1023

					                                                              HEARING DATE AND TIME: March 25, 2004 at 10:00 a.m. EST
                                                                    OBJECTION DEADLINE: March 22, 2004 at 4 pm EST

KIRKLAND & ELLIS LLP
Citigroup Center
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
Facsimile: (212) 446-4900
Matthew A. Cantor (MC-7727)
Jonathan S. Henes (JH-1979)

Attorneys for Debtors and Debtors in Possession

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
–––––––––––––––––––––––––––––––––––– X
In re                                :
                                     :                                          Chapter 11 Case No.
Allegiance Telecom, Inc., et al.,    :                                          03-13057 (RDD)
                                     :
                     Debtors.        :                                          Jointly Administered
–––––––––––––––––––––––––––––––––––– X

      MOTION OF THE DEBTORS FOR AN ORDER, PURSUANT TO (A)
    RULE 9019 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE,
 APPROVING THE CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL
 RELEASE, DATED FEBRUARY 27, 2004, AMONG LEVEL 3 COMMUNICATIONS,
   LLC AND THE DEBTORS; (B) SECTION 363 OF THE BANKRUPTCY CODE
   AUTHORIZING THE TRANSFER, AS A PART OF SUCH SETTLEMENT, OF
CERTAIN ASSETS FREE AND CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES,
    AND (C) SECTION 365 OF THE BANKRUPTCY CODE, APPROVING AND
 AUTHORIZING, AS A PART OF SUCH SETTLEMENT, THE ASSUMPTION AND
              ASSIGNMENT OF AN EXECUTORY CONTRACT

TO THE HONORABLE UNITED STATES BANKRUPTCY JUDGE:

                        Allegiance Telecom, Inc. and its direct and indirect subsidiaries, as debtors and

debtors in possession (collectively, “Allegiance” or the “Debtors”), respectfully represent:

                                                                   Introduction

                        1.          On May 14, 2003 (the “Commencement Date”), each of the Debtors

commenced with this Court a voluntary case under chapter 11 of title 11 of the United States




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Code (the “Bankruptcy Code”).                             The Debtors are authorized to operate their business and

manage their properties as debtors in possession pursuant to sections 1107(a) and 1108 of the

Bankruptcy Code.                  The Debtors’ chapter 11 cases have been consolidated for procedural

purposes only and are being jointly administered pursuant to rule 1015(b) of the Federal Rules of

Bankruptcy Procedure (the “Bankruptcy Rules”).

                        2.          No trustee or examiner has been appointed in these chapter 11 cases. On

May 28, 2003, pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the United States

Trustee for the Southern District of New York (the “U.S. Trustee”) appointed a statutory

committee of unsecured creditors (the “Creditors Committee”) in these chapter 11 cases.

                                                                    Jurisdiction

                        3.          This Court has subject matter jurisdiction to consider and determine this

Motion pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b).

Venue is proper before this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

                                              An Overview of Allegiance’s Business

                        4.          Allegiance is a facilities-based national local exchange carrier that

provides integrated telecommunications products and services to small and medium-sized

business customers, large businesses (i.e., national customers with multiple locations),

governmental entities, wholesale customers and other institutional users. Allegiance offers its

customers a variety of services, including:

                        •     local and long distance voice services, including basic telephone services and
                              advanced calling features;

                        •     broadband and other Internet and data services, including high-speed Internet
                              access, wide area network interconnection, domain name registration, web
                              hosting, email and colocation services;


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                        •     integrated local long distance/Internet access offerings, which provide
                              customers with integrated voice and Internet access over a single broadband
                              line;

                        •     wholesale services to other regional and national service providers, including
                              equipment colocation, managed modem ports and Internet protocol traffic
                              aggregation; and

                        •     customer premise equipment sales and maintenance services.

                        5.          As of the Commencement Date, the Debtors served more than 100,000

business customers in major markets throughout the United States. As of December 31, 2003,

the Debtors employed approximately 2,893 people, of which approximately 66 employees are

covered by collective bargaining agreements.

                        6.          As of December 31, 2003, the Debtors had approximately $284.2 million

of unrestricted cash on hand. As of December 31, 2003, the Debtors’ consolidated books and

records reflected assets totaling approximately $1.136 billion and liabilities totaling

approximately $1.449 billion. For the 12 months ending December 31, 2003, the Debtors, on a

consolidated basis, reported revenues of approximately $776.9 and net losses of approximately

$360.0 million.

                        7.          On February 20, 2004, this Court entered an Order (I) Approving The Sale

Free And Clear Of All Liens, Claims And Encumbrances To The Successful Bidder, (II)

Authorizing The Assumption And Assignment Of Certain Executory Contracts And Unexpired

Leases, And (III) Granting Related Relief (the “XO Sale Order”), which, among other things,

approved the sale to XO Communications, Inc. or its designee (“XO” or the “Buyer”), pursuant

to and in accordance with a certain asset purchase agreement (the “XO APA”) dated February

18, 2004, by and among certain of the Debtors and Buyer, of substantially all of the assets of




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Allegiance and ATCW and all of the stock of the direct and indirect reorganized subsidiaries of

ATCW, excluding the stock of Shared Technologies Allegiance, Inc., one of the Debtors1.

                  Disputes Under the Integrated Network Solution Purchase Agreement

                        8.          Allegiance Telecom Company Worldwide (“ATCW”), one of the Debtors

in these chapter 11 cases, and Level 3 Communications LLC (“Level 3”) are currently parties to

an Integrated Network Solution Purchase Agreement, which was entered into on or about July

24, 2000 (as amended, the “INSPA”).2 The INSPA was originally executed by ATCW and Level

3’s predecessor-in-interest, Genuity Solutions, Inc. (“Genuity”). In 2003, in connection with a

sale of substantially all of its assets, Genuity assigned to Level 3, and Level 3 assumed from

Genuity, the INSPA.

                        9.          Pursuant to the INSPA, Allegiance provides an integrated network

solution to the Level 3 dial-up modem service business. By way of example, if an Internet

subscriber wants to connect with an Internet service provider such as America Online (“AOL”),

the subscriber will dial a local telephone number and the call will connect to a bank of modems

owned by a local exchange carrier, such as Allegiance. The call is then transferred by an operator



1     ATCW’s managed modem business, and the INSPA, as defined below, are excluded from the sale to XO.

2     Capitalized terms used in this section, but not otherwise defined in this section shall have the meanings set forth
      in the INSPA. The INSPA contains confidential, proprietary and commercially sensitive information. In that
      regard, the INSPA contains a comprehensive confidentiality provision prohibiting Allegiance and Level 3 from
      disclosing the INSPA or its contents to the public. On February 10, 2004, this Court entered an Order Pursuant
      to Section 107(b) Of The Bankruptcy Code And Rule 9018 Of the Federal Rules of Bankruptcy Procedure (A)
      Authorizing Level 3 Communications, LLC To File Certain Exhibits To the Motion for Recoupment And Relief
      From the Automatic Stay Under Seal, and (B) Scheduling An In Camera Hearing On The Motion (as
      subsequently modified and partially vacated, the “INSPA Seal Order”). The INSPA Seal Order authorized
      Level 3 to file a redacted form of the INSPA in connection with the Credit Motion and to file Exhibits B and F
      to the Credit Motion under Seal. The INSPA Seal Motion was modified and partially vacated by a stipulation
      entered into by Allegiance, Level 3 and KMC Telecom XI LLC, which was approved by this Court on February
      24, 2004.




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of a data network, such as Level 3, to the Internet service provider’s network. Accordingly, for

Level 3 to service its Internet service provider customers, it relies on Allegiance to provide local

exchange access to Level 3’s customer subscribers in accordance with the INSPA. In addition,

in providing local exchange services to Level under the INSPA, Allegiance subcontracts a

portion of such services from KMC Telecom XI, LLC (including, without limitation, subsidiaries

and affiliates thereof, “KMC”), pursuant to the Primary Rate Interface Services Agreement,

dated as of February 11, 2002 (as amended, the “KMC Agreement”), between Allegiance and

KMC.

                        10.         Based on the nature of the services provided by Allegiance, the INSPA

contains a variety of performance standards and payment obligations. In connection therewith, a

number of disputes have arisen between Allegiance and Level 3 concerning the performance of

their respective obligations under the INSPA. On February 4, 2004, Level 3 filed a motion (the

“Credit Motion”), in part under seal, which claims that Level 3 is entitled to recoup $25 million

in credits against certain payments it would otherwise owe to Allegiance due to alleged breaches

of the INSPA related to performance warranties. On February 8, 2004, Level 3 commenced an

adversary proceeding against Allegiance (the “Termination Complaint”), which seeks a

declaratory judgment that Allegiance is in continuing material breach of the INSPA, and, as a

result, Level 3 should be entitled to terminate the INSPA. Allegiance disputes the allegations

contained in the Credit Motion and the Termination Complaint.

                        11.         The issues related to the Credit Motion and the Termination Complaint are

highly technical and complex and would require testimony of experts on, among other things, the

performance of transfers of calls from one network to another, “call blocking” performance and

other performance issues. As a result, Allegiance, together with its attorneys, have commenced


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the process of developing a litigation strategy, which would include significant witness

preparation and extensive depositions of Level 3’s management team and employees, to address

the claims of Level 3.                      At the same time, Allegiance, in consultation with the Creditors

Committee, has been in negotiations to attempt to reach an amicable resolution to its dispute with

Level 3.

                              Confidential Settlement Agreement and Mutual Release

                        12.         As noted directly above, the Debtors and Level 3, in consultation with the

Creditors Committee, have been engaged in settlement discussions relating to the disputes under

the INSPA. Based on these negotiations, the Debtors and Level 3 have agreed to amicably

resolve, compromise and settle any and all claims or demands with respect to the INSPA,

provide for the structured termination of the INSPA, and provide for the orderly migration of

services delivered under the INSPA to the Level 3 network. Accordingly, subject to this Court’s

approval, ATCW and Level 3 have entered into that certain Confidential Settlement Agreement

and Mutual Release dated as of February 27, 2004 (the “Settlement Agreement”). In addition, it

is likely that XO will also be a party to the Settlement Agreement.3 Due to the confidential nature




3     In connection with certain transactions contemplated by the Settlement Agreement, Allegiance and Level 3
      have requested the cooperation of XO. In that regard, XO, is reviewing the terms of the Settlement Agreement
      and has engaged in discussions with Allegiance. Based on the foregoing, the Debtors believe that XO will
      cooperate and become a signatory to the Settlement Agreement.

