10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

Commission File Number: 0-30900

XO HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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

13865 Sunrise Valley Drive
Herndon, Virginia 20171
(Address of principal executive offices, including zip code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months.
Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o  Accelerated filer þ  Non-accelerated filer   o
(Do not check if a smaller reporting company) Smaller reporting company o 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of common stock outstanding as of August 5, 2009 was 182,075,035.

XO HOLDINGS, INC.
Table of Contents

		Page
PART I — FINANCIAL INFORMATION
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Cash Flows		3
	Notes to Condensed Consolidated Financial Statements		4
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		27
ITEM 4.	Controls and Procedures		28
PART II — OTHER INFORMATION
ITEM 1.	Legal Proceedings		29
ITEM 1A.	Risk Factors		30
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
ITEM 3.	Defaults Upon Senior Securities		30
ITEM 4.	Submission of Matters to a Vote of Security Holders		31
ITEM 5.	Other Information		31
ITEM 6.	Exhibits		31
EX-10.3
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

XO Holdings, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except per share data)

	June 30, 2009			December 31, 2008
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	281,885		$	256,747
Marketable securities		115,129			117,148
Accounts receivable, net of allowance for doubtful accounts of $8,975 and $9,727, respectively		139,122			152,622
Prepaid expenses and other current assets		42,410			41,200
Total current assets		578,546			567,717
Property and equipment, net		724,426			724,404
Intangible assets, net		45,233			53,515
Other assets		40,774			30,348
Total Assets	$	1,388,979		$	1,375,984
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable	$	91,311		$	93,547
Accrued liabilities		199,088			221,356
Total current liabilities		290,399			314,903
Deferred revenue, less current portion		47,937			29,715
Other liabilities		47,333			55,215
Total Liabilities		385,669			399,833
Class A convertible preferred stock		267,860			259,948
Class B convertible preferred stock		593,997			573,795
Class C perpetual preferred stock		212,147			200,877
Commitments and contingencies
Stockholders’ Deficit
Preferred stock: par value $0.01 per share, 200,000 shares authorized; 4,000 shares of Class A convertible preferred stock issued and outstanding; 555 shares of Class B convertible preferred stock issued and outstanding; 225 shares of Class C perpetual preferred stock issued and outstanding		—			—
Warrants, common stock and additional paid in capital: par value $0.01 per share, 1,000,000 shares authorized; 182,075 shares issued and outstanding		902,307			941,270
Accumulated other comprehensive income (loss)		32,355			(4,844	)
Accumulated deficit		(1,005,356	)		(994,895	)
Total Stockholders’ Deficit		(70,694	)		(58,469	)
Total Liabilities, Redeemable Preferred Stock and Stockholders’ Deficit	$	1,388,979		$	1,375,984

See accompanying notes to the unaudited condensed consolidated financial statements.

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XO Holdings, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except per share data)

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Revenue	$	385,624		$	367,370		$	763,448		$	728,519
Costs and expenses
Cost of service (exclusive of depreciation and amortization)		229,565			213,272			449,569			441,615
Selling, general and administrative		119,122			127,770			249,085			255,569
Depreciation and amortization		42,910			47,139			86,306			92,668
Impairment of LMDS licenses		8,282			—			8,282			—
Loss (gain) on disposal of assets		2,562			(878	)		4,077			(832	)
Total costs and expenses		402,441			387,303			797,319			789,020
Loss from operations		(16,817	)		(19,933	)		(33,871	)		(60,501	)
Interest income		3,554			801			7,461			1,678
Investment gain (loss), net		8,262			(15	)		18,020			4,106
Interest expense, net		(475	)		(9,513	)		(1,261	)		(18,264	)
Other income		—			1			—			251
Net loss before income taxes		(5,476	)		(28,659	)		(9,651	)		(72,730	)
Income tax expense		(518	)		(342	)		(810	)		(684	)
Net loss		(5,994	)		(29,001	)		(10,461	)		(73,414	)
Preferred stock accretion		(19,874	)		(3,756	)		(39,383	)		(7,457	)
Net loss allocable to common shareholders	$	(25,868	)	$	(32,757	)	$	(49,844	)	$	(80,871	)
Net loss allocable to common shareholders per common share, basic and diluted	$	(0.14	)	$	(0.18	)	$	(0.27	)	$	(0.44	)
Weighted average shares, basic and diluted		182,075			182,075			182,075			182,075

See accompanying notes to the unaudited condensed consolidated financial statements.

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XO Holdings, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

	Six Months Ended June 30,
	2009			2008
OPERATING ACTIVITIES:
Net loss	$	(10,461	)	$	(73,414	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization		86,306			92,668
Accrued interest converted to long term debt		—			18,289
Provision for doubtful accounts		8,449			6,282
Stock-based compensation		421			897
Gain from investments		(18,020	)		(4,106	)
Impairment of LMDS licenses		8,282			—
Loss (gain) on disposal of assets		4,077			(832	)
Changes in assets and liabilities
Accounts receivable		5,052			(9,166	)
Other assets		(11,636	)		(16,690	)
Accounts payable		(1,069	)		17,063
Accrued liabilities		(9,967	)		(28,553	)
Net cash provided by operating activities		61,434			2,438
INVESTING ACTIVITIES:
Capital expenditures		(91,720	)		(118,524	)
Proceeds from fixed asset sales		150			1,574
Proceeds from the sale of available-for-sale marketable securties		57,238			132
Net cash used in investing activities		(34,332	)		(116,818	)
FINANCING ACTIVITIES:
Proceeds from issuance of related party note		—			75,000
Financing costs		—			(1,007	)
Payments on capital leases		(1,964	)		(2,104	)
Net cash (used in) provided by financing activities		(1,964	)		71,889
Net increase (decrease) in cash and cash equivalents		25,138			(42,491	)
Cash and cash equivalents, beginning of period		256,747			108,075
Cash and cash equivalents, end of period	$	281,885		$	65,584
SUPPLEMENTAL DATA:
Cash paid for interest	$	695		$	539
Cash paid for income taxes	$	993		$	854

See accompanying notes to the unaudited condensed consolidated financial statements.

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XO Holdings, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Organization

XO Holdings, Inc., together with its consolidated subsidiaries (“XOH” or the “Company”), is a leading facilities-based, competitive telecommunications services provider that delivers a comprehensive array of telecommunications services to the telecommunications provider, business and government markets. The Company uses its nationwide internet protocol (“IP”) network, extensive local metropolitan networks and broadband wireless facilities to offer a broad portfolio of services. Core services include products using next generation IP technologies and transport services and include Broadband services and Integrated/Voice services. Legacy/TDM services are primarily deployed using TDM and circuit switched voice technologies such as voice services and managed IP, data and end-to-end communications solutions.

b. Basis of Presentation

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual consolidated financial statements prepared according to U. S. generally accepted accounting principles (“GAAP”) have been condensed or omitted, although the Company believes the disclosures are adequate to prevent the information presented from being misleading. As a result, the accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2008 (the “2008 Annual Report”). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring entries) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Operating results for any interim period are not necessarily indicative of results that may be expected for any subsequent interim period or for the year ended December 31, 2009.

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 transactions among consolidated entities have been eliminated.

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ materially from these estimates. Management’s estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Significant items subject to such estimates and assumptions include: estimated customer life related to revenue recognition; estimated collection of accounts receivable; accrued balances and disputed amounts payable for cost of service provided by other telecommunication carriers; liability estimates related to loss contingencies,

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asset retirement obligations and accruals for underutilized space; estimated useful lives and recoverability of long-lived fixed assets and intangible assets; and valuation of preferred stock.

c. Transaction-Based Taxes and Other Surcharges

The Company records certain transaction-based taxes and other surcharges on a gross basis. For both the three months ended June 30, 2009 and 2008, revenue and expenses included taxes and surcharges of $3.4 million. For the six months ended June 30, 2009 and 2008, revenue and expenses included taxes and surcharges of $6.9 million and $7.4 million, respectively.

d. New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard will not have a material impact on our financial statements.

In April 2009, the FASB issued FASB Staff Position (“FSP”) 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB 28, Interim Financial Reporting, to require these disclosures in summarized interim periods. The Company adopted the provisions of FSP 107-1 as of June 30, 2009. The adoption of FSP 107-1 did not affect the amount of any of the Company’s financial statement line items. See Note 4 for information related to the fair value of XOH’s financial instruments.

In April 2009, the FASB issued FSP 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and modifies the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Additionally, FSP 115-2 requires all disclosures required by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, on a quarterly basis. The Company adopted the provisions of FSP 115-2 as of June 30, 2009. The adoption of FSP FAS 115-2 did not affect the amount of any of the Company’s financial statement line items. The expanded disclosures required by FSP 115-2 are included in Note 5.

e. Reclassifications

Certain prior period amounts have been reclassified to conform to current period presentation.

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2. COMPREHENSIVE LOSS

Comprehensive loss includes the Company’s net loss, as well as net unrealized gains and losses on available-for-sale investments. The following table summarizes the Company’s calculation of comprehensive loss (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2009			2008			2009			2008
Net loss	$	(5,994	)	$	(29,001	)	$	(10,461	)	$	(73,414	)
Other comprehensive income:
Net unrealized gain (loss) on investments		22,817			(319	)		37,199			(2,255	)
Comprehensive income (loss)	$	16,823		$	(29,320	)	$	26,738		$	(75,669	)

3. PRIOR PERIOD ADJUSTMENTS

In the first quarter of 2008, the Company determined that during each year between 2003 and 2006, it had incorrectly recorded certain payments for taxes due to various state and local jurisdictions. In certain cases taxes were overpaid and in other cases taxes were recorded as a reduction in liabilities rather than current expense. The Company concluded that the effects of the errors were not material to any of the affected years and recorded the correction in operating expenses and current assets and liabilities in March 2008. As a result, the Company’s loss from operations and net loss was increased by $4.1 million, or $0.02 per basic and diluted share, for the six months ended June 30, 2008.

In the fourth quarter of 2008, the Company determined that during each period between 2004 and the third quarter of 2008, it had incorrectly calculated the net present value for its underutilized operating leases. As a result, the Company’s underutilized operating lease liability was understated by $9.3 million as of June 30, 2008. Net loss was overstated by $0.7 million for the three months ended June 30, 2008 and understated by $0.8 million for the six months ended June 30, 2008. The Company recorded an immaterial prior period adjustment in December 2008 resulting in the revised amounts below (in thousands, except per share data):

	Three Months Ended						Six Months Ended
	June 30, 2008						June 30, 2008
	Prior			Adjusted			Prior			Adjusted
Underutilized operating lease liability	$	16,325		$	25,654		$	16,325		$	25,654
Selling, general and administrative	$	128,446		$	127,770		$	254,771		$	255,569
Net loss	$	(29,677	)	$	(29,001	)	$	(72,616	)	$	(73,414	)
Accumulated deficit-beginning	$	(911,080	)	$	(919,614	)	$	(911,080	)	$	(919,614	)
Net loss allocable to common shareholders per common share, basic and diluted	$	(0.18	)	$	(0.18	)	$	(0.44	)	$	(0.44	)

4. FAIR VALUE MEASUREMENTS

The carrying amounts reported in our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other liabilities approximate fair value due to the immediate to short-term maturity of these financial

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instruments. The estimated fair values of our marketable securities at June 30, 2009 have been calculated based upon available market information and are as follows (in thousands):

	Quoted Prices in
	Active Markets
	(Level 1)
Available-for-sale marketable securities
Equity securities	$	19,214
Corporate debt securities		95,915
Total marketable securities	$	115,129

The following are the major categories of assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2009, (in thousands):

	Significant		Total Losses
	Unobservable		for the Six
	Inputs		Months Ended
	(Level 3)		June 30, 2009
LMDS licenses	$	27,500	$	(8,282	)

As a result of integrating the Company’s Nextlink segment into its existing product offerings, the Company performed an impairment evaluation of its LMDS licenses as of June 30, 2009. The Company determined that the fair value of the LMDS licenses were less than their carrying value. In accordance with the provisions of SFAS 142, Goodwill and Other Intangible Assets, LMDS licenses with a carrying amount of $35.8 million were written down to their fair value of $27.5 million, resulting in an impairment charge of $8.3 million, which was included in net loss for the period. The fair value of the licenses was determined using a discounted cash flow model. Cash flow projections and assumptions are based on a combination of the Company’s historical performance and trends, the Company’s business plans and management’s estimate of future performance. Other assumptions include the discount rate, costs to build and operate the network and the Company’s projected growth rate.

