.

     We will use the net proceeds of this offering to prepay and reduce indebtedness outstanding under this New Credit Agreement.

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DESCRIPTION OF OUTSTANDING EQUITY SECURITIES

     We have summarized some of the terms and provisions of our capital stock and warrants in this section. The summary is not complete. You should read our amended and restated Certificate of Incorporation and our restated by-laws relating to the applicable capital stock and the warrant agreement with respect to any warrants for additional information before making any investment decision.

New Common Stock

     Total Shares.We have the authority to issue a total of 1.0 billion shares of New Common Stock. As of March 31, 2003, there were approximately 95.0 million shares of New Common Stock outstanding.

     Voting Rights.The New Common Stock has one vote per share and is eligible to vote on all matters that come before the stockholders, including without limitation, election of directors to the Board of Directors. All holders of New Common Stock have the same voting rights and shall vote together as a single class.

     Dividends. If a dividend is declared by the Board of Directors, the New Common Stock is entitled to receive dividends.

     Liquidation. In the event of any dissolution, liquidation or winding-up of XO Parent, after payment or provision for payment of our debts and subject to any amounts that may be payable in respect of any outstanding preferred class of capital stock of XO Parent, the remaining assets will be distributed to the holders of New Common Stock on a per share basis.

Preferred Stock

     The Certificate of Incorporation of XO Parent authorizes the creation of up to 200.0 million shares of undesignated preferred stock, $0.01 par value. As of the date hereof, XO Parent has not designated the rights or preferences of any series of preferred stock and no preferred stock issued or outstanding.

Warrants

Terms

     We have issued and are in the process of distributing three series of warrants under our Plan of Reorganization: Series A Warrants, Series B Warrants and Series C Warrants.

•  The Series A Warrants are exercisable at an exercise price of $6.25 per share. As of March 31, 2003, Series A Warrants to purchase 9.5 million shares of New Common Stock are outstanding.

•  The Series B Warrants are exercisable at an exercise price of $7.50 per share. As of March 31, 2003, Series B Warrants to purchase approximately 7.1 million shares of New Common Stock are outstanding.

•  The Series C Warrants are exercisable at an exercise price of $10.00 per share. As of March 31, 2003, Series C Warrants to purchase approximately 7.1 million shares of New Common Stock are outstanding.

     Each series of warrants expires on January 16, 2010.

The Warrant Agreements

     Each of the Warrant Agreements relating to each series of warrants provides that, in the event that XO Parent issues New Common Stock at prices below the then prevailing market prices, or securities convertible into shares of New Common Stock with conversion prices below the then prevailing market prices, the number of shares of New Common Stock to be issued upon exercise of a warrant set forth on the face thereof shall, subject to certain conditions, be adjusted. In addition the number of shares of New Common Stock to be issued upon exercise of each warrant shall be adjusted after the occurrence of certain corporate events with respect to shares of New Common Stock, including stock splits, certain dividends and other distributions.

     From the January 16, 2003 until July 16, 2004, if XO Parent consummates a merger, reorganization, reclassification, consolidation or other similar transaction, the warrant will become exercisable on a per share basis for the greater of (i) the amount of cash or other consideration delivered to a non-controlling holder of a

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share of New Common Stock and (ii) the sum of the exercise price and the option value of the Warrant. After July 16, 2004, the warrants will no longer have this additional protection. The Rights Offering does not trigger any adjustment pursuant to the warrant agreement.

     No fractions of a share of New Common Stock will be issued upon the exercise of any warrant, but we will pay the cash value thereof determined as provided in the Warrant Agreement.

CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS

     The following is a summary of the Certificate of Incorporation and Bylaws of XO Parent. These provisions are summaries and are qualified in their entirety by the Certificate of Incorporation and the Bylaws, which are included as exhibits to the registration statement of which this prospectus is a part.

Board of Directors

     The Certificate of Incorporation provides that the number of directors shall be determined in the manner specified by the Bylaws, and may be increased or decreased from time to time in the manner prescribed by the Bylaws. Currently, the Board of Directors consists of seven (7) directors.

Amendment of Bylaws

     Our Board of Directors and stockholders are authorized and empowered to adopt, amend and repeal our Bylaws.

Section 203 Amendment

     The Certificate of Incorporation makes the anti-takeover protection of Section 203 of the Delaware General Corporate Law, which we refer to as the DGCL, inapplicable to XO Parent. Section 203 of the DGCL provides that a person who acquires fifteen percent (15%) or more of the outstanding voting stock of a Delaware corporation becomes an “interested stockholder.” Section 203 prohibits a corporation from engaging in mergers or certain other “business combinations” with an interested stockholder for a period of three (3) years following the time that such interested stockholder becomes an interested stockholder, unless certain conditions are satisfied.

     The DGCL defines a “business combination” broadly to include, among other things, any merger or consolidation with the interested stockholder, any merger or consolidation caused by the interested stockholder in which the surviving corporation will not be subject to Delaware law, or the sale, lease, exchange, mortgage, pledge, transfer or other disposition to the interested stockholder of any assets of the corporation having a market value equal to or greater than 10% of the aggregate market value of the assets of the corporation.

PLAN OF DISTRIBUTION

     We are offering shares of our New Common Stock directly to eligible participants pursuant to this offering. We have not employed any brokers, dealers or underwriters in connection with the solicitation or exercise of Subscription Rights in this offering and no commissions, fees or discounts will be paid in connection with it. Certain of our officers and other employees may solicit responses from you, but such officers and other employees will not receive any commissions or compensation for such services other than their normal employment compensation.

     We will pay the fees and expenses of American Transfer & Trust Company as Rights Agent, and MacKenzie Partners, Inc., as Information Agent, and also have agreed to indemnify the Rights Agent and the Information Agent from any liability they may incur in connection with this offering.

     On or about                               , we will distribute the rights certificates and copies of this prospectus to the eligible participants or their record holders. If you wish to exercise your rights and subscribe for newly-issued shares of our New Common Stock, you should follow the procedures described under “The Offering — Procedure” on page      . The Subscription Rights are not transferable.

104

MATERIAL FEDERAL INCOME TAX CONSIDERATIONS

     The following discussion is based on the opinion of Willkie Farr & Gallagher, counsel to us, and summarizes certain United States federal income tax considerations to holders of the exercise or lapse of Subscription Rights and of the disposition of the New Common Stock acquired upon the exercise of the Subscription Rights. This discussion is based on the Internal Revenue Code of 1986, as amended, or the IRC, regulations promulgated thereunder by the United States Department of Treasury, published rulings and pronouncements of the Internal Revenue Service, or the IRS, and judicial decisions, all as in effect on the date of this document. Changes in these rules, or new interpretations thereof, may have retroactive effect and could significantly affect the federal income tax consequences described below.

     No rulings or determinations of the IRS or any other taxing authority has been sought or obtained with respect to the tax considerations described herein, and the discussion below is not binding upon the IRS or any other taxing authority. No assurance can be given that the IRS will not assert, or that a court will not sustain, a different position from any discussed herein.

     The following discussion applies only to U.S. persons who hold the Subscription Rights and New Common Stock acquired upon the exercise of the Subscription Rights as capital assets within the meaning of Section 1221 of the IRC. This discussion does not address all aspects of federal income taxation that may be relevant to holders in light of their particular circumstances or to holders who may be subject to special rules under the IRC, including, without limitation, banks and certain other financial institutions, insurance companies, tax-exempt organizations, persons that are, or hold Subscription Rights or New Common Stock through, pass-through entities, persons whose functional currency is not the United States dollar, foreign persons, dealers in securities or foreign currency, persons who received their stock pursuant to the exercise of any employee stock option or otherwise as compensation and persons holding New Common Stock that is a hedge against, or that is hedged against, currency risk or that is part of a straddle, constructive sale or conversion transaction. Furthermore, the following discussion does not address foreign, state or local tax consequences and does not address United States federal taxes other than income taxes.

     THE FOLLOWING SUMMARY OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS DOES NOT DISCUSS ALL OF THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY BE RELEVANT TO A HOLDER OF SUBSCRIPTION RIGHTS OR A HOLDER OF NEW COMMON STOCK. HOLDERS OF SUBSCRIPTION RIGHTS OR NEW COMMON STOCK ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR UNITED STATES FEDERAL, STATE, LOCAL AND ANY FOREIGN TAX CONSEQUENCES OF THE RIGHTS OFFERING OR THE RELATED ISSUANCE OF NEW COMMON STOCK TO SUCH HOLDERS.

Exercise of the Subscription Rights

     You will not recognize any gain or loss upon the exercise of the Subscription Rights. The basis of the New Common Stock acquired through your exercise of the Subscription Rights will be equal to the sum of the subscription price paid for the New Common Stock acquired through exercise of the Subscription Rights and your basis, if any, in the Subscription Rights. The holding period for the New Common Stock acquired through the exercise of the Subscription Rights will begin on the date the Subscription Rights are exercised.

Lapse of the Subscription Rights

     If you allow your Subscription Rights to lapse, you will recognize loss equal to the amount of your basis in the Subscription Rights.

Sale of New Common Stock

     If you sell your New Common Stock acquired through the exercise of the Subscription Rights, you will recognize gain or loss in an amount equal to the difference between the amount realized on the sale and your basis in the New Common Stock, which will include the exercise price. If you hold the shares as a capital

105

asset, gain or loss on the sale will be long-term or short-term capital gain or loss, depending on whether you have held the shares for more than one year beginning on the date of the exercise of the rights.

Basis in the Subscription Rights

     Your basis in the Subscription Rights will depend on the treatment of your claims under the Plan of Reorganization. In some cases, the distribution of Subscription Rights will taxable, and you will have a fair market value basis in the Subscription Rights. In other cases, the distribution of Subscription Rights will be part of a tax-free recapitalization transaction, and your basis will depend on your basis in the claims cancelled under the Plan of Reorganization.

     (i) Pre-petition common and preferred stock — the receipt of Subscription Rights will be taxable, and you will have a fair market value basis in the Subscription Rights.

     (ii) Pre-petition subordinated notes — because the pre-petition subordinated notes should be treated as securities for tax purposes, the receipt of Subscription Rights should be part of a tax-free recapitalization, and your basis in the subordinated notes should be apportioned among the consideration you received. If the pre-petition subordinated notes are not treated as securities for tax purposes, the receipt of Subscription Rights will be taxable, and you will have a fair market value basis in the Subscription Rights.

     (iii) Pre-petition senior unsecured note claims — the treatment of the receipt of Subscription Rights will depend on whether the senior unsecured note claims are securities for tax purposes. If such claims were securities for tax purposes, the receipt of Subscription Rights is part of a tax-free recapitalization, and your basis in the senior note claims would be apportioned among the consideration you received (Subscription Rights, Warrants and New Common Stock). If such claims were not securities for tax purposes, the receipt of Subscription Rights will be taxable, and you will have a fair market value basis in the Subscription Rights.

     (iv) Pre-petition Credit Facility — the treatment of the receipt of Subscription Rights will depend on whether claims under the Pre-Petition Credit Facility are securities for tax purposes. If such claims were not securities for tax purposes, the receipt of Subscription Rights will be taxable, and you will have a fair market value basis in the Subscription Rights. If such claims were securities for tax purposes, your basis in the Subscription Rights will depend on your basis in the claims, apportioned among the consideration received under the Plan of Reorganization.

     (v) General unsecured claims — the receipt of Subscription Rights will be taxable, and you will have a fair market value basis in the Subscription Rights.

LEGAL MATTERS

     The validity of the New Common Stock offered in this registration statement on form S-1 will be passed upon for us by Willkie Farr & Gallagher, New York, New York.

EXPERTS

     The consolidated financial statements of XO Communications, Inc. at December 31, 2002, and for the year then ended, appearing in this Prospectus and the Registration Statement, have been audited by Ernst & Young LLP, independent auditors, and at December 31, 2001, and for each of the two years in the period ended December 31, 2001, by Arthur Andersen, LLP, independent public accountants, as set forth in their respective reports thereon (the 2001 Arthur Andersen, LLP report contains an explanatory paragraph describing conditions that raise substantial doubt about the Company’s ability to continue as a going concern) appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firms as experts in accounting and auditing.

106

WHERE YOU CAN FIND MORE INFORMATION

     This prospectus is part of a registration statement on Form S-1 that was filed with the Securities and Exchange Commission. This prospectus does not contain all of the information set forth in the registration statement. Some items may have been omitted from the prospectus as permitted by the rules and regulations of the Securities and Exchange Commission. You should refer to the registration statement and its accompanying exhibits for further information with respect to the Company and the Plan of Reorganization. Statements made in this prospectus as to the provisions of any contract, agreement or other document are summaries of the material terms of such contracts, agreements or other documents and are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, please refer to the exhibit for a more complete description of the matter involved.

     We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended or the Exchange Act, and, in accordance therewith, file reports and other information with the SEC. Our reports and other information we file can be inspected and copied at the Public Reference Section of the SEC located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of these materials can be obtained from the Public Reference Section of the SEC at prescribed rates. Please call the SEC at 1-800-SEC-0330 for more information on the Public Reference Section. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information on a delayed basis regarding registrants, including us, that file electronically with the SEC.

     Effective as of October 25, 2000 we changed our name from NEXTLINK Communications, Inc. to XO Communications, Inc. The reports and other information that we filed with the SEC prior to October 25, 2000 will be under the NEXTLINK name.

     We also post our most recent Exchange Act filings on our website at www.xo.com.

     Quotations for our New Common Stock under the symbol “XOCM” are available at www.OTCBB.com on the Nasdaq over-the-counter bulletin board and in the Pink Sheets at www.pinksheets.com.

     YOU MAY REQUEST A COPY OF OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, AT NO COST, OR AT WWW.SEC.GOV, OR BY WRITING OR TELEPHONING US AT THE FOLLOWING ADDRESS:

XO Communications, Inc.

11111 Sunset Hills Road

Reston, Virginia 20190

Attn: Corporate Secretary

Telephone: (703) 547-2000

     You should rely only on the information contained in this prospectus or that we have specifically referred you to. We have not authorized anyone else to provide you with different information. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of those documents.