      In the Settlement Agreement Seal Motion, as defined below, the Debtors incorrectly stated that XO currently is
      a signatory to the Settlement Agreement. Based on information available to the Debtors’ counsel at the time the
      Settlement Agreement Seal Motion was filed, the Debtors’ counsel believed the statement regarding XO as
      signatory was true and correct. However a subsequent conversation with representatives of the Debtors revealed
      that XO has not yet executed the Settlement Agreement.




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of certain terms and conditions set forth in the Settlement Agreement, the Debtors have annexed

hereto a redacted version of the Settlement Agreement.4

                        13.         As set forth in more detail below, the Debtors submit that the approval of

the Settlement Motion is in the best interests of their estates, creditors and all parties in interest.

The approval of the Settlement Agreement enables the Debtors to obtain $54 million in cash for

their estates upon closing the sale to XO, eliminates the cost and risk of litigation and permits the

Debtors to focus on proposing and implementing a chapter 11 plan of reorganization.

                                                                Relief Requested

                        14.         By this Motion, the Debtors seek approval, pursuant to Bankruptcy Rule

9019(a), and sections 363 and 365 of the Bankruptcy Code, of the terms of the Settlement

Agreement, and the transactions contemplated therein. Subject to this Court’s approval, under

the terms of the Settlement Agreement:



4     All descriptions of the Settlement Agreement contained in this Motion are qualified in their entirety by the
      terms and conditions of the Settlement Agreement. On March 5, 2004, the Debtors filed that certain Motion Of
      The Debtors For Entry Of An Order, Pursuant To Section 107(b) Of The Bankruptcy Code And Rule 9018 Of
      The Federal Rules Of Bankruptcy Procedure, Authorizing The Debtors To File A Redacted Version Of The
      Settlement Agreement In Connection With The Debtors’ Motion For An Order Pursuant To (A) Rule 9019 Of
      The Federal Rules Of Bankruptcy Procedure, Approving The Confidential Settlement Agreement And Mutual
      Release, Dated February 27, 2004, Among Level 3 Communications, LLC, The Debtors And XO
      Communications, Inc.; (B) Section 363 Of The Bankruptcy Code Authorizing The Transfer Of Certain Assets
      Free And Clear Of Liens, Claims And Encumbrances, And (C) Section 365 Of The Bankruptcy Code,
      Approving And Authorizing The Assumption And Assignment Of An Executory Contract (the “Settlement
      Agreement Seal Motion”). On March 5, 2004, the Court entered an order granting the Settlement Agreement
      Seal Motion (the “Settlement Agreement Seal Order”) and authorizing the Debtors to, among other things, file
      only a redacted version of the Settlement Agreement; and providing that the redacted information in the
      Settlement Agreement remain confidential. The Court further allowed the Debtors to serve the unredacted
      Settlement Agreement only on the Court, the U.S. Trustee, attorneys for the Creditors Committee and attorneys
      for the Debtors’ prepetition secured lenders (the “Prepetition Lenders”). Moreover, under the terms of the
      Settlement Agreement Seal Motion, the Settlement Agreement shall not be made available to the general public
      or any parties in interest in these chapter 11 cases; provided that the Settlement Agreement may be provided to
      certain persons, at the discretion of the Debtors, who are subject to confidentiality obligation to the Debtors; and
      provided further that any such person receiving an unredacted version of the Settlement Agreement pursuant to
      this Order shall also be bound by this Order to maintain the confidentiality of the Settlement Agreement.




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                        •     ATCW will pay to Level 3 amounts equal to the “reciprocal compensation”
                              derived from the INSPA for the period beginning February 1, 2004 and
                              ending on the Closing Date (as defined in the Settlement Agreement);

                        •     ATCW and Level 3 will immediately commence with the preparation of a
                              comprehensive migration plan (the “Migration Plan”) to migrate the services
                              currently delivered under the INSPA to the Level 3 Network;

                        •     Level 3’s obligation to make the February Purchase Price Payment will be
                              suspended;

                        •     Level 3 will reimburse ATCW for certain payments made by it to KMC under
                              the KMC Agreement, as defined below, from February 1, 2004 until the
                              earlier to occur of the Early Funding Date or the Option Exercise Date (as
                              each is defined in the XO APA);

                        •     Pending final consummation of the Settlement Agreement, Allegiance and
                              Level 3 will forbear from taking further legal action with regard to disputes
                              under the INSPA, which will include forbearance on the part of Allegiance
                              from commencing any adversary proceeding against Level 3 in relation to
                              valid claims Allegiance believes it has against Level 3.

                        15.         Moreover, if approved by this Court, the Settlement Agreement further

provides that on the Early Funding Date:5

                        •     the INSPA will terminate;

                        •     in accordance with Section 5.6 of the INSPA, the “Buy-Out Assets” will be
                              conveyed, pursuant to section 363 of the Bankruptcy Code, to Level 3, free
                              and clear of all liens, interests, claims or encumbrances;

                        •     Allegiance, pursuant to section 365 of the Bankruptcy Code, will assume the
                              KMC Agreement and assign the KMC Agreement to Level 3,6and Allegiance


5     If the Early Funding Date has not occurred by April 15, 2004, Level 3 will have an option to cause Allegiance
      to consummate certain of the transactions set forth above immediately following April 15, 2004. In the event
      the Early Funding Date has not occurred by August 20, 2004, Allegiance and Level 3 will have the option of
      terminating the Settlement Agreement. If the Settlement Agreement is terminated, certain provisions will have
      continuing effect, including, without limitation, in respect of any option exercise as referred to above and
      section 12 of the Settlement Agreement.

6     Pursuant to the Settlement Agreement, Allegiance may reject the KMC Agreement if it obtains the prior written
      consent of Level 3. As of the date hereof, Allegiance is in the process of reviewing the KMC Agreement to
      determine whether, on a stand-alone basis, it should be assumed and assigned or rejected. To the extent that
      Allegiance determines the KMC Agreement should be rejected, Allegiance reserves its rights in accordance
                                                                                                        (Continued…)


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                              will use its good faith efforts to enter into a collocation agreement with KMC
                              relating to certain facilities;

                        •     Level 3 will pay $54 million in cash to Allegiance

                        •     Allegiance, Level 3 and XO will grant mutual releases, including the
                              dismissal, with prejudice, of the currently pending Credit Motion and
                              Termination Complaint;

                        •     Allegiance and Level 3 will implement the Migration Plan.

                                   The Settlement Agreement Should Be
                        Approved Because It Falls Within the Range of Reasonableness

                        16.         Bankruptcy Rule 9019(a) provides, in relevant part, that: “[o]n motion by

the trustee and after notice and a hearing, the court may approve a compromise and settlement.”

Compromises and settlements are “a normal part of the process of reorganization.” Protective

Comm. for Indep. Stockholders of TMT Trailer Ferry, Inc. v. Anderson, 390 U.S. 414, 424

(1968) (quoting Case v. Los Angeles Lumber Prods. Co., 308 U.S. 106, 130 (1939)).

                        17.         To approve a compromise and settlement under Bankruptcy Rule 9019, a

bankruptcy court should find that the compromise and settlement is fair and equitable, reasonable

and in the best interests of the debtor’s estate. See, e.g., In re Ionosphere Clubs, Inc., 156 B.R.

414, 426 (S.D.N.Y. 1993), aff’d, 17 F.3d 600 (2d Cir. 1994) (citations omitted); In re Enron

Corp., Case No. 02 Civ. 8489, 2003 WL 230838, *2 (S.D.N.Y. Jan. 31, 2003). The decision to

approve a particular settlement lies within the sound discretion of the bankruptcy court. Nellis v.

Shugrue, 165 B.R. 115, 122-123 (S.D.N.Y. 1994). In exercising its discretion, the bankruptcy

court must make an independent determination that the settlement is fair and reasonable. Id. at

122. The court may consider the opinions of the debtor in possession and its counsel that the


      with the Settlement Agreement to reject the KMC Agreement, and prior to the hearing on this Motion to seek
      Level 3’s written consent with respect thereto.




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settlement is fair and reasonable. Id.; see In re Purofied Down Prods. Corp., 150 B.R. 519, 522

(S.D.N.Y. 1993). This discretion should be exercised by the bankruptcy court “in light of the

general public policy favoring settlements.” In re Hibbard Brown & Co., Inc., 217 B.R. 41, 46

(Bankr. S.D.N.Y. 1998); Shugrue, 165 B.R. at 123 (“the general rule [is] that settlements are

favored and, in fact, encouraged by the approval process outlined above”).

                        18.         In determining whether to approve a proposed settlement, a bankruptcy

court need not decide the numerous issues of law and fact raised by the settlement, but rather

should “canvass the issues and see whether the settlement ‘fall[s] below the lowest point in the

range of reasonableness.’” In re W.T. Grant Co., 699 F.2d 599, 608 (2d Cir. 1983); see also

Purofied Down Prods., 150 B.R. at 522 (“the court need not conduct a ‘mini-trial’ to determine

the merits of the underlying [dispute]”).

                        19.         In deciding whether a particular settlement falls within the “range of

reasonableness,” courts consider, among others, the following factors:

                                    (a)         the probability of success in the litigation;

                                    (b)         the complexity of the litigation, and the attendant expense,
                                                inconvenience and delay; and

                                    (c)         the paramount interests of creditors.

Id. (citing Drexel v. Loomis, 35 F.2d 800, 806 (8th Cir. 1989)); Six West Retail Acquisition, Inc.

v. Loews Cineplex Entm’t Corp., 286 B.R. 236, 248 n.13 (S.D.N.Y. 2002), see also In re Drexel

Burnham Lambert Group, Inc., 960 F.2d 285, 292 (2d Cir. 1992). “The ‘reasonableness’ of a

settlement depends upon all factors, including probability of success, the length and cost of the

litigation, and the extent to which the settlement is truly the product of ‘arms-length’ bargaining,

and not of fraud or collusion.” Ionosphere Clubs, 156 B.R. at 428.



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                        20.         In the instant case, the terms of the Settlement Agreement are fair and

equitable, fall well within the range of reasonableness and enable Allegiance and Level 3 to

avoid the significant costs of currently pending litigation, and potential future litigation. As

noted above, the disputes related to the INSPA are highly complex. Due to the complexity of the

disputes, the likelihood of Allegiance succeeding in all aspects of the current and future litigation

is uncertain and difficult to handicap. Moreover, the Debtors, in order to adequately proceed

with litigation against Level 3, will be required to expend a significant amount of preparation

time and incur substantial legal and other expenses. As a result, Allegiance has balanced the

costs, benefits, risks and likelihood of prevailing in a complex litigation against the benefit of

entering into the Settlement Agreement.

