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

• pursuit of growth opportunities; and

• the potential need to obtain 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; 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.

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. We believe our nationwide high-capacity network, advanced IP and converged communications services, broadband wireless capabilities, and a responsive, customer-focused orientation, among other things, differentiate us from our competitors. 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 have used and plan to continue using 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 $148.9 million in fixed assets for long-term growth during the nine months ended September 30, 2009. During the first nine months 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 $64.7 million of revenue growth for our core services. While our total revenue increased 3.9% for the nine months ended September 30, 2009 compared to the year-ago period, we were able to limit the corresponding increase in cost of service to 2.3% 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 32.3% for the nine months ended September 30, 2009 from 34.1% 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. These initiatives are partially being realized in 2009, with further realization expected in 2010 and beyond. 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.
For the three and nine months ended September 30, 2009 we recognized net income of $19.0 million and $8.6 million, respectively. These results were primarily derived from investment gains from the sale of marketable securities of $16.3 million and $34.3 million in the three and nine months ended September 30, 2009, respectively.

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.
On July 9, 2009, we received a letter from 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 net per share.
As reported in our recent 8-K filing, on September 28, 2009 the special committee of the Board of Directors of XO Holdings, Inc. announced that it has "unanimously concluded that the proposal of ACF Industries Holding Corp., an affiliate of Carl C. Icahn and holder of a majority of the shares of XO Holdings' common stock, to purchase all of the shares of XO Holdings' common stock not currently held by ACF at a price of $0.55 per share substantially undervalues the company, and, therefore, the special committee does not support the proposal." The special committee communicated to Mr. Icahn that it would consider a proposal that recognizes the full value of the company and reflects the significant benefits that would accrue to ACF as a result of full ownership. On October 23, 2009, ACF sent a letter to the special committee pursuant to which ACF made a non-binding proposal to increase its previously outstanding offer to acquire all of the outstanding shares which it does not own, to an aggregate of $0.80 net per share in cash. The offer made on October 23, 2009 expired on October 26, 2009 at 6:00 pm (EST). The Chairman and other related parties filed Amendment no. 22 to Schedule 13D on November 9, 2009. Such amendment stated: "In the period following October 26, 2009, the stated termination date of ACF Holding's $0.80 per share offer, representatives of ACF Holding continued to discuss the matter with members of the Special Committee and its advisors...Representatives of ACF Holding pointed out that the CLEC industry faced difficult times ahead and that ACF Holding believed that its offer of $0.80 per share was fair, especially in light of the fact that it required a majority of the minority stockholders to vote for it in order to become effective. Representatives of ACF Holding also pointed out that ACF Holding had raised its proposed merger price from $0.55 to $0.80 per share without receiving a counteroffer. They also stated that the initial offer was made when the market price for the Shares was under $0.30 per share. In light of all of the above facts, ACF Holding is now terminating its offer." 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 September 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 September 30,
                                              % of                             % of                   Change
                             2009           Revenue           2008           Revenue         Dollars         Percent
Revenue                    $ 382,000           100.0 %      $ 373,925           100.0 %      $  8,075             2.2 %

Costs and expenses:
Cost of service*             217,712            57.1 %        210,925            56.4 %         6,787             3.2 %
Selling, general and
administrative               120,331            31.5 %        119,964            32.1 %           367             0.3 %
Depreciation and
amortization                  43,288            11.3 %         47,847            12.8 %        (4,559 )          -9.5 %
Loss on disposal of
assets                           912             0.2 %            796             0.2 %           116            14.6 %

Total costs and
expenses                     382,243           100.1 %        379,532           101.5 %         2,711             0.7 %

Loss from operations $ (243 ) -0.1 % $ (5,607 ) -1.5 % $ (5,364 ) -95.7 %

                                          Nine Months Ended September 30,
                                                % of                               % of                   Change
                              2009            Revenue            2008            Revenue          Dollars         Percent
Revenue                    $ 1,145,448           100.0 %      $ 1,102,444           100.0 %      $  43,004             3.9 %

Costs and expenses:
Cost of service*               667,281            58.3 %          652,540            59.2 %         14,741             2.3 %
Selling, general and
administrative                 369,418            32.3 %          375,531            34.1 %         (6,113 )          -1.6 %
Depreciation and
amortization                   129,593            11.3 %          140,515            12.7 %        (10,922 )          -7.8 %
Impairment of LMDS
licenses                         8,282             0.7 %                -               -            8,282              nm
Loss (gain) on
disposal of assets               4,989             0.4 %              (37 )            nm            5,026              nm

Total costs and
expenses                     1,179,563           103.0 %        1,168,549           106.0 %         11,014             0.9 %

Loss from operations $ (34,115 ) -3.0 % $ (66,105 ) -6.0 % $ (31,990 ) -48.4 %

* - exclusive of depreciation and amortization

nm - not meaningful

Revenue
Total revenue for the three and nine months ended September 30, 2009 increased 2.2% and 3.9%, respectively as compared to the same periods in 2008, due to growth in our core service offerings relating to Broadband services, formerly reported as Data and IP services, partially as a result of 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 September 30,
                                        % of                       % of              Change
                          2009        Revenue        2008        Revenue      Dollars      Percent
  Core services
  Broadband             $ 199,949         52.3 %   $ 173,398         46.4 %   $ 26,551         15.3 %
  Integrated/Voice         69,151         18.1 %      77,799         20.8 %     (8,648 )      -11.1 %

  Total core services     269,100         70.4 %     251,197         67.2 %     17,903          7.1 %