107

INDEX TO FINANCIAL STATEMENTS

Unaudited Interim Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets for Reorganized XO as of March 31, 2003 and January 1, 2003 and for Predecessor XO as of December 31, 2002 (Unaudited)	F-2
	Condensed Consolidated Statements of Operations for Reorganized XO for the Three Months Ended March 31, 2003 and for Predecessor XO for January 1, 2003 and for the Three Months Ended March 31, 2002 (Unaudited)	F-3
	Condensed Consolidated Statements of Cash Flows for Reorganized XO for the Three Months Ended March 31, 2003 and for Predecessor XO for January 1, 2003 and for the Three Months Ended March 31, 2002 (Unaudited)	F-4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	F-5
Audited Consolidated Financial Statements
	Report of Ernst & Young LLP, Independent Auditors	F-19
	Report of Independent Public Accountants	F-20
	Consolidated Balance Sheets as of December 31, 2002 and 2001 and Pro Forma Unaudited Balance Sheet as of December 31, 2002	F-21
	Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000	F-22
	Consolidated Statement of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2002, 2001 and 2000	F-23
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000	F-25
	Notes to Consolidated Financial Statements	F-26
	Schedule II — Consolidated Valuation and Qualifying Accounts	F-54

F-1

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

			Reorganized XO			Reorganized XO		Predecessor XO
			March 31, 2003			January 1, 2003		December 31, 2002
			(Unaudited)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	288,764		$	314,038	$	314,038
	Marketable securities			249,616			246,945		246,945
	Accounts receivable, net of allowance for doubtful accounts of $38,965 at March 31, 2003; $37,030, at January 1, 2003 and at December 31, 2002, respectively			105,549			116,541		116,541
	Other current assets			28,564			35,192		83,480
		Total current assets		672,493			712,716		761,004
Property and equipment, net				476,509			476,588		2,780,589
Fixed wireless licenses and other intangibles, net				129,137			135,678		984,614
Other assets, net				45,804			23,108		59,289
		Total assets	$	1,323,943		$	1,348,090	$	4,585,496
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable		$	56,304		$	67,268	$	63,729
	Accrued liabilities			232,872			235,192		266,102
	Current liabilities subject to compromise			—			—		5,497,207
		Total current liabilities		289,176			302,460		5,827,038
Long-term liabilities not subject to compromise				—			—		75,242
Long-term liabilities subject to compromise				—			—		7,182
Long-term debt				507,868			500,000		—
Other long-term liabilities				72,585			70,630		—
		Total liabilities		869,629			873,090		5,909,462
Predecessor 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				—			—		1,708,316
Commitments and contingencies
Stockholders’ equity (deficit):
	Reorganized XO preferred stock: par value $0.01 per share, 200,000,000 shares authorized: none issued			—			—		—
	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			—			—		4,628,139
	Reorganized XO common stock, par value $0.01 per share, 1,000,000,000 shares authorized: 95,000,001 shares issued and outstanding on March 31, 2003			475,000			475,000		—
	Deferred compensation			—			—		(8,500	)
	Accumulated other comprehensive income (loss)			(198	)		—		2,512
	Accumulated deficit			(20,488	)		—		(7,654,433	)
		Total stockholders’ equity (deficit)		454,314			475,000		(3,032,282	)
		Total liabilities and stockholders’ equity (deficit)	$	1,323,943		$	1,348,090	$	4,585,496

See accompanying notes to the unaudited condensed consolidated financial statements.

F-2

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

						Predecessor XO
			Reorganized XO
			Three Months Ended			January 1,		Three Months Ended
			March 31, 2003			2003		March 31, 2002
Revenue			$	286,093		$	—	$	333,405
Costs and expenses:
	Cost of service			107,506			—		140,367
	Selling, operating, and general			166,235			—		205,250
	Stock-based compensation			—			—		9,095
	Depreciation and amortization			26,367			—		161,356
		Total costs and expenses		300,108			—		516,068
Income (loss) from operations				(14,015	)		—		(182,663	)
Interest income				3,210			—		5,540
Interest expense, net				(9,683	)		—		(120,726	)
Other income (loss), net				—			—		(203	)
Reorganization gain (expense), net				—			3,032,282		(976	)
Net income (loss) before cumulative effect of accounting change				(20,488	)		3,032,282		(299,028	)
Cumulative effect of accounting change				—			—		(1,876,626	)
Net income (loss)				(20,488	)		3,032,282		(2,175,654	)
Preferred stock dividends and accretion of preferred stock redemption obligation, net				—			—		(22,826	)
Net income (loss) applicable to common shares			$	(20,488	)	$	3,032,282	$	(2,198,480	)
Net income (loss) per common share, basic and diluted:
Net income (loss) before cumulative effect of accounting change			$	(0.22	)	$	6.86	$	(0.68	)
Cumulative effect of accounting change				—			—		(4.24	)
Net income (loss)				(0.22	)		6.86		(4.92	)
Preferred stock dividends and accretion of preferred stock redemption obligation, net				—			—		(0.05	)
Net income (loss) per common share, basic and diluted			$	(0.22	)	$	6.86	$	(4.97	)
Weighted average shares, basic and diluted				95,000,001			441,964,342		442,205,796

See accompanying notes to the unaudited condensed consolidated financial statements.

F-3

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

					Predecessor XO
		Reorganized XO
		Three Months						Three Months
		Ended			January 1,			Ended
		March 31, 2003			2003			March 31, 2002
OPERATING ACTIVITIES:
Net income (loss)		$	(20,488	)	$	3,032,282		$	(2,175,654	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
	Non-cash reorganization items		—			(3,032,282	)		—
	Depreciation and amortization		26,367			—			161,356
	Stock-based compensation		—			—			9,095
	Cumulative effect of accounting change		—			—			1,876,626
	Accretion of interest		9,897			—			36,045
Changes in assets and liabilities:
	Accounts receivable		15,176			—			39,224
	Other assets		982			—			(17,164	)
	Accounts payable		(4,586	)		—			23,671
	Accrued liabilities		(3,158	)		—			(607	)
Net cash provided by (used in) operating activities			24,190			—			(47,408	)
INVESTING ACTIVITIES:
Purchases of property and equipment			(21,377	)		—			(136,454	)
Proceeds from sales of property and equipment			—			—			24,339
Sales of marketable securities			30,825			—			278,293
Purchases of marketable securities			(33,693	)		—			(8,224	)
Net releases (purchases) of escrowed/pledged securities			(25,000	)		—			1,960
Net cash provided by (used in) investing activities			(49,245	)		—			159,914
FINANCING ACTIVITIES:
Repayments of capital leases and other obligations			(219	)		—			(4,848	)
Net cash used in financing activities			(219	)		—			(4,848	)
Effect of exchange rate changes on cash			—			—			(1,256	)
Net increase (decrease) in cash and cash equivalents			(25,274	)		—			106,402
Cash and cash equivalents, beginning of period			314,038			314,038			246,189
Cash and cash equivalents, end of period		$	288,764		$	314,038		$	352,591
SUPPLEMENTAL DATA:
Non-cash financing and investing activities:
	Accrued redeemable preferred stock dividends, payable in shares of redeemable preferred stock	$	—		$	—		$	12,357
Cash paid for interest		$	213		$	—		$	19,192

See accompanying notes to the unaudited condensed consolidated financial statements.

F-4

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.     BASIS OF PRESENTATION

     As further discussed in the annual report on Form 10-K of XO Communications, Inc. (“XO Parent”) and its subsidiaries (together with its predecessors, collectively referred to as the “Company” or “XO”) for the year ended December 31, 2002 as filed with the Securities and Exchange Commission (the “Commission”) on March 21, 2003 (the “2002 Annual Report”), 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”), on June 17, 2002 (the “Petition Date”). 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.

     The condensed consolidated financial statements of XO are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States for interim financial statements and the Commission’s 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 months ended March 31, 2003, show the operations of the reorganized Company from and including January 1, 2003, the date that the reorganized Company applied fresh start, through March 31, 2003. Predecessor XO’s January 1, 2003 statements of operations and cash flows reflect only the effect of the reorganization and application of fresh start as of such date and do not reflect any operating results. Operating results for the three month period ended March 31, 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.

2.     REORGANIZATION AND FRESH START ACCOUNTING

     On 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 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

•  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.

F-5

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     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 Statement of Financial Accounting Standards (“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

F-6

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

			Predecessor XO									Reorganized XO
			December 31,									January 1,
			2002						Fresh Start			2003
			(Audited)			Reorganization			Adjustments(d)			(Unaudited)
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
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 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.

F-7

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.

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 March 31, 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

F-8

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 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 provided using the straight-line method over the shorter of the estimated useful lives of the assets owned 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 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

F-9

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

indefinite life. Accordingly, it is not subject to amortization; however, it is reviewed at least annually for impairment as required under SFAS No. 142, “Goodwill and Other Intangible Assets,” (“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 capital loss carryforwards of approximately $0.5 billion and net operating loss carryforwards of approximately $4.0 billion. As of the Effective Date, the Company recognized a substantial amount of taxable income from the cancellation of indebtedness. Accordingly, a substantial portion of the Company’s $4.5 billion of capital and net operating loss carryforwards have been eliminated. 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 telecommunication 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.

     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 customer installations and other upfront charges are deferred and recognized ratably over the estimated customer life.

     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 three months ended March 31, 2003 and March 31, 2002.

     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 credit worthiness of its customers. The Company believes that the established valuation allowances were adequate as of March 31, 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.

F-10

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 quarter of 2003, the settlements resulted in approximately $6.4 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 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 plans 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 Company’s pro forma net loss applicable to

F-11

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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
		March 31, 2003			March 31, 2002
Net loss applicable to common shares, as reported		$	(20,488	)	$	(2,198,480	)
	Add: Stock-based employee compensation expense included in net loss applicable to common shares, as reported		—			9,095
	Deduct: Total stock-based employee compensation expense determined under fair value based methods for all stock awards, net of related tax effects		(4,038	)		(366	)
Pro forma net loss		$	(24,526	)	$	(2,189,751	)
Net loss per common share, basic and diluted:
	Net loss per common share, basic and diluted — as reported	$	(0.22	)	$	(4.97	)
	Net loss per common share, basic and diluted — pro forma	$	(0.26	)	$	(4.95	)
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	$	2.85		$	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

     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 March 31, 2003 to cover these risks. The Company’s Board of Directors has recently taken actions that would permit the Company to make investments in a broader range of securities, including securities that may increase the Company’s credit risk.

     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.

F-12

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Recent Accounting Pronouncements

     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 three months ended March 31, 2003 and 2002. 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 first quarter of 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.

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, have been recorded at their then fair values.

     As of March 31, 2003, the Company had approximately $606 million of long-lived assets, including approximately $94 million of construction-in-progress and certain fixed wireless licenses that are not currently ready for their intended use. 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
	March 31,			January 1,		December 31,
	2003			2003		2002
Telecommunications networks and acquired bandwidth	$	358,368		$	359,247	$	2,920,819
Furniture, fixtures, equipment, and other		67,301			61,501		656,994
		425,669			420,748		3,577,813
Less accumulated depreciation		(19,890	)		—		(1,165,216	)
		405,779			420,748		2,412,597
Network construction-in-progress		70,730			55,840		367,992
	$	476,509		$	476,588	$	2,780,589

F-13

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Depreciation expense related to property and equipment for the reorganized Company’s three months ended March 31, 2003 was $19.9 million and for the predecessor Company’s three months ended March 31, 2002 was $135.1 million.

     Fixed Wireless Licenses and Other Intangibles

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

	Reorganized XO			Reorganized XO		Predecessor XO
	March 31,			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		(6,541	)		—		(303,001	)
		112,475			119,016		984,614
XO Trade name — indefinite life asset		16,662			16,662		—
	$	129,137		$	135,678	$	984,614

     Amortization expense related to intangible assets for the reorganized Company’s three months ended March 31, 2003 was $6.5 million and for the predecessor Company’s three months ended March 31, 2002 was $26.3 million.

     Goodwill

     In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) which revises the accounting for purchased goodwill and intangible assets and supersedes APB Opinion No. 17, “Intangible Assets” (“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, the 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 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 the weighted average probability of incurring these costs in the future. 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.

F-14

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 then current and expected future market conditions and the divestiture of its European operations. As of March 31, 2003, the remaining restructuring accrual was $37.8 million, which relates primarily to payments due to landlords on exited leased facilities. The restructuring accrual has decreased from $125.8 million as of December 31, 2001, 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.

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 a rights offering to be undertaken in accordance with the Plan of Reorganization. At March 31, 2003, long-term debt totaled $507.9 million including $500.0 million principal amount outstanding on the New Credit Agreement and accrued interest thereon totaling $7.9 million. Approximately 85% of the underlying loans of the New Credit Agreement are held by Arnos Corp., an entity controlled by Mr. Carl C. Icahn.

     The Company is not required to pay 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 March 31, 2003, the annualized weighted average interest rate applicable to outstanding borrowings under the New Credit Agreement was 7.66%.

     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) 4,750,000 shares of New Common Stock of the reorganized Company, (ii) warrants to purchase shares up to an additional 23,750,000 shares of New Common Stock of the reorganized Company (iii) rights to purchase shares of New Common Stock in a rights offering to be undertaken in accordance with the Plan of Reorganization 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, discussed further in note 8. 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 a rights offering to be undertaken in accordance with the Plan of Reorganization.

F-15

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 preferred stock. At March 31, 2003, approximately 95.0 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 a result of the cancellation of the pre-petition senior notes and pre-petition general unsecured claims, discussed in note 7, pursuant to the Plan of Reorganization, such holders were granted 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;

•  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.

     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. Of the warrants distributed under the Plan of Reorganization, XO estimates Cardiff received 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.

     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 a rights offering to be undertaken in accordance with the Plan of Reorganization.

9.     OPERATING SEGMENTS

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

		Reorganized XO		Predecessor XO
		Three Months Ended		Three Months Ended
		March 31,		March 31,
		2003		2002
Voice services		$	150,723	$	168,834
Data services			101,977		135,761
Integrated voice and data services			33,393		28,810
	Total revenue	$	286,093	$	333,405

F-16

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

10.     RELATED PARTY TRANSACTIONS

     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 is obligated to pay approximately $19.0 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 affiliates of Mr. Icahn at rates that the Company believes are comparable to rates charged other customers that purchase similar services and volumes. For the three months ended March 31, 2003, the Company recognized revenue of approximately $88 thousand with respect to these services and had outstanding receivables for such services at March 31, 2003 of approximately $83 thousand.

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 consummation of the Plan of Reorganization, on the Effective Date, 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 in the form of restricted stock or options to purchase stock, pursuant to which up to 17.6 million shares of New Common Stock may be issued. Non-qualified options to purchase 11.4 million shares of New Common Stock have been granted and are outstanding as of March 31, 2003.

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

F-17

XO COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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. Sales from prepaid calling card services that are potentially subject to these taxes accounted for approximately $56 million of the Company’s total revenues from 1999, when the Company began providing these services, through June 30, 2002. The Company believes that its accounting for these potential tax obligations is appropriate and that its accruals of liabilities relating to these obligations are adequate.

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) 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.

     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.

F-18

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors of XO Communications, Inc.:

     We have audited the accompanying consolidated balance sheet of XO Communications, Inc. (the “Company”) as of December 31, 2002, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit. The consolidated financial statements and schedule of the Company for each of the two years in the period ended December 31, 2001, were audited by other auditors who have ceased operations, and whose report dated February 6, 2002, expressed an unqualified opinion on those consolidated financial statements and schedules before the restatement adjustments described in Note 5 and included an explanatory paragraph that discussed the substantial doubt about the Company’s ability to continue as a going concern.

     We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

     In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of XO Communications, Inc. at December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

     As discussed in Note 5 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”.

     As discussed in Note 1 to the consolidated financial statements, effective January 16, 2003, the Company was reorganized under a plan of reorganization confirmed by the United States Bankruptcy Court for the Southern District of New York. In connection with its reorganization, the Company will apply fresh start accounting in the first quarter of 2003.

     As discussed above, the financial statements of XO Communications, Inc. for the years ended December 31, 2001 and 2000 were audited by other auditors who have ceased operations. As described in Note 5, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 5 with respect to 2001 and 2000 included (a) agreeing the previously reported net loss to the previously issued financial statements and the adjustments to reported net loss representing amortization expense recognized in those periods related to goodwill and intangible assets that are no longer being amortized to the Company’s underlying records obtained from management, and (b) testing the mathematical accuracy of the reconciliation of adjusted net loss to reported net loss, and the related loss-per-share amounts. In our opinion, the disclosures for 2001 and 2000 in Note 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any form of assurance on the 2001 or 2000 financial statements taken as a whole.