                        21.         Specifically, the approval of the Settlement Agreement will enable the

Debtors to receive $54 million from Level 3. In considering whether the $54 million payment

was a fair and reasonable price for settling all claims with Level 3, the Debtors: (a) considered

the views of the Creditors Committee and the Secured Lenders,7 (b) consulted with their

professionals, (c) determined the present value of the future income stream under the INSPA

adjusted for litigation and collection risk, and (d) considered the harm litigation might cause to

the Debtors’ estates and the risks to the Debtors’ estates if such litigation was not successful.

Based on this careful analysis, the Debtors submit that the settlement is in the best interests of the

Debtors’ estates and should be approved.




7     The Creditors Committee and the Senior Lenders fully support approval of the Settlement Agreement.




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                         The Transfer of the “Buy Out Assets” Should be Authorized
                        and Approved Pursuant to Section 363 of the Bankruptcy Code


                         22.        In accordance with the terms of the Settlement Agreement, Allegiance is

required to convey the Buy Out Assets to Level 3, free and clear of all liens, claims and

encumbrances.8 As such, the conveyance of the Buy Out Assets to Level 3 is an essential and

integral component of the Settlement Agreement, and is not severable from the Settlement as a

whole.

                         23.        Section 363(b) of the Bankruptcy Code provides, in relevant part, as

follows.

                                  The trustee, after notice and hearing, may use, sell or lease,
                                  other than in the ordinary course of business, property of
                                  the estate.

11 U.S.C. § 363(b).

                         24.        Section 363 does not set forth a standard for determining when it is

appropriate for a court to authorize the disposition of a debtor’s assets prior to a confirmation of

a plan. However, courts in this Circuit and others have required that the decision to transfer

assets outside the ordinary course of business be based upon the sound business judgment of the

debtor. See In re Chateaugay Corp. 973 F.2d 141 (2d Cir. 1992); Committee of Equity Security

Holders v. Lionel Corp. (In re Lionel Corp.), 722 F.2d 1063, 1071 (2d Cir. 1983).

                         25.        As noted above, the conveyance is an essential component of the

Settlement Agreement. In that regard, a condition to the settlement between the Debtors and

8     Pursuant to Section 5.6 of the INSPA, “[u]pon expiration or termination [of the INSPA] … [Level 3] shall have
      the right to purchase all right, title and interest in and to such dedicated components of the Configuration Plan
      [i.e. the Buy Out Assets)] for consideration of one dollar ($1.00).”




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Level 3 was the conveyance of the Buy Out Assets, which Level 3 requires to provide the

services currently being supplied under the INSPA. Accordingly, based on the Debtors’ belief

that entering into the Settlement Agreement is the best interests of their estates, and the

conveyance of the Buy Out Assets is a condition to the Settlement Agreement, the Debtors

submit that the decision to transfer the Buy Out Assets as part of the settlement with Level 3 is a

product of sound business judgment.

                              The Transfer of the Buy Out Assets Should be Approved
                                Free and Clear of Liens, Claims and Encumbrances

                         26.        In order to facilitate the transfer of the Buy Out Assets as an express

condition of the Settlement Agreement, the Debtors require authorization to convey their interest

in the Buy Out Assets and title in the Buy Out Assets to Level 3 free and clear of any and all

liens, interests, claims, or encumbrances that may be asserted.

                         27.        Section 363(f) of the Bankruptcy Code permits a debtor in possession to

dispose of property under section 363(b) “free and clear of any interest in such property of an

entity other than the estate” if one of the following conditions is satisfied:

                        (1)     applicable nonbankruptcy law permits sale of such property
                        free and clear of such interest;

                        (2)         such entity consents;

                        (3)     such interest is a lien and the price at which such property
                        is to be sold is greater than the aggregate value of all liens on such
                        property;

                        (4)         such interest is in bona fide dispute; or

                        (5)    such entity could be compelled, in a legal or equitable
                        proceeding, to accept a money satisfaction of such interest.

See 11 U.S.C. § 363(f).



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                         28.        Section 363(f) of the Bankruptcy Code is drafted in the disjunctive. Thus,

satisfaction of any one of its five requirements will be sufficient to permit the conveyance of the

Buy Out Assets free and clear of any such liens, interests, claims or encumbrances, as required

by the Settlement Agreement. Notably, the Secured Lenders that hold a lien on substantially all

of the assets of the Debtors, including the Buy Out Assets, have consented to the conveyance of

the Buy Out Assets, as a part of their approval of the Settlement Agreement. Moreover, all

holders of interests in the Buy Out Assets could be compelled to accept a money satisfaction of

their interests in legal or equitable proceedings in accordance with section 365(f)(5) of the

Bankruptcy Code. Such legal or equitable proceedings include proceedings to confirm a plan of

reorganization, under which the holder of a lien may be compelled to accept a payment in

satisfaction of its lien pursuant to section 1129(b)(2)(A) of the Bankruptcy Code. The Debtors

therefore submit that the transfer of the Buy Out Assets free and clear of any and all liens, claims

and encumbrances satisfies the statutory prerequisites of section 363(f) of the Bankruptcy Code.

                         Assumption of the KMC Agreement is Supported by the
                    Debtors’ Business Judgment and Should be Approved by the Court

                         29.        Section 3(d) of the Settlement Agreement provides, in pertinent part, that

Allegiance shall as of the Early Funding Date, assume, and assign to Level 3, the Primary Rate

Interface Services Agreement, dated as of February 11, 2002 (as amended, the “KMC

Agreement”), between Allegiance and KMC Telecom XI, LLC (including, without limitation,

subsidiaries and affiliates thereof, “KMC”). Accordingly, by this Motion, the Debtors also seek

authorization to assume and assign the KMC Agreement to Level 3.

                         30.        Specifically, the Settlement Agreement provides that the assumption and

assignment of the KMC Agreement to Level 3 shall preserve in full all rights of Allegiance under

the KMC Agreement against KMC as of the date of assumption and assignment thereof to Level

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3, including, without limitation, rights, liabilities and claims respecting KMC performance

warranty breaches, if any, under the KMC Agreement (provided, however, that any claims

respecting backhaul latency or non-delivery of ports relating to periods of time prior to the

assumption and assignment of the KMC Agreement shall not be assigned to Level 3, and may be

enforced by Allegiance in its sole discretion).

                         31.        Section 365(a) of the Bankruptcy Code provides that a debtor in

possession, “subject to the court’s approval, may . . . assume any executory contract . . . of the

debtor.” 11 U.S.C. § 365(a).

                         32.        Section 365(b)(1) of the Bankruptcy Code codifies the requirements for

assuming an executory contract of a debtor. This subsection provides:

                        (1)         If there has been a default in an executory contract or unexpired lease of
                                    the debtor, the trustee may not assume such contract or lease unless, at the
                                    time of the assumption of such contract or lease, the trustee —

                                    (A)         cures, or provides adequate assurance that the trustee will promptly
                                                cure, such default;

                                    (B)         compensates, or provides adequate assurance that the trustee will
                                                promptly compensate, a party other than the debtor to such
                                                contract of lease, for any actual pecuniary loss to such party
                                                resulting from such default; and

                                    (C)         provides adequate assurance of future performance under such
                                                contract or lease.

11 U.S.C. § 365(b)(1).

                         33.        The standard to be applied by a court in determining whether an executory

contract should be assumed is the “business judgment” test, which is premised on the debtor’s

business judgment that the assumption would be beneficial to its estate. See Orion Pictures

Corp. v. Showtime Networks, Inc. (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir.

1993); In re Gucci, 193 B.R. 411, 415 (S.D.N.Y. 1996).

                                                                            15
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                         34.        Upon finding that the debtor has exercised its sound business judgment in

determining that the assumption or rejection of an executory contract is in the best interests of

the debtors, its creditors, and all parties in interest, the court should approve such assumption or

rejection under section 365(a) of the Bankruptcy Code. See, e.g., In re Riodizio, Inc., 204 B.R.

417, 424 (Bankr. S.D.N.Y. 1997); In re Bradlees Stores, Inc., 194 B.R. 555, 558 n.1 (Bankr.

S.D.N.Y. 1996); In re G Survivor Corp., 171 B.R. 755, 757 (Bankr. S.D.N.Y. 1994); In re

Ionosphere Clubs, Inc., 100 B.R. 670, 673 (Bankr. S.D.N.Y. 1989).

                         35.        The assumption and assignment of the KMC Agreement is an essential

and integral component of the Settlement Agreement, and is not severable from the Settlement as

a whole. As noted above, after careful analysis and extensive discussions, the Debtors

determined the compromise between Allegiance and Level 3 was in the best interest of the estate.

As such the assumption and assignment of the KMC Agreement as it is a critical component of

the Settlement Agreement, is in the best interest of the estate. Accordingly, the Debtors submit

that the assignment and assumption of the KMC Agreement to Level 3 should be approved.9

                                       Cure of Defaults Under the KMC Agreement

                         36.        The Debtors are in the process of determining the cure obligations under

the KMC Agreement.                        Currently, the Debtors submit that the maximum amount of cure

obligations under the KMC Agreement is $1,447,598.00. Nonetheless, as the Debtors continue

to evaluate the cure obligations, it is likely that such amount will be reduced based on various

offsets, recoupments or other defenses. In connection with this evaluation, the Debtors will


9     Nonetheless, as described above, the Debtors continue to analyze the KMC Agreement. The Debtors reserve
      their right to seek the written consent of Level 3 to reject the KMC Agreement prior to the hearing on this
      Motion, if appropriate.




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contact and discuss issues regarding the cure obligations with KMC. To the extent the Debtors

and KMC are able to reach a resolution with respect to the cure obligations prior to the hearing

on the Motion, such resolution will be announced on the record at the hearing. However, if a

dispute remains, the Debtors and KMC will litigate such dispute at the hearing or, with the

consent of both parties, at a future hearing to be scheduled by the Court. Notwithstanding the

foregoing, the Debtors submit that $1,447,598.00 will be segregated to ensure that the cure

obligations under the KMC Contract will be fulfilled and, accordingly, any disputes between the

Debtors and KMC should not delay the assumption and assignment of the KMC Agreement to

Level 3. Payment by the Debtors of any cure obligations must be without prejudice to, and will

not be a waiver of, any rights against KMC that are to be preserved for Level 3.