  Legacy/TDM services     112,900         29.6 %     122,728         32.8 %     (9,828 )       -8.0 %

  Total revenue         $ 382,000        100.0 %   $ 373,925        100.0 %   $  8,075          2.2 %

Core Services. For the three months ended September 30, 2009 compared to the three months ended September 30, 2008, we experienced continued growth in market demand for telecommunications services utilizing next generation Broadband technologies and transport services as evidenced by the 15.3% increase in revenue from our Broadband services. This increase principally resulted from revenue growth in IP VPN, IP Flex, Dedicated Private Line, and DIA services. IP VPN revenue for the three months ended September 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 September 30, 2009 increased $4.8 million, or 18.6%, 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 6.0%, increase in Dedicated Private Line revenues for the three months ended September 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 $2.4 million, or 5.8%, increase in DIA revenue and a $5.1 million, or 69.5%, increase in wholesale VoIP origination and termination services during the three months ended September 30, 2009 over the year-ago period. VoIP termination revenue benefitted significantly from efforts to optimize pricing relative to network capacity.
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 $1.8 million, or 9.0%, compared to the year-ago period. Like VoIP termination, CLDT was also impacted by market conditions and our ability to operate within these market conditions. The gain for CLDT

however 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 September 30, 2009, revenue from our Legacy/TDM services category decreased compared to the three months ended September 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.

                                          Nine Months Ended September 30,
                                                % of                               % of                   Change
                              2009            Revenue            2008            Revenue          Dollars         Percent
Core services
Broadband                  $   584,677            51.0 %      $   490,629            44.5 %      $  94,048            19.2 %
Integrated/Voice               216,440            18.9 %          245,764            22.3 %        (29,324 )         -11.9 %

Total core services            801,117            69.9 %          736,393            66.8 %         64,724             8.8 %

Legacy/TDM services            344,331            30.1 %          366,051            33.2 %        (21,720 )          -5.9 %

Total revenue              $ 1,145,448           100.0 %      $ 1,102,444           100.0 %      $  43,004             3.9 %

Core Services. During the nine months ended September 30, 2009, revenue from our Broadband services increased 19.2% 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 nine months ended September 30, 2009 increased $22.2 million compared to the year-ago period primarily due to continued strong response to marketing efforts. Revenue from our IP Flex service for the nine months ended September 30, 2009 increased $16.9 million, or 24.0%, 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 $14.4 million, or 6.9%, increase in Dedicated Private Line revenues for the nine months ended September 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 $13.2 million, or 11.2%, increase in DIA revenue and a $12.6 million, or 62.9%, increase in wholesale VoIP origination and termination services during the nine months ended September 30, 2009 compared to 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 nine months ended September 30, 2009 compared

to the year-ago period. Integrated/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 $7.9 million, or 12.5%, increase in CLDT revenue for the nine months ended September 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 nine months ended September 30, 2009, revenue from our Legacy/TDM services category decreased compared to the nine months ended September 30, 2008 due primarily to the $28.8 million, or 12.2%, 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.
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 September 30,
                                              % of                              % of                    Change
                             2009            Revenue           2008            Revenue         Dollars          Percent
Telecommunications
services                   $ 154,499             40.5 %      $ 150,021             40.1 %      $  4,478              3.0 %
Network operations            50,035             13.1 %         47,617             12.7 %         2,418              5.1 %
Pass-through taxes            13,178              3.4 %         13,287              3.6 %          (109 )           -0.8 %

Total cost of
services                   $ 217,712             57.0 %      $ 210,925             56.4 %      $  6,787              3.2 %

The COS increase for the three months ended September 30, 2009 compared to the same period in 2008 was mainly due to the increase in telecommunications services costs and network operation costs. The primary telecommunications services costs that contributed to the period over period increase were $11.3 million related to growth in sales of our Broadband service lines and the $4.7 million incremental increase in wholesale long distance usage costs. These increases were partially offset by $10.5 million of incremental cost savings achieved through planned network optimization projects completed as of September 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 re-homing 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.
Network operations costs for the three months ended September 30, 2009 compared to the same period in 2008 increased by $2.4 million, primarily due to a $1.5 million increase in technical sites software and related costs and $0.8 million due to increases in building access rights of way.

                                         Nine Months Ended September 30,
                                              % of                              % of                    Change
                             2009            Revenue           2008            Revenue         Dollars          Percent
Telecommunications
services                   $ 478,729             41.8 %      $ 468,474             42.5 %      $ 10,255              2.2 %
Network operations           149,838             13.1 %        143,045             13.0 %         6,793              4.7 %
Pass-through taxes            38,714              3.4 %         41,021              3.7 %        (2,307 )           -5.6 %

Total cost of
services                   $ 667,281             58.3 %      $ 652,540             59.2 %      $ 14,741              2.3 %

The telecommunications services increase for the nine months ended September 30, 2009 compared to the same period in 2008 was due primarily to $36.4 million of growth in sales of our Broadband service lines and the $20.8 million incremental increase in wholesale long distance usage costs. These increases were partially offset by a $12.3 million decline in the cost of terminating wholesale long distance usage as a result of traffic terminating to lower cost locations and $29.6 million of incremental cost savings achieved through planned network optimization projects completed as of September 30, 2009. Additionally, we realized $5.1 million cost reductions during 2009 due to net favorable vendor dispute settlements.
The network operations costs increased by $6.8 million for the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was attributed to a $3.4 million increase in technical sites software and related costs and $2.4 million increase in building access rights of way. . . .