/S/ ERNST & YOUNG LLP

February 28, 2003

Baltimore, Maryland

F-19

     The following report is a copy of a report previously issued by Arthur Andersen LLP (“Andersen”), whose report has not been reissued by Andersen. Certain financial information for each of the two years in the period ended December 31, 2001, was not reviewed by Andersen and includes additional disclosures to conform with new accounting pronouncements and SEC rules and regulations issued during such fiscal year, see Item 1, “Business”, for discussion of risks.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of XO Communications, Inc.:

     We have audited the accompanying consolidated balance sheets of XO Communications, Inc. (“XO Parent,” a Delaware corporation) and subsidiaries (collectively the “Company”) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XO Communications, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

     The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred recurring operating losses and negative cash flows from operating activities, has defaulted on its debt obligations and has begun to implement a proposed recapitalization that contemplates XO Parent filing a voluntary petition for relief under chapter 11 of the United States Bankruptcy Code. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might otherwise be necessary should the Company be unable to continue as a going concern.

     Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

/S/ ARTHUR ANDERSEN LLP

Vienna, VA

February 6, 2002

F-20

XO COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except for per share data)

				Pro forma Unaudited		December 31,
				Reorganized Company
				December 31, 2002(a)		2002			2001
ASSETS
Current assets:
	Cash and cash equivalents			$	314,038	$	314,038		$	246,189
	Marketable securities				246,945		246,945			508,978
	Accounts receivable, net of allowance for doubtful accounts of $37,030 and $32,492, respectively				116,541		116,541			216,753
	Other current assets				32,654		83,480			101,760
		Total current assets			710,178		761,004			1,073,680
Property and equipment, net			��		502,176		2,780,589			3,742,577
Fixed wireless licenses, net					59,508		911,832			947,545
Goodwill, net					—		—			1,876,626
Other intangibles, net					76,171		72,782			153,404
Other assets, net					23,108		59,289			136,633
		Total assets		$	1,371,141	$	4,585,496		$	7,930,465
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities not subject to compromise:
	Accounts payable			$	69,729	$	63,729		$	156,488
	Accrued liabilities				246,048		265,889			341,094
	Accrued interest payable				213		213			114,882
	Long-term debt in default				—		—			5,109,503
		Current liabilities not subject to compromise			315,990		329,831			5,721,967
Current liabilities subject to compromise					—		5,497,207			—
		Total current liabilities			315,990		5,827,038			5,721,967
Long-term liabilities not subject to compromise					—		75,242			129,092
Long-term liabilities subject to compromise					—		7,182			—
Long-term debt					500,000		—			—
Other long-term liabilities					80,151		—			—
		Total liabilities			896,141		5,909,462			5,851,059
Redeemable preferred stock: par value $0.01 per share, 25,000,000 shares authorized: 7,856,918 and 7,857,612 shares issued and outstanding on December 31, 2002 and December 31, 2001, respectively; aggregate liquidation preference of $1,693,293 and $1,693,328 on December 31, 2002 and December 31, 2001, respectively
Subject to compromise					—		1,708,316			—
Not subject to compromise					—		—			1,781,990
Commitments and contingencies
Stockholders’ (deficit) equity:
	Common stock, par value $0.02 per share, stated at amounts paid in Class A, 1,000,000,000 shares authorized: 331,033,219 and 337,774,204 shares issued and outstanding on December 31, 2002 and December 31, 2001, respectively; Class B, 120,000,000 shares authorized: 104,423,158 shares issued and outstanding on both December 31, 2002 and December 31, 2001				475,000		4,628,139			4,628,509
	Deferred compensation				—		(8,500	)		(37,428	)
	Accumulated other comprehensive income				—		2,512			10,406
	Accumulated deficit				—		(7,654,433	)		(4,304,071	)
		Total stockholders’ (deficit) equity			475,000		(3,032,282	)		297,416
		Total liabilities and stockholders’ (deficit) equity		$	1,371,141	$	4,585,496		$	7,930,465

(a)  As discussed in footnote 3, the Company emerged from bankruptcy on January 16, 2003 and will be required to adopt the fresh start accounting provisions of SOP 90-7 in the first quarter of 2003. The pro forma balances reflect what the December 31, 2002 balances would have been had the Company applied fresh start accounting as of December 31, 2002.

See accompanying notes to consolidated financial statements.

F-21

XO COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

			Year Ended December 31,
			2002			2001			2000
Revenue			$	1,259,853		$	1,258,567		$	723,826
Costs and expenses:
	Cost of service			522,924			527,698			302,666
	Selling, operating and general (excludes stock-based compensation)			736,925			971,714			730,604
	Stock-based compensation			28,928			37,173			48,328
	Depreciation and amortization			699,806			1,162,671			617,714
	Restructuring and asset write-downs			480,168			509,202			—
	In-process research and development			—			—			36,166
		Total costs and expenses		2,468,751			3,208,458			1,735,478
Loss from operations				(1,208,898	)		(1,949,891	)		(1,011,652	)
Interest income				16,478			77,938			180,905
Interest expense, net (contractual interest was $501,118 for the year ended December 31, 2002)				(226,451	)		(465,401	)		(434,122	)
Other income (loss), net				(200	)		(93,781	)		163,570
Reorganization expense, net				(91,121	)		—			—
Net loss before extraordinary item and cumulative effect of accounting change				(1,510,192	)		(2,431,135	)		(1,101,299	)
Extraordinary gain on repurchases of debt, net				—			345,010			—
Cumulative effect of accounting change				(1,876,626	)		—			—
Net loss				(3,386,818	)		(2,086,125	)		(1,101,299	)
Recognition of preferred stock modification fee, net — reorganization item				78,703			—			—
Gain on repurchases of preferred stock, net				—			376,879			—
Preferred stock dividends and accretion of preferred stock redemption obligation, net (contractual dividend was $98,768 for the year ended December 31, 2002)				(42,247	)		(129,671	)		(146,356	)
Net loss applicable to common shares			$	(3,350,362	)	$	(1,838,917	)	$	(1,247,655	)
Net loss per common share, basic and diluted:
Net loss before extraordinary item and cumulative effect of accounting change			$	(3.42	)	$	(6.02	)	$	(3.42	)
Extraordinary gain on repurchases of debt, net				—			0.86			—
Cumulative effect of accounting change				(4.24	)		—			—
Net loss				(7.66	)		(5.16	)		(3.42	)
Recognition of preferred stock modification fee, net — reorganization item				0.18			—			—
Gain on repurchases of preferred stock, net				—			0.93			—
Preferred stock dividends and accretion of preferred stock redemption obligation, net				(0.10	)		(0.32	)		(0.45	)
Net loss per common share, basic and diluted			$	(7.58	)	$	(4.55	)	$	(3.87	)
Weighted average shares, basic and diluted				441,964,342			403,882,956			322,089,883

See accompanying Notes to consolidated financial statements.

F-22

XO COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands)

			Common Stock
													Accumulated
			Shares										Other
										Deferred			Comprehensive			Accumulated
			Class A		Class B			Amount		Compensation			Income (Loss)			Deficit			Total
Balance at December 31, 1999				150,457,264		117,485,100		$	1,139,232	$	(85,489	)	$	150,634		$	(1,217,499	)	$	(13,122	)
	Issuance of common stock, options and warrants in acquisitions			77,536,299		—			3,002,309		—			—			—			3,002,309
	Issuance of compensatory stock options and restricted stock			200,440		—			30,641		(22,704	)		—			—			7,937
	Compensation attributable to stock options vesting			—		—			—		36,143			—			—			36,143
	Issuance of common stock through employee benefit plans			13,150,088		—			126,604		—			—			—			126,604
	Conversion of Class B common stock into Class A common stock			12,070,874		(12,070,874	)		—		—			—			—			—
	Conversion of 6 1/2% redeemable cumulative preferred stock into Class A common stock			8,595,750		—			93,860		—			—			—			93,860
	Comprehensive loss:
		Net loss		—		—			—		—			—			(1,101,299	)		(1,101,299	)
		Preferred stock dividends and accretion of preferred stock redemption obligation		—		—			—		—			—			(146,356	)		(146,356	)
		Other comprehensive income — net unrealized holding gains and foreign currency translation adjustments		—		—			—		—			38,870			—			38,870
		Realized net gains transferred to current period earnings		—		—			—		—			(206,545	)		—			(206,545	)
		Total comprehensive loss		—		—			—		—			—			—			(1,415,330	)
Balance at December 31, 2000				262,010,715		105,414,226		$	4,392,646	$	(72,050	)	$	(17,041	)	$	(2,465,154	)	$	1,838,401
	Issuance of common and restricted stock in acquisitions			11,211,416		—			29,055		—			—			—			29,055
	Issuance of compensatory stock options			—		—			2,551		(2,551	)		—			—			—
	Compensation attributable to stock options and restricted stock vesting			—		—			—		37,173			—			—			37,173
	Issuance of common stock through employee benefit plans			11,939,685		—			30,899		—			—			—			30,899
	Conversion of Class B common stock into Class A common stock			991,068		(991,068	)		—		—			—			—			—
	Conversion of 6 1/2% redeemable cumulative preferred stock into Class A common stock			1,621,320		—			17,700		—			—			—			17,700
	Issuance of common stock related to equity investment, net of offering costs			50,000,000		—			155,658		—			—			—			155,658
	Comprehensive loss:
		Net loss		—		—			—		—			—			(2,086,125	)		(2,086,125	)
		Gain on repurchases of preferred stock, net		—		—			—		—			—			376,879			376,879
		Preferred stock dividends and accretion of preferred stock redemption obligation, net		—		—			—		—			—			(129,671	)		(129,671	)
		Other comprehensive income — net unrealized holding gains and foreign currency translation adjustments		—		—			—		—			22,556			—			22,556
		Realized net losses transferred to current period earnings		—		—			—		—			4,891			—			4,891
		Total comprehensive loss		—		—			—		—			—			—			(1,811,470	)
Balance at December 31, 2001				337,774,204		104,423,158		$	4,628,509	$	(37,428	)	$	10,406		$	(4,304,071	)	$	297,416

See accompanying notes to consolidated financial statements.

F-23

XO COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

(Dollars in thousands)

			Common Stock
														Accumulated
														Other
			Shares											Comprehensive
											Deferred			Income			Accumulated
			Class A			Class B		Amount			Compensation			(Loss)			Deficit			Total
Balance at December 31, 2001				337,774,204			104,423,158	$	4,628,509		$	(37,428	)	$	10,406		$	(4,304,071	)	$	297,416
	Compensation attributable to stock options and restricted stock vesting			—			—		—			28,928			—			—			28,928
	Issuance of common stock through employee benefit plans			85,854			—		24			—			—			—			24
	Conversion of 6 1/2% redeemable cumulative preferred stock into Class A common stock			3,173			—		35			—			—			—			35
	Conversion of Preferred Stock			23,570			—		—			—			—			—
	Refund of Employee Stock Purchase Plan funds withheld after cancellation(a)						—		(429	)		—			—			—			(429	)
	Cancellation of Craig McCaw’s Class A common stock			(6,853,582	)		—		—			—			—			—
	Comprehensive loss:
		Net loss		—			—		—			—			—			(3,386,818	)		(3,386,818	)
		Recognition of preferred stock modification fee, net — reorganization item		—			—		—			—			—			78,703			78,703
		Preferred stock dividends and accretion of preferred stock redemption obligation, net		—			—		—			—			—			(42,247	)		(42,247	)
		Realized net losses and foreign currency translation adjustments transferred to current period earnings		—			—		—			—			(7,894	)		—			(7,894	)
		Total comprehensive loss		—			—		—			—			—			—			(3,358,256	)
Balance at December 31, 2002				331,033,219			104,423,158	$	4,628,139		$	(8,500	)	$	2,512		$	(7,654,433	)	$	(3,032,282	)

(a)  In the latter half of 2001, the Company’s Employee Stock Purchase Plan was cancelled; however employee salary deferrals continued in December 2001, and were subsequently refunded in early 2002.

See accompanying notes to consolidated financial statements.

F-24

XO COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

		Year Ended December 31,
		2002			2001			2000
OPERATING ACTIVITIES:
Net loss		$	(3,386,818	)	$	(2,086,125	)	$	(1,101,299	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization		699,806			1,162,671			617,714
	Stock-based compensation		28,928			37,173			48,328
	Non-cash restructuring charges and asset write-downs		477,250			502,737			—
	Non-cash reorganization expense, net		89,448			—			—
	In-process research and development		—			—			36,166
	Net losses (gains) on impairment or sale of investments		—			95,804			(162,429	)
	Extraordinary gain on repurchases of debt, net		—			(345,010	)		—
	Cumulative effect of accounting change		1,876,626			—			—
Changes in assets and liabilities, net of effects from acquisitions:
	Accounts receivable		85,514			(43,254	)		(68,761	)
	Other assets		(21,572	)		(66,566	)		(42,167	)
	Other liabilities subject to compromise		195,904			—			—
	Other liabilities not subject to compromise		(27,484	)		181,693			113,034
Net cash provided by (used in) operating activities			17,602			(560,877	)		(559,414	)
INVESTING ACTIVITIES:
Purchases of property and equipment, net			(208,713	)		(1,433,746	)		(1,380,629	)
Prepayment for network assets			—			(120,800	)		—
Payments to acquire fixed wireless licenses			—			(206	)		(49,502	)
Net releases of pledged securities			3,161			150			33,386
Sales of marketable securities and investments			364,069			2,912,454			19,337,905
Purchases of marketable securities			(103,935	)		(2,031,072	)		(19,381,106	)
Cash received for (paid for) divestitures (acquisitions)			3,000			(25,203	)		46,940
Investments in unconsolidated entities			—			(10,175	)		(71,489	)
Net cash provided by (used in) investing activities			57,582			(708,598	)		(1,464,495	)
FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable preferred stock			—			—			1,248,901
Borrowings under senior secured credit facility			—			625,000			375,000
Proceeds from issuance of unsecured notes			—			517,500			—
Net proceeds from sale of common stock and modification of preferred stock agreement			—			248,657			—
Proceeds from issuance of common stock under employee benefit plans			—			30,899			98,655
Repurchases of senior notes			—			(201,883	)		—
Repurchases of redeemable preferred stock			—			(88,424	)		—
Repayments of capital lease and other obligations			(6,079	)		(44,124	)		(6,809	)
Dividends paid on convertible preferred stock			—			(53,778	)		(49,984	)
Costs incurred in connection with financing activities			—			(14,200	)		(17,100	)
Net cash (used in) provided by financing activities			(6,079	)		1,019,647			1,648,663
Effect of exchange rate changes on cash			(1,256	)		3,013			(213	)
Net increase (decrease) in cash and cash equivalents			67,849			(246,815	)		(375,459	)
Cash and cash equivalents, beginning of year			246,189			493,004			868,463
Cash and cash equivalents, end of year		$	314,038		$	246,189		$	493,004

See accompanying notes to consolidated financial statements.