                                                  Waiver of Memorandum of Law

                        37.         This Motion includes citations to the applicable authorities and a

discussion of their application to this Motion. Accordingly, the Debtors respectfully submits that

such citations and discussion satisfy the requirement that the Debtors submit a separate

memorandum of law in support of this Motion pursuant to Rule 9013-1(b) of the Local

Bankruptcy Rules for the Southern District of New York.

                                                                         Notice

                        38.         This Notice has been provided to (a) the U.S. Trustee; (b) attorneys for the

Banks; (c) attorneys for the Debtors’ prepetition lenders; (d) attorneys for the Creditors

Committee and (e) all other parties on the Master Service List maintained in these chapter 11

cases. In light of the nature of the relief requested herein, the Debtors submit that no other or

further notice is required.




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                                                               No Prior Request

                        39.         No prior Motion for the relief requested herein has been made to this or

any other court.




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                        WHEREFORE, the Debtors respectfully request that the Court enter an order,

substantially in the form attached hereto, granted the relief requested herein, and granting such

other and further relief as may be just and proper.

Dated: New York, New York
       March 5, 2004


                                                                          Respectfully submitted,

                                                                          /s/ Jonathan S. Henes______________
                                                                          Matthew A. Cantor (MC-7727)
                                                                          Jonathan S. Henes (JH-1979)
                                                                          KIRKLAND & ELLIS LLP
                                                                          Citigroup Center
                                                                          153 East 53rd Street
                                                                          New York, New York 10022-4675
                                                                          Telephone: (212) 446-4800
                                                                          Facsimile: (212) 446-4900

                                                                          Attorneys for Debtors and Debtors in Possession




C:\DOCUME~1\pchan\LOCALS~1\Temp\notesEC3FD6\Level 3 9019 Motion V6 030504.doc
                                                                                                     Confidential



       CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE1

        This Confidential Settlement Agreement and Mutual Release (“Agreement”) is
entered into as of this 27th day of February 2004 (the “Execution Date”) by and between Level 3
Communications, LLC, a Delaware limited liability company (“Level 3”), and Allegiance
Telecom Company Worldwide, a Delaware corporation (“Allegiance”). Level 3 and
Allegiance may be referred to individually as a “Party” and together as the “Parties”. Further, if
and to the extent that XO Communications, Inc. a Delaware corporation (the “Purchaser”), has
executed this Agreement where indicated, Purchaser shall be considered to be a Party hereto for
those matters which are applicable to it hereunder.

         For purposes of this Agreement, Level 3 is defined to include Level 3 Communications,
LLC together, where applicable, with all of its relevant corporate parents, subsidiaries, and
affiliated entities, and all of the agents, employees, officers and directors of any of them.

        For purposes of this Agreement, Allegiance is defined to include Allegiance Telecom
Company Worldwide together, where applicable, with all of its relevant corporate parents,
subsidiaries, and affiliated entities, and all of the agents, employees, officers and directors of any
of them, and includes Allegiance and all of its corporate parents, subsidiaries, and affiliated
entities in their respective capacities as debtors and debtors-in-possession in the Bankruptcy
Case, as hereinafter defined.

         For purposes of this Agreement, Purchaser is defined to include XO Communications,
Inc. together, where applicable, with all of its relevant corporate parents, subsidiaries, and
affiliated entities, and all of the agents, employees, officers and directors of any of them.

                                               BACKGROUND

       A.      Allegiance and Level 3’s predecessor-in-interest, Genuity Solutions, Inc.
(“Genuity”), entered into an Integrated Network Solution Purchase Agreement on or about July
24, 2000 (as amended, the “INSPA”), pursuant to which Allegiance agreed to supply, and
1
         On March 5, 2004, the Court entered an order (the “Settlement Agreement Seal Order”) authorizing the
Debtors to, among other things, file only a redacted version of the Settlement Agreement; and providing that the
redacted information in the Settlement Agreement remain confidential. The Court further allowed the Debtors to
serve the unredacted Settlement Agreement only on the Court, the U.S. Trustee, attorneys for the Creditors
Committee and attorneys for the Debtors’ prepetition secured lenders (the “Prepetition Lenders”). Moreover, under
the terms of the Settlement Agreement Seal Motion, the Settlement Agreement shall not be made available to the
general public or any parties in interest in these chapter 11 cases; provided that the Settlement Agreement may be
provided to certain persons, at the discretion of the Debtors, who are subject to confidentiality obligation to the
Debtors; and provided further that any such person receiving an unredacted version of the Settlement Agreement
pursuant to this Order shall also be bound by this Order to maintain the confidentiality of the Settlement Agreement.

This version of the Settlement Agreement is the redacted version approved by the Court in the Settlement
Agreement Seal Order.



116715.01613/21247885v2
Genuity agreed to procure, an integrated network solution which Genuity used to support its dial-
up modem services business. Capitalized terms used but not otherwise defined herein shall have
the meanings set forth in the INSPA.

        B.    On February 4, 2003, Genuity (in its own bankruptcy cases filed in the United
States Bankruptcy Court for the Southern District of New York) assumed the INSPA and the
INSPA was assigned to Level 3.

        C.      A number of disputes have arisen between Allegiance and Level 3 concerning the
performance of Allegiance’s responsibilities under the INSPA, Level 3 has claimed entitlement
to certain performance warranty remedies and other remedies available to it under the INSPA
and Allegiance has disputed such claim.

        D.      On May 14, 2003 (the “Petition Date”), Allegiance and most of its direct and
indirect domestic subsidiaries each filed voluntary petitions (collectively, the “Bankruptcy
Case”) under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §101, et seq. (the
“Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of New
York (the “Bankruptcy Court”) and Allegiance is currently operating its business and managing
its property as a debtor-in-possession.

      E.     In January and February 2004, Allegiance delivered notices of default under the
INSPA to Level 3. Level 3 has disputed the notice of default.

         F.     On February 4, 2004, Level 3 filed a motion (the “Credit Motion”), in part under
seal, to permit recoupment and for other relief. Allegiance has disputed the Credit Motion.

        G.      On February 8, 2004, Level 3 filed a complaint (the “Complaint”), filed in part
under seal, for certain declaratory relief relating to the INSPA. Allegiance disputes the
allegations contained in the Complaint.

        H.     On February 18, 2004, Purchaser entered into an agreement with Allegiance (the
“Asset Purchase Agreement”) pursuant to which it agreed to purchase substantially all of the
assets of Allegiance, but excluding (among other assets) the INSPA, the KMC Agreement (as
defined herein) and related managed modem facilities and business assets specified therein.

        I.      Allegiance and Level 3 now seek to amicably resolve, compromise and settle any
and all claims or demands with respect to the INSPA, and to orderly terminate the INSPA
subject to and in accordance with the terms hereof.

        J.     The Parties agree that the transactions contemplated hereby and the consideration
exchanged in respect thereof constitute contemporaneous exchanges for new value and that such
consideration is of reasonably equivalent value in exchange for the transactions contemplated
hereby.

       In consideration of the foregoing premises and the mutual covenants and agreements
contained herein, subject to the entry of the Bankruptcy Court Approval Order (as defined in
Section 11 below) each of the Parties agrees as set forth below. As more fully set forth in
                                                2
116715.01613/21247885v2
Section 15 below, this Agreement shall be fully enforceable as between Allegiance and Level 3,
even if Purchaser has not accepted this Agreement as contemplated hereby.

1.       The Transaction. The transaction contemplated by this Agreement shall take place in
         two stages: (a) commencing immediately (but subject to entry of the Bankruptcy Court
         Approval Order), the Parties shall perform pursuant to Section 2 below; and (b) on the
         “Early Funding Date” (as defined in the Asset Purchase Agreement), the transaction
         described in Section 3 below shall be consummated; the Parties acknowledge, however,
         that the two stages may occur simultaneously if the Early Funding Date shall occur prior
         to or contemporaneous with the entry of the Bankruptcy Court Approval Order.

2.       Immediate Transactions.

         (a)      [redacted]

         (b)      Commencing on the Execution Date, Allegiance and Level 3 shall work to
                  procure and cooperate with Level 3 in the procurement of consents from the
                  suppliers of the Off-Net Assets (as defined in Section 4 hereof) as may be
                  required in order for Level 3 to continue to use the Off-Net Assets (including
                  software contained therein) for their intended use. The costs of obtaining any
                  licenses or consents from such suppliers shall be borne solely by Level 3.

         (c)      Commencing on the Execution Date, the Parties shall commence preparation of
                  the agreed Migration Plan as set forth in Section 8 below.

         (d)      Level 3’s obligations to make the Purchase Price Payment under the INSPA
                  which were allegedly due and payable in February 2004 shall be suspended
                  pending the Parties’ efforts to secure the Bankruptcy Court Approval Order (such
                  suspension shall terminate if this Agreement is deemed void ab initio pursuant to
                  Section 12 hereof).

         (e)      Level 3 shall reimburse Allegiance for payments made by Allegiance to KMC
                  under and pursuant to the KMC Agreement (each as defined in Section 3 below)
                  for services delivered to Allegiance in support of the INSPA relating to the period
                  of time from and after February 1, 2004 through the soonest to occur of the Early
                  Funding Date or the Option Exercise Date. Level 3 shall have the right to review
                  and audit all invoices and other materials delivered to Allegiance from KMC in
                  order to confirm the validity and accuracy of the charges imposed by KMC under
                  the KMC Agreement. To the extent that Level 3 wishes to have the “Competitive
                  Offer” (as defined in the KMC Agreement) provisions of the KMC Agreement
                  invoked prior to the assumption and assignment thereof to Level 3, Allegiance
                  agrees to cooperate with Level 3 in regard to the enforcement of such rights.

3.       Early Funding Date Transactions. Subject to entry of the Bankruptcy Court Approval
         Order, on the Early Funding Date:


                                                   3
116715.01613/21247885v2
         (a)      The INSPA shall be terminated and neither Party shall have any continuing
                  obligations under the INSPA except as set forth in this Agreement.

         (b)      The Parties’ obligations respecting Termination Assistance Services (as set forth
                  in Section 7 below) shall become effective with respect to the migration of the all
                  of the Ports as to both Allegiance until the Closing Date and as to the Purchaser
                  from and after the Closing Date.