The Company’s principal concentration of credit risk is accounts receivable. As of June 30, 2009, there were no individual customers who accounted for more than ten percent of the Company’s total trade receivables. Although the Company’s accounts receivable are geographically dispersed and include numerous customers in many different industries, the receivables from other telecommunications service providers represented 33.6% of our consolidated receivables as of June 30, 2009. XOH generally does not require collateral to secure its receivable balances.

5. MARKETABLE SECURITIES

The Company’s marketable securities consist of equity securities and corporate debt securities classified as available-for-sale, which are stated at estimated fair value. Unrealized gains and losses are computed on the basis of average cost and are reported as a separate component of accumulated other comprehensive income (loss) in shareholders’ equity until realized.

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A summary of available-for-sale investments is as follows (in thousands):

			Gross Unrealized
	Cost		Gains		Losses			Fair Value
June 30, 2009
Equity Securities	$	10,309	$	8,905	$	—		$	19,214
Corporate Debt Securities		72,465		23,450		—			95,915
Total	$	82,774	$	32,355	$	—		$	115,129
December 31, 2008
Equity Securities	$	10,632	$	—	$	—		$	10,632
Corporate Debt Securities		111,360		1,835		(6,679	)		106,516
Total	$	121,992	$	1,835	$	(6,679	)	$	117,148

At June 30, 2009, the corporate debt securities have contractual maturities of six years.

Proceeds from sales of marketable securities totaled $22.0 million and $51.4 million for the three and six months ended June 30, 2009, respectively. The gross realized gains related to sales of marketable securities were $7.8 million and $11.7 million for the three and six months ended June 30, 2009, respectively. The amount of gains reclassified out of accumulated other comprehensive income into earnings for the three and six months ended June 30, 2009 were $4.6 million and $5.5 million, respectively. There were no gross realized losses related to sales of marketable securities for the three or six months ended June 30, 2009. Proceeds from sales of marketable securities totaled $0.1 million for the three and six months ended June 30, 2008. There were no gross realized gains related to sales of marketable securities for the three or six months ended June 30, 2008. The gross realized losses related to sales of marketable securities were insignificant for the three and six months ended June 30, 2008.

There was no impairment of marketable securities recorded for the three or six months ended June 30, 2009. Impairments of marketable securities for other-than-temporary declines in fair market value were zero and $0.2 million for the three and six months ended June 30, 2008, respectively.

There were no marketable securities with unrealized losses as of June 30, 2009. A summary of marketable securities with unrealized losses as of December 31, 2008, aggregated by the length of time that investments have been in a continuous unrealized loss position is as follows (in thousands):

	Less than Twelve Months
			Gross
	Estimated		Unrealized
	Fair Value		Losses
Corporate Debt Securities	$	65,786	$	(6,679	)

The Company recognized net investment gains of $8.3 million and $18.0 million for the three and six months ended June 30, 2009, respectively. Net investment gains for the three months ended June 30, 2009 principally resulted from realized gains from the sale of available-for-sale

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securities. For the six months ended June 30, 2009, net investment gains principally resulted from $11.7 million of realized gains from the sale of available-for-sale marketable securities and the receipt of a $5.8 million distribution related to a legal matter regarding the Company’s holding of certain debt securities.

The Company’s net investment gains for the six months ended June 30, 2008 principally resulted from a $4.4 million gain from the conversion of a non-publicly traded investment recorded as a non-current asset to a publicly-traded available-for-sale security.

6. PROPERTY AND EQUIPMENT

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

	June 30, 2009			December 31, 2008
Telecommunications networks and acquired bandwith	$	1,291,025		$	1,211,894
Furniture, fixtures, equipment and other		388,231			371,561
		1,679,256			1,583,455
Less: accumulated depreciation		(1,021,480	)		(931,607	)
		657,776			651,848
Construction-in-progress, parts and equipment		66,650			72,556
Property and equipment, net	$	724,426		$	724,404

Depreciation and amortization expense was $42.9 million and $47.1 million for the three months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008, depreciation and amortization expense was $86.3 million and $92.7 million, respectively. Assets classified as construction-in-progress, parts and equipment are not being depreciated as they have not yet been placed in service. During the three months ended June 30, 2009 and 2008, the Company capitalized interest on construction costs of $0.4 million and $0.6 million, respectively. During the six months ended June 30, 2009 and 2008, the Company capitalized interest on construction costs of $0.9 million and $1.3 million, respectively.

7. EARNINGS (LOSS) PER SHARE

Net loss per common share, basic is computed by dividing net loss allocable to common shareholders by the weighted average common shares outstanding during the period. Net loss per common share, diluted is calculated by dividing net loss allocable to common shareholders by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options, warrants and preferred stock. In periods where the assumed common share equivalents for stock options, warrants and preferred stock are anti-dilutive, they are excluded from the calculation of diluted weighted average shares.

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The table below details the anti-dilutive items that were excluded in the computation of net loss per common share, diluted for the three and six months ended June 30, (in millions):

	2009		2008
Stock options		8.2		9.7
Warrants		23.7		23.7
Class A preferred stock		58.0		54.6
Class B convertible preferred stock		394.9		—

8. INCOME TAXES

The provision for income taxes for the three and six months ended June 30, 2009 of $0.5 million and $0.8 million, respectively, and $0.3 million and $0.7 million, respectively, for the three and six months ended June 30, 2008, are for current taxes. Of the $0.8 million provision for income taxes recorded in the six months ended June 30, 2009, $0.2 million relates to provision for foreign income taxes. The Company has a full valuation against its operating loss and net deferred tax assets. The current provision for income taxes consists primarily of the Texas Gross Margin Tax, Michigan Modified Gross Receipts Tax, Foreign Income Tax and interest on certain state income tax positions.

Open Tax Years

The statutes of limitation for the Company’s U.S. federal income tax return and certain state income tax returns including California, New Jersey, Texas, and Virginia remain open for the tax years 2005 through 2008.

9. RELATED PARTY TRANSACTIONS

Various entities controlled by Carl C. Icahn, the Chairman of the Company’s Board of Directors and the Company’s majority stockholder (the “Chairman”), hold the following interests in the Company:

	At June 30, 2009 1			At December 31, 2008 2
Outstanding Common Stock	Greater than 50%			Greater than 50%
Series A, B and C Warrants	Greater than 40%			Greater than 40%
Class A Preferred Stock 3	Greater than 70%			Greater than 70%
Class B Convertible Preferred Stock		100	%		100	%
Class C Perpetual Preferred Stock		100	%		100	%

1	As reported in the July 1, 2009 Form 4 for the Chairman and other parties to such joint filing, and the July 1, 2009 Amendment No. 18 to Schedule 13D filed by the Chairman and other parties to such joint filing.
2	As reported in the January 5, 2009 Form 4 for the Chairman and other parties to such joint filing, and the January 5, 2009 Amendment No. 15 to Schedule 13D filed by the Chairman and other parties to such joint filing.
3	The terms of the Company’s Class A preferred stock provide that on January 15, 2010, the Company redeem in cash and in a manner provided for therein all of the shares of Class A preferred stock then outstanding at a redemption price equal to 100% of its liquidation preference. On February 5, 2009, ACF Industries Holding Corp. (“ACF Holding”), an affiliate of the Chairman, agreed to extend the date on which the Company would be required to redeem the shares of Class A preferred stock held by ACF Holding from January 15, 2010 to a date no later than April 15, 2010. ACF Holding is the record holder of 3,096,549 shares of Class A preferred stock (the “ACF Holding Shares”) which represent 77.4% of the outstanding shares of the Class A preferred stock as of June 30, 2009 (83.8% after giving effect to the July 9, 2009 repurchase of 304,314 shares of Class A preferred stock discussed in Note 12). The extension will not affect the redemption date of any of the shares of Class A preferred stock other than the ACF Holding Shares.

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As a result of his ownership of a majority of the Company’s common stock and voting preferred stock, the Chairman can elect all of the Company’s directors. Currently, three employees of entities controlled by the Chairman are members of the Company’s Board of Directors and certain of its committees. Under applicable law and the Company’s certificate of incorporation and by-laws, certain actions cannot be taken without the approval of holders of a majority of the Company’s voting stock, including mergers, acquisitions, the sale of substantially all of the Company’s assets and amendments to the Company’s certificate of incorporation and by-laws. In addition, Mr. Carl Grivner, the Company’s CEO, is a member of the Company’s Board of Directors.

Icahn Sourcing LLC (“Icahn Sourcing”) is an entity formed and controlled by the Chairman in order to leverage the potential buying power of a group of entities which the Chairman either owns or with which he otherwise has a relationship in negotiating with a wide range of suppliers of goods, services, and tangible and intangible property. The Company is a member of the buying group and, as such, is afforded the opportunity to purchase goods, services and property from vendors with whom Icahn Sourcing has negotiated rates and terms. Icahn Sourcing does not guarantee that the Company will purchase any goods, services or property from any such vendors and the Company is under no legal obligation to do so. The Company does not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement. The Company has purchased a variety of goods and services as a member of the buying group at prices and on terms that it believes are more favorable than those which would be achieved on a stand-alone basis.

10. SEGMENT INFORMATION

As previously reported in the Company’s 2008 Annual Report, the Company operated its business in two reportable segments through two primary operating subsidiaries. XO Communications, LLC operated the Company’s wireline business under the trade name “XO Communications” (“XOC”) and Nextlink Wireless, Inc. (“Nextlink”) operated the Company’s fixed-wireless business. XOC and Nextlink were managed separately; each segment required different resources, expertise and marketing strategies. In April 2009, the Company decided to integrate Nextlink’s operations into XOC’s existing product offerings, discontinuing Nextlink as a separate operating segment. As a result of this change, the Company’s chief operating decision maker no longer reviews the results of Nextlink’s operations to evaluate performance and allocate resources. Thus, Nextlink ceased to be considered a reportable segment resulting in XOC being the only operating segment for the Company as of June 30, 2009. XOC continues to use the LMDS spectrum assets to support existing wireless customers, customer growth and network cost reduction opportunities.

11. COMMITMENTS AND CONTINGENCIES

The Company is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort and employment matters, which arise in the ordinary course of

11

business. The Company accrues its best estimates of required provisions for any such matters when the loss is probable and the amount of loss can be reasonably estimated. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, management believes that the Company has valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could be materially and adversely affected in any particular period by the unfavorable resolution of one or more of these contingencies. Legal costs related to litigation in these matters are expensed as incurred.

Metro Nashville

The Metropolitan Government of Nashville and Davidson County, Tennessee (“Metro”) filed a complaint against XO Tennessee, Inc. (“XOT”), now XO Communications Services Inc., successor in interest to XOT, on March 1, 2002, before the Tennessee State Chancery Court for Davidson County, Tennessee. Metro sought declaratory judgment that, under Metro’s franchise ordinance and the franchise agreement executed by XOT’s predecessor, US Signal, on October 18, 1994, XOT (a) owed franchise fees in the amount of five percent of gross revenues from 1997 to current, and (b) was contractually obligated to allow Metro access and use of four dark fibers on XOT’s network. On February 28, 2003, XOT answered the complaint contending that the franchise fee and “dark fiber” compensation provisions violated Tennessee and federal law. XOT also filed a counterclaim seeking to recover all sums paid to Metro under the invalid ordinance and to recover the value of the free fiber that Metro has been using and continues to use without payment. In an amended complaint, Metro added an alternative basis for relief, namely legal or equitable relief up to its costs allocated to XOT for maintaining, managing, and owning the rights-of-way. Based on a study conducted by Metro (received by the Company in November 2006) and the length of the relevant period of this case, to date, Metro’s costs, as calculated by Metro for the relevant period and allocated by Metro to XOT, would likely exceed $20.0 million. XOT disputes the methodology and results of the study and believes a reasonable estimate of Metro’s relevant costs to be no more than $1.0 million. On August 9, 2007, XOT filed a motion for judgment on the pleadings. On February 25, 2008, the court denied XOT’s motion. On March 26, 2008, XOT filed a request with the court seeking permission to file an interlocutory appeal of the court’s denial. On July 16, 2009, the court granted XOT’s Motion for Interlocutory Appeal. XOT is now petitioning the appellate court to take the appeal. The matter has been stayed by the court pending the outcome of the interlocutory appeal. An estimated loss, if any, associated with this case is not known at this time.