F-25

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2002, 2001 and 2000

1.     ORGANIZATION AND DESCRIPTION OF BUSINESS

     Overview

     XO Communications Inc. (formerly NEXTLINK Communications, Inc.), a Delaware corporation (“XO Parent”), through its subsidiaries, owns and operates an integrated metropolitan and nationwide fiber optic network that provides broadband communication services, local and long distance voice communication services and a wide array of data and integrated data services to business customers in over 60 United States markets. Voice services include local and long distance services, calling card and interactive voice response systems. Data services include Internet access, private data networking and hosting services. XO Parent, through its subsidiaries, also offers combined voice and data services in flat rate “bundled” packages.

     Organization

     The consolidated financial statements include the accounts and activities of XO Parent, and its subsidiaries (collectively referred to as the “Company” or “XO”). The consolidated financial statements also include the results of Concentric Network Corporation (“Concentric”) commencing June 16, 2000, the date on which Concentric merged with XO. The Company, through predecessor entities, was formed in September 1994. As of December 31, 2002, the Company was majority controlled by Craig O. McCaw through shares of Class A and Class B common stock held by Eagle River Investments, LLC, an entity controlled by Mr. McCaw, and other shares of the Company’s Class A and Class B common stock owned or controlled by Mr. McCaw.

     As further discussed in note 2, 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”). Accordingly, the accompanying consolidated financial statements have been prepared in accordance with 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”) and on a going concern basis which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the Company. The Company conducts its operations through direct and indirect subsidiaries of XO Parent. None of these subsidiaries were debtors in the Chapter 11 proceedings.

     On January 16, 2003 (the “Effective Date”), XO Parent emerged from the Bankruptcy Court proceedings pursuant to the terms of its third amended plan of reorganization (the “Plan of Reorganization”). As discussed in note 3, the Company will implement fresh start accounting under the provisions of SOP 90-7. Under the fresh start accounting provisions of SOP 90-7, the fair value of the reorganized Company will be allocated to its assets and liabilities, and its accumulated deficit will be eliminated. As discussed in the Pro Forma column on the accompanying balance sheet and in note 3, the implementation of fresh start accounting will result 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 historical financial statements will not be comparable to financial statements of the Company published for periods following the implementation of fresh start accounting.

2.     REORGANIZATION

     The Chapter 11 Petition and Plan of Reorganization

     On June 17, 2002, XO Parent filed for protection under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On November 15, 2002, the Bankruptcy Court confirmed XO Parent’s Plan of Reorganization,

F-26

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and, on January 16, 2003, XO Parent consummated the Plan of Reorganization and emerged from its Chapter 11 reorganization proceedings with a significantly restructured balance sheet.

     During the period immediately preceding and after the filing of XO Parent’s Chapter 11 petition, the Company met with a committee of lenders under the $1.0 billion secured credit facility (the “Pre-Petition Credit Facility”), an informal committee of unsecured creditors that represented holders of our senior unsecured notes (and following the filing of the Chapter 11 petition, the official committee of unsecured creditors appointed in the Chapter 11 proceedings) and potential investors to discuss potential restructuring transactions that could be implemented to reorganize XO Parent’s capital structure. These discussions led to an agreement with the lenders under the Pre-Petition Credit Facility regarding the terms of a Plan of Reorganization that envisioned two potential reorganization structures the first of which was based on, among other things, a proposed cash investment in XO Parent by third parties, which was ultimately abandoned, and the second of which contemplated a stand alone restructuring with no new cash infusion committed in advance. The Plan of Reorganization was filed on July 22, 2002 and distributed to creditors of XO Parent eligible to vote in the reorganization.

     On August 21, 2002, High River Limited Partnership, a limited partnership controlled by Mr. Carl Icahn (“High River”), commenced an offer to purchase loans under the company’s Pre-Petition Credit Facility at a purchase price of $0.50 for each $1.00 in principal amount thereof. Purchases made under this offer, together with the loans under the Pre-Petition Credit Facility that High River previously had acquired, resulted in High River holding approximately 85% of the loans outstanding under the Pre-Petition Credit Facility.

     The consummation of the Plan of Reorganization resulted in the $1.0 billion of loans under the Pre-Petition Credit Facility being converted into the following:

•  90.25 million shares of common stock, par value $0.01 per share, of reorganized XO Parent (“New Common Stock”); and

•  $500 million of outstanding principal amount of loans under a restructured secured credit and guaranty agreement (the “New Credit Agreement”).

     The Plan of Reorganization also resulted in the cancellation of all of XO Parent’s pre-bankruptcy senior notes and pre-bankruptcy general unsecured claims in exchange for the following:

•  4.75 million shares of New Common Stock;

•  warrants to purchase shares up to an additional 23.75 million shares of New Common Stock described below;

•  rights to purchase shares of New Common Stock in the rights offering described below; and

•  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 (the “Investment Termination Payment”)

     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;

•  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.

F-27

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The warrants will expire 7 years after the date of issuance. Each series of warrants is identical, except as to the applicable exercise price. The exercise price applicable to each respective series of warrants is subject to adjustment in certain events.

     Under the Plan of Reorganization and after the filing and effectiveness of a registration statement with the Securities and Exchange Commission, XO Parent will issue to certain holders of claims of interests in XO Parent, who hold such claims and/or interests as of the November 15, 2002 record date, rights to subscribe for up to 40,000,000 shares of New Common Stock, at $5.00 per share, for an aggregate purchase price of up to approximately $200.0 million through a rights offering (the “Rights Offering”). In addition, pursuant to the stipulation relating to the settlement of a claim made against XO Parent purportedly on behalf of its stockholders (the “Stockholder Stipulation”), holders of shares of pre-petition class A common stock of XO Parent will receive additional nontransferable rights exercisable for a up to 3,333,333 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 3,333,333 shares of New Common Stock. Accordingly, not less than 40,000,000 and not more than 43,333,333 shares will be offered in the Rights Offering.

     In addition, under the Plan of Reorganization:

•  Holders of pre-petition subordinated notes of XO Parent had their securities cancelled, and received a cash payment from High River based upon the amount of the Investment Termination Payment that High River would have been entitled to receive as a holder of the loans under the New Credit Agreement and the right to participate in the Rights Offering; and

•  Holders of pre-petition class A common stock of XO Parent had their securities cancelled, and received the right to a portion of the cash consideration pursuant to the Stockholder Stipulation and have the right to participate in the Rights Offering; and

•  Holders of pre-petition class B common stock and holders of all series of pre-petition preferred stock of XO Parent had their securities cancelled and received the right to participate in the Rights Offering.

     Of the 95.0 million shares of New Common Stock distributed on the Effective Date, more than 80% were issued to High River. Immediately following this distribution, High River transferred all interest in its New Common Stock to Cardiff Holding LLC, a Delaware limited liability company also controlled by Mr. Icahn (“Cardiff”). Of the warrants to be distributed under the Plan of Reorganization, XO estimates 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. High River assigned its approximately 85% interest in the loans outstanding under the New Credit Agreement to Chelonian Corp. (“Chelonian”), which subsequently assigned those loans to Arnos Corp. (“Arnos”). Both Chelonian and Arnos are controlled by Mr. Icahn.

     Accounting Impact of Chapter 11 Filing

     Liabilities subject to compromise reflected in the accompanying consolidated financial statements and the XO Parent stand-alone financial statements represent the liabilities of XO Parent incurred prior to the Petition Date that are with unrelated parties (other than those that are payable to a subsidiary in the XO Parent Stand-Alone Balance Sheet). In accordance with SOP 90-7, liabilities subject to compromise were recorded at the amount allowed on pre-petition claims in the Chapter 11 proceedings. Other obligations that

F-28

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

are not subject to compromise have retained their historical balance sheet classifications and amounts. Liabilities subject to compromise consisted of the following as of December 31, 2002 (dollars in thousands):

Long-term debt		$	5,165,718
Accrued interest and preferred stock dividends			295,820
Pre-petition accounts payable and accrued liabilities			33,640
Capital lease obligations			9,211
Total liabilities subject to compromise			5,504,389
Less: long-term liabilities subject to compromise			7,182
	Current liabilities subject to compromise	$	5,497,207

     At December 31, 2002, there were approximately $34 million of liabilities subject to compromise that had not been settled by the Bankruptcy Court. The Company expects to pay approximately $6 million to settle these claims which will result in a reorganization benefit of approximately $28 million.

     In order to record its debt instruments at the amount allowed by the Bankruptcy Court in accordance with SOP 90-7, as of the Petition Date, XO Parent wrote off all of its debt issuance costs and discounts related to debt (collectively the “Deferred Financing Fees”) as a component of reorganization expense. Reorganization expense also includes professional fees incurred in connection with the Chapter 11 proceedings, as well as gains or penalties from the settlement or rejection of liabilities subject to compromise and the net gains from the Investment Termination Payment. Reorganization expenses for the year ended December 31, 2002 consisted of the following (dollars in thousands):

		Year Ended
		December 31,
		2002
Net loss from the settlement or rejection of liabilities subject to compromise		$	14,916
Net gain from Investment Termination Payment			(16,667	)
Deferred Financing Fees			56,270
Professional fees			36,602
	Total reorganization expense, net	$	91,121

     Under SOP 90-7, XO Parent was required to accrue interest expense during the Chapter 11 proceedings only to the extent that such interest was expected to be paid pursuant to the proceedings. Under the Plan of Reorganization, there were no cash payments of interest on the loans outstanding under the Pre-Petition Credit Facility or XO Parent’s unsecured notes. Therefore, XO Parent ceased accruing interest on the Pre-Petition Credit Facility and on its unsecured notes as of the Petition Date. The contractual interest amounts parenthetically disclosed on the accompanying consolidated statement of operations represent the additional interest expense that would have been accrued under the relevant financing agreements had the Company not ceased accruing interest as described above.

     In accordance with SOP 90-7, XO Parent recorded its preferred stock at the amount allowed by the Bankruptcy Court. Accordingly, as of the Petition Date, XO Parent recognized a gain equal to the remaining $81.5 million unamortized balance of a deferred modification fee and wrote off all issuance costs and discounts related to its preferred stock, which resulted in a charge of $2.8 million. In addition, the Company stopped accruing preferred stock dividends subsequent to the Petition Date. The dividend amounts parenthetically disclosed on the accompanying consolidated statement of operations represent the additional dividends that would have been accrued under the terms of the relevant preferred stock had the Company not ceased accruing such dividends as described above.

F-29

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

XO Parent Stand-Alone Financial Statements

     In accordance with SOP 90-7, stand-alone financial statements of XO Parent are presented below. Such financial statements have been prepared using standards consistent with the Company’s consolidated financial statements without eliminating intercompany transactions and without consolidating controlled subsidiaries (dollars in thousands).

XO Communications, Inc.

(XO Parent)

Debtor In Possession

Stand-Alone Balance Sheet

As of December 31, 2002

(Unaudited)

ASSETS
Current assets:
	Pledged securities		$	1,100
	Other current assets			66,764
		Total current assets		67,864
Property and equipment, net				65,654
Fixed wireless licenses, net				67,039
Other intangibles, net				79,711
Investment in and notes receivable from subsidiaries, net				8,542,749
Other assets, net				43,638
		Total assets	$	8,866,655
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities not subject to compromise			$	50,422
Debt and accrued interest payable to subsidiary subject to compromise			��	620,389
Current liabilities subject to compromise				5,497,207
		Total current liabilities		6,168,018
Long-term liabilities not subject to compromise				62,633
Long-term liabilities subject to compromise				7,182
		Total liabilities		6,237,833
Redeemable preferred stock held by and payable to a subsidiary subject to compromise				514,640
Redeemable preferred stock subject to compromise				1,708,316
Stockholders’ equity:
	Common stock			4,628,139
	Deferred compensation			(8,149	)
	Accumulated deficit			(4,214,124	)
		Total stockholders’ equity		405,866
		Total liabilities and stockholders’ equity	$	8,866,655

F-30

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

XO Communications, Inc.

(XO Parent)

Debtor In Possession

Stand-Alone Statement of Operations

(Unaudited)

			Period from the
			Petition Date of
			June 17, 2002
			through
			December 31, 2002
Revenue			$	—
Costs and expenses:
	Selling, operating, and general (excludes stock based compensation)			75,000
	Stock-based compensation			12,352
	Depreciation and amortization			47,584
		Total costs and expenses		134,936
Loss from operations				(134,936	)
Reorganization expense, net				(91,121	)
Interest income on notes receivable from subsidiaries				286,202
Interest expense				(3,468	)
Net income				56,677
Recognition of preferred stock modification fee, net — reorganization item				78,703
Net income applicable to common shares			$	135,380

XO Communications, Inc.

(XO Parent)

Debtor In Possession

Stand-Alone Statement of Cash Flows

(Unaudited)

		Period From the
		Petition Date of
		June 17, 2002
		through
		December 31, 2002
OPERATING ACTIVITIES:
Net income		$	56,677
Adjustments for non-cash items:
	Depreciation and amortization		47,584
	Reorganization expense		91,121
	Stock-based compensation		12,352
	Interest income on notes receivable from subsidiaries		(286,202	)
	Interest expense		3,468
Changes in assets and liabilities:
	Notes receivable from subsidiaries, net		75,000
Net cash used in operating activities			—
Net increase (decrease) in cash and cash equivalents			—
Cash and cash equivalents, beginning of the period			—
Cash and cash equivalents, end of period		$	—

F-31

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3. FRESH START ACCOUNTING

     The Company will adopt the fresh start accounting provisions (“fresh start”) of SOP 90-7 during the first quarter of 2003. Under SOP 90-7, the implementation of fresh start reporting is triggered in part by the emergence of XO Parent from its Chapter 11 proceedings. Although the effective date of the Plan of Reorganization was January 16, 2003, the Company plans to account for the consummation of the Plan of Reorganization as if it had occurred on January 1, 2003 and implement fresh start reporting as of that date. Fresh start requires that the Company adjust the historical cost of its assets and liabilities to their fair value. The fair value of the reorganized Company, or the reorganization value, of approximately $1.4 billion was determined based on the sum of the reorganized Company’s $500.0 million of debt outstanding under the New Credit Agreement, $475.0 million of New Common Stock as approved by the Bankruptcy Court, and the $425.0 million of other liabilities that were not eliminated or discharged under the Plan of Reorganization.