         (c)      Pursuant to Section 5.6 of the INSPA, title in and to all of the “Buy-Out Assets”
                  shall be conveyed to Level 3 free and clear of all liens, interests, claims, or
                  encumbrances (and the Parties shall work to create a schedule (“Schedule 3(c)”)
                  listing all such Buy-Out Assets). With respect to the conveyance of the Buy-Out
                  Assets, any software licenses or rights of use shall be conveyed to Level 3 if and
                  only if such rights are transferable to Level 3 pursuant to applicable law (and
                  Allegiance makes no representation to Level 3 with respect to the transferability
                  of such rights). Commencing on the Bankruptcy Court Approval Date,
                  Allegiance and Level 3 shall work to procure consents from the suppliers of the
                  Buy-Out Assets as may be required in order for Level 3 to continue to use (from
                  and after the Early Funding Date) the Buy-Out Assets (including software
                  contained therein) for their intended use. The costs of obtaining any licenses or
                  consents from such suppliers, or the costs associated with asserting the
                  transferability of software licenses or rights of use, shall be borne solely by Level
                  3.

         (d)      Allegiance shall assume and assign to Level 3 that certain Primary Rate Interface
                  Services Agreement dated as of February 11, 2002 (as amended, the “KMC
                  Agreement”) between Allegiance and KMC Telecom XI, LLC. (including,
                  without limitation, subsidiaries and affiliates thereof, “KMC”). Such assumption
                  and assignment shall preserve in full all rights of Allegiance under the KMC
                  Agreement against KMC as of the date of assumption and assignment thereof to
                  Level 3, including, without limitation, rights, liabilities and claims respecting
                  KMC performance warranty breaches, if any, under the KMC Agreement
                  (provided, however, that any claims respecting backhaul latency or non-delivery
                  of ports relating to periods of time prior to the assumption and assignment of the
                  KMC Agreement shall not be assigned to Level 3, and may be enforced by
                  Allegiance in its sole discretion). Notwithstanding any other provision of this
                  Agreement, nothing in this Agreement shall preclude Allegiance from rejecting
                  the KMC Agreement pursuant to applicable bankruptcy laws, provided that
                  Allegiance secures Level 3’s prior written consent thereto (which consent may be
                  given or withheld in Level 3’s sole and absolute discretion); in the event of any
                  such rejection, the cash consideration paid to Allegiance under Section 5 hereof
                  shall be increased by an amount to be agreed upon by Allegiance and Level 3.

         (e)      If Allegiance assumes the KMC Agreement and assigns it to Level 3, as between
                  Allegiance and Level 3, Allegiance shall have the obligation to make the cure
                  payment, if any, to KMC in connection with the assumption and assignment of

                                                    4
116715.01613/21247885v2
                  the KMC Agreement and Level 3 shall have no liability for any cure amount
                  relating to the assumption and assignment of the KMC Agreement, to KMC,
                  Purchaser, Allegiance or its estates. Level 3 shall have standing to participate in
                  any contested matters between KMC and Allegiance as to the cure amount and
                  related issues to the extent that Level 3 reasonably determines that its rights may
                  be affected by such contested matter.

         (f)      Prior to and continuing after the Early Funding Date, each of Level 3, Purchaser
                  and Allegiance shall cooperate with respect to transition services needed, if any,
                  regarding the KMC Agreement, and Allegiance (and Purchaser, to the extent that
                  migration is not completed by the Early Funding Date or the Closing Date) shall
                  provide Termination Assistance Services (as described in Section 7 below) to
                  Level 3 with respect to its efforts to migrate the Off-Net Ports under the KMC
                  Agreement to the Level 3 network.

         (g)      Upon receipt of any business downturn notice delivered at any time after the
                  Effective Date and through the soonest to occur of the Early Funding Date or
                  Option Exercise Date, Allegiance shall immediately (and in no event later than
                  seven (7) days after receipt thereof) deliver appropriate notice to KMC under the
                  KMC Agreement of termination of the services provided by KMC which are
                  affected by such business downturn notice.

         (h)      [redacted]

         (i)      [redacted]

4.       Failure to Achieve Early Funding Date. In the event that the Early Funding Date has
         not occurred on or before April 15, 2004, Level 3 shall have the option (provided that it is
         not then in breach of the Agreement) to cause Allegiance to consummate the transactions
         described in Sections 3(d), (e), and (f) above, and (immediately upon such election): (a)
         the INSPA shall be deemed immediately amended hereby so as to eliminate Allegiance’s
         obligation to deliver, and Level 3’s obligation to purchase, any ports in Off-Net
         Serviceable Rate Centers (either Level 3 or Allegiance may propose or require a formal
         amendment to the INSPA in respect thereof by written notice delivered on or before the
         date of exercise of the option granted hereunder); and (b) the INSPA shall thereafter
         continue to apply with respect to the approximately 260,232 ports installed in Serviceable
         On-Net Rate Centers as of the Execution Date (the “On-Net Ports”), and neither Party
         waives any rights under the INSPA with respect to such On-Net Ports except as expressly
         set forth in this Agreement. The date upon which Level 3 exercises such option shall be
         the “Option Exercise Date.” On the Option Exercise Date, Level 3 shall pay Allegiance
         the amount of $5,000,000 (the “Option Exercise Price”). In such event, provided that the
         Bankruptcy Court Approval Order has been entered, Allegiance shall convey to Level 3,
         free and clear of all liens, interests, claims and encumbrances, the equipment owned
         and/or used by and as may be permitted by applicable law, all general intangibles,
         licenses, copyrights, trademarks, patents, intellectual property and other personal
         property owned and/or used by Allegiance in connection with the KMC Agreement (and

                                                    5
116715.01613/21247885v2
         the Parties shall work to create a “Schedule 4” to this Agreement listing such assets) (the
         “Off-Net Assets”). Allegiance shall provide Level 3 with, or transfer to Level 3, all
         goods, intangible rights, and services which Allegiance is presently entitled to enjoy, or is
         in possession of, under and in respect of the KMC Agreement. With respect to the
         conveyance of the Off-Net Assets, any software licenses or rights of use shall be
         conveyed to Level 3 if and only if such rights are transferable to Level 3 pursuant to
         applicable law (and Allegiance makes no representation to Level 3 with respect to the
         transferability of such rights). The costs of obtaining any licenses or consents from the
         suppliers of the Off-Net Assets, or the costs associated with asserting the transferability
         of software licenses or rights of use, shall be borne solely by Level 3. In addition, in such
         event, Allegiance shall supply Level 3 with Termination Assistance Services respecting
         the Off-Net Ports as set forth in this Agreement (notwithstanding the fact that the Early
         Funding Date has not occurred).

5.       Cash Termination Consideration. On the Early Funding Date(provided that the
         Bankruptcy Court Approval Order has been entered), provided that Allegiance is not then
         in default under the Agreement, Level 3 shall pay Allegiance $54,000,000, which amount
         shall be paid by wire transfer. The Option Exercise Price is included in the $54,000,000
         payable by Level 3 hereunder; therefore, if the Option Exercise Price has been paid, the
         cash consideration due hereunder shall be reduced by the Option Exercise Price.

6.       Mutual Release and Litigation Standstill. Upon the Early Funding Date (provided that
         the Bankruptcy Court Approval Order has been entered), provided that each Party has
         fully performed its obligations hereunder and under the INSPA and satisfied all related
         requirements and conditions hereunder, then, except as otherwise specifically set forth
         herein, in the Bankruptcy Court Approval Order, in the Migration Plan, or in any
         documents, agreements, schedules, and instruments specifically agreed to by the Parties
         to effectuate the terms of this Agreement, the Bankruptcy Court Approval Order or the
         Migration Plan, the Parties agree as follows:

         (a)      Allegiance and Purchaser (if Purchaser has accepted this Agreement, as
                  contemplated hereby) hereby fully and forever waive, release, acquit, discharge
                  and hold harmless Level 3 and its owners, stockholders, successors, assigns,
                  partners, parents, insurance carriers, bonding companies, affiliates and
                  subsidiaries, and each of their respective directors, officers, agents, employees
                  and representatives from any and all claims, actions, debts, demands, damages,
                  judgments, liabilities, duties, indemnities, covenants, liens, and obligations of any
                  kind whatsoever, whether known or unknown, whether in law or in equity,
                  whether fixed and liquidated or contingent and unliquidated, whether billed or
                  unbilled, which Allegiance and Purchaser has, had, may have or claim to have had
                  against Level 3 arising prior to the Early Funding Date in respect of the INSPA
                  (including but not limited to claims arising out of Level 3’s assertion of remedies
                  or claims under, in respect of or at all relating to, the INSPA), occurring at any
                  time up to and including the Early Funding Date.



                                                    6
116715.01613/21247885v2
         (b)      Level 3 hereby fully and forever waives, releases, acquits, discharges and holds
                  harmless Allegiance and Purchaser and their respective owners, stockholders,
                  successors, assigns, partners, parents, insurance carriers, bonding companies,
                  affiliates and subsidiaries, and each of their respective directors, officers, agents,
                  employees and representatives, from any and all claims, actions, debts, demands,
                  damages, judgments, liabilities, duties, indemnities, covenants, liens, and
                  obligations of any kind whatsoever, whether known or unknown, whether in law
                  or in equity, whether fixed and liquidated or contingent and unliquidated, whether
                  billed or unbilled, which Level 3 has, had, may have or claim to have had against
                  Allegiance arising prior to the Early Funding Date in respect of the INSPA,
                  occurring at any time up to and including the Early Funding Date.

         (c)      Notwithstanding anything herein to the contrary, no Party releases or otherwise
                  waives any claims relating to performance of this Agreement.

         (d)      Upon the Execution Date, each of Allegiance and Level 3 shall stand still
                  respecting the contested matters joined by the Credit Motion, the adversary
                  proceeding initiated by the Complaint and all related threatened or pending
                  litigation or claims respecting the INSPA, and such matters shall be deemed
                  administratively stayed upon entry, as more fully set forth herein, of the
                  Bankruptcy Court Approval Order. Without limitation, neither Party shall
                  conduct discovery with respect to, or otherwise prosecute, any such litigation or
                  claim, and all rights of the Parties in respect thereto shall be preserved in full until
                  the releases provided for above are effective. When the releases provided for
                  above are effective, the Credit Motion and the Complaint shall be dismissed with
                  prejudice, and Level 3 shall, within three (3) business days following the Early
                  Funding Date, amend its proof of claim filed in connection with the Bankruptcy
                  Case so as to eliminate any claims associated with or related to the INSPA.