Nashville Electric Service

On June 5, 2008, the Nashville Electric Service, part of Metro, (“NES”) served XO Communication Services, Inc. (“XOCS”) with a complaint and a motion for temporary injunction filed in Chancery Court, Davidson County, Tennessee. The dispute between NES and XOCS is based on a disagreement regarding the legality and enforceability of certain provisions of a fiber optics license agreement, commonly referred to as a “pole attachment” agreement, previously signed by NES and XOCS. The pole attachment agreement between NES and XOCS contains a provision that states XOCS would provide certificates of title to six strands of optic fiber to NES in the Company’s fiber optic bundles on poles and on conduits controlled by NES. The pole attachment agreement also contains a “gross revenue” provision that provides that XOCS would pay to NES either four percent of XOCS’ gross revenue derived from rent or sale of fiber optic network services provided on XOCS’ fiber network in Nashville, or a set per-pole

12

fee, whichever is greater, based upon XOCS’ financial statements, which per the agreement XOCS is also allegedly obligated to provide to NES. Based upon certain court decisions in Tennessee, XOCS had previously informed NES that XOCS believed that the gross revenue and title to six strands of fiber provisions of the pole attachment agreement were contrary to law and invalid and therefore unenforceable. XOCS then invoiced NES for the use of the six fiber optic strands. XOCS has not provided title to the six strands of optic fiber (although XOCS allows NES to utilize six strands of optic fiber for its fiber network). XOCS has not provided financial statements to NES, and while XOCS is currently up to date on the payment of pole attachment fees, it has not paid to NES under the “gross revenue” provisions. The pole attachment expired in January of 2005, and NES has refused to renegotiate the terms of the pole attachment agreement, and has attempted to treat the agreement as extending from month-to-month, although no such provisions exist in the pole attachment agreement. The NES Complaint of June 5, 2008 alleges breach of contract, unjust enrichment, and violation of the Tennessee Consumer Protection Act. The complaint and the motion for temporary injunctive relief also seeks specific performance of the terms of the pole attachment agreement in the form of XOCS providing certificates of title to the six strands of optic fiber, an accounting for a determination of amounts allegedly due under the gross revenue provision, and injunctive relief in the form of non-interference by XOCS with the right of NES to continue to utilize the six strands of optic fiber. On June 23, 2008, XOCS filed a notice of removal to federal court (the US District Court, Middle District of Tennessee). On June 30, 2008, NES filed a motion to remand the case back to state court, but that motion was denied by the Court. On July 7, 2008, XOCS filed its answer and counterclaim in federal court. The XOCS counterclaim alleges that compensation paid by XOCS to NES has been in excess of fair and reasonable compensation for access to NES poles and conduit, in violation of the Communications Act, the US and Tennessee Constitutions (unconstitutional taking), and resulted in unjust enrichment to NES. On July 24, 2008, NES filed a partial motion to dismiss certain portions of XOCS’ counterclaim. On January 7, 2009 the Court denied NES’ motion to dismiss. In July of 2009, XOCS renewed settlement discussions with NES. On August 6, 2009, the parties reached agreement in principle for a settlement which is subject to negotiation of final details and documentation. The effect of this case is not expected to be material to the Company’s financial position, results of operations, or cash flows.

Choice Tel

On August 30, 2007, the Company notified Choice Tel, a business channel agent for the Company, of the Company’s decision to terminate the agent agreement because of Choice Tel’s apparent failure to sell the Company’s services. Choice Tel challenged that termination and, on November 22, 2007, filed an arbitration claim, believing it was due at least $2.4 million in residual commissions. The arbitration hearing was conducted on March 11, 2009. On May 27, 2009, the Arbitrator found in favor of Choice Tel on the issue of liability for breach of contract. The arbitration hearing on damages has not been scheduled. An estimated loss, if any, associated with this case is not known at this time.

City of Memphis Franchise Fees

XOH has a Right of Way (“ROW”) franchise arrangement with the City of Memphis (the “City”) for XOH fiber. The ROW franchise arrangement, among other provisions, states that, as payment for the ROW, XOH was to pay a percent of its gross receipts and provide dark fiber to the City. On July 12, 2004, the Tennessee Court of Appeals, in BellSouth vs. City of Memphis found that the City’s franchise fee structure violated state law and determined that any fee imposed by a city acting pursuant to its police powers “must bear a reasonable relation to the cost to the city” in providing use of the rights-of-way. XOH has refused to pay the City’s gross

13

receipts based franchise fees based on this court ruling. Further, XOH claims that the City owes XOH for the use of the dark fiber XOH provided to the City because this also amounted to an improper “payment” imposed upon XOH by the City under its franchise fee agreement that was violative of state law. The City claims that XOH owes the City some amount for the use of the City’s rights-of-way. No litigation has been filed to date by either the City or XOH. An estimated loss, if any, associated with this case is not known at this time.

R2 Derivative Litigation

On April 28, 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of the Company’s Board of Directors and certain entities controlled by Carl C. Icahn, the Chairman of the Company’s Board of Directors, as defendants and naming the Company as the nominal defendant in connection with derivative claims. The plaintiff alleges that the defendants breached fiduciary duties in connection with the financing transaction consummated in July 2008 and other related matters. The complaint seeks equitable relief as well as damages in an unspecified amount. On July 24, 2009 the Defendants filed a Motion to Dismiss the Complaint. The effect of this case on the Company, if any, is not known at this time.

12. SUBSEQUENT EVENTS

The Company adopted SFAS 165, Subsequent Events, as of June 30, 2009. SFAS 165 requires disclosure of the date through which an entity has evaluated subsequent events and whether that represents the date the financial statements were issued or were available to be issued. The adoption of SFAS 165 did not affect the amount of any of the Company’s financial statement line items. The Company has evaluated subsequent events through August 10, 2009, the issue date of these financial statements.

On July 6, 2009, the Company entered into a Stock Purchase Agreement to repurchase 304,314 shares of Class A preferred stock from entities unaffiliated with the Company at an aggregate purchase price of approximately $18.4 million. The repurchase closed on July 9, 2009.

On July 9, 2009, the Company received a letter from ACF Industries Holding Corp. (“ACF Holding”), an entity wholly owned by the Chairman that owns the majority of the Company’s common shares, pursuant to which ACF Holding made a non-binding proposal to acquire all of the Company’s outstanding common shares which it does not own, for consideration in the form of cash of $0.55 per share. The letter states that in no event is ACF Holding or its affiliates prepared to be a seller of its shares of common stock in any transaction and, therefore, it will not sell or transfer its shares to a third party or vote in favor of a transaction which involves the sale or transfer of its shares to a third party. On July 10, 2009, the Company’s Board of Directors established a Special Committee to consider, review, and evaluate ACF Holding’s proposal. The Special Committee has retained J.P. Morgan Securities Inc. to act as its financial advisor, Dechert LLP as its legal counsel and Bouchard Margules & Friedlander, P.A. as its Delaware legal counsel.

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

The Company uses the terms “we,” “us,” and “our,” to describe XOH and its subsidiaries within this Quarterly Report on Form 10-Q. This management’s discussion and analysis of financial condition and results of operations is intended to provide readers with an understanding of our past performance, our financial condition and our prospects. This discussion should be read in conjunction with our 2008 Annual Report and our condensed consolidated financial statements, including the notes thereto, appearing in Part 1, Item 1 of this Quarterly Report.

Cautionary Language Concerning Forward-Looking Statements

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” “can,” “may,” “could” or other comparable words. Our forward-looking statements are based on currently available operational, financial and competitive information and management’s current expectations, estimates and projections. These forward-looking statements include:

• expectations regarding revenue, expenses, capital expenditures and financial position in future periods;

• our ability to broaden our customer reach and expand our market share;

• pursuit of growth opportunities; and

• the necessity of obtaining future financing to fund our business plan and repay our scheduled obligations.

Readers are cautioned that these forward-looking statements are only predictions and are subject to a number of both known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should our underlying assumptions prove incorrect, our actual results in future periods may differ materially from the future results, performance, and/or achievements expressed or implied in this document. These risks include any failure by us to:

• generate funds from operations sufficient to meet our cash requirements and execute our business strategy;

• prevail in our legal proceedings;

• increase the volume of traffic on our network;

• develop a market for our fixed wireless licenses; and

• achieve and maintain market penetration and revenue levels given the highly competitive nature of the telecommunications industry.

For a detailed discussion of risk factors affecting our business and operations, see Item 1A, Risk Factors in our 2008 Annual Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date.

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Executive Summary

We are a leading nationwide facilities-based competitive telecommunications services provider that delivers a comprehensive array of telecommunications solutions to large enterprises, medium and small business, government customers, telecommunications carriers and service providers, and Internet content providers. The items we believe differentiate us from the competition include our nationwide high-capacity network, advanced IP and converged communications services, broadband wireless capabilities, and a responsive, customer-focused orientation. We offer customers a broad range of managed voice, data and IP services in more than 75 metropolitan markets across the United States.

In 2008 we retired all of our long-term debt through the sale of preferred stock to entities affiliated with our Chairman. During 2009, we plan to continue to use the remaining proceeds from such sale to fund our business and growth initiatives, provide ongoing working capital for our business and pursue additional opportunities which create value for our shareholders. We continue to see opportunities to invest our capital and invested $91.7 million during the six months ended June 30, 2009 for long-term growth.

During the first half of 2009, we continued to see the results from a number of initiatives previously implemented including the lighting of our long-haul fiber network, development of the carrier/wholesale channel, and expansion of our portfolio of services to business and enterprise customers. Our prior capital expenditure investments significantly contributed to $46.8 million of revenue growth for our core services. While our total revenue increased 4.8% for the six months ended June 30, 2009 compared to the year-ago period, we were able to limit the corresponding increase in cost of service to 1.8% due primarily to planned network optimization projects. Additionally, improvements to our internal cost structure have driven the reduction in our selling, general and administrative expenses as a percentage of revenue to 32.6% for the six months ended June 30, 2009 from 35.1% for the year-ago period.

As a result of discontinuing Nextlink as a separate operating segment and integrating its operations into our existing product offerings, we performed an impairment evaluation of our LMDS licenses as of June 30, 2009. We determined that the carrying value of these assets exceeded their fair value and recorded an impairment charge of $8.3 million during the second quarter of 2009.

In 2008, XOC commenced an enterprise-wide transformation initiative intended to enhance shareholder value through focusing on improving service delivery, accelerating revenue growth, and reducing operating costs. We expect to begin deriving benefits in 2010. In conjunction with this transformation initiative, we intend to continue to invest in new network infrastructure, develop new service offerings and continue expanding our customer base in high-growth markets.

We continue to monitor the impact of macro-economic conditions on our business. Potential negative aspects include a general slowdown in the demand for telecommunications services, delayed IT and other projects that have telecommunications needs, elongated sales cycles on the part of our customers, higher involuntary churn, and delayed payments from customers.

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Critical Accounting Policies and Estimates

Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations are in the areas of revenue recognition, cost of service, allowance for uncollectible accounts, assessment of loss contingencies and property and equipment. For more information on critical accounting policies and estimates, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

During the three months ended June 30, 2009, we did not change or adopt any new accounting policies that had a material effect on our consolidated financial condition or results of operations.

Results of Operations

The following table contains certain data from our unaudited condensed consolidated statements of operations (dollars in thousands):

	Three Months Ended June 30,
				% of						% of
				Consolidated						Consolidated			Change
	2009			Revenue			2008			Revenue			Dollars			Percent
Revenue	$	385,624			100.0	%	$	367,370			100.0	%	$	18,254			5.0	%
Costs and expenses:
Cost of service*		229,565			59.5	%		213,272			58.0	%		16,293			7.6	%
Selling, general and administrative		119,122			30.9	%		127,770			34.8	%		(8,648	)		-6.8	%
Depreciation and amortization		42,910			11.1	%		47,139			12.8	%		(4,229	)		-9.0	%
Impairment of LMDS licenses		8,282			2.2	%		—			—			8,282		nm
Loss (gain) on disposal of assets		2,562			0.7	%		(878	)		-0.2	%		3,440			391.8	%
Total costs and expenses		402,441			104.4	%		387,303			105.4	%		15,138			3.9	%
Loss from operations	$	(16,817	)		-4.4	%	$	(19,933	)		-5.4	%	$	(3,116	)		-15.6	%

*	exclusive of depreciation and amortization
nm — not meaningful

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	Six Months Ended June 30,
				% of						% of
				Consolidated						Consolidated			Change
	2009			Revenue			2008			Revenue			Dollars			Percent
Revenue	$	763,448			100.0	%	$	728,519			100.0	%	$	34,929			4.8	%
Costs and expenses:
Cost of service*		449,569			58.9	%		441,615			60.6	%		7,954			1.8	%
Selling, general and administrative		249,085			32.6	%		255,569			35.1	%		(6,484	)		-2.5	%
Depreciation and amortization		86,306			11.3	%		92,668			12.7	%		(6,362	)		-6.9	%
Impairment of LMDS licenses		8,282			1.1	%		—			—			8,282		nm
Loss (gain) on disposal of assets		4,077			0.5	%		(832	)		-0.1	%		4,909			-590.0	%
Total costs and expenses		797,319			104.4	%		789,020			108.3	%		8,299			1.1	%
Loss from operations	$	(33,871	)		-4.4	%	$	(60,501	)		-8.3	%	$	(26,630	)		-44.0	%

*	exclusive of depreciation and amortization
nm — not meaningful

Revenue

Total revenue for the three and six months ended June 30, 2009 increased 5.0% and 4.8%, respectively, due to growth in our core service offerings relating to Broadband services, formerly reported as Data and IP services, due in part to the investments in next-generation Broadband services combined with sales and marketing efforts targeting these high-growth strategic services. This growth was partially offset by decreases in Integrated/Voice and our older Legacy/TDM services which are predominately deployed using TDM, circuit-switched voice technologies. Based on continued investments which leverage next-generation Broadband technologies, we expect revenue from Legacy/TDM services, as a percentage of our total revenue, will continue to decline during 2009 as our sales continue to be focused on next-generation Broadband solutions. Results for 2009 have been and likely will continue to be sensitive to influences in a challenging macro-economic environment and changes in the regulatory climate.