     Fresh start requires that the reorganization value be allocated to the entity’s net assets in conformity with procedures specified by Accounting Principles Board Opinion (“APB”) No. 16, “Business Combinations,” (“APB No. 16”) as superseded by Statement of Financial Accounting Standards (“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 fair value adjustments impacted current assets, property and equipment, fixed wireless licenses, intangible assets and accrued liabilities. A reconciliation of the adjustments to be recorded in connection with the debt restructuring and the adoption of fresh start accounting is presented below (in thousands):

										Reorganized XO
										Pro forma
			Predecessor XO							December 31,
			December 31,		Debt		Fresh Start			2002
			2002		Restructuring		Adjustments(d)			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	314,038	$	—	$	—		$	314,038
	Marketable securities			246,945		—		—			246,945
	Accounts receivable			116,541		—		—			116,541
	Other current assets			83,480		—		(50,826	)		32,654
		Total current assets		761,004		—		(50,826	)		710,178
Property and equipment, net				2,780,589		—		(2,278,413	)		502,176
Fixed wireless licenses, net				911,832		—		(852,324	)		59,508
Other intangibles, net				72,782		—		3,389			76,171
Other assets, net				59,289		—		(36,181	)		23,108
		Total assets	$	4,585,496	$	—	$	(3,214,355	)	$	1,371,141

F-32

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

												Reorganized XO
												Pro forma
			Predecessor XO									December 31,
			December 31,			Debt			Fresh Start			2002
			2002			Restructuring			Adjustments(d)			(Unaudited)
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
	Accounts payable		$	63,729		$	—		$	6,000		$	69,729
	Accrued liabilities			265,889			—			(19,841	)		246,048
	Accrued interest payable			213			—			—			213
Total current liabilities				329,831			—			(13,841	)		315,990
Current liabilities subject to compromise				5,497,207			(5,461,433	)(a)		(35,774	)		—
Long-term debt				—			500,000	(b)		—			500,000
Other long-term liabilities				75,242			—			4,909			80,151
Long-term liabilities subject to compromise				7,182			—			(7,182	)		—
		Total liabilities		5,909,462			(4,961,433	)		(51,888	)		896,141
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	)		6,194,749			1,459,684			—
		Total stockholders’ (deficit) equity		(3,032,282	)		6,669,749			(3,162,467	)		475,000
		Total liabilities and stockholders’ (deficit) equity	$	4,585,496		$	—		$	(3,214,355	)	$	1,371,141

(a)	To record the discharge of indebtedness, including Pre-Petition Credit Facility ($1,000.0 million), pre-petition senior and convertible subordinated notes ($4,165.7 million), accrued interest ($245.2 million), and accrued dividends ($50.6 million) and the elimination of pre-petition Redeemable Preferred Stock ($1,708.3 million) 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.
(d)	To adjust the carrying value of assets, liabilities and stockholders’ equity to fair value, in accordance with fresh start accounting.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Review of Significant Accounting Policies

     As discussed in note 3, the Company will adopt fresh start accounting during the first quarter of 2003, creating, in substance, per SOP 90-7 a new reporting entity. SOP 90-7 also requires that changes in accounting principles required in the financial statements of the emerging entity within twelve months of fresh start reporting should be adopted at the time fresh start reporting is adopted.

F-33

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Principles of Consolidation

     The Company’s 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 Consolidated Financial Statements

     The preparation of 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting 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 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.

     Long-Lived Assets

     Long-lived assets, including property and equipment, fixed wireless licenses, and intangible assets with definite useful lives to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”). SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” (“SFAS No. 121”). In accordance with implementation requirements, the Company implemented the provisions of SFAS No. 144 on January 1, 2002. The criteria for determining impairment for long-lived assets to be held and used are generally consistent with SFAS No. 121. Pursuant to SFAS No. 144, impairment is determined by comparing the carrying value of these long-lived assets to management’s best estimate of future undiscounted cash flows expected to result from the use of the assets. The Company believes that no impairment existed under SFAS No. 144 as of December 31, 2002. In the event that there are changes in the planned use of the Company’s long-lived assets or its expected future undiscounted cash flows are reduced significantly, the Company’s assessment of its ability to recover the carrying value of these assets under SFAS No. 144 could change. As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003, which will result in a significant write-down of the Company’s long-lived assets.

F-34

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Property and Equipment

     Property and equipment is stated at historical 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. The estimated useful lives of property and equipment 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. 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 costs of constructing property and equipment are capitalized including interest costs related to construction. As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003, which will result in a significant write down of property and equipment.

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

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

Telecommunications networks and acquired bandwidth	5-20 years
Furniture, fixtures, equipment, and other	3-5 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 that could impact the network architecture and asset utilization. This latter assessment is significant because XO operates within an industry in which new technological changes could render some or all of its network related equipment obsolete requiring application of a shorter useful life or, in a worst case, a write off of the entire value of the asset. Accordingly, in making this assessment, the Company considers the views of experts within the Company and outside sources regarding the impact of technological advances and trend in the industry on the value and useful lives of its network assets.

     Fixed Wireless Licenses

     Fixed wireless licenses consist of direct costs to acquire fixed wireless licenses. The estimated useful life is 20 years, which represents the original ten year license term with one ten year renewal. Amortization commences when commercial service using fixed wireless technology is deployed in the license’s geographic area. Renewal is conditioned upon the satisfaction of certain utilization requirements established by the Federal Communications Commission (“FCC”). The Company’s current utilization may not be sufficient to satisfy this FCC condition on certain licenses which could impact the FCC’s decision to renew. As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003 which will result in a significant write down of fixed wireless licenses.

     Goodwill

     Goodwill consisted primarily of goodwill from the Concentric merger. Effective January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), in which goodwill and intangible assets with indefinite lives are no longer amortized but must be tested for impairment annually or more frequently if an event indicates that the asset might be impaired. The Company performed the required transitional impairment tests of goodwill as of January 1, 2002, and determined that the goodwill

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

was totally impaired. Accordingly, in the first quarter of 2002 the Company recognized a $1,876.6 million charge as a cumulative effect of accounting change to write off all of its goodwill.

     Other Intangibles

     Other intangibles consist primarily of intangibles from the Concentric merger. Such costs are amortized using the straight line method of accounting over a period of up to five years. As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003 which will result in a net increase to other intangibles.

     Other Assets

     Other assets consist primarily of deferred costs associated with the installation of customer services, investments in both publicly traded and privately held companies and pledged securities. The Company defers direct labor costs related to customer installations, which are amortized ratably over the estimated customer service period.

     The Company has investments in entities in which XO has no significant influence. These investments are accounted for under the cost method. The Company regularly reviews its investment portfolio to determine if any declines in value are other than temporary. During 2000 and 2001, the slowing economy had a negative impact on the equity value of companies in the telecommunications sector. In light of these circumstances and based on the Company’s review of its investment portfolio in this sector, the Company recorded other than temporary impairment charges in other income (loss) of $89.0 million in 2001 and $57.7 million in 2000 with respect to its public and private equity investments.

     As of December 31, 2002 and 2001, the Company had pledged $1.4 million and $16.6 million, respectively, in certificates of deposit as collateral for outstanding letters of credit. The pledged securities are stated at cost, adjusted for accrued interest. The fair value of the pledged securities approximates their carrying value.

     As disclosed in note 3, the Company will apply fresh start accounting during the first quarter of 2003 which will result in a reduction of other assets.

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 be 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.

Revenue Recognition

     Revenues from telecommunication services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. 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 customer installations and other upfront charges are deferred and recognized ratably over the estimated customer life. 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. In 2001, approximately 1.5% of XO’s total

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

revenue was attributed to sales of unlit network capacity. There were no sales of unlit network capacity during 2002 or 2000.

     The Company establishes valuation allowances for collection of doubtful accounts and other sales credit adjustments. Valuation allowances for sales credits are established through a charge to revenue, while valuation allowances for doubtful accounts are established through a charge to selling, operating and general expense. The Company assesses the adequacy of these reserves monthly evaluating 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 its customers. As considered necessary, the Company also assesses the ability of specific customers to meet their financial obligations to XO and establishes specific valuation allowances based on the amount XO expects to collect from its customers. The Company believes that the established valuation allowances were adequate as of December 31, 2002 and 2001. 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 estimate of the recoverability of its trade receivables could be further reduced.

     In-Process Research and Development

     In conjunction with the Concentric merger, the Company allocated $36.2 million of the purchase price to in-process research and development which represented the estimated fair value of incomplete projects based on risk-adjusted future cash flows. At the date of the Concentric merger, the development of these projects had not yet reached technological feasibility and the technology had no alternative future uses. Accordingly, the entire $36.2 million of acquired in-process research and development was expensed as of the acquisition date.

Net Loss Per Share

     Net loss per common share, basic and diluted, is computed by dividing 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, warrants and convertible securities are anti-dilutive. Assuming exercise or conversion of outstanding stock options, warrants and convertible securities, calculated under the treasury method, diluted shares would have been 549.8 million for 2002, 512.6 million for 2001 and 398.5 million for 2000.

     As discussed in note 2, the Company emerged from bankruptcy on January 16, 2003 and has a reorganized equity structure. In particular, implementation of the Company’s Plan of Reorganization resulted in the cancellation of all of the shares of all classes of the Company’s common and preferred stock that were outstanding prior to the Petition Date.

Stock-Based Compensation

     As allowed by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) the Company has chosen to account for compensation cost associated with its employee stock plans 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. See note 16 for additional information regarding the Company’s stock compensation arrangements.

     Had compensation costs been recognized based on the calculated fair value of stock options at the date of grant, the pro forma amounts of the Company’s net loss applicable to common shares and net loss per

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

common share for the years ended December 31, 2002, 2001 and 2000 would have been as follows (dollars in thousands, except for per share data):

	Year Ended December 31,
	2002			2001			2000
Net loss applicable to common shares — pro forma	$	(3,351,824	)	$	(1,845,882	)	$	(1,435,253	)
Net loss per common share — pro forma	$	(7.58	)	$	(4.57	)	$	(4.46	)

Comprehensive Loss

     Comprehensive loss includes the Company’s net loss applicable to common shares, as well as net unrealized gains and losses on available-for-sale investments and foreign currency translation adjustments relating to the Company’s European operations. Comprehensive loss excludes net realized gains and losses transferred to current period earnings relating to the sale of available-for-sale investments and other than temporary impairment charges.

Concentration of Credit Risk

     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 recently filed for protection under Chapter 11 of the Bankruptcy Code. The Company believes that its established valuation and credit allowances are adequate as of December 31, 2002 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 as a result of the Company’s emergence from bankruptcy, the holders of the Company’s debt and equity instruments received certain rights and securities as described further in note 2.

New 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. The provisions of SFAS No. 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. As required by SOP 90-7, the Company will implement SFAS No. 143 during the first quarter of 2003 in conjunction with the implementation of fresh start accounting. The accompanying pro forma balance sheet and note 3 includes an estimated asset retirement obligation of $21.4 million.

     In April 2002, the FASB issued 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”, (“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

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with respect to the rescission of SFAS No. 4 and for transactions occurring after May 15, 2002, with respect to provisions related to SFAS No. 13. The Company has recognized extraordinary gains from debt repurchases in 2001 and has determined that the classification of such gains as extraordinary items will change under SFAS No. 145 when XO implements fresh start accounting in accordance with SOP 90-7.

     In June 2002, the FASB issued 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. The Company will apply the provisions of SFAS No. 146 to any exit or disposal activities initiated after December 31, 2002.

     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, 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 Opinion 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. 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. The provisions of SFAS No. 148 are effective for fiscal years beginning after December 15, 2002 with respect to the amendments of SFAS No. 123 and effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 with respect to the amendments of APB No. 28. The Company will implement SFAS No. 148 effective January 1, 2003 regarding disclosure requirements for condensed financial statements for interim periods. Management is currently evaluating the impact of the fair value method of accounting for stock-based compensation on the Company’s results of operations and financial position.

5. CUMULATIVE EFFECT OF ACCOUNTING CHANGE

     In July 2001, the FASB issued SFAS No. 142, which revises the accounting for purchased goodwill and intangible assets and supersedes APB Opinion No. 17, “Intangible Assets” (“APB No. 17”). Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized but must be tested for impairment annually or more frequently if an event indicates that the asset might be impaired. This impairment test under SFAS No. 142 is based on fair values determined by using market prices, current prices for similar assets and liabilities, or a discounted cash flow methodology. Intangible assets with definite useful lives continue to be amortized over their useful lives.

     SFAS No. 142 required that the initial impairment analysis of goodwill be completed by June 30, 2002. If however, events or changes in circumstances indicate that goodwill of a reporting unit might be impaired before June 30, 2002, goodwill was required to be tested for impairment when this indication of possible impairment arises. The Company performed the required transitional impairment tests of goodwill as of January 1, 2002, and determined that the value of its goodwill was totally impaired. Accordingly, in the first quarter of 2002, the Company recorded a $1,876.6 million charge as a cumulative effect of accounting change

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

to write-off all of its goodwill. The pro forma impact on net loss before cumulative effect of accounting change for the year ended December 31, 2002, 2001, and 2000 compared to the actual results for the same period is as follows (dollars in thousands, except for per share data):

	2002			2001			2000
Net loss before extraordinary item and cumulative effect of accounting change	$	(1,510,192	)	$	(2,431,135	)	$	(1,101,299	)
Goodwill amortization		—			595,601			323,109
Adjusted net loss before extraordinary item and cumulative effect of accounting change	$	(1,510,192	)	$	(1,835,534	)	$	(778,190	)
Net loss per common share before extraordinary item and cumulative effect of accounting change, basic and diluted:
Reported net loss before extraordinary item and cumulative effect of accounting change	$	(3.42	)	$	(6.02	)	$	(3.42	)
Goodwill amortization		—			1.47			1.00
Adjusted net loss per common share before extraordinary item and cumulative effect of accounting change, basic and diluted	$	(3.42	)	$	(4.55	)	$	(2.42	)

6. RESTRUCTURING CHARGES AND ASSET WRITE-DOWNS

     On August 8, 2002, the Company entered into a Master Agreement with Level 3 Communications, Inc. (“Level 3”), which amends various agreements related to XO acquisition of fiber networks in the United States from Level 3 and the recurring maintenance thereon (the “Master Agreement”). Beginning on January 1, 2003 and continuing over the remaining term of the initial agreement, the Company’s operating and maintenance fees as well as fiber relocation charges will be reduced from approximately $17.0 million annually to a fixed rate of $5.0 million annually. In exchange for this reduction and certain other concessions, effective as of February 11, 2003, the closing date for the transaction, the Company surrendered its indefeasible right to use an empty conduit and six of the 24 fibers previously acquired from Level 3. Because the Company had committed to this plan of disposal and believed at the time that XO entered into the Master Agreement that consummation of the contemplated transaction was probable, the Company recorded a $477.3 million non-cash write-down of these assets during the third quarter of 2002. Pursuant to applicable accounting principles, the write-down is based on the book value of the surrendered facilities and does not reflect the future benefits to be received by the Company under the Master Agreement.

     During the second half of 2001, 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 of current and future market conditions and the divestiture of its European operations. As a result of the restructuring plan, the Company recorded $509.2 million of estimated restructuring charges during the year ended December 31, 2001. The Company continued to restructure its operations, reducing its workforce by approximately 350 additional employees, the majority of which were employed in network operations, sales and marketing and information technology, and recorded a $2.9 million restructuring charge related to involuntary termination severance liabilities in the second quarter of 2002. These employees were notified of their termination of employment in the second quarter of 2002 and the employment of the majority of the notified employees was terminated by June 30, 2002. As of December 31, 2002, the remaining restructuring accrual was $79.0 million, which relates primarily to payments due to landlords on exited leased facilities. The restructuring accrual has decreased from $125.8 million as of December 31, 2001 primarily due to payments associated with exited leased facilities.

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. MARKETABLE SECURITIES

     Marketable securities consisted of the following (dollars in thousands):

	December 31,
	2002		2001
U.S. Government and agency notes and bonds	$	246,945	$	242,048
Corporate notes and bonds		—		266,930
	$	246,945	$	508,978

8. PROPERTY AND EQUIPMENT

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

	December 31,
	2002		2001
Telecommunications networks and acquired bandwidth	$	2,920,819	$	2,832,878
Furniture, fixtures, equipment, and other		656,994		758,022
		3,577,813		3,590,900
Less accumulated depreciation		1,165,216		795,739
		2,412,597		2,795,161
Network construction-in-progress		367,992		947,416
	$	2,780,589	$	3,742,577

     As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003, which will result in a significant write down of property and equipment and the associated depreciation expense in future periods. During 2002, 2001 and 2000, depreciation expense was $598.5 million, $447.0 million and $223.8 million, respectively. During 2002, 2001 and 2000, the Company capitalized interest on construction costs of $11.1 million, $51.6 million, and $31.0 million, respectively.