         (e)      Nothing in the “Bankruptcy Plan” or the “Disclosure Statement” (as each is
                  defined in the Asset Purchase Agreement) to be filed by Allegiance shall in any
                  way be inconsistent with the provisions of this Agreement. To the extent that the
                  Bankruptcy Plan and the Disclosure Statement, as the case may be, are consistent
                  with the provisions of this Agreement, and so long as Allegiance and Purchaser
                  each are in compliance with this Agreement, Level 3 shall not (nor will it
                  encourage any other person to): (i) object to the Bankruptcy Plan or propose, file
                  or support any restructuring, workout, or plan of reorganization for Allegiance
                  other than the Bankruptcy Plan; (ii) object to the Disclosure Statement; (iii) delay,
                  impede, or take any other action to interfere, directly, or indirectly, in any respect
                  with the approval of the Disclosure Statement, or the acceptance, confirmation, or
                  implementation of the Bankruptcy Plan.

7.       Termination Assistance Services. Commencing on the Early Funding Date (or the
         Option Exercise Date, with respect to the Off-Net Ports), and continuing during the
         Migration Period (as defined in Section 8 below), Allegiance and Purchaser shall provide
         Termination Assistance Services to Level 3 so as to assure the orderly transition of

                                                     7
116715.01613/21247885v2
         services provided under the INSPA from the Allegiance network to the Level 3 network.
         The Termination Assistance Services shall include the continued provision by Allegiance
         and Purchaser of network connectivity, space, power and other services such that the
         delivery of the Integrated Network Solution shall continue notwithstanding the
         occurrence of the Early Funding Date or the Closing Date. With respect to the
         Termination Assistance Services during the Migration Period:

         (a)      [redacted]

         (b)      [redacted]

         (c)      [redacted]

         (d)      [redacted]

         (e)      [redacted]

8.       Migration Plan. Commencing on the Execution Date, the Parties shall work
         cooperatively to establish an agreed “Migration Plan” specifying the steps to be taken by
         the Parties in order to effectuate an orderly migration of services; the Migration Plan,
         once completed, shall become “Schedule 8” to this Agreement. Each Party shall,
         commencing on the Early Funding Date (or the Option Exercise Date, with respect to the
         Off-Net Ports), work cooperatively and in good faith to migrate services delivered under
         the INSPA to the Level 3 network pursuant to the Migration Plan. Each Party shall take
         such actions as are reasonably required in order to effectuate the Migration Plan. The
         Migration Plan shall contemplate the completion of all migration of ports to the Level 3
         network within six (6) months after the Closing Date (such period of time shall be the
         “Migration Period”). Upon the conclusion of the six (6) month period following the
         Closing Date, unless the Parties otherwise agree, the obligation to deliver Termination
         Assistance Services shall cease.

9.       Filing Under Seal. Allegiance agrees to file this Agreement with the Bankruptcy Court
         under seal. Notwithstanding the foregoing, subject to the requirements of Section 11
         hereof, Allegiance shall be permitted to disclose the terms of the Agreement in the
         Compromise Motion (as defined in Section 11 hereof), if necessary, to obtain Bankruptcy
         Court approval therefor. Notwithstanding anything herein to the contrary, Allegiance
         shall be permitted to disclose the terms of the Agreement and provide copies thereof,
         without the need for a confidentiality agreement, to the attorneys, advisors and principals
         of (i) the official committee of unsecured creditors of Allegiance (the “Committee”), and
         (ii) the agent for the senior secured lenders of Allegiance.

10.      Confidentiality. The terms and conditions of this Agreement are confidential and each
         Party warrants and represents that it will not (except as permitted in Section 9) reveal or
         engage in any action which it knows or has reason to believe will result in the disclosure
         of any information concerning the terms of this Agreement to anyone; provided,
         however, that each Party may reveal the terms of this Agreement (a) to its successors,
         assigns and its or their officers, directors, employees, agents, counsel, financial advisors
                                                   8
116715.01613/21247885v2
         and accountants in the normal course of business provided that the recipients are
         instructed that the terms of this Agreement are confidential and are to be maintained as
         such, and (b) upon order of or direction by a court or government unit of competent
         jurisdiction. Notwithstanding the foregoing, a Party may disclose such information as is
         required to be disclosed by applicable law or in order to obtain the Bankruptcy Court
         Approval Order. Each Party shall notify the other of any process, order or direction of a
         court or government unit of competent jurisdiction requiring the disclosure of the terms
         of this Agreement in a writing delivered as soon as possible upon receipt of any subpoena
         or other similar process or order and in any event no later than three (3) days prior to any
         required disclosure. The Parties agree that money damages are an insufficient measure of
         the harm disclosure of the terms of this Agreement, the Migration Plan, or any related
         documents, agreements, schedules, and instruments, may cause to either Party and each
         agree that either is entitled to injunctive relief to quash any disclosure of the terms of this
         Agreement, the Migration Plan, or any related documents, agreements, schedules, and
         instruments.

11.      Filing for Approval. Within five (5) business days after the Execution Date, Allegiance
         shall file with the Bankruptcy Court and serve upon parties in interest pursuant to
         applicable administrative Orders of the Bankruptcy Court, and as otherwise required by
         applicable bankruptcy law and procedures, a motion seeking approval of this Agreement,
         the transactions described herein, the compromises evidenced hereby under and pursuant
         to Bankruptcy Code §§363, 365, Fed. R. Bankr. P. 9019, and otherwise applicable
         bankruptcy or non-bankruptcy law (the “Compromise Motion”). With respect to the
         Compromise Motion and for all purposes related hereto, the Parties agree that this
         Agreement represents a settlement and compromise of disputed matters under the INSPA
         and shall not be subject to any solicitation or auction initiated by or on behalf of
         Allegiance, the Committee, or any employees, agents, members or professionals thereof.
         The Compromise Motion must be in form and substance acceptable to the Parties prior to
         its filing with the Bankruptcy Court. For all purposes under this Agreement, a
         “Bankruptcy Court Approval Order” shall mean an order, in form and content
         reasonably satisfactory to the Parties, approving this Agreement, the Migration Plan and
         the transactions described herein entered on the docket of the Bankruptcy Court, upon
         due and proper notice to parties in interest, which Order shall be final, non-appealable
         and unstayed and shall: (i) survive confirmation of a plan of reorganization or liquidation
         in the Bankruptcy Case, the sale, assignment, transfer or other disposition of any
         Allegiance assets, compromises with other parties in interest, and conversion or dismissal
         of the Bankruptcy Case and (ii) govern (and as appropriate, be incorporated into) any
         plan, related Orders of the Bankruptcy Court under applicable bankruptcy or non-
         bankruptcy law, including, without limitation, an Order in respect of plan confirmation, a
         Bankruptcy Code §§363 or 365 Order, or a Bankruptcy Court Order under Fed. R. Bankr.
         P. 9019. The Bankruptcy Court Approval Order shall expressly state that the assumption
         and assignment to Level 3 of the KMC Agreement shall not release or waive any claims
         that Allegiance may have against KMC respecting performance of the KMC Agreement,
         and that (except with respect to claims respecting backhaul latency or non-delivery of
         ports relating to periods of time prior to the assumption and assignment of the KMC
         Agreement, as set forth in Section 3(d) hereof) Level 3 shall be free to enforce all such
                                                   9
116715.01613/21247885v2
         rights against KMC (even if such rights relate to periods of time prior to the assignment
         of the KMC Agreement to Level 3). All Parties shall in good faith endeavor to obtain the
         Bankruptcy Court Approval Order. Each Party shall bear its own fees and costs
         associated with such efforts.

12.      Bankruptcy Court Approval Date. Except with respect to Sections 10 and 11, this
         Agreement shall have no binding effect upon any Party until the Bankruptcy Court
         Approval Date. Subject to the Bankruptcy Court’s calendar and availability, the
         Bankruptcy Approval Order must be approved by the Court and so ordered thereby no
         later than March 25, 2004. The “Bankruptcy Court Approval Date” is the first date upon
         which the Bankruptcy Court Approval Order is unstayed, and has become final and non-
         appealable, without an appeal having been filed with respect thereto. Notwithstanding
         the foregoing, the Parties may begin taking steps to perform the terms of this Agreement
         prior to the Bankruptcy Court Approval Date. If the Bankruptcy Court does not grant the
         Compromise Motion, approve the terms of this Agreement, and authorize the
         compromise and transactions evidenced hereby within the times set forth above, this
         Agreement (except with respect to Section 10 hereof) will be deemed null and void ab
         initio. In such event, the claims, rights and remedies of the Parties under and in respect
         of the INSPA and otherwise shall remain in full force and effect and shall be immediately
         enforceable without impairment or modification.

13.      Termination and Early Funding Date.

         (a)      In the event that the Early Funding Date has not occurred on or before August 30,
                  2004, either Party may terminate this Agreement upon delivery of written notice
                  to the other Party (the effective date of such termination to be the “Termination
                  Date”). On the Termination Date, Level 3 shall be obligated (if it has not already
                  done so) to exercise the option and pay the Option Purchase Price as
                  contemplated by Section 4 hereof, and termination of this Agreement shall not
                  affect the effectiveness of the transactions described in Section 4 hereof.

         (b)      In the event this Agreement is terminated pursuant to paragraph (a) above, the
                  Interim Services Payment shall cease and thereafter Level 3 shall be obligated to
                  commence payment of the Purchase Price as set forth in the INSPA (but not with
                  respect to the Off-Net Ports, if Level 3 has paid the Option Purchase Price). In
                  such event, the Parties agree that any outstanding issues or disputes under the
                  INSPA (including, but not limited to, disputes respecting the application of any
                  Business Downturn under Section 4.3 of the INSPA, disputes regarding pricing
                  for the ports as a result of any Competitive Offer, disputes regarding the
                  application of Performance Warranty Remedies (even if such Performance
                  Warranty Remedies related to periods of time before the Execution Date), or any
                  disputes arising out of Level 3’s assertion of remedies or claims under, in respect
                  of or at all relating to, the INSPA) shall be immediately submitted to binding
                  arbitration pursuant to this Section. Either Party may initiate such binding
                  arbitration action in accordance with the Commercial Arbitration Rules (the
                  “Rules”) of the American Arbitration Association (“AAA”). The confidentiality

                                                   10
116715.01613/21247885v2
                  provisions of this Agreement shall govern all AAA arbitration proceedings. The
                  Parties shall attempt to select a single neutral arbitrator to hear the matters in
                  dispute. Such arbitrator need not be affiliated with the AAA. If the Parties fail to
                  agree on a single neutral arbitrator within ten (10) days of the filing of the demand
                  for arbitration, then three neutral arbitrators shall be appointed in accordance with
                  the Rules. The arbitration award shall be in writing and shall specify the factual
                  and legal basis for the award. The arbitration shall be conducted in New York,
                  NY, and judgment upon the award rendered by the arbitrator(s) may be entered in
                  any court having jurisdiction thereof. Unless otherwise ordered by the
                  arbitrator(s), the costs of the arbitration, including the AAA administration fee,
                  the arbitrator’s fee, and costs for the use of facilities during the hearings, shall be
                  borne equally by the Parties. Attorneys’ fees and costs may be awarded to the
                  prevailing or most prevailing party at the discretion of the arbitrator(s).