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

	Three Months Ended June 30,
			% of					% of			Change
	2009		Revenue			2008		Revenue			Dollars			Percent
Core services
Broadband	$	195,361		50.7	%	$	163,744		44.6	%	$	31,617			19.3	%
Integrated/Voice		74,533		19.3	%		82,026		22.3	%		(7,493	)		-9.1	%
Total core services		269,894		70.0	%		245,770		66.9	%		24,124			9.8	%
Legacy/TDM services		115,730		30.0	%		121,600		33.1	%		(5,870	)		-4.8	%
Total revenue	$	385,624		100.0	%	$	367,370		100.0	%	$	18,254			5.0	%

Core Services. For the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, we experienced continued growth in market demand for telecommunications

18

services utilizing next generation Broadband technologies and transport services as evidenced by the 19.3% increase in revenue from our Broadband services. This increase principally resulted from improvements in IP VPN, IP Flex, Dedicated Private Line, and DIA services. IP VPN revenue for the three months ended June 30, 2009 increased $7.7 million compared to the year-ago period primarily due to continued strong response to marketing efforts in 2008 following the product launch in late 2007. IP VPN offers value compared to traditional private line solutions for secure local access and demand continues to grow as a result. IP Flex is our flagship integrated data and voice solution. Revenue from our IP Flex service for the three months ended June 30, 2009 increased $5.6 million, or 24.1%, compared to the year-ago period primarily due to our continued focus to move customers from TDM-based solutions. Also contributing significantly to the growth in our Core Broadband services was the $4.2 million, or 6.1%, increase in Dedicated Private Line revenues for the three months ended June 30, 2009 compared to the year-ago period as a result of our investments in our long-haul network. Revenue from our Broadband services also increased as a result of a $4.8 million, or 12.4%, increase in DIA revenue and a $3.6 million, or 46.9%, increase in wholesale VoIP origination and termination services during the three months ended June 30, 2009 over the year-ago period.

The growth in the Broadband category of our Core Services was partially offset by a net reduction in Integrated/Voice revenue. This category contains more mature bundled data and voice offerings introduced in 2000 such as XOptions and Integrated Access, as well as traditional carrier long distance termination (“CLDT”). Revenue from CLDT increased $5.6 million, or 26.9%, compared to the year-ago period as demand was strong. However, this gain was more than offset by the decrease in traditional TDM-based integrated solutions as part of the customer demand shift to Broadband-enabled solutions.

Legacy/TDM Services. Voice and data services we consider to be legacy are primarily deployed using TDM, circuit switched voice technologies. Legacy voice and other services include basic business lines, switched trunks, local usage, commercial traditional switched long distance, carrier reciprocal access, IVR, voice conferencing, calling card and revenue from transaction-based pass-through taxes.

For the three months ended June 30, 2009, revenue from our Legacy/TDM services category decreased compared to the three months ended June 30, 2008 due primarily to declines in our legacy voice products, including retail long distance usage. Our Legacy/TDM services comprise approximately one-third of our installed customer base and generate a considerable percentage of our revenue. We believe certain Legacy/TDM services continue to be an important part of our overall service mix; however, sales and marketing efforts are focused on promoting our Core Broadband services.

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	Six Months Ended June 30,
			% of					% of			Change
	2009		Revenue			2008		Revenue			Dollars			Percent
Core services
Broadband	$	384,727		50.4	%	$	317,231		43.5	%	$	67,496			21.3	%
Integrated/Voice		147,289		19.3	%		167,965		23.1	%		(20,676	)		-12.3	%
Total core services		532,016		69.7	%		485,196		66.6	%		46,820			9.6	%
Legacy/TDM services		231,432		30.3	%		243,323		33.4	%		(11,891	)		-4.9	%
Total revenue	$	763,448		100.0	%	$	728,519		100.0	%	$	34,929			4.8	%

Core Services. During the six months ended June 30, 2009, revenue from our Broadband services increased 21.3% compared to the year-ago period primarily due to increased revenue from our IP VPN, IP Flex, Dedicated Private Line, and DIA services. IP VPN revenue for the six months ended June 30, 2009 increased $14.5 million compared to the year-ago period primarily due to continued strong response to marketing efforts. Revenue from our IP Flex service for the six months ended June 30, 2009 increased $12.1 million, or 27.1%, compared to the year-ago period primarily due to our continued focus to move customers from TDM-based solutions. Also contributing significantly to the growth in our Core Broadband services was the $10.2 million, or 7.4%, increase in Dedicated Private Line revenues for the six months ended June 30, 2009 compared to the year-ago period as a result of our investments in our long-haul network. Revenue from our Core Broadband services also increased as a result of a $10.8 million, or 14.2%, increase in DIA revenue and a $7.5 million, or 55.5%, increase in wholesale VoIP origination and termination services during the six months ended June 30, 2009 over the year-ago period.

The growth in the Broadband category of our Core Services was partially offset by a net reduction in Integrated/Voice revenue for the six months ended June 30, 2009 compared to the year-ago period. Integrate/Voice revenue decreased due principally to the decrease in traditional TDM-based integrated solutions as part of the demand shift from XOptions to Broadband-enabled solutions. This decline was partially offset by a $6.1 million, or 14.0%, increase in CLDT revenue for the six months ended June 30, 2009 compared to the year-ago period due to strong demand.

During the remainder of 2009, we expect Core services revenue as a percentage of total revenue to increase compared to 2008 as we continue to orient our marketing focus to respond to the ongoing demand for these products and services.

Legacy/TDM Services. For the six months ended June 30, 2009, revenue from our Legacy/TDM services category decreased compared to the six months ended June 30, 2008 due primarily to the $18.3 million, or 11.6%, decline in our legacy voice products.

During the remainder of 2009, we expect our Legacy/TDM services revenue to decrease compared to 2008 as we continue to orient our marketing focus to our Core Services.

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Cost of Service

Our cost of service (“COS”) includes telecommunications services costs, network operations costs and pass-through taxes. Telecommunications services costs include expenses directly associated with providing services to customers, such as the cost of connecting customers to our network via leased facilities, leasing components of network facilities and interconnect access and transport services paid to third-party service providers. Network operations include costs related to network repairs and maintenance, costs to maintain rights-of-way and building access facilities, and certain functional costs related to engineering, network, system delivery, field operations and service delivery. Pass-through taxes are taxes we are assessed related to selling our services which we pass through to our customers. COS excludes depreciation and amortization expense.

The following table summarizes our cost of service by component (dollars in thousands):

	Three Months Ended June 30,
			% of					% of			Change
	2009		Revenue			2008		Revenue			Dollars		Percent
Telecommunications services	$	165,990		43.0	%	$	153,762		41.8	%	$	12,228		8.0	%
Network operations		49,766		12.9	%		47,438		12.9	%		2,328		4.9	%
Pass-through taxes		13,809		3.6	%		12,072		3.3	%		1,737		14.4	%
Total cost of services	$	229,565		59.5	%	$	213,272		58.0	%	$	16,293		7.6	%

The COS increase for the three months ended June 30, 2009 compared to the same period in 2008 was mainly due to the increase in telecommunications services costs in both dollars and as a percentage of total revenue. The primary factors that contributed to the period over period increase were $12.0 million related to growth in sales of our Broadband service lines and the $10.7 million incremental increase in wholesale long distance usage costs. These increases were partially offset by $9.9 million of incremental cost savings achieved through planned network optimization projects completed as of June 30, 2009. Network optimization projects are initiatives and actions we take to reduce our costs associated with providing telecommunications services to our customers. Network optimization projects include rehoming circuits to the nearest network POP, hubbing circuits onto the same transport facility, moving network facilities to lower cost providers, disconnection of capacity from third party providers which is no longer required and other similar actions which vary in type, size and duration.

	Six Months Ended June 30,
			% of					% of			Change
	2009		Revenue			2008		Revenue			Dollars			Percent
Telecommunications services	$	324,229		42.5	%	$	318,453		43.7	%	$	5,777			1.8	%
Network operations		99,804		13.1	%		95,428		13.1	%		4,375			4.6	%
Pass-through taxes		25,536		3.3	%		27,734		3.8	%		(2,198	)		-7.9	%
Total cost of services	$	449,569		58.9	%	$	441,615		60.6	%	$	7,954			1.8	%

The telecommunications services increase for the six months ended June 30, 2009 compared to the same period in 2008 was due primarily to $23.4 million of growth in sales of our Broadband service lines and the $6.3 million incremental increase in wholesale long distance usage costs. These increases were partially offset by $19.0 million of incremental cost savings achieved through planned network optimization projects completed as of June 30, 2009. Additionally, we

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recognized a $4.4 million cost benefit during 2009 due to net changes in dispute balances and other accrued liabilities.

The decrease in pass-through taxes for the six months ended June 30, 2009 compared to the year-ago period principally resulted from a $4.1 million error correction recorded in 2008 pertaining to the period from 2003 through 2006. We determined certain payments for taxes due to various state and local jurisdictions had been incorrectly recorded and concluded the correction was not material to any of the affected years and corrected the liability during the first quarter of 2008.

In 2009, we expect growth in revenue and communications traffic volume will contribute to increases in our COS, compared to 2008. Overall, excluding the effects of future net dispute settlements, if any, we anticipate our COS as a percentage of revenue for the remainder of 2009 will remain relatively consistent with the same period in 2008.

Selling, General and Administrative

Selling, general and administrative expense (“SG&A”) includes expenses related to payroll, commissions, sales and marketing, information systems, general corporate office functions and collection risks. SG&A decreased during the three months ended June 30, 2009 compared to the same period in 2008 primarily due to a $9.9 million decrease in payroll related expenses due to headcount reductions and changes in employee benefit programs.

For the six months ended June 30, 2009 compared to the same period in 2008, SG&A decreased primarily due to a $10.7 million decrease in payroll and related expenses due to headcount reductions and changes in employee benefit programs. This decrease was partially offset by the $4.5 million increase in legal related expenses due to favorable developments in ongoing litigation during 2008 which were not repeated during 2009.

SG&A as a percentage of revenue decreased to 32.6% for the six months ended June 30, 2009 from 35.1% for the year-ago period. This improvement was principally driven by our continued execution on our initiatives to increase revenue growth, while improving our internal cost structure. We plan on continuing to invest in the resources and infrastructure necessary to help grow and support our business units during 2009 while continuing to realize cost savings. Our goal during 2009 is to decrease SG&A as a percentage of revenue through implementation of company-wide expense reduction measures in response to the current economy.

Impairment of LMDS Licenses

As a result of the impairment evaluation performed for our LMDS licenses resulting from the integration of our Nextlink operations into our existing product offerings, it was determined that the fair value of our LMDS licenses was less than its carrying value. Consequently, the carrying value of our LMDS licenses was reduced by $8.3 million in the quarter ended June 30, 2009.

Interest Income

The $2.8 million and $5.8 million, respectively, increases in interest income for the three and six months ended June 30, 2009 compared to the same periods of the prior year were due primarily to the interest earned on the debt securities purchased in 2008.

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Investment Gain, Net

We recognized net investment gains of $8.3 million and $18.0 million for the three and six months ended June 30, 2009, respectively. Net investment gains for the three months ended June 30, 2009 principally resulted from realized gains from the sale of available-for-sale securities. For the six months ended June 30, 2009, net investment gains principally resulted from $11.7 million of realized gains from the sale of available-for-sale marketable securities and the receipt of a $5.8 million distributions related to a legal matter regarding our holding of certain debt securities.