     As of December 31, 2002, the Company owned a North American inter-city network with a carrying value of $260.5 million. The inter-city network requires the purchase and installation of optical networking equipment in order for the fiber to be “lit” and operationally ready for its intended use. The Company has postponed lighting this network and in the interim has purchased Level 3 wavelength capacity to provide inter-city transport. As a result, the inter-city network has not been placed into service, is not being depreciated and is included in network construction-in-progress as of December 31, 2002.

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9. OTHER INTANGIBLES

     Intangible assets with definite useful lives consisted of the following (dollars in thousands):

	December 31, 2002							December 31, 2001
	Gross							Gross
	Carrying		Accumulated			Net Book		Carrying		Accumulated			Net Book
	Amount		Amortization			Value		Amount		Amortization			Value
Acquired technology	$	130,515	$	(84,336	)	$	46,179	$	141,541	$	(56,027	)	$	85,514
Customer lists		123,745		(105,635	)		18,110		124,873		(80,845	)		44,028
Other		35,413		(26,920	)		8,493		48,731		(24,869	)		23,862
Total intangible assets	$	289,673	$	(216,891	)	$	72,782	$	315,145	$	(161,741	)	$	153,404
Fixed wireless licenses	$	997,942	$	(86,110	)	$	911,832	$	997,942	$	(50,397	)	$	947,545

     As discussed in note 3, the Company will apply fresh start accounting during the first quarter of 2003, which will result in a significant write down of other intangibles and the associated amortization expense. Amortization expense for the years ended December 31, 2002, 2001 and 2000 was $101.3 million, $715.7 million and $393.9 million, respectively. Fixed wireless licenses are amortized when commercial service using the wireless technology is deployed in the license’s geographic area. At December 31, 2002, $635.3 million of the fixed wireless licenses are being amortized.

10. ACCRUED LIABILITIES

     Accrued liabilities consisted of the following components (dollars in thousands):

	December 31,
	2002		2001
Accrued compensation	$	58,551	$	73,807
Accrued telecommunications costs		52,803		40,955
Accrued construction		1,123		27,552
Other accrued liabilities		153,412		198,780
	$	265,889	$	341,094

11. LONG-TERM DEBT

     As of December 31, 2002, the carrying value of the Company’s long-term debt was $5.2 billion including $3.7 billion in pre-petition senior notes, $0.5 billion in pre-petition convertible subordinated notes, and $1.0 billion outstanding under the Pre-Petition Credit Facility, all of which are classified as current liabilities subject to compromise. The Company ceased making all scheduled interest payments due under the terms of its senior unsecured notes effective December 1, 2001, and its subordinated unsecured notes in February 2002. Consequently, as of December 31, 2001, the Company was in default on certain unsecured notes and had triggered cross-default provisions under the Pre-Petition Credit Facility and the indentures under which all other senior notes were issued, so the entire $5.2 billion of pre-petition debt was classified as current.

     As discussed further in note 2, upon the Company’s consummation of the Plan of Reorganization, all of XO Parent’s pre-petition senior notes and pre-petition general unsecured claims were cancelled in exchange for (i) 4,750,000 shares of New Common Stock, (ii) warrants to purchase shares up to an additional 23,750,000 shares of New Common Stock (iii) rights to purchase shares of New Common Stock in the Rights Offering and (iv) a portion of the cash consideration received by XO Parent from the Investment Termination Payment. Any holders of pre-petition subordinated notes of XO Parent had their securities cancelled, and

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

received a cash payment from High River based upon the amount of the Investment Termination Payment that High River would have been entitled to receive as holder of the loans under the New Credit Agreement and the right to participate in the Rights Offering. The pre-petition senior notes had interest rates ranging from 9.0% to 12.75% and the interest rate on the pre-petition convertible subordinated notes was 5.75%.

     The Pre-Petition Credit Facility bore interest at the Company’s option, at an alternative base rate, as defined, or at the reserve-adjusted London Interbank Offered Rate (“LIBOR”), plus in each case, applicable margins. As discussed further in note 2, upon the Company’s consummation of the Plan of Reorganization, the $1.0 billion of loans under the Pre-Petition Credit Facility were converted into 90.25 million shares of New Common Stock and the $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 the 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.

     The Company is not required to pay interest accrued on the principal amount under the New Credit Agreement until it meets certain financial ratios. 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 LIBOR, plus in each case, applicable margins. Once the Company begins to pay accrued interest in cash, the applicable margins are reduced. 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.

     During the second half of 2001, in a series of transactions, a subsidiary of the Company paid $201.9 million to repurchase $557.1 million of the outstanding principal of certain series of the pre-petition senior notes at a substantial discount to their respective face values. As a result of these transactions, during the year ended December 31, 2001, the Company recognized an extraordinary gain of $345.0 million, net of unamortized financing costs.

12. REDEEMABLE PREFERRED STOCK

     As of December 31, 2002 and 2001, the carrying values of the Company’s pre-petition preferred stock were $1.7 billion and $1.8 billion, respectively. As discussed in note 2, as a result of the Company’s emergence from bankruptcy and consummation of the Plan of Reorganization, the Company’s pre-petition redeemable preferred stock has been cancelled and discharged and the holders of such securities will receive no distribution under the Plan of Reorganization.

     In conjunction with the implementation of the transactions that ultimately led to the reorganization of the Company’s capital structure pursuant to the Plan of Reorganization, the Company ceased making all scheduled dividend payments effective December 31, 2001 and stopped accruing preferred stock dividends subsequent to the Petition Date. In accordance with SOP 90-7, during the Chapter 11 proceedings, the Company was required to record its preferred stock at the amount allowed by the Bankruptcy Court. Accordingly, during the second half of 2002, the Company recognized a gain equal to the remaining unamortized balance of a deferred modification fee and wrote off all issuance costs and discounts related to its preferred stock which resulted in a net gain of $78.7 million.

     During the second half of 2001, in a series of transactions, a subsidiary of the Company paid $88.4 million to repurchase $301.6 million in liquidation preference of its 14% pre-petition Series A senior exchangeable redeemable preferred stock and $171.0 million in liquidation preference of its pre-petition 13 1/2% Series E

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

senior redeemable exchangeable preferred stock at a substantial discount to their respective carrying amounts. As a result of these transactions, the Company recognized a gain of $376.9 million, net of unamortized financing costs.

13. STOCKHOLDERS’ EQUITY

     In December 2001, the Company voluntarily delisted its pre-petition Class A common stock from the Nasdaq National Market and began trading on the Nasdaq Over-the-Counter Bulletin Board (“OTCBB”) on December 17, 2001 under the symbol “XOXO.” The Company’s pre-petition Class A common stock stopped trading on the OTCBB as of the Effective Date and the New Common Stock began trading on the OTCBB under the symbol “XOCM” shortly thereafter. As discussed in note 2, 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.

     On June 7, 2001, an investment fund affiliated with Forstmann Little invested $250.0 million of cash in the Company to provide additional funding for general corporate purposes. In exchange for the investment, the Company issued 50.0 million shares of its pre-petition Class A common stock to the Forstmann Little fund and amended the terms of outstanding pre-petition convertible preferred stock held by various funds affiliated with Forstmann Little to reduce the share conversion price from $31.625 to $17.00 per share. The value of the pre-petition Class A common stock issued at the date the investment closed was $157.5 million. The remaining $92.5 million, attributed to the pre-petition convertible preferred stock amendment, was recorded as a credit to the preferred stock balance and was being amortized against the accretion of the preferred stock redemption obligation. As discussed in note 12, during the second half of 2002, the Company recognized a gain equal to the remaining unamortized balance of this deferred modification fee.

     In June 2000, the Company effected two-for-one stock splits of the issued and outstanding shares of pre-petition Class A and Class B common stock, in the form of stock dividends. The accompanying consolidated financial statements and the related notes herein have been adjusted retroactively to reflect the two-for-one stock splits.

14.     INCOME TAXES

     Components of deferred tax assets and liabilities were as follows (dollars in thousands):

		December 31,
		2002			2001
Deferred tax assets:
	Provisions not currently deductible	$	123,280		$	41,954
	Property, equipment and other long-term assets (net)		367,208			348,582
	Net operating loss and capital loss carryforwards		1,863,336			1,313,477
Total deferred tax assets			2,353,824			1,704,013
Valuation allowance			(2,028,331	)		(1,390,017	)
Net deferred tax assets			325,493			313,996
Deferred tax liabilities:
	Property, equipment and other long-term assets (net)		(101,402	)		(72,108	)
	Other identifiable intangibles		(222,537	)		(238,465	)
	Other		(1,554	)		(3,423	)
Total deferred tax liabilities			(325,493	)		(313,996	)
Net deferred taxes		$	—		$	—

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XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The net change in valuation allowance for the year ended December 31, 2002 was an increase of $638.3 million. The net change in the valuation allowance for years ended December 31, 2001 and 2000 was an increase of $591.2 million and $521.2 million, respectively.

     As of December 31, 2002, the Company has capital loss carryforwards of approximately $0.5 billion and net operating loss carryforwards of approximately $4.0 billion. As discussed in notes 2 and 3, upon consummation of the Plan of Reorganization during the first quarter of 2003, the Company will recognize a substantial amount of cancellation of indebtedness income. Accordingly, a substantial portion of the Company’s $4.5 billion of capital and net operating loss carryforwards are expected to be eliminated. Other tax attributes, including property bases, could also be 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.

     The Company will join with the affiliated group of corporations controlled by Mr. Icahn in filing a consolidated federal income tax return. As such, the Company entered into a Tax Allocation Agreement with Starfire Holding Corporation (“Starfire”), the Parent entity of the affiliated group of corporations controlled by Mr. Icahn. Generally, the Tax Allocation Agreement provides that Starfire will pay all consolidated federal income taxes on behalf of the consolidated group that includes XO, and XO 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.

     A reconciliation of the Company’s effective income tax rate and the U.S. federal and state tax rate is as follows:

	2002			2001
Statutory U.S. federal rate		35.0	%		35.0	%
State income taxes, net of federal benefit		6.0	%		6.0	%
Valuation allowance for deferred tax assets		(18.3	)%		(29.4	)%
Other identifiable intangibles		(22.7	)%		(11.6	)%
Effective income tax rate		—	%		—	%

15.     COMPREHENSIVE LOSS

     Comprehensive loss includes the Company’s net loss applicable to common shares, as well as net unrealized gains and losses on available-for-sale investments and foreign currency translation adjustments from the Company’s former European operations, which were sold in February 2002. The following table reflects the Company’s calculation of comprehensive loss for the years ended December 31, 2002, 2001 and 2000 (dollars in thousands):

		Year Ended December 31,
		2002			2001			2000
Net loss applicable to common shares		$	(3,350,362	)	$	(1,838,917	)	$	(1,247,655	)
Other comprehensive (gains) loss:
	Net unrealized holding (gains) losses and foreign currency translation adjustments		—			22,556			38,870
	Less: Net realized (gains) losses and foreign currency translation adjustments transferred to current period earnings		(7,894	)		4,891			(206,545	)
Comprehensive loss		$	(3,358,256	)	$	(1,811,470	)	$	(1,415,330	)

F-45

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.     STOCK COMPENSATION ARRANGEMENTS

     The Company had an Employee Stock Purchase Plan, (the “Purchase Plan”), under which 12.0 million shares of Class A common stock were authorized for issuance. The Purchase Plan was suspended in 2001 in connection with the commencement of XO Parent’s balance sheet reorganization, and then was subsequently cancelled. As discussed in note 2, pursuant to the Plan of Reorganization, all interests in the Company’s pre-petition Class A common stock were terminated as of the Effective Date. Prior to the suspension of the Purchase Plan, eligible employees could purchase the Company’s pre-petition Class A common shares at 85% of the lower of the average market value of the Class A common stock on the first and the last trading day of each calendar quarter. Employees who owned 5% or more of the voting rights of the Company’s outstanding common shares could not participate in the Purchase Plan. During the years ended December 31, 2001 and 2000, employees purchased 6.3 million and 0.4 million shares of pre-petition Class A common stock, respectively, under the Purchase Plan.

     Prior to the Effective Date, the Company also maintained the XO Communications, Inc. Stock Option Plan (the “Stock Option Plan”) and certain other equity compensation plans that had been assumed in connection with the acquisition of Concentric Network (collectively, the “Old Stock Option Plans”) to provide a performance incentive for certain officers, employees and individuals or companies who provide services to the Company. The Old Stock Option Plans provided for the granting of qualified and non-qualified stock options. The options became exercisable over vesting periods of up to four years and expired no later than 10 years after the date of grant.

     The Company had authorized 113.0 million shares of pre-petition Class A common stock for issuance under the Old Stock Option Plans. In May 2001, the Company offered its employees the opportunity to exchange certain options outstanding under the Old Stock Option Plans for new options equal to 85% of the number of shares tendered. The Company granted the new options on January 17, 2002, the first business day that was six months and one day following the closing of this exchange offer. The exercise price of the new options was the last reported sale price of the pre-petition Class A common stock on the date of that grant, which was $0.14 per share. The new options were 30% vested on the date of grant and the remaining 70% vest monthly in equal installments over the following 36-month period until fully vested. As of December 31, 2002, 44.0 million shares were available for issuance under the Old Stock Option Plans. However, as discussed in note 2 under the Plan of Reorganization, all interests in the Company’s pre-petition Class A common stock including any options or awards granted under the Old Stock Option Plans, were terminated and cancelled as of the Effective Date, and holders of such options under such plans were entitled to no distribution pursuant to the Plan of Reorganization.

     The Company recorded approximately $28.9 million, $37.2 million, and $48.3 million of stock-based compensation expense related to the Old Stock Option Plan for the years ended December 31, 2002, 2001, and 2000, respectively.