         (c)      In the event of termination of this Agreement pursuant to paragraph (a) above,
                  Level 3 shall be obligated to pay the difference between the Purchase Price which
                  would have otherwise been due under the INSPA (as may be modified as a result
                  of the arbitration referenced in paragraph (b) above) and the Interim Services
                  Payments made hereunder for the period of time from and after February 1, 2004
                  through the Termination Date. With respect to any payment obligations arising
                  under the INSPA between February 1, 2004 and the Termination Date in the event
                  of a termination of this Agreement pursuant to paragraph (a) above, the Parties
                  agree that the decision of the arbitrator(s) with respect to market pricing shall be
                  applied retroactively as though Level 3 had delivered each alleged Competitive
                  Offer introduced by Level 3 during such proceedings on the Execution Date, and
                  the decision of the arbitrator(s) with respect to such issue shall have retroactive
                  application to February 1, 2004 (such that, as an example, if the arbitrator(s) find
                  that the market price should be lower than the present pricing, such price would
                  be applied from and after February 1, 2004).

14.      Material Breach. If there is a material breach of any material provision of this
         Agreement or the Migration Plan, upon written notice to the allegedly breaching Party,
         the Party asserting the breach may (in addition to any other remedies it may have under
         applicable law) terminate this Agreement within ten (10) business days’ written notice.
         In such event, the claims, rights and remedies of the Parties under and in respect of the
         INSPA and otherwise shall remain in full force and effect and shall be immediately
         enforceable without impairment or modification. In the event of a breach in connection
         with the delivery of Termination Assistance Services or the Migration Plan by Allegiance
         or Purchaser, each of Allegiance and Purchaser agree that money damages are an
         insufficient measure of the harm any such breach may cause and, as a result, Level 3 is
         entitled to injunctive relief to compel specific performance of the obligations imposed on
         Allegiance and Purchaser before the Bankruptcy Court or (in the case of claims against
         Purchaser) before any court of competent jurisdiction. Each Party consents to the
         jurisdiction of the Bankruptcy Court with respect to any actions to enforce this
         Agreement.


                                                    11
116715.01613/21247885v2
15.      Purchaser Approval. Purchaser shall not be bound by the terms of this Agreement
         unless and until Purchaser accepts and adopts this Agreement as set forth below the
         signature blocks for Level 3 and Allegiance. Allegiance shall use reasonable good faith
         efforts to procure Purchaser’s acceptance of this Agreement. In the event that Purchaser
         has not accepted this Agreement on or before the Early Funding Date, then, on or before
         the Early Funding Date, Allegiance shall cause Purchaser to execute a master services
         agreement as contemplated and required by Section 6.26 and Schedule 6.26 of the Asset
         Purchase Agreement. This Agreement is fully enforceable by its terms between
         Allegiance and Level 3 regardless of whether Purchaser joins and accepts this
         Agreement. If Purchaser so accepts and adopts this Agreement, its obligations under
         such Section 6.26 and Schedule 6.26 shall cease and Level 3 shall not in any way seek to
         object to or otherwise oppose the transactions contemplated by the Asset Purchase
         Agreement so long as Purchaser and Allegiance are in compliance with this Agreement.

16.      Notices. Any notice to a Party required or permitted under this Agreement must be in
         writing and delivered by certified mail, by a nationally recognized overnight delivery
         service (with signature required for delivery), or by a courier service to the applicable
         address indicated below or such address as the Party to be notified has designated by
         giving notice in compliance with this Section:




                                                  12
116715.01613/21247885v2
         If to Allegiance:     Allegiance Telecom Company Worldwide
                               9201 North Central Expressway
                               Dallas, Texas 75231
                               Attn: General Counsel

         With a copy to:       Kirkland & Ellis, LLP
                               153 East 53rd
                               New York, New York 10022
                               Attn: Jonathan Henes, Esq.
                                      Kimberly Taylor, Esq.

         With a further copy to the Committee, care of:

                               Akin Gump Strauss Hauer & Feld, LLP
                               590 Madison Avenue
                               New York, New York 10022
                               Attn: Ira Dizengoff, Esq.


         If to Level 3:        Level 3 Communications, LLC
                               1025 Eldorado Blvd.
                               Broomfield, Colorado 80021
                               Attn: Assistant General Counsel

         If to Purchaser:      XO Communications, Inc.
                               11111 Sunset Hills Road
                               Reston, Virginia 20190
                               Attn: General Counsel

17.      Validity. This Agreement is for the benefit of and is binding upon the respective past
         and present parents, subsidiaries, and divisions, and predecessors and successors of the
         Parties, and each of their respective directors, officers, shareholders, employees and
         representatives. Nothing in this Agreement may be construed to create any rights in, or
         grant any cause of action to, any person not a Party to this Agreement.

18.      Survivability. This Agreement inures to the benefit of the Parties, and their respective
         successors and assigns, and is binding upon any trustee, party, entity or other fiduciary
         that may be appointed in connection with the Bankruptcy Case whether under Chapter 7
         or Chapter 11 of the Bankruptcy Code.

19.      Choice of Law. This Agreement is governed by and construed in accordance with the
         domestic laws of the State of New York without giving effect to any choice or conflict of
         law provision or rule that would cause the application of the laws of any jurisdiction
         other than the State of New York.



                                                 13
116715.01613/21247885v2
20.      Retention of Jurisdiction. Except as otherwise expressly set forth herein, the Parties to
         this Agreement consent to the jurisdiction of the Bankruptcy Court. The Parties submit
         to the jurisdiction of the Bankruptcy Court in connection with the interpretation and
         enforcement of this Agreement.

21.      Attorneys Fees. In the event that any of the Parties must resort to legal action in order to
         enforce any provision or right under this Agreement or to defend such suit, the prevailing
         Party is entitled to receive reimbursement from the non-prevailing Party or Parties for all
         reasonable attorneys’ fees and costs incurred in the litigation of such suit.

22.      No Admission; No Third Party Beneficiary. This Agreement effects the settlement of
         potential and existing claims and disputes and nothing contained herein is construed as an
         admission by any Party hereto of any wrongdoing of any kind. Neither Party’s consent to
         the terms of this Agreement, including, without limitation, the consent to any assignment
         and assumption of any other agreement or the assignment of any rights or obligations
         thereunder, may be used against it as an admission or declaration against interest in
         construing any of the agreements enumerated herein nor any similar or other agreements.
         There shall be no third party beneficiaries to the terms and conditions of this Agreement.

23.      Entire Agreement. This Agreement and the Exhibits attached hereto constitute the
         entire agreement and understanding between the Parties with respect to the subject matter
         hereof and all prior negotiations, agreements, understandings, written or oral, between the
         Parties are deemed superseded and are replaced hereby. No provision may be changed,
         waived or modified, except in writing, signed by the Parties hereto.

24.      Non-Integration. The Parties agree that the Termination Assistance Services and the
         other provisions of this Agreement are not intended to be integrated and that upon the
         payment by Level 3 to Allegiance of the amounts contemplated by Section 4 or Section
         13(a) hereof, as applicable, only the provisions regarding the Termination Assistance
         Services shall be deemed to be executory.

25.      Counterparts. This Agreement may be executed by facsimile and in multiple
         counterparts, each of which is deemed an original, but all of which together constitutes
         one and the same document.




                                   [Signatures on following page]


                                                  14
116715.01613/21247885v2
       IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and
year written below.

Dated: February __, 2004                    LEVEL 3 COMMUNICATIONS, LLC, on behalf
                                            of itself and other affiliated entities governed
                                            hereby.


                                            By: ____________________________________

                                            Its: ____________________________________



Dated: February __, 2004                    ALLEGIANCE TELECOM COMPANY
                                            WORLDWIDE, on behalf of itself and other
                                            affiliated entities governed hereby.


                                            By: ___________________________________

                                            Its: ___________________________________


Joined, agreed and accepted this ____ day of February, 2004, intending to be legally bound:

XO COMMUNICATIONS, INC.


By: _______________________________

Its: _______________________________




                                              15
116715.01613/21247885v2
                            Schedule 8

                          Migration Plan

                            [redacted]




                               16
116715.01613/21247885v2
KIRKLAND & ELLIS LLP                                                         Hearing Date: March 25, 2004 @ 10:00 a.m.
Citigroup Center                                                             Objection Deadline: March 22, 2004 @ 4:00 p.m.
153 East 53rd Street
New York, New York 10022-4675
Telephone: (212) 446-4800
Fax:         (212) 446-4900
Matthew A. Cantor (MC-7727)
Jonathan S. Henes (JH-1979)
Attorneys for Debtors and Debtors in
Possession


UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

                                                                         X
In re                                                                    :
                                                                         :     Chapter 11 Case No.
Allegiance Telecom, Inc., et al.,                                        :     03-13057 (RDD)
                                                                         :
                                    Debtors.                             :     Jointly Administered
                                                                         X

    NOTICE OF HEARING ON MOTION OF THE DEBTORS FOR AN ORDER,
   PURSUANT TO (A)RULE 9019 OF THE FEDERAL RULES OF BANKRUPTCY
 PROCEDURE, APPROVING THE CONFIDENTIAL SETTLEMENT AGREEMENT
    AND MUTUAL RELEASE, DATED FEBRUARY 27, 2004, AMONG LEVEL 3
    COMMUNICATIONS, LLC AND THE DEBTORS; (B) SECTION 363 OF THE
  BANKRUPTCY CODE AUTHORIZING THE TRANSFER, AS A PART OF SUCH
SETTLEMENT, OF CERTAIN ASSETS FREE AND CLEAR OF LIENS, CLAIMS AND
    ENCUMBRANCES, AND (C) SECTION 365 OF THE BANKRUPTCY CODE,
  APPROVING AND AUTHORIZING, AS A PART OF SUCH SETTLEMENT, THE
      ASSUMPTION AND ASSIGNMENT OF AN EXECUTORY CONTRACT

                        PLEASE TAKE NOTICE that upon the annexed motion, dated March 5, 2004

(the “Motion”), of Allegiance Telecom, Inc. and its direct and indirect subsidiaries, as debtors

and debtors in possession (collectively, the “Debtors”), requesting an order, pursuant to

rule 9019 of the Federal Rules of Bankruptcy Procedure, approving the Confidential Settlement

Agreement and Mutual Release, dated February 27, 2004, among Level 3 Communications,

LLC, the Debtors and XO Communications, Inc., as more fully set forth in the Motion, a hearing



C:\DOCUME~1\pchan\LOCALS~1\Temp\notesEC3FD6\Level 3 9019 Notice V1.doc
will be held before the Hon. Robert D. Drain, United States Bankruptcy Judge, in Room 610 of

the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy

Court”), Alexander Hamilton Custom House, One Bowling Green, New York, New York,

10004-1408, on March 25, 2004, at 10:00 a.m., prevailing Eastern Time, or as soon thereafter as

the Debtors are heard.