Our net investment gains for the six months ended June 30, 2008 principally resulted from a $4.4 million gain from the conversion of a non-publicly traded investment recorded as a non-current asset to a publicly-traded available-for-sale security.

Interest Expense, Net

Interest expense, net decreased from $9.5 million for the three months ended June 30, 2008 to $0.5 million for the current year period. Interest expense, net declined $17.0 million to $1.3 million for the six months ended June 30, 2009 compared to the same period during 2008. These declines in interest expense occurred because we retired all of our long-term debt in July 2008 with the issuance of preferred stock and therefore incurred no related interest expense during 2009. Total interest expense was offset by capitalized interest of $0.4 million and $0.6 million, respectively, for the three months ended June 30, 2009 and 2008 and $0.9 million and $1.3 million, respectively, for the six months ended June 30, 2009 and 2008.

Capital Expenditures

Six Months Ended June 30,			% of Revenue
(dollars in thousands)
2009	$	91,720		12.0	%
2008	$	118,524		16.3	%

Capital expenditures decreased for the six months ended June 30, 2009 compared to the year-ago period due to timing of expenditures. We plan to spend between $120.0 million and $140.0 million on additional capital expenditures during the remainder of 2009 for continued investment in our networks and Ethernet and Broadband services, expansion into new markets and continuation of our transformation initiatives.

Liquidity and Capital Resources

Our primary capital needs are to finance the cost of operations, to acquire capital assets in support of our operations and to fund the redemption of our Class A preferred stock. We believe that cash on hand and operating cash flow will be sufficient to finance our operational cash needs. We are exploring various alternatives to obtain additional capital to fund the redemption of the Class A preferred stock and to meet other strategic needs. We believe that these alternatives should not include an issuance of high yield debt because such an issuance would be deleterious to XOH for the following reasons: 1) the high cost of such debt will negatively affect our ability to compete in the current highly competitive telecommunications environment and 2) the unduly burdensome restrictive covenants associated with such debt would impair our ability to pursue potential strategic investments and to take advantage of other opportunities which may be necessary for us to compete in the current highly competitive telecommunications environment.

Redemption of Class A Convertible Preferred Stock

The terms of our Class A preferred stock provide that on January 15, 2010, we redeem in cash and in a manner provided for therein all of the shares of Class A preferred stock then outstanding at a redemption price equal to 100% of its liquidation preference. On February 5, 2009, ACF Holding, an affiliate of our Chairman, agreed to extend the date on which we would be required to redeem the shares of Class A preferred stock held by ACF Holding from January 15, 2010 to a date no later than April 15, 2010. ACF Holding is the record holder of 3,096,549 shares of Class

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A preferred stock (the “ACF Holding Shares”) which represent 77.4% of the outstanding shares of the Class A preferred stock as of June 30, 2009 (83.8% after giving effect to the July 9, 2009 repurchase of 304,314 shares of Class A preferred shares as discussed in the following paragraph). The extension will not affect the redemption date of any of the shares of Class A preferred stock other than the ACF Holding Shares.

On July 9, 2009, we repurchased 304,314 shares of our Class A preferred stock from entities unaffiliated with XOH at an aggregate purchase price of approximately $18.4 million, which reduced the amount of Class A preferred stock we are required to redeem by January 15, 2010.

Cash Flow

As of June 30, 2009, our balance of cash and cash equivalents was $281.9 million, an increase of $25.1 million from December 31, 2008. The primary reason for this increase was the $50.9 million proceeds from sale of marketable securities and $61.4 million of operating cash flow, partially offset by $91.7 million of capital expenditures. We invested all of our cash provided by operations in strategic, growth-related capital expenditure investments to grow revenue through enhancing our next generation broadband network. As part of plans to grow our business, during the first half of 2009 we continued the investments in our long-haul fiber optic network, customer driven collocation sites and Ethernet and Broadband services. We expect our growth-related investment in network and services will continue to outpace our cash inflows from operations during the remainder of 2009.

The following table summarizes the components of our cash flows for the six months ended June 30 (in thousands):

	2009			2008			Change
Cash provided by operating activities	$	61,434		$	2,438		$	58,996
Cash used in investing activities	$	(34,332	)	$	(116,818	)	$	(82,486	)
Cash (used in) provided by financing activities	$	(1,964	)	$	71,889		$	(73,853	)

Operating Activities. The increase in cash provided by operating activities for the six months ended June 30, 2009 compared to the same period in 2008 was related primarily to the $63.0 million decrease in net loss.

Investing Activities. For the six months ended June 30, 2009, cash used in investing activities decreased due primarily to $50.9 million of proceeds received from the sale of debt securities and $5.8 million of proceeds related to a legal matter regarding our holding of certain debt securities. In addition, capital expenditures declined $26.8 million compared to the same period in 2008 due to the timing of expenditures. We plan to spend between $120.0 million and $140.0 million on additional capital expenditures during 2009 for continued investment in our

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networks and Ethernet and Broadband services, expansion into new markets and continuation of our transformation initiative. Without these expenditures, we believe it would be difficult to continue to effectively compete against the ever increasing pressures from the ILECs as well as wireless and cable providers.

Financing Activities. Cash provided by financing activities for the six months ended June 30, 2008 was predominantly due to $75.0 million of proceeds from a promissory note with an affiliate of our Chairman.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP. The Codification is effective for interim and annual periods ending after September 15, 2009. The adoption of this standard will not have a material impact on our financial statements.

In April 2009, the FASB issued FSP 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB 28, Interim Financial Reporting, to require these disclosures in summarized interim periods. We adopted the provisions of FSP 107-1 as of June 30, 2009. The adoption of FSP 107-1 did not affect the amount of any of our financial statement line items.

In April 2009, the FASB issued FSP 115-2 and FSP 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSP 115-2”). This FSP amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and modifies the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. Additionally, FSP 115-2 requires all disclosures required by SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, on a quarterly basis. We adopted the provisions of FSP 115-2 as of June 30, 2009. The adoption of FSP 115-2 did not affect the amount of any of our financial statement line items.

Regulatory

For additional information regarding the regulatory matters affecting our business, see the “Regulatory” subheading in Item 1, Business of our 2008 Annual Report. Other than as discussed below, during the three months ended June 30, 2009, there was no new material activity related to regulatory matters.

LMDS Licenses

Our wholly-owned subsidiary, Nextlink Wireless, Inc., holds 91 licenses in the LMDS wireless spectrum (28-31 GHz range) and ten 39 GHz licenses. These licenses cover 75 basic trading areas (“BTA”), which are typically cities or metropolitan areas located throughout the United

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States. For every license, the license holder must make both a license renewal filing and a demonstration of “substantial service” at the FCC.

LMDS License Renewal Filings. The license terms of our wireless licenses are generally ten years and are renewable for additional ten year terms. The renewal dates for our 39 GHz licenses are in 2010. Ninety of our 91 LMDS licenses were up for renewal in 2008. Of the 13 renewal requests pending with the FCC as of December 31, 2008, nine of our LMDS licenses were renewed on May 20, 2009, followed by FCC action on June 30, 2009 to approve the final four pending LMDS license renewals. As of June 30, 2009, the FCC had granted renewal of all 90 of our LMDS licenses that were up for renewal in 2008.

LMDS Substantial Service Filings. In order to secure renewal of its LMDS licenses, we must generally be in compliance with all relevant FCC rules and demonstrate that we are providing “substantial service” in our licensed areas. As of December 31, 2008, the FCC had approved our successful demonstration of substantial service in 30 of our LMDS licensed markets, with 13 demonstrations pending approval. On May 20, 2009, the FCC approved the substantial service showings for nine of our LMDS markets, followed by FCC action on June 26, 2009, approving substantial service showings for the final four LMDS licenses. As of June 30, 2009, the FCC had approved substantial service showings for 43 LMDS licensed markets. The remaining 48 LMDS substantial service demonstrations have been granted an extension until June 1, 2012 by the FCC.

Additional Federal Regulations

Verizon and Qwest Petitions for Forbearance from Unbundling Requirements. On September 6, 2006 and on April 27, 2007, pursuant to section 10 of the Communications Act of 1934, as amended (the “Communications Act”), the regulated, wholly owned subsidiaries of Verizon Communications, Inc. (collectively “Verizon”) and Qwest Corporation (“Qwest”), respectively, filed petitions for forbearance from loop and transport unbundling obligations imposed by section 251(c), price cap regulations, dominant carrier tariff regulation, computer III requirements, and section 214 dominant carrier regulations. Verizon sought relief in six markets: Boston, New York, Pittsburgh, Philadelphia, Providence, RI and Virginia Beach, VA. Qwest’s request included relief in four markets: Denver, Minneapolis, Phoenix and Seattle. On December 4, 2007, the FCC, in a unanimous decision, found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of Verizon’s requests. Accordingly, the Commission denied the requested relief in all six MSAs. On January 14, 2008, Verizon filed an appeal in the U.S. Court of Appeals for the DC Circuit (“DC Circuit”). On July 25, 2008, in a unanimous decision, the FCC adopted a Memorandum Opinion and Order denying Qwest’s four petitions in their entirety. On July 29, 2008, Qwest filed an appeal of the FCC’s decision with the U.S. Court of Appeals for the DC Circuit. We intervened in the appeals of the FCC’s decisions in the Verizon and Qwest Forbearance cases in support of the FCC. On June 19, 2009, the DC Circuit ruled on Verizon’s appeal, remanding to the FCC a very limited question regarding how the FCC reached its rejection of the forbearance petitions — but not overturning the actual decision. While the Qwest appeal is still pending in the DC Circuit, on July 17, 2009, the FCC asked the DC Circuit to remand the pending Qwest appeal back to the FCC so that the issues in the Qwest forbearance case can be decided simultaneously with the remand of the Verizon forbearance case. In addition, on March 24, 2009, Qwest re-filed its petition for forbearance for the Phoenix market, citing greater intermodal competition since July 25, 2008 when the FCC rejected Qwest’s first petition for forbearance for the Phoenix

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market. The FCC has asked interested parties to file comments and reply comments on the Qwest re-filed Phoenix petition by August 28, 2009 and September 28, 2009, respectively. It is not possible to predict the outcome of, or potential effect upon, our operations of the pending Qwest appeal or Qwest’s re-filed forbearance petition for the Phoenix market.

Additional State and Local Regulation

XOH Complaints Against Verizon. On April 18, 2008, XOCS filed formal complaints against Verizon New England, Inc. and Verizon Pennsylvania Inc., before the Massachusetts’ Department of Telecommunications and Cable (“MA Department”) and the Pennsylvania Public Utilities Commission, respectively. On July 11, 2008, XO Virginia, LLC (“XOVA”), along with several other competitive carriers, filed a formal complaint against Verizon Virginia Inc. before the Virginia State Corporation Commission. On July 24, 2008, XOCS filed a formal complaint against Verizon New York Inc. before the New York Public Service Commission. In the complaints, XOCS and XOVA claimed that Verizon was erroneously, and in violation of its tariff, assessing switched access dedicated tandem trunk port charges on local interconnection trunks used to jointly provide switched access services to third party interexchange carriers. Verizon has filed answers in the Massachusetts, Pennsylvania and Virginia complaint proceedings denying XOCS’ claims and setting forth an affirmative defense. Verizon’s answer has not yet been scheduled in the New York complaint proceeding. In Virginia, the coalition of competitive carriers, including XOCS, filed a reply on September 30, 2008. On April 9, 2009, the MA Department ordered Verizon to discontinue the imposition of the disputed charges on XOCS and to reimburse XOCS for any and all dedicated tandem trunk port charges previously paid by XOCS to Verizon. Evidentiary hearings were held on March 4, 2009 in the Pennsylvania proceeding and on May 12, 2009 in the Virginia proceeding. The likely outcomes of the pending proceedings are not known at this time.

Qwest Complaints Against XOH. On June 24, 2008, Qwest Communications Corporation (“QCC”) filed a formal complaint against XOCS and numerous other CLECs before the Public Utilities Commission of the State of Colorado. On December 12, 2008 QCC amended this complaint to include additional parties to the complaint. On August 1, 2008, QCC filed a formal complaint against XOCS and numerous other CLECs before the Public Utilities Commission for the State of California. On July 2, 2009, QCC filed a formal complaint against XOCS and numerous other CLECs before the Public Service Commission for the State of New York. In the complaints, QCC claimed that XOCS and the other CLECs violated state statutes and regulations and, in certain cases the CLEC’s respective tariffs, subjecting QCC to unjust and unreasonable rate discrimination in connection with the provision of intrastate access services. On August 1, 2008 and September 22, 2008, XOCS filed its answers to the Colorado and California complaints, respectively, denying QCC’s claims and setting forth affirmative defenses. The New York Public Service Commission has not set a date for XOCS and the other CLECs to file an answer to QCC’s complaint. The likely outcomes of these proceedings are not known at this time.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are no longer subject to interest rate risk on long-term debt due to the retirement in 2008 of all of our long-term debt and accrued interest.

