V. The Transaction

Pursuant to the stock purchase agreement, XO will issue new common shares to the investors, each of whom will pay $400 million in cash for the shares, for a total aggregate investment in XO of $800 million. Specifically, Forstmann Little will purchase 79,999,998 shares of Class A Common Stock, par value $0.01 per share of XO, and two shares of a newly created class of Class D Common Stock, par value $0.01 per share of XO. The Forstmann Little shares will equal approximately 40% of the total outstanding equity securities of XO. Telmex will purchase 80,000,000 shares of a newly created class of Class C Common Stock, par value $0.01 per share, of XO. The Telmex shares will equal approximately 40% of the total outstanding equity securities of XO. The remaining approximately 20% will be common stock divided between XO's management (approximately 2%) and other holders (18%).

The purchase by and issuance of the new shares to the investors will occur at the closing of the contemplated transactions. In addition, Forstmann Little and Telmex each also will be entitled to designate persons to serve on the XO Board of Directors proportionate to the equity interests so long as they hold more than 10% of XO's common stock. The investors will hold their interests independently of one another and have no agreement to act in concert except with respect to the election of directors. Neither investor will participate in the day-to-day operations of XO California and XO Long Distance. XO currently plans to retain its existing senior management and it is not contemplated that there will be significant changes in XO's current management occasioned by the investment or restructuring.

On June 20, 2002, XO's attorneys, Kelley, Drye and Warren, wrote to the assigned Administrative Law Judge (ALJ) to inform the Commission that XO filed a petition with the U.S. Bankruptcy Court pursuant to Chapter 11 of the U.S. Bankruptcy Code on June 17, 2002. XO California and XO Long Distance were not included in that filing. The letter noted XO had no plans to terminate the transaction that is the subject of this application. Because this letter and the application indicated a supplement might be filed, XO's in-house attorneys wrote to the ALJ on July 11, 2002 to indicate that XO did not intend to amend or supplement the application. In that letter, XO's attorneys requested that the Commission act expeditiously on the application, as the application had requested.

Where acquiring companies do not possess CPCNs, we apply the same requirements as an applicant seeking a CPCN to exercise the type of authority held by the company being acquired, a minimum of $100,000 in case or cash equivalent, and technical expertise in telecommunications or a related business. FLVII and FLDEVIII, among other Forstmann Little entities, acquired McLeod USA Telecommunications Services Inc., a limited facilities-based and resale provider of local exchange and interexchange telecommunications services, and its CPCN in D.02-03-050. Telmex USA, L.L.C., a Delaware limited liability company and a subsidiary of Telmex, has a CPCN to provide inter- and intra- local access and transport area services, granted in D.00-09-045. The Forstmann Little acquiring entities were found to have sufficient resources to meet our financial requirements in D.02-03-050. With the granting of that acquisition, they now possess the technical expertise we require. XO California and XO Long Distance provided a Telmex audited financial statement, which demonstrates that Telmex has sufficient resources to meet our requirements. Telmex has the technical expertise we require, as evidenced by the CPCN granted to its subsidiary.

No new construction is being proposed. Accordingly, there is no possibility that the proposed transaction contemplated herein may have any significant impact on the environment.