                        PLEASE TAKE FURTHER NOTICE that objections, if any, to the relief

requested in the Motion shall be in writing, shall conform to the Federal Rules of Bankruptcy

Procedure and the Local Bankruptcy Rules of the Southern District of New York, shall set forth

the name of the objectant, the nature and amount of claims or interests held or asserted by the

objectant against the Debtors’ estates or property, the basis for the objection, and the specific

grounds therefore, and shall be filed with the Bankruptcy Court electronically in accordance with

General Order M-242 (which can be found at www.nysb.uscourts.gov) by registered users of the

Bankruptcy Court’s case filing system and, by all other parties in interest, on a 3.5 inch disk,

preferably in Portable Document Format (PDF), WordPerfect, or any other Windows-based word

processing format (with a hard copy delivered directly to Chambers) and served in accordance

with General Order M-242, and shall further be served upon (a) Kirkland & Ellis LLP, 153 East

53rd Street, New York, New York 10022 (Attn. Jonathan S. Henes, Esq.); (b) the Office of the

United States Trustee, 33 Whitehall Street, 21st Floor, New York, New York 10004 (Attn.

Pamela J. Lustrin, Esq.); (c) Paul, Hastings, Janofsky & Walker LLP, 600 Peachtree Street, N.E.,

24th Floor, Atlanta, Georgia 30308 (Attn. Jesse Austin, III, Esq.); and (d) Akin Gump Strauss

Hauer Feld LLP, 590 Madison Avenue, New York, New York 10022 (Attn. Ira S. Dizengoff,

Esq.), so as to be actually received no later than March 22, 2004, at 4:00 p.m., prevailing Eastern

Time.




C:\DOCUME~1\pchan\LOCALS~1\Temp\notesEC3FD6\Level 3 9019 Notice V1.doc
Dated: New York, New York
       March 5, 2004

                                                                         Respectfully submitted,

                                                                         /s/ Jonathan S. Henes
                                                                         Matthew A. Cantor (MC-7727)
                                                                         Jonathan S. Henes (JH-1979)
                                                                         KIRKLAND & ELLIS LLP
                                                                         Citigroup Center
                                                                         153 East 53rd Street
                                                                         New York, New York 10022-4675
                                                                         Telephone: (212) 446-4800
                                                                         Facsimile: (212) 446-4900

                                                                         Attorneys for Debtors and Debtors in Possession




C:\DOCUME~1\pchan\LOCALS~1\Temp\notesEC3FD6\Level 3 9019 Notice V1.doc
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK

                                                         X
In re                                                    :
                                                         :       Chapter 11 Case No.
Allegiance Telecom, Inc., et al.,                        :       03-13057 (RDD)
                                                         :
                            Debtors.                     :       Jointly Administered
                                                         X

                       ORDER, PURSUANT TO (A)
    RULE 9019 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE,
 APPROVING THE CONFIDENTIAL SETTLEMENT AGREEMENT AND MUTUAL
 RELEASE, DATED FEBRUARY 27, 2004, AMONG LEVEL 3 COMMUNICATIONS,
   LLC AND THE DEBTORS; (B) SECTION 363 OF THE BANKRUPTCY CODE
   AUTHORIZING THE TRANSFER, AS A PART OF SUCH SETTLEMENT, OF
CERTAIN ASSETS FREE AND CLEAR OF LIENS, CLAIMS AND ENCUMBRANCES,
    AND (C) SECTION 365 OF THE BANKRUPTCY CODE, APPROVING AND
 AUTHORIZING, AS A PART OF SUCH SETTLEMENT, THE ASSUMPTION AND
              ASSIGNMENT OF AN EXECUTORY CONTRACT

                  Upon consideration of the motion (the “Motion”), dated March 5, 2004, of

Allegiance Telecom, Inc. and its direct and indirect subsidiaries, as debtors in possession

(collectively, the “Debtors”), seeking entry of an order, pursuant to Bankruptcy Rule 9019 and

section 363 and 365 of the Bankruptcy Code for (a) approval of the Settlement Agreement1, (b)

authorization of the transfer of the Buy Out Assets, free and clear of liens, interests, claims and

encumbrances, as a part of such settlement and (c) authorization of the assumption and

assignment of the KMC Agreement, as a part of such settlement, all as more fully set forth in the

Motion; and it appearing that this Court has jurisdiction to consider and determine the Motion as

a core proceeding pursuant to 28 U.S.C. §§ 157 and 1334; and due and proper notice of the

Motion having been given; and the Court having reviewed the Motion and having determined

that the legal and factual bases set forth in the Motion establish just cause for the relief granted

1    Unless otherwise defined herein, capitalized terms shall have the meaning ascribed to them in the Motion and the
Settlement Agreement.
herein; and it further appearing that the relief requested in the Motion is within the Debtors’

sound business judgment; and it further appearing that (a) the Settlement Agreement is fair,

reasonable and in the best interests of the Debtors, their estates, creditors and other parties in

interest; and the Court having determined that the Settlement Agreement was entered into in

good faith and is a result of arms-length negotiations; (b) the decision to convey the Buy Out

Assets to Level 3 is a product of the Debtors’ sound business judgment, and is an essential and

integral component of the Settlement Agreement; and (c) the assumption and assignment of the

KMC Agreement is based upon the Debtors’ sound business judgment and is necessary and in

the best interests of the Debtors, their estates, creditors and other parties in interest, and is an

essential and integral component of the Settlement Agreement; and after due deliberation and

sufficient cause appearing therefor, it is

               ORDERED that the Motion is granted; and it is further

               ORDERED that the Settlement Agreement, each of its terms, provisions, and

conditions and the compromise and settlement evidenced thereby, is authorized and approved

pursuant to Bankruptcy Rule 9019 and sections 363 and 365 of the Bankruptcy Code; and it is

further

               ORDERED that the conveyance of the Buy Out Assets to Level 3, free and clear

of all liens, interest, claims and encumbrances, is authorized and approved pursuant to Section

363 of the Bankruptcy Code; and it is further

               ORDERED that effective on, but not before, the Early Funding Date (or the

Option Exercise Date, if applicable), the assumption of the KMC Agreement by the Debtors and

the assignment of the KMC Agreement to Level 3, shall be authorized and approved, pursuant to

Section 365 of the Bankruptcy Code; provided, however, that nothing in this Order shall


                                                 2
preclude the Debtors from hereafter seeking to reject the KMC Agreement (a prerequisite to

which shall be the Debtors obtaining the prior written consent of Level 3 to do so) at any time

prior to assuming and assigning the KMC Agreement to Level 3; and it is further

                  ORDERED that the Debtors are authorized and directed to execute, deliver,

implement and fully perform any and all obligations, instruments, documents and papers and to

take any and all actions reasonably necessary or appropriate to consummate the Settlement

Agreement and perform any and all obligations and transactions contemplated therein; and it is

further

                  ORDERED, that that the Debtors are authorized and directed to execute, deliver,

implement and fully perform any and all obligations, instruments, documents and papers and to

take any and all actions reasonably necessary or appropriate to convey the Buy Out Assets to

Level 3, free and clear of all liens, claims and encumbrances; and it is further

                  ORDERED that that the Debtors are authorized and directed to execute, deliver,

implement and fully perform any and all obligations, instruments, documents and papers and to

take any and all actions reasonably necessary or appropriate to assume and assign the KMC

Agreement to Level 3; and it is further,2

                  ORDERED that the assumption and assignment of the KMC Agreement to Level

3 shall not release or waive any rights or claims that Allegiance may have against KMC under

the KMC Agreement, including, without limitation, performance warranty breaches, if any,

under the KMC Agreement, and that (except with respect to claims respecting backhaul latency

or non-delivery of ports relating to period of time prior to the assumption and assignment of the

KMC Agreement, as set forth in Section 3(d) of the Settlement Agreement) such rights and

2        To the extent that, in the future, the Debtors determine in their sound business judgment to reject the KMC
Agreement, with the prior written consent of Level 3 to do so and subject to this Court's approval at that time, then
this decretal paragraph shall not have any force and effect.

                                                          3
claims shall be preserved for Level 3, and Level 3 shall be free to enforce all rights and claims

against KMC (even if such rights or claims relate to periods of time prior to the assignment of

the KMC Agreement to Level 3); and it is further

                ORDERED that Level 3 is directed to execute, deliver, implement and fully

perform any and all obligations, instruments, documents and papers and to take any and all

actions reasonably necessary or appropriate to consummate the Settlement Agreement and

perform any and all obligations contemplated therein, and take such other action as may be

necessary or appropriate to implement and effectuate the transactions contemplated by this

Order; and it is further

                ORDERED that XO is directed to execute, deliver, implement and fully perform

any and all obligations, instruments, documents and papers and to take any and all actions

reasonably necessary or appropriate to consummate the Settlement Agreement and perform any

and all obligations contemplated therein and take such other action as may be necessary or

appropriate to implement and effectuate the transactions contemplated by this Order; and it is

further

                ORDERED that (a) any chapter 11 plan that is confirmed by the Court and related

orders entered by this Court in these chapter 11 cases, (b) the sale, assignment, transfer or other

disposition of any assets of the Debtors, (c) compromises with other parties in interest, and (d)

conversion or dismissal of the Debtors’ chapter 11 case shall have no effect on this Order or the

terms or transactions contemplated by the Settlement Agreement and that the terms of this Order

shall be deemed incorporated, where appropriate, into any plan of reorganization and related

Orders of this Court, including without limitation any confirmation Order, and as more fully set

forth in Section 11 of the Settlement Agreement; and it is further


                                                 4
               ORDERED that this Court shall retain jurisdiction to hear and determine all

matters arising from or related to the implementation of this Order, and as expressly set forth in

the Settlement Agreement.



Dated: New York, New York
       ____________, 2004
                                             ____________________________________
                                             UNITED STATES BANKRUPTCY JUDGE




                                                5

				
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