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Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required financial disclosures.

We carried out an evaluation, under the supervision and with the participation of our management including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) or 15d-15(e) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

XOH is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort and employment matters, which arise in the ordinary course of its business. XOH believes it has adequate provisions for any such matters. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could be materially and adversely affected in any particular period by the unfavorable resolution of one or more of these contingencies. Legal costs related to litigation in these matters are expensed as incurred.

Nashville Electric Service

On June 5, 2008, the Nashville Electric Service, part of Metro, (“NES”) served XO Communication Services, Inc. (“XOCS”) with a complaint and a motion for temporary injunction filed in Chancery Court, Davidson County, Tennessee. The dispute between NES and XOCS is based on a disagreement regarding the legality and enforceability of certain provisions of a fiber optics license agreement, commonly referred to as a “pole attachment” agreement, previously signed by NES and XOCS. The pole attachment agreement between NES and XOCS contains a provision that states XOCS would provide certificates of title to six strands of optic fiber to NES in our fiber optic bundles on poles and on conduits controlled by NES. The pole attachment agreement also contains a “gross revenue” provision that provides that XOCS would pay to NES either 4% of XOCS’ gross revenue derived from rent or sale of fiber optic network services provided on XOCS’ fiber network in Nashville, or a set per-pole fee, whichever is greater, based upon XOCS’ financial statements, which per the agreement XOCS is also allegedly obligated to provide to NES. Based upon certain court decisions in Tennessee, XOCS had previously informed NES that XOCS believed that the gross revenue and title to six strands of fiber provisions of the pole attachment agreement were contrary to law and invalid and therefore unenforceable. XOCS then invoiced NES for the use of the six fiber optic strands. XOCS has not provided title to the six strands of optic fiber (although XOCS allows NES to utilize six strands of optic fiber for its fiber network). XOCS has not provided financial statements to NES, and while XOCS is currently up to date on the payment of pole attachment fees, it has not paid to NES under the “gross revenue” provisions. The pole attachment expired in January of 2005, and NES has refused to renegotiate the terms of the pole attachment agreement, and has attempted to treat the agreement as extending from month-to-month, although no such provisions exist in the pole attachment agreement. The NES Complaint of June 5, 2008 alleges breach of contract, unjust enrichment, and violation of the Tennessee Consumer Protection Act. The complaint and the motion for temporary injunctive relief also seeks specific performance of the terms of the pole attachment agreement in the form of XOCS providing certificates of title to the six strands of optic fiber, an accounting for a determination of amounts allegedly due under the gross revenue provision, and injunctive relief in the form of non-interference by XOCS with the right of NES to continue to utilize the six strands of optic fiber. On June 23, 2008, XOCS filed a notice of removal to federal court (the US District Court, Middle District of Tennessee). On June 30, 2008, NES filed a motion to remand the case back to state court but that motion was denied by the Court. On July 7, 2008, XOCS filed its answer and counterclaim in federal court.

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The XOCS counterclaim alleges that compensation paid by XOCS to NES has been in excess of fair and reasonable compensation for access to NES’ poles and conduit, in violation of the Communications Act, the US and Tennessee Constitutions (unconstitutional taking), and resulted in unjust enrichment to NES. On July 24, 2008, NES filed a partial motion to dismiss certain portions of XOCS’ counterclaim. On January 7, 2009 the Court denied NES’ motion to dismiss. In July of 2009, XOCS renewed settlement discussions with NES. On August 6, 2009, the parties reached agreement in principle for a settlement which is subject to negotiation of final details and documentation.

R2 Derivative Litigation

On April 28, 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of our Board of Directors and certain entities controlled by our Chairman, as defendants and naming XOH as the nominal defendant in connection with derivative claims. The plaintiff alleges that the defendants breached fiduciary duties in connection with the financing transaction consummated in July 2008 and other related matters. The complaint seeks equitable relief as well as damages in an unspecified amount. On July 24, 2009 the Defendants filed a Motion to Dismiss the Complaint. The effect of this case on XOH, if any, is not known at this time.

Hillenmeyer Derivative Litigation

On July 21, 2009, an XOH shareholder, Don Hillenmeyer, filed under seal in the Delaware Court of Chancery a Complaint titled “Verified Derivative and Class Action Complaint.” On August 6, 2009, XOH filed a redacted version of the Complaint in the Chancery Court. The Complaint names as defendants individual members of our Board of Directors and ACF Holding, an entity controlled by Carl C. Icahn, the Chairman of our Board of Directors, and names XOH as the nominal defendant. The Complaint challenges both XOH’s 2008 sale of preferred stock to affiliates of Mr. Icahn and ACF Holding’s recent proposal to acquire all of the outstanding XOH common shares which it does not already own, and alleges various breaches of fiduciary duties.

Item 1A. Risk Factors

A description of the risks associated with our business and operations is set forth in Part I, Item 1A, Risk Factors of our 2008 Annual Report. There have been no material changes in our risks from such description.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

The XO Holdings, Inc. annual meeting of stockholders was held on June 16, 2009 in New York City. The stockholders elected the following individuals to the Board of Directors for the succeeding year and until their successors are duly qualified and elected:

	Votes For		Votes Withheld
Carl C. Icahn		716,495,459		46,207,945
Carl J. Grivner		727,916,700		34,786,704
Adam Dell		725,939,187		36,764,217
Vincent J. Intrieri		725,949,662		36,753,742
David S. Schechter		719,235,073		43,468,331
Keith Meister		719,137,822		43,565,582
Robert Knauss		723,738,843		38,964,561
Fredrik Gradin		719,138,420		43,564,984

Item 5. Other Information

None.

Item 6. Exhibits

3.1	Certificate of Incorporation of XO Holdings, Inc., as filed with the Secretary of State of the State of Delaware on October 25, 2005 (incorporated by reference to exhibit 3.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)
3.2	Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and other Special Rights of the 6% Class A Convertible Preferred Stock and Qualifications, Limitations and Restrictions thereof, as filed with the Secretary of State of the State of Delaware on February 28, 2006 (incorporated by reference to exhibit 3.2 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)
3.3	Bylaws of XO Holdings, Inc. (incorporated herein by reference to exhibit 3.3 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)
4.1	Series A Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (incorporated 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	Series B Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (incorporated by reference to exhibit 10.2 filed with the Current Report on Form 8-K of XO Communications, Inc. filed on January 30, 2003).
4.3	Series C Warrant Agreement, dated as of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (incorporated by reference to exhibit 10.3 filed with the Current Report on Form 8-K of XO Communications, Inc. filed on January 30, 2003).
4.4	Certificate of Designation of the Powers, Preferences and Relative Participating, Optional and Other Special Rights of the 7% Class B Convertible Preferred Stock and Qualifications, Limitations and Restrictions Thereof (incorporated by reference to exhibit 4.1 filed with the Current Report on Form 8-K of XO Holdings, Inc. filed on July 28, 2008).
4.5	Certificate of Designation of the Powers, Preferences and Relative Participating, Optional and Other Special Rights of the 9.50% Class C Perpetual Preferred Stock and Qualifications, Limitations and Restrictions Thereof (incorporated by reference to exhibit 4.2 filed with the Current Report on Form 8-K of XO Holdings, Inc. filed on July 28, 2008).
10.1	XO Holdings, Inc. 2009 Executive Bonus Plan (incorporated by reference to exhibit 10.1 filed with the Quarterly Report on Form 10-Q of XO Holdings, Inc. for the quarter ended March 31, 2009)
10.2	Employment Agreement, dated as of January 5, 2009, by and between XO Holdings, Inc. and Daniel J. Wagner (incorporated by reference to exhibit 10.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on January 20, 2009)
10.3	Redacted version of Master Professional Services Agreement, executed April 21, 2009 and effective as of March 30, 2009, by and between XO Communications Services, Inc. on behalf of itself, its operating affiliates and subsidiaries and Thomas Cady (filed herewith). CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER A CONFIDENTIAL TREATMENT REQUEST, PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE REDACTED TERMS HAVE BEEN MARKED IN THIS EXHIBIT AT THE APPROPRIATE PLACE WITH THREE ASTERISKS [***].
14.1	XO Business Ethics Policy (incorporated by reference to exhibit 14.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 17, 2009)
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith)
31.2	Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act as amended (filed herewith)
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 10, 2009	XO HOLDINGS, INC.
		By:  /s/ Laura W. Thomas
		Laura W. Thomas
		Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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EX-10.3

CONFIDENTIAL PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER A CONFIDENTIAL TREATMENT REQUEST, PURSUANT TO RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED, AND RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE REDACTED TERMS HAVE BEEN MARKED IN THIS EXHIBIT AT THE APPROPRIATE PLACE WITH THREE ASTERISKS [***].

Exhibit 10.3

REDACTED COPY OF
MASTER PROFESSIONAL SERVICES AGREEMENT

This MASTER PROFESSIONAL SERVICES AGREEMENT (“Agreement”) is entered into this 30th day of March 2009 (the “Effective Date”) by and between XO Communications Services, Inc. on behalf of itself, its operating affiliates and subsidiaries, with a principal place of business at 13865 Sunrise Valley Drive, Herndon, VA 20171 (“XO”) and THOMAS CADY, with his principal residence at 5308 Wriley Road, Bethesda, MD 20816 (“Consultant”). The parties may individually be referred to herein as a “Party” and collectively as the “Parties.”

     WHEREAS, Consultant has particular expertise in the area of telecommunications sales and marketing;

     WHEREAS, XO desires to engage Consultant to provide business consulting services to the Company or one or more of its subsidiaries, to specifically include, but not limited to providing to XO an accelerated growth plan for XO’s Interactive Voice Recognition services (“IVR”) and to provide certain deliverables as may be specified hereunder and requested by XO from time to time; and

     WHEREAS, Consultant desires to be so engaged by XO.

     NOW, THEREFORE, in consideration of the foregoing, of the mutual promises herein contained, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby agree as follows:

ARTICLE 1. — DEFINITIONS.

Capitalized terms and phrases used in this Agreement will have the meanings set forth in Exhibit 1 hereto or as otherwise defined throughout the terms herein. Terms that are not so defined will be deemed defined in the context in which they are used.

ARTICLE 2. SERVICES.

A. Description of Services. Consultant will function as an independent Consultant. In that capacity, and as directed by XO, Consultant will research XO’s current IVR capabilities, customers, and IVR expansion and growth opportunities for XO’s IVR business. Consultant will provide to XO on or before June 30, 2009 a report outlining a three year $[***] growth plan for XO Interactive to increase IVR Sales Revenue from current IVR Sales Revenue to $[***] IVR Sales Revenue (the “Business Plan”). Specifically, Consultant’s Business Plan will include:

a.	An evaluation of XO’s IVR market position.
b.	An evaluation of XO’s current IVR platform capabilities.
c.	An evaluation of current IVR market opportunities.
d.	An evaluation of the current IVR competitive landscape.
e.	An evaluation and business plan for XO to expand its IVR market to include, but not limited to:

(i) Operational plan including:

a.	Technology requirements
b.	Product development
c.	Distribution strategies
d.	Market coverage plans
e.	Partnership development
f.	Target customers
g.	Value proposition

(ii) Required investments

In order to ensure that all expectations of the Services, priorities and outcomes are being met, it is expected that Consultant will schedule regular meetings with appropriate XO management and executives to review the progress of this project, any issues, etc; and that Consultant will issue regular reports on progress and outcomes as directed by XO. All decisions made in connection with advice and recommendations made as a result of the Services will be the responsibility of, and made by XO. If XO accepts the Business Plan, Consultant will, through June 2010, meet and consult with and advise and provide oversight for XO as needed or as reasonably requested by XO on how best to implement and execute the Business Plan.

B. Additional Services. Additional professional services that may be required from Vendor which differ from those described above, (e.g., consulting, analysis, development, etc) will be set forth in a mutually agreed upon SOW. Any future SOW(s) will contain a conspicuous reference identifying it as an SOW under this Agreement, and will include the following information: (i) a statement of project requirements; (ii) a description of the Services; (iii) specifications covering any Deliverable(s) and the design, testing, and final acceptance thereof; (iv) required progress meetings and personnel; (v) compensation structure, including maximum authorized total expenditure (if applicable); (vi) any assumption(s) on which performance of Services or delivery of Deliverables is conditioned; and (vii) any special warranty provisions.