F-46

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     The following two tables summarize information regarding options under the Company’s Old Stock Option Plan for the last three years:

					Weighted
		Number of			Average
		Shares			Exercise Price
Outstanding at December 31, 1999			55,203,534		$	9.86
	Assumed in acquisition		13,086,985		$	20.51
	Granted		36,850,732		$	35.17
	Canceled		(12,590,334	)	$	19.52
	Exercised		(11,310,416	)	$	6.63
Outstanding at December 31, 2000			81,240,501		$	22.77
	Granted		5,909,809		$	7.72
	Canceled		(49,163,452	)	$	28.32
	Exercised		(3,677,562	)	$	5.36
Outstanding at December 31, 2001			34,309,296		$	13.91
	Granted		24,978,119		$	0.14
	Canceled		(15,053,582	)	$	9.97
	Exercised		(35,860	)	$	0.01
Outstanding at December 31, 2002			44,197,973		$	7.37
Exercisable, at December 31, 2000			16,369,892		$	11.30
Exercisable, at December 31, 2001			18,902,125		$	12.38
Exercisable, at December 31, 2002			30,350,882		$	8.00

	Options Outstanding
							Options Exercisable
			Weighted
	Options		Average		Weighted		Options		Weighted
	Outstanding		Remaining		Average		Exercisable		Average
	at December 31,		Contractual		Exercise		at December 31,		Exercise
Range of Exercise Prices	2002		Life		Price		2002		Price
$0.01 - $0.16		22,929,528		8.6	$	0.12		13,097,978	$	0.11
$0.25 - $6.25		5,892,586		6.1	$	4.26		4,818,112	$	4.68
$6.28 - $14.06		8,416,102		6.5	$	9.61		7,521,309	$	9.39
$14.25 - $66.00		6,959,757		6.9	$	31.16		4,913,483	$	30.16
		44,197,973		7.6	$	7.37		30,350,882	$	8.00

     The Company uses the Black-Scholes option-pricing model to determine the pro forma effect of using the intrinsic value method rather than the fair value method of accounting for employee stock options. The model uses certain information, such as the interest rate on a risk-free security maturing generally at the same time as the option being valued, and requires certain assumptions, such as the expected amount of time an option will be outstanding until it is exercised or it expires, to calculate the weighted average fair value per share of

F-47

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

stock options granted. This information and the assumptions used for 2002, 2001, and 2000 are summarized below:

	2002			2001			2000
Expected volatility		125.0	%		125.0	%		77.2	%
Risk free interest rate		4.0	%		4.3	%		6.2	%
Dividend yield		0.0	%		0.0	%		0.0	%
Expected life (range in years)		4.0			4.0			4.0
Weighted average fair value per share at grant date	$	0.11		$	5.10		$	19.14

     In connection with the confirmation of the Company’s Plan of Reorganization, the Bankruptcy Court approved the adoption of the XO Communications, Inc. 2002 Stock Incentive Plan (the “2002 Stock Incentive Plan”), as of the Effective Date. Under the 2002 Stock Incentive Plan, the Company is authorized to issue, in the aggregate, stock awards of up to 17.6 million of shares of New Common Stock, in the form of options to purchase stock or restricted stock. Non-qualified options to purchase 11.5 million shares of the New Common Stock have been granted and are outstanding as of March 1, 2003, each at a purchase price of $5.00 per share. Of these options, 25% are vested and the remainder vest over three years.

     The 2002 Stock Incentive Plan is administered by the Compensation Committee of the Company’s Board of Directors, which has the discretionary authority to determine all matters relating to awards of stock options and restricted stock, including the selection of eligible participants, the number of shares of common stock to be subject to each option or restricted stock award, the exercise price of each option, vesting, and all other terms and conditions of awards.

     Unless the Compensation Committee designates otherwise, all options expire on the earlier of (i) ten years after the date of grant, (ii) twelve months after termination of employment with XO due to death or complete and permanent disability, (iii) immediately upon termination of employment by XO for cause, or (iv) three months after termination of employment by the employee or by XO for other than cause.

17.     SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA

     Supplemental disclosure of the Company’s cash flow information is as follows (dollars in thousands):

		Year Ended December 31,
		2002		2001		2000
Non-cash financing and investing activities were as follows:
	Class A common stock, warrants and options issued in acquisitions and under lease arrangements	$	—	$	29,055	$	3,002,309
	Redeemable preferred stock dividends, paid in shares of redeemable preferred stock		—		86,237		76,671
	Accrued redeemable preferred stock dividends, payable in shares of redeemable preferred stock		—		6,524		17,090
	Assumption of preferred stock and liabilities in acquisitions		—		8,816		614,027
	Conversion of 6 1/2% redeemable cumulative preferred stock to Class A common stock		35		17,700		93,860
	Other obligations assumed		—		—		11,119
Cash paid for interest		$	11,681	$	313,178	$	331,892

     As discussed in note 2, the Company ceased paying dividends and interest on its redeemable preferred stock and its senior unsecured notes during 2001 and its subordinated unsecured notes in February 2002.

F-48

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Employee Savings and Retirement Plan

     At December 31, 2002, the Company had a defined contribution plan, generally covering all full time employees in the United States. The Company provides a company match to all eligible employees based on certain plan provisions and the discretion of the Board of Directors. Beginning November 30, 2001, the Company’s pre-petition Class A common stock was no longer available as an investment option due to the Company’s pending reorganization. Effective April 1, 2002, the Company changed its employer matching contribution from a 100% matching contribution up to 5% of the participant’s compensation to a 50% matching contribution up to 5% of the participant’s compensation. Company contributions were $7.0 million, $12.5 million and $8.3 million during 2002, 2001 and 2000, respectively.

18. OPERATING SEGMENTS

Reportable Segments

     The Company operates its business as one communications segment. The Company’s communications segment includes all of its products and services including data, voice, integrated voice and data, and other services. These services have similar network operations and technology requirements and are sold through similar sales channels to a similar targeted customer base. Therefore, the Company manages these services as a single segment that is divided into profit centers that are focused on geographic areas, or markets, within the United States, or that are focused on customers with a presence across geographical markets.

Products and Services

     The Company classifies its products and services revenues offered by its communications services segment into voice services, data services, integrated voice and data services, and other services (dollars in thousands):

	Year Ended December 31,
	2002		2001		2000
Voice services	$	658,453	$	606,848	$	386,796
Data services		472,247		596,664		331,892
Integrated voice and data services		128,048		52,018		2,693
Other services		1,105		3,037		2,445
Total revenue	$	1,259,853	$	1,258,567	$	723,826

19. SELECTED QUARTERLY DATA (Unaudited)

     Quarterly financial information is summarized in the table below (dollars in thousands, except for share data):

	Quarter Ended 2002
	March 31,			June 30,			September 30,			December 31,
Revenue	$	333,405		$	325,480		$	301,526		$	299,442
Cost of service		140,367			134,346			126,215			121,996
Loss from operations(a)(b)		(182,663	)		(176,771	)		(673,001	)		(176,463	)
Net loss before extraordinary item and cumulative effect of accounting change		(299,028	)		(346,133	)		(695,209	)		(169,822	)
Net loss(c)		(2,175,654	)		(346,133	)		(695,209	)		(169,822	)
Net loss applicable to common shares(d)		(2,198,480	)		(286,851	)		(695,209	)		(169,822	)
Net loss per common share (basic and diluted)(e)		(4.97	)		(0.65	)		(1.57	)		(0.39	)

F-49

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Quarter Ended 2001
	March 31,			June 30,			September 30,			December 31,
Revenue	$	277,307		$	306,779		$	331,478		$	343,003
Cost of service		114,894			122,942			138,100			151,762
Loss from operations(a)		(358,248	)		(362,418	)		(547,285	)		(681,940	)
Net loss before extraordinary item		(443,511	)		(461,116	)		(734,655	)		(791,853	)
Net loss(c)		(443,511	)		(461,116	)		(398,917	)		(782,581	)
Net loss applicable to common shares(d)		(482,552	)		(500,722	)		(50,752	)		(804,891	)
Net loss per common share (basic and diluted)(e)		(1.31	)		(1.32	)		(0.12	)		(1.84	)

(a)	In the third quarter of 2002, loss from operations includes a non-cash asset write down totaling $477.3 million resulting from an agreement with Level 3 to amend various agreements relating to the Company’s Level 3 inter-city fiber network facilities. In the second quarter of 2001, loss from operations includes restructuring charges totaling $509.2 million associated with plans to restructure certain aspects of the Company’s business operations.
(b)	Loss from operations in the quarters ended March 31, June 30, and September 30, 2002, respectively, reflects the reclassification of reorganization expense, net to below loss from operations.
(c)	In the first quarter of 2002, net loss includes a $1,876.6 million impairment charge to write-off all of XO’s goodwill as a cumulative effect of accounting change, pursuant to SFAS No. 142. In the third quarter of 2001, net loss includes an extraordinary gain of $345.0 million resulting from the repurchase of certain of XO’s senior notes and a write-down of $87.0 million for an other than temporary decline in the value of certain investments.
(d)	In the second quarter of 2002, net loss applicable to common shares includes a net gain of $78.7 million as XO’s preferred stock was deemed subject to compromise under SOP 90-7 as of the Petition Date, requiring the Company to recognize the remaining $81.5 million unamortized balance of its deferred modification fee and write-off certain issuance costs and discounts.
(e)	The net loss per share data has been calculated based on the shares outstanding of the Company’s pre-petition class A and class B common stock prior to the consummation of its Plan of Reorganization. On the Effective Date of the Company’s Plan of Reorganization, all interests in XO’s pre-petition class A and class B common stock were terminated and all outstanding shares were cancelled. See note 2 for further discussion. The net loss per share data has been adjusted for the stock splits effected in 2000 and in prior periods.

20. RELATED PARTY TRANSACTIONS

     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 the purchase of the building by Dixon, it assumed the existing lease agreement. Pursuant to the assumed lease agreement, XO is obligated to pay $20.4 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, a company controlled by Mr. Icahn, which in turn indirectly controls Cardiff, in connection with the fact that 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.

F-50

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Arnos, which is owned and controlled by Mr. Icahn, holds approximately 85% of the $500 million in loans outstanding under the New Credit Agreement. Under the New Credit Agreement, no cash interest payments are required to be made by the Company until it achieves specified financial targets.

     In July 2001, the Company executed a multi-year agreement with Nextel Communications, Inc. (“Nextel”) pursuant to which XO will provide Nextel telecommunications services. Individuals who served as members of the Company’s board of directors prior to the Effective Date of the Company’s Plan of Reorganization also serve on the board of directors of Nextel. One of these members, Craig O. McCaw, along with his affiliates, held a controlling voting interest in the Company prior to the Effective Date of the Plan of Reorganization and holds certain management rights related to his investment in Nextel. Prior to entering into the agreement with Nextel, the Company participated in a competitive proposal process initiated by Nextel, which included numerous national telecommunications providers. Therefore, in management’s opinion, the agreement with Nextel was consummated in the normal course of operations with prices and terms equivalent to those available to, and transacted with, unrelated parties.

     Prior to the Effective Date of the Company’s Plan of Reorganization, certain investment funds affiliated with Forstmann Little & Co. had a significant equity interest in the Company and had designated certain individuals to serve as members of the Company’s board of directors. Such investment funds and other entities affiliated with Forstmann Little & Co. also hold a significant equity interest in McLeodUSA (“McLeod”). McLeod provides interconnection and facilities based telecommunications services to the Company, and the Company provides, on a limited basis, telecommunications service to McLeod. In addition, during 2001, XO acquired certain unlit metro network capacity from McLeod to support infrastructure requirements in a specific XO market.

     The following table summarizes the Company’s transactions with Nextel and McLeod (dollars in thousands):

	Revenue Recognized				Payments Made
	from Services				for Services
	Provided for the				Received for the
	Year Ended				Year Ended
	December 31,				December 31,
	2002		2001		2002		2001
McLeod	$	373	$	7,112	$	1,953	$	8,410
Nextel	$	66,852	$	27,599	$	2,745	$	6,206

     The following amounts are outstanding as a result of the Company’s transactions (dollars in thousands):

					Accounts
	Accounts				Payable as
	Receivable as of				of December
	December 31,				31,
	2002		2001		2002		2001
McLeod	$	16	$	57	$	20	$	—
Nextel	$	11,219	$	9,732	$	—	$	10

21.     COMMITMENTS AND CONTINGENCIES

Operating Commitments

     The Company is leasing premises under various noncancelable operating leases for administrative space, building access, and other leases, which, in addition to rental payments, require payments for insurance, maintenance, property taxes and other executory costs related to the leases. The lease agreements have various expiration dates and renewal options through 2021. The Company also has various noncancelable long-term contractual obligations associated with maintenance and service agreements.

F-51

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

     Future minimum lease commitments required under noncancelable operating leases and contractual obligations are as follows (dollars in thousands):

	Operating		Other Long-Term
	Lease		Contractual
Year Ending December 31,	Obligations		Obligations
2003	$	62,733	$	74,126
2004		59,045		57,612
2005		55,600		17,574
2006		51,458		14,577
2007		47,334		11,780
Thereafter		232,550		107,277
Total minimum commitments	$	508,720	$	282,946

     Rent expense for cancelable and noncancelable leases totaled approximately $76.4 million, $100.1 million, and $54.6 million for the years ended December 31, 2002, 2001, and 2000, respectively.

     Capital Leases

     Network assets under capital leases totaled approximately $16.3 million and $27.2 million as of December 31, 2002 and 2001, respectively, and are included in telecommunications networks in property and equipment. Depreciation on leased assets of $2.0 million for the year ended December 31, 2002 is included in depreciation expense. Future minimum lease payments under capital lease obligations as of December 31, 2002 are as follows (dollars in thousands):

Year Ending December 31,
2003		$	10,031
2004			2,809
2005			2,668
2006			2,416
2007			1,733
Thereafter			277
Total minimum capital lease payments			19,934
Less: imputed interest			4,123
Less: current portion of capital lease obligations			8,629
	Long-term portion of capital lease obligation	$	7,182

     As of December 31, 2002 both the current portion and long-term portions of the capital lease obligation are classified as subject to compromise, in accordance with SOP 90-7.

     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.

     Prepaid Calling Card Tax Matter

     On July 26, 2002, the Company was advised by the staff of the Securities and Exchange Commission that it was conducting an informal inquiry primarily relating to obligations with respect to, and XO’s accrual of liabilities for, specified federal excise and state sales tax and similar tax obligations arising in connection with

F-52

XO COMMUNICATIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prepaid calling card services and relating to certain other matters. Sales from prepaid calling card services that are potentially subject to these taxes accounted for approximately $56 million of total revenues for 1999, when the Company began providing these services, through June 30, 2002. The Company believes that its accounting for these potential obligations is appropriate and that its accruals of liabilities relating to these obligations are adequate.

     Unfunded Affiliate Pension Obligation

     As discussed in note 2, 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) 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.

     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.

22.     SUBSEQUENT EVENT

     Effectiveness of Bankruptcy Plan

     The Plan of Reorganization that was confirmed by order of the Bankruptcy Court on November 15, 2002 became effective January 16, 2003, and is discussed in more detail in note 2.

F-53

XO COMMUNICATIONS, INC.

SCHEDULE II — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

For The Years Ended December 31, 2002, 2001 and 2000

				Additions
		Beginning		Charged to					Ending
		Balance		Expense		Reductions			Balance
		(In thousands)
Allowance for doubtful accounts
	2000	$	7,215	$	21,999	$	(8,215	)	$	20,999
	2001	$	20,999	$	45,757	$	(34,264	)	$	32,492
	2002	$	32,492	$	53,631	$	(49,093	)	$	37,030
Restructuring accrual
	2000	$	30,935	$	—	$	(30,935	)	$	—
	2001(a)	$	—	$	509,202	$	(383,429	)	$	125,773
	2002(b)	$	125,773	$	480,168	$	(526,951	)	$	78,990

(a)	Only $16.6 million of the reduction in the 2001 restructuring accrual was for cash payments. The balance was associated with the write down for the excess of carrying value of assets to be sold or abandoned and was applied to those assets.
(b)	Only $49.7 million of the reduction in 2002 restructuring accrual was for cash payments. The balance was associated with the non-cash asset write down resulting from an agreement with Level 3 to amend various agreements relating to XO’s Level 3 inter-city fiber network facilities.

F-54

XO Communications, Inc.

Rights Offering

43,333,333 Shares of Common Stock, $0.01 par value

Exercise Price $5.00 per share

PROSPECTUS

Dated [                    ], 2003

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

Securities and Exchange Commission Registration Fee		$	17,528.33
Printing Expenses		$	300,000.00
Accounting Fees and Expenses		$	[        ]
Legal Fees and Expenses		$	185,000.00
Rights Agent’s, Information Agent’s and Registrar’s Fees and Expenses		$	50,000.00
Miscellaneous Expenses		$	—
	Total	$

Item 14. Indemnification of Directors and Officers.

     XO Communications, Inc., or XO Parent, is a Delaware corporation. In its Certificate of Incorporation, XO Parent has adopted the provisions of Section 102(b)(7) of the Delaware General Corporation Law (the “Delaware Law”), which enables a corporation in its original certificate of incorporation or an amendment thereto to eliminate or limit the personal liability of a director for monetary damages for breach of the director’s fiduciary duty, except (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the Delaware Law (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction from which a director will personally receive a benefit in money, property or services to which the director is not legally entitled.

     XO Parent also has adopted indemnification provisions pursuant to Section 145 of the Delaware Law, which provides that a corporation may indemnify any person who is or was a party to any actual or threatened legal action, whether criminal, civil, administrative or investigative, by reason of the fact that the person is or was an officer, director or agent of the corporation, or is or was serving at the request of the corporation as a director, officer or agent of another corporation, partnership or other enterprise, against expenses (including attorney’s fees), judgments, fines and settlement payments reasonably and actually incurred by him or her in connection with such proceeding, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe was unlawful, except that, with respect to any legal action by or in the right of the corporation itself, an officer, director or agent of the corporation is entitled to indemnification only for expenses (including attorney’s fees) reasonably and actually incurred, and is not entitled to indemnification in respect of any claim, issue or matter as to which he or she is found liable to the corporation, unless the court determines otherwise.

     XO Management Services, Inc., a subsidiary of XO Parent entered into indemnification agreements with certain the then-existing directors and officers of XO Parent as of July 14, 2002 to indemnify them for claims against them arising from their employment by XO Parent, and for payment of related costs and expenses. Although XO Parent originally planned to provide customary “tail” insurance coverage to supplement these indemnification provisions, after reviewing the costs of insurance in the marketplace, XO Parent and its senior secured lenders determined that comparable benefits could be provided at sharply reduced costs by placing $25 million of XO Parent’s cash on hand into escrow as security for XO Parent’s existing indemnification obligations, in lieu of purchasing third party coverage. The Escrow Agreement, dated January 15, 2003, by and among XO Communications, Inc., XO Management Services, Inc. and U.S. Bank Trust National Association, as escrow agent, implements this decision, and provides a mechanism for review and payment of appropriate claims. The Escrow Agreement does not change any of existing indemnification rights referred to above, but merely provides funds to secure their payment.

II-1

     Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

Item 15.     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 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.

     (c) Subscription Rights with basic subscription privileges and oversubscription privileges in this Rights Offering to holders of our pre-petition senior notes and general unsecured creditors in exchange for their claims.

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.

     Under the Plan of Reorganization we also issued Subscription Rights with oversubscription privileges in the Rights Offering to holders of our pre-petition subordinated notes, pre-petition preferred stock and pre-petition common stock. These Subscription Rights were issued for no consideration and therefore are exempt from registration under the Securities Act under the no sale doctrine.

Item 16.  Exhibits and Financial Statement Schedules

2.1	Third Amended Plan of Reorganization of XO Communications, Inc., dated July 22, 2002 (Incorporated herein by reference to exhibit 2.1 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
2.2	Plan Supplement, dated October 23, 3003, to the Third Amended Plan of Reorganization of XO Communications, Inc., dated July 22, 2002 (Incorporated herein by reference to exhibit 2.2 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
2.3	Order Confirming Third Amended Plan of Reorganization, dated November 15, 2002 (Incorporated herein by reference to exhibit 99.1 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
3.1	Amended and Restated Certificate of Incorporation of XO Communications, Inc. (Incorporated herein by reference to exhibit 3.1 filed with the Registration Statement on Form 8-A of XO Communications, Inc., filed on February 7, 2003, pursuant to the Securities Exchange Act)
3.2	Amended and Restated By-laws of XO Communications, Inc. (Incorporated herein by reference to exhibit 3.2 filed with the Registration Statement on Form 8-A of XO Communications, Inc., filed on February 7, 2003, pursuant to the Securities Exchange Act)
4.1	Form of stock certificate of New Common Stock (Incorporated herein by reference to exhibit 4.1 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
4.2.1	Series A Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.1 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)

II-2

4.2.2	Series B Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.2 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
4.2.3	Series C Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.3 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
5.1†	Opinion of Willkie Farr & Gallagher
5.2†	Tax Opinion of Willkie Farr & Gallagher
10.1.1	XO Communications, Inc. 2002 Stock Incentive Plan (Incorporated herein by reference to exhibit 10.1.1 filed with the Annual Report for the year ended December 31, 2002 on Form 10-K of XO Communications, Inc.)
10.1.2	XO Communications, Inc. Retention Bonus and Incentive Plan (Incorporated herein by reference to exhibit 10.2.1 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
10.2.1	Registration Rights Agreement, dated as of January 16, 2003, between XO Communications, Inc. and High River Limited Partnership and Meadow Walk Limited Partnership (Incorporated herein by reference to exhibit 10.4 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
10.2.2	Tax Allocation Agreement, dated as of January 16, 2003, between XO Communications, Inc. and Starfire Holding Corporation (Incorporated herein by reference to exhibit 10.5 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
10.3.1	Employment Term Sheet between XO Communications, Inc. and Carl J. Grivner (Incorporated herein by reference to exhibit 10.1 filed with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 of XO Communications, Inc.)
10.3.2	Change of Control Agreement, dated April 25, 2003, by and between XO Communications, Inc. and Carl J. Grivner (Incorporated herein by reference to exhibit 10.2 filed with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 of XO Communications, Inc.)
10.3.3	Employment Agreement, dated as of January 3, 2000, by and between Nathaniel A. Davis and NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc.) (Incorporated herein by reference to exhibit 10.11 filed with the Annual Report on Form 10-K for the year ended December 31, 1999 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)
10.3.4	Letter agreement, dated December 17, 2002, by and among Communications Consultants, Inc., XO Communications, Inc., Eagle River Investments, L.L.C. and R. Gerard Salemme (Incorporated herein by reference to exhibit 10.3.2 filed with the Annual Report of Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
10.3.5	Employment Agreement, dated as of January 13, 2000, by and between Michael S. Ruley and XO Communications, Inc. (Incorporated herein by reference to exhibit 10.3.3 filed with the Annual Report on Form 10-K for the year ended December 31, 2001 of XO Communications, Inc.)
10.4.1	Cost Sharing and IRU Agreement, dated July 18, 1998, between Level 3 Communications, LLC and XO Intercity Holdings No. 2, LLC (f/k/a INTERNEXT LLC) (Incorporated herein by reference to exhibit 10.8 filed with the quarterly report on Form 10-Q for the quarterly period ended September 30, 1998 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)
10.4.2	Master Agreement, dated August 8, 2002, between Level 3 Communications, Inc. and XO Communications, Inc. (Incorporated herein by reference to exhibit 10.4.1 filed with the Annual Report on Form 10-K of XO Communications, Inc., filed on March 21, 2003)
10.5	Amended and Restated Credit and Guaranty Agreement, dated as of January 16, 2003, among XO Communications, Inc., certain subsidiaries of XO Communications, Inc., the Lenders party thereto from time to time, and Mizuho Corporate Bank, as Administrative Agent (Incorporated herein by reference to exhibit 10.5 filed with the Annual Report on Form 10-K of XO Communications, Inc., filed on March 21, 2003)
10.6*	Form of Rights Certificate

II-3

16	Letter from Arthur Andersen LLP to the Securities and Exchange Commission, dated May 15, 2002 (Incorporated herein by reference to exhibit 16 filed with the Current Report on Form 8-K of XO Communications Inc. filed on May 16, 2002)
21	Subsidiaries of the Registrant (Incorporated herein by reference to exhibit 21 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
23.1*	Consent of Ernst & Young LLP, independent auditors
23.2*	Notice Regarding Lack of Consent of Arthur Andersen
24.1*	Power of Attorney (See p. II-  of this Registration Statement)
99.1*	Form of Letter of Instructions from Nominee Holders to Beneficial Owners

*  Filed herewith.

†  To be filed by amendment.

Item 17. Undertakings.

     (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 or the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the indemnification provisions described herein, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

     (b)     The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period of the Rights Offering, to set forth the results of the Rights Offering and the terms of any subsequent reoffering thereof. If any public offering by an underwriter is to be made on terms differing from those set forth on the cover page of this prospectus, a post-effective amendment will be filed to set forth the terms of such offering.

II-4

SIGNATURES

     Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Reston and State of Virginia, on the 22nd day of July, 2003.

XO COMMUNICATIONS, INC.

By:  /s/  WAYNE M. REHBERGER

Name: Wayne M. Rehberger

Title:  Executive Vice President,
Chief Financial Officer

POWER OF ATTORNEY

     We, the undersigned officers and directors of XO Communications, Inc., hereby severally and individually constitute and appoint Wayne M. Rehberger, Noelle N. Beams, Kathy Isaac and Lee Wiener, and each of them, as true and lawful attorneys-in-fact for the undersigned, in any and all capacities, with full power of substitution, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact, or either of them, may lawfully do or cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below on the 22nd day of July, 2003 by the following persons on behalf of the Registrant and in the capacities indicated:

Name	Title
/s/ CARL J. GRIVNER Carl J. Grivner	Chief Executive Officer, President and Director (Principal Executive Officer)
/s/ WAYNE M. REHBERGER Wayne M. Rehberger	Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
/s/ CARL C. ICAHN Carl C. Icahn	Chairman of the Board of Directors
/s/ ANDREW R. COHEN Andrew R. Cohen	Director

II-5

Name	Title
/s/ ADAM DELL Adam Dell	Director
/s/ VINCENT J. INTRIERI Vincent J. Intrieri	Director
/s/ KEITH MEISTER Keith Meister	Director

II-6

EXHIBIT INDEX

2.1	Third Amended Plan of Reorganization of XO Communications, Inc., dated July 22, 2002 (Incorporated herein by reference to exhibit 2.1 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
2.2	Plan Supplement, dated October 23, 3003, to the Third Amended Plan of Reorganization of XO Communications, Inc., dated July 22, 2002 (Incorporated herein by reference to exhibit 2.2 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
2.3	Order Confirming Third Amended Plan of Reorganization, dated November 15, 2002 (Incorporated herein by reference to exhibit 99.1 filed with the Current Report on Form 8-K/ A of XO Communications, Inc., filed on November 26, 2002)
3.1	Amended and Restated Certificate of Incorporation of XO Communications, Inc. (Incorporated herein by reference to exhibit 3.1 filed with the Registration Statement on Form 8-A of XO Communications, Inc., filed on February 7, 2003, pursuant to the Securities Exchange Act)
3.2	Amended and Restated By-laws of XO Communications, Inc. (Incorporated herein by reference to exhibit 3.2 filed with the Registration Statement on Form 8-A of XO Communications, Inc., filed on February 7, 2003, pursuant to the Securities Exchange Act)
4.1	Form of stock certificate of New Common Stock (Incorporated herein by reference to exhibit 4.1 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
4.2.1	Series A Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.1 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
4.2.2	Series B Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.2 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
4.2.3	Series C Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (Incorporated herein by reference to exhibit 10.3 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
5.1†	Opinion of Willkie Farr & Gallagher
5.2†	Tax Opinion of Willkie Farr & Gallagher
10.1.1	XO Communications, Inc. 2002 Stock Incentive Plan (Incorporated herein by reference to exhibit 10.1.1 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
10.1.2	XO Communications, Inc. Retention Bonus and Incentive Plan (Incorporated herein by reference to exhibit 10.2.1 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
10.2.1	Registration Rights Agreement, dated as of January 16, 2003, between XO Communications, Inc. and High River Limited Partnership and Meadow Walk Limited Partnership (Incorporated herein by reference to exhibit 10.4 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
10.2.2	Tax Allocation Agreement, dated as of January 16, 2003, between XO Communications, Inc. and Starfire Holding Corporation (Incorporated herein by reference to exhibit 10.5 filed with the Current Report on Form 8-K of XO Communications, Inc., filed on January 30, 2003)
10.3.1	Employment Term Sheet between XO Communications, Inc. and Carl J. Grivner (Incorporated herein by reference to exhibit 10.1 filed with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 of XO Communications, Inc.)
10.3.2	Change of Control Agreement, dated April 25, 2003, by and between XO Communications, Inc. and Carl J. Grivner (Incorporated herein by reference to exhibit 10.2 filed with the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 of XO Communications, Inc.)

10.3.3	Employment Agreement, dated as of January 3, 2000, by and between Nathaniel A. Davis and NEXTLINK Communications, Inc. (predecessor to XO Communications, Inc.) (Incorporated herein by reference to exhibit 10.11 filed with the Annual Report on Form 10-K for the year ended December 31, 1999 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)
10.3.4	Letter agreement, dated December 17, 2002, by and among Communications Consultants, Inc., XO Communications, Inc., Eagle River Investments, L.L.C. and R. Gerard Salemme (Incorporated herein by reference to exhibit 10.3.2 filed with the Annual Report of Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
10.3.5	Employment Agreement, dated as of January 13, 2000, by and between Michael S. Ruley and XO Communications, Inc. (Incorporated herein by reference to exhibit 10.3.3 filed with the Annual Report on Form 10-K for the year ended December 31, 2001 of XO Communications, Inc.)
10.4.1	Cost Sharing and IRU Agreement, dated July 18, 1998, between Level 3 Communications, LLC and XO Intercity Holdings No. 2, LLC (f/k/a INTERNEXT LLC) (Incorporated herein by reference to exhibit 10.8 filed with the quarterly report on Form 10-Q for the quarterly period ended September 30, 1998 of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.)
10.4.2	Master Agreement, dated August 8, 2002, between Level 3 Communications, Inc. and XO Communications, Inc. (Incorporated herein by reference to exhibit 10.4.1 filed with the Annual Report on Form 10-K of XO Communications, Inc., filed on March 21, 2003)
10.5	Amended and Restated Credit and Guaranty Agreement, dated as of January 16, 2003, among XO Communications, Inc., certain subsidiaries of XO Communications, Inc., the Lenders party thereto from time to time, and Mizuho Corporate Bank, as Administrative Agent (Incorporated herein by reference to exhibit 10.5 filed with the Annual Report on Form 10-K of XO Communications, Inc., filed on March 21, 2003)
10.6*	Form of Rights Certificate
16	Letter from Arthur Andersen LLP to the Securities and Exchange Commission, dated May 15, 2002 (Incorporated herein by reference to exhibit 16 filed with the Current Report on Form 8-K of XO Communications Inc. filed on May 16, 2002)
21	Subsidiaries of the Registrant (Incorporated herein by reference to exhibit 21 filed with the Annual Report on Form 10-K for the year ended December 31, 2002 of XO Communications, Inc.)
23.1*	Consent of Ernst & Young LLP, independent auditors
23.2*	Notice Regarding Lack of Consent of Arthur Andersen
24.1*	Power of Attorney (See p. II-  of this Registration Statement)
99.1*	Form of Letter of Instructions from Nominee Holders to Beneficial Owners

*  Filed herewith.

†  To be filed by amendment.