C. Consultant Responsibilities. This Agreement is personal and Consultant may not provide or perform any of the Services through Affiliates, subcontractors or agents of any kind without XO’s express written consent. In providing the Services, neither Consultant nor its employees, suppliers, subcontractors, agents or other licensees will restrict or interfere with any XO system or the maintenance or use thereof. Consultant will adhere to all reasonable security measures implemented by XO. Consultant will advise XO immediately of any actual or potential conflict of interest involving Consultant’s anticipated or actual provision of services to other

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clients, employers or other third parties and Services provided by Consultant to XO (“Conflict of Interest”).

ARTICLE 3. FEES AND PAYMENT TERMS.

A. Fees and Expenses. XO will pay the Consultant $15,000 on or about May 15, 2009, and another $15,000 on or about June 15, 2009. XO will evaluate the Business Plan within 30 Days of its submission to XO. If the Business Plan is accepted by XO, XO may undertake execution of the Business Plan with the assistance of Consultant as described in Article 2 A. above. Further, if and only if the Business Plan is accepted by XO and XO undertakes the execution of the Business Plan, XO will pay the Consultant within ten days after the end of each of the following four quarters (July 2009 through June 2010) $7,500 as payment for consulting and oversight services. Within thirty (30) days after June 30, 2010, XO will evaluate the effectiveness of the Business Plan. At that time, if XO determines that it has achieved at least ninety five percent (95%) of the IVR Sales Revenue Target, XO will pay Consultant a Plan Execution Bonus as follows within thirty (30) days of such determination:

PERCENT
ACHIEVEMENT OF	PLAN EXECUTION
IVR SALES REVENUE	BONUS PAYABLE TO
TARGET:	CONSULTANT:
At least 95% but less than 96%	$	95,000
96% or more but less than 97%	$	96,000
97% or more but less than 98%	$	97,000
98% or more but less than 99%	$	98,000
99% or more but less than 100%	$	99,000
100% or more but less than 101%	$	100,000
101% or more but less than 102%	$	101,000
102% or more but less than 103%	$	102,000
103% or more but less than 104%	$	103,000
104% or more but less than 105%	$	104,000
105% or more	$	105,000

No Plan Execution Bonus will be paid to the Consultant if the IVR Sales Revenue Target is below ninety five percent (95%).

All reasonable out-of-pocket expenses of Consultant that are approved in writing in advance by XO will be reimbursed by XO, including reasonable and customary business expenses. Consultant will comply with then-current XO travel and expense policy.

B. Payment. Except as otherwise provided for herein, Consultant will render invoices for Services, goods or other billable items to XO on a weekly basis. Payment on undisputed charges will be due and payable no later than forty-five (45) Days after the date of the invoice.

C. Taxes. All charges will be calculated exclusive of any applicable federal, state or local use, excise, value-added, gross receipts, sales and privilege taxes, duties, universal service assessments or similar liabilities associated with the Services, whether charged to XO, its suppliers or Affiliates, Consultant or End User. XO is not responsible for or obligated to pay taxes based on Consultant’s income or payroll taxes, any state business franchise or occupation taxes, or any goods or services not covered by this Agreement.

ARTICLE 4. TERM & TERMINATION.

A. Term. This Agreement will commence on the Effective Date and will continue for a Term of eighteen months from the Effective Date, and may be extended by written authorization of XO unless otherwise earlier terminated in accordance with this Agreement.

B. Event of Default Termination. Except as provided in Section 4(B), if either Party commits an Event of Default, the other Party may, by giving written notice to the defaulting Party, immediately terminate the applicable SOW or the entire Agreement at the election of the terminating party. The foregoing notwithstanding, the non-defaulting party may pursue any legal remedies it may have under applicable law or principles of equity relating to such breach and subject to the terms of this Section.

C. Termination for Convenience. XO may terminate this Agreement or any SOW (i) immediately upon written notice to Consultant in the event that XO determines that Consultant has a Conflict of Interest, and (ii) upon ten (10) Days advance written notice to Consultant for any reason or no reason. Consultant may terminate this Agreement for any reason or no reason upon thirty (30) Days advance written notice to XO.

D. Effect of Termination. Termination refers to the cessation of the Parties’ respective commitments and obligations under an SOW or this Agreement from and after the date of termination, but does not relieve the Parties of their payment and other obligations. If termination occurs, except for termination for nonpayment of fees by XO, Consultant agrees to: (1) provide reasonable transition assistance to XO; (2) inform XO of the extent to which performance has been completed through the date of termination or expiration; (3) wind up its work in a commercially reasonable manner; (4) preserve items of value created prior to termination; (5) deliver to XO all work in progress that XO has paid for at that time; and (6) invoice XO all amounts properly due and owing since the date of last invoice. Additionally, as requested by XO at any time after a notice of termination or non-renewal of this Agreement, Consultant will cooperate with XO to

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develop an appropriate plan, and to provide professional services for a reasonably period of time to transition any Services to XO or a replacement provider. Upon termination of this Agreement, XO shall be required to pay to the Consultant fees owed on a prorate basis and, except as otherwise provided herein, XO shall have no further obligations pursuant to this Agreement. If this Agreement is terminated before the Consultant submits the Business Plan to XO, the Consultant will not be required to submit the Business Plan to XO and XO will XO will not be required to pay the Consultant any part of the $120,000 Plan Execution Bonus.

ARTICLE 5. REPRESENTATIONS & DISCLAIMERS.

A. Consultant Representations. Consultant represents and warrants, as of the Effective Date and throughout the term of this Agreement, that Consultant : (1) is appropriately qualified, skilled and trained to provide the Services and will operate the Services in a professional and workmanlike manner, in accordance with then-current, accepted industry standards, and in compliance with all laws, regulations, rules, orders and decrees applicable to Consultant; (2) will comply with all applicable federal, state and local laws, rules and regulations in the provision of Services and creation of any Deliverable; and (3) will own or otherwise have the right to provide the Services and Deliverables contemplated hereunder and will not infringe, misappropriate or violate the Intellectual Property rights, confidentiality or established privacy rights of any Person in the provision thereof.

B. Disclaimers. EXCEPT AS OTHERWISE SPECIFICALLY SET FORTH IN THIS AGREEMENT, ALL SERVICES AND DELIVERABLES PROVIDED HEREUNDER ARE PROVIDED “AS IS” AND NEITHER PARTY NOR ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR ASSIGNS MAKE ANY WARRANTIES OR REPRESENTATIONS TO THE OTHER, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING, BY WAY OF EXAMPLE AND NOT LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, TITLE AND NONINFRINGEMENT RELATING TO ANYTHING PROVIDED HEREUNDER, OR AS TO ANY OTHER MATTER, ALL OF WHICH WARRANTIES AND REPRESENTATIONS ARE HEREBY EXPRESSLY EXCLUDED AND DISCLAIMED.

ARTICLE 6. INTELLECTUAL PROPERTY.

XO owns and shall retain all right, title and interest in and to its Intellectual Property. XO hereby grants to Consultant the limited right to use XO Materials only in connection with Consultant’s performance of Services; otherwise, no licenses will be deemed to have been granted by XO to any of its Intellectual Property rights. Consultant will not reverse engineer or otherwise attempt to derive any formula, business plans or source code from any XO Materials. XO will own, solely and exclusively, all rights in any Deliverables or other newly-developed materials or work product created pursuant to this Agreement, which will also constitute a “work made for hire,” as such term is defined in 17 U.S.C. §101. If all or any part of that work product does not constitute work made for hire, Consultant will assign all those rights to XO without further consideration and will secure any necessary consents or waivers from any individual creator(s). All Deliverables rendered hereunder will be deemed Confidential Information of XO.

ARTICLE 7. CONFIDENTIALITY.

A. Nondisclosure Agreement. The Parties may disclose valuable Confidential Information to the other in the course of obtaining and/or providing Services under this Agreement. The use and disclosure of all such Confidential Information will be subject to the General Nondisclosure Agreement by and between the Parties executed with this Agreement and that the Term thereof will run concurrently with the Term of this Agreement.

B. Publicity. Neither Party will identify, either expressly or by implication, the other Party or its Affiliates or use any of their trade names, trademarks, service marks, or other proprietary marks in any advertising, sales presentation, news releases, advertising, or other promotional or marketing materials without such other Party’s prior written consent, which will not be unreasonably withheld.

ARTICLE 8. INDEMNIFICATION.

A. Consultant Obligations. Consultant will defend, indemnify and hold harmless XO, its Affiliates, officers, directors, employees, and shareholders from and against any Claims arising out of, relating to, incurred in connection with, or based upon: (1) any breach by Consultant of its obligations, warranties and representations set forth in this Agreement or any SOW hereunder; (2) any actual or alleged non-compliance with Law by Consultant; (3) any breach of the provisions respecting Confidentiality; and (3) any infringement, misappropriation or violation of any Intellectual Property right asserted by any third party relating to a Service or Deliverable, including the provision or use thereof by Consultant, except to the limited extent such a Claim is based on XO-provided specifications where such specifications form the basis for the Claim unless Consultant could have chosen a non-infringing alternative while complying with such XO’s specifications.

B. Procedure. If a third party makes a Claim against a Party which is subject to indemnification hereunder, the Party in receipt of such Claim (“Indemnified Party”) will promptly notify the other Party (“Indemnifying Party”) in writing no later than sixty (60) Days after receipt of such notification of a potential claim. The Indemnifying Party may assume sole control of the defense of such claim and all related settlement negotiations. The Indemnified Party will

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provide the assistance, information and authority necessary to assist the Indemnifying Party in its obligations under this Section. Neither Party may settle any such matter without the consent of the other as to any settlement that imposes an obligation on,, or requires any admission by, the Indemnified Party. Failure of the Indemnified Party to promptly notify the other will not relieve the Indemnifying Party of its obligations hereunder except to the limited extent such delay prejudices the Indemnifying Party.

C. Option. In addition to the foregoing indemnification obligations, if all or any part of a Service or a Deliverable is, or in the reasonable opinion of Consultant may become, the subject of a claim of infringement, misappropriation or violation of a third party’s United States Intellectual Property rights, XO may elect that Consultant, at its expense, either: (1) procure for XO the right to continue receiving and using the Services or Deliverable; or (2) replace or modify the allegedly infringing aspect of the Services or Deliverable to make it non-infringing, without altering its functionality. If neither option is reasonably available, XO may terminate this Agreement [or the affected SOW] and receive a refund of fees paid for the affected Service or Deliverable.

ARTICLE 9. LIABILITY AND LIMITATIONS OF LIABILITY

A. Mutual Liability. Subject to the specific provisions of this Article, it is the intent of the Parties that each will be liable to the other only for any direct damages incurred by the non-breaching Party as a result of the breaching Party’s failure to perform its obligations in the manner required by the Agreement.

B. Limitations UNLESS OTHERWISE PROVIDED IN THIS AGREEMENT, NEITHER PARTY, ITS AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR ASSIGNS WILL BE LIABLE FOR ANY CONSEQUENTIAL, INCIDENTAL, PUNITIVE, SPECIAL, EXEMPLARY OR OTHER INDIRECT DAMAGES, INCLUDING, BY WAY OF EXAMPLE AND NOT LIMITATION, LOSS OF BUSINESS, PROFITS, USE, DATA, OR OTHER ECONOMIC ADVANTAGE, WHETHER BY STATUTE, IN TORT, OR IN CONTRACT, EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. FOR BREACH OF ANY PROVISION FOR WHICH AN EXPRESS REMEDY OR MEASURE OF DAMAGES IS PROVIDED, THAT EXPRESS REMEDY OR MEASURE OF DAMAGES WILL BE THE EXCLUSIVE REMEDY OF THE PARTIES AND THE SOLE LIABILITY OF EACH. OTHERWISE, EACH PARTY’S LIABILITY HEREUNDER WILL BE LIMITED TO THE LESSER OF (1) ACTUAL DIRECT DAMAGES, OR (2) AMOUNTS ACTUALLY PAID TO CONSULTANT BY XO IN CONNECTION WITH THE CONTESTED SERVICE OVER THE PRECEEDING TWELVE (12) MONTHS FROM THE TIME THE EVENT RESULTING IN LIABILITY OCCURS. THE FORGOING LIMITATIONS DO NOT APPLY TO THIRD PARTY CLAIMS SUBJECT TO CLAIMS FOR (i) INDEMNIFICATION, (ii) CONSULTANT’S NON-COMPLIANCE WITH LAW OR ITS OBLIGATIONS RESPECTING CONFIDENTIAL INFORMATION.

C. Force Majeure. Neither Party will be liable for any loss or damage resulting from any cause beyond its reasonable control (a “Force Majeure Event”) including an “act of God”, insurrection or civil disorder, war or military operations, national or local emergency, acts or omissions of government or other competent authority, compliance with any statutory obligation or executive order not otherwise applicable to the Parties in the ordinary course of business, fire, lightning, explosion, flood, subsidence, weather of exceptional severity, or any similar act or omission beyond the reasonable control of any Party. Upon the occurrence of a Force Majeure Event and to the extent such occurrence interferes with a Party’s performance of this Agreement, each Party will be excused from performance of its obligations during the period of such interference, provided that such Party uses all reasonable commercial efforts to avoid or remove such causes of nonperformance.

ARTICLE 10

GENERAL

A. Assignment. Consultant may not assign or otherwise transfer all or any portion of its rights or obligations under this Agreement without prior written consent of XO. Any assignment or transfer in violation of this Section will be void and have no effect.

B. Notices. Any notices, requests, demands, and determinations under this Agreement (other than routine operational communications), will be in writing with copies to the legal representative of the receiving Party, and will be duly given by verifiable means either upon receipt via express, overnight or certified courier or mail with a reliable system for tracking delivery, delivery costs paid, sent to the address listed on the first page of this Agreement. A Party may change its address or designee for notice purposes by giving the other prior written notice of the new address or designee and the date upon which it will become effective.

C. Counterparts. This Agreement may be executed in counterparts, all of which taken together will constitute one single agreement between the Parties.

D. Relationship of Parties. The Parties are independent contractors, bound to each other only as provided for herein. Neither Party has the authority to bind, act on behalf of or represent the other. Nothing in this Agreement creates a relationship of partnership, employer and employee, principal and agent, master and servant, or franchisor and franchisee. Neither Party will act or fail to act in a way that could reasonably cause others to believe that it has authority to act on behalf of the other beyond the authority expressly granted herein.

E. Audit. During the Term and for a period of three (3) years after any termination or expiration of this Agreement, Consultant will: (1) provide to XO, access at

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all reasonable times to billing and payment records relating to the Services and Deliverables, and reasonable supporting documentation, for the sole purpose of performing audits to verify the accuracy of charges and invoices; and (2) cooperate fully with XO’s reasonable requests in connection with such audit, and provide to XO such assistance as they reasonably require. The Auditors will comply with Consultant’s reasonable security requirements.

F. Insurance. During the Term of this Agreement, Consultant will procure and maintain at its sole expense (including all deductible and self-insured expenses) appropriate business insurance, including but not limited to the following types: (a) Property Insurance covering Consultant property, tools and equipment used and necessary in the performance of services under this Agreement; (b) Automobile Liability Insurance including coverage for owned, hired, leased, rented and non-owned vehicles. Except as otherwise provided herein, all coverage must be primary and non-contributory and must be maintained without interruption from the date of this Agreement until the date of termination of this Agreement.

G. Severability and Modification. If any provision of this Agreement conflicts with the law under which this Agreement are to be construed or if any such provision is held invalid by an arbitrator or a court with jurisdiction over the Parties, such provision will be modified to reflect as nearly as possible the original intentions of the Parties in accordance with applicable law. The remainder of this Agreement will remain in full force and effect. If any state or federal body of competent jurisdiction determines that any provision of this Agreement violates any applicable rules, policies, or regulations, both Parties will make reasonable efforts to promptly bring this Agreement into compliance and will endeavor in those efforts to preserve for both Parties the economic benefits as reflected in this Agreement to the maximum extent possible.

H. Consents and Approval. Except where expressly provided as being in the sole discretion of a Party, where agreement, approval, acceptance, consent, or similar action by either Party is required under this Agreement, such action will not be unreasonably delayed, conditioned or withheld. An approval or consent given by a Party under this Agreement will not relieve the other Party from responsibility for complying with the requirements of this Agreement, nor will it be construed as a waiver of any rights under this Agreement, except as and to the extent otherwise expressly provided in such approval or consent.

I. Waiver of Default. No waiver or discharge hereof will be valid unless in writing and signed by an authorized representative of the Party against which such amendment, waiver, or discharge is sought to be enforced. A delay or omission by either Party hereto to exercise any right or power under this Agreement will not be construed to be a waiver thereof. A waiver by either of the Parties of any of the covenants to be performed by the other or any breach thereof will not be construed to be a waiver of any succeeding breach thereof or of any other covenant.

J. Cumulative Remedies. Except as otherwise expressly provided, all remedies provided for in this Agreement will be cumulative and in addition to and not in lieu of any other remedies available to either Party at law, in equity or otherwise.

K. Survival. Any provision of this Agreement which contemplates performance or observance subsequent to any termination or expiration (in whole or in part) will survive any such termination or expiration (in whole or in part, as applicable) and continue in full force and effect.

L. Third Party Beneficiaries. Except as otherwise expressly provided, this Agreement will not create any rights in third parties, including End Users, suppliers and vendors of a Party, or to create any obligations of a Party to any such third parties, or to give any right to either Party to enforce this Agreement on behalf of a third party.

M. Governing Law. This Agreement and performance hereunder will be governed by and construed in accordance with the laws of the State of New York, without regard to its choice of law principles or the U.N Convention on Contracts for the International Sale of Goods. The Parties hereby expressly opt-out from the applicability of any State’s version of the Uniform Computer Information Transactions Act.

N. Arbitration. Without prejudice to either Party’s right to seek equitable relief (including, but not limited to, injunction) from a court of competent jurisdiction, any dispute arising out of or related to this Agreement that cannot be resolved by negotiation, will be settled by binding arbitration before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association . The arbitration will take place in Fairfax, Virginia, and be governed by the laws of the State of New York. The Parties will share the costs of arbitration, including the fees and expenses of the arbitrator, equally, unless the arbitration award provides otherwise. Each Party will bear the cost of preparing and presenting its case. The arbitrator will have no power or authority to make awards or issue orders of any kind except as expressly permitted by this Agreement, and in no event will the arbitrator have the authority to make any award that provides for punitive or exemplary damages. The arbitrator will use all reasonable means to settle the dispute with dispatch and will state his/her opinion in writing along with his/her reasons for the decision. The arbitrator’s decision will follow the plain meaning of the relevant documents, and will be final and binding. The award may be confirmed and enforced in any court of competent jurisdiction pursuant to Federal Arbitration Act, 9 U.S.C. §§ 1-16, et seq. To the extent applicable, the Parties each waive any right they may have to a trial by jury in any legal proceeding arising from or related to this Agreement.

O. Order of Precedence. Any conflict among or between the terms and conditions of the documents

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making up this Agreement will be resolved in accordance with the following order of precedence (in descending order of precedence): (i) this Agreement; (ii) the SOW; (iii) any additional documentation (e.g, invoices, etc).

P. Mutual Representations. Each Party represents that it has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated there under, and the execution, delivery and performance of this Agreement have been duly authorized.

Q. Entire Agreement. This Agreement, including all addenda, exhibits, schedules or SOWs made hereunder, constitutes the entire agreement between the Parties with respect only to the subject matter in this Agreement, the SOW hereunder which specifically reference this Agreement and supersedes all prior agreements, whether written or oral, with respect to the subject matter contained therein. This Agreement may be modified only by a written instrument executed by both parties.

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the Effective Date.

XO Communications Services, Inc. for itself and its operating affiliates and subsidiaries:		Thomas Cady:
By	/s/ Daniel Wagner		/s/ Thomas W. Cady
Printed Name	Daniel Wagner	Date:	4/15/'09
Title	President
Date	4/21/'09

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Exhibit 1 To Master Professional Services Agreement

Pursuant to Article 1 of the Master Professional Services Agreement (“Agreement”), the following capitalized terms and phrases used in the Agreement will have the meanings set forth herein. Terms that are not so defined will be defined in the context in which they are used.

A. “Affiliate” means, with respect to an entity other than XO, any other entity or person Controlling, Controlled by, or under common Control with, such entity. With respect to XO, “Affiliate” means (i) XO Holdings, Inc.; and (ii) all direct or indirect subsidiaries of XO Holdings, Inc. (other than XO itself).

B. “Claims” means any actual or threatened losses, liability, claims, damages, penalties, costs, fees, fines, levies, assessments or expenses (including without limitation attorneys’ fees and costs) arising from or incurred in connection with any investigations, litigation, settlement, judgment, interest and other penalties.

C. “Confidential Information” means all information, in any form, disclosed by the disclosing Party to the other Party as defined in the NDA, including without limitation all Deliverables and information that:

(i)	concerns the operations, plans, know-how, trade secrets, business affairs, personnel, Consultants or suppliers of the disclosing Party; or
(ii)	concerns XO Customers or End Users and confidential information belonging to End Users.
(iii)	the receiving Party knows or might reasonably expect is regarded by the disclosing Party as the confidential information of the disclosing Party;
(iv)	is designated as confidential, restricted, proprietary, or with similar designation; or
(v)	concerns any of the terms or conditions or other facts with respect to this Agreement.

D. “Control” and its derivatives means the legal, beneficial or equitable ownership, directly or indirectly, of more than fifty percent (50%) of the outstanding voting capital stock (or other ownership interest, if not a corporation) of an entity, or actual managerial or operational control over such entity.

E. “Days” means calendar days unless otherwise specified.

F. “Deliverables” means the final work product or other material, regardless of form, that Consultant is required to deliver to XO in accordance with a Statement of Work.

G. “End User” means XO or the person to which ultimately uses the services provided by Consultant.

H. “Event of Default” means any of the following:

(i)	any representation or warranty made by a Party in this Agreement which was incorrect in any respect when made and that could reasonably be expected to have a material adverse effect upon the other Party’s ability to realize the benefits of its bargain;
(ii)	a material breach of this Agreement that is not cured within thirty (30) Days after notice of breach to the breaching Party;
(iii)	Failure to make any payment when such payment or amount is due and such failure continues for thirty (30) Days after receipt of written notice of such failure.

I. “Intellectual Property” means all statutory or common law rights in and relating to copyrights, patents, trademarks, trade secrets, moral rights, or any similar rights established under U.S. law.

J. “IVR Sales Revenue” means revenue (as defined and quantified and reported in XO’s annual financial statements pursuant to generally accepted accounting principles and XO’s bad debt and credit reserve policies and procedures and subject to Sarbanes Oxley controls) generated from sales of XO Interactive Applications, Inbound Call Automation (IVR), Outbound Call Automation, Intelligent Call Routing, and Hosted Voice XML.

K. “IVR Sales Revenue Target” means IVR Sales Revenue equal to $[***].

L. “Law” means all laws, statute, regulation, ordinance, rule, order, decree or governmental requirement enacted, promulgated or imposed by any governmental authority at any level.

M. “Person” means any individual, corporation, proprietorship, firm, partnership, limited liability company, trust, association or other entity.

N. “Services” means services set forth in the SOW executed by the Parties and appended to this Agreement, including access and or license to use all necessary software, third party elements, and modifications made from time-to-time thereto.

O. “XO Customer/End User” includes, without limitation any XO customers and users of any XO systems or service offerings. End Users and Confidential Information belonging to XO Customers and End Users to which Consultant may have access is Confidential hereunder.

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“XO Materials” means XO business, marketing or financial information; tools, software (both in object code and source code form), hardware, equipment, data, databases, architecture, diagrams, other materials and know-how, intellectual property and other personal property (both tangible and intangible) which XO developed prior to the Agreement or which XO independently develops or licenses from a third party at any time.

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EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Carl J. Grivner, certify that:

1. I have reviewed this Form 10-Q of XO Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2009	/s/ Carl J. Grivner
	Carl J. Grivner
	Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Laura W. Thomas, certify that:

1. I have reviewed this Form 10-Q of XO Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors:

a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 10, 2009	/s/ Laura W. Thomas
	Laura W. Thomas
	Senior Vice President and Chief Financial Officer (Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002

In connection with the Quarterly Report of XO Holdings, Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”) we, Carl J. Grivner, Chief Executive Officer, and Laura W. Thomas, Senior Vice President and Chief Financial Officer of the Registrant, certify that, to the best of our knowledge,:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Date: August 10, 2009

/s/ Carl J. Grivner Carl J. Grivner

Chief Executive Officer

(Principal Executive Officer)

/s/ Laura W. Thomas Laura W. Thomas

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)