Carl C. Icahn's vision of a telephone company is starting to come into focus.

A year and a half after the acquisitive billionaire gained control of bankrupt XO Communications Inc., the Reston phone company has become the biggest of the upstarts that sell local and long-distance service in competition with giants like Verizon Communications Inc.

With its recent $513 million acquisition of Allegiance Telecom Inc., XO serves 200,000 small and medium-sized businesses in more than 70 cities from Los Angeles to Boston.

Now, chief executive Carl J. Grivner says XO is looking at other phone companies to buy, and it plans to form partnerships with companies overseas to offer service internationally. It's discussing joining with mobile-phone companies to package cellular calling with its service. And by the end of the year, it plans to offer an Internet-phone product with features like voice messages sent as attachments to e-mail.

"We want to continue to be the largest competitive carrier in the U.S.," Grivner said, "and that means we are going to keep looking at opportunities to grow."

But analysts question whether XO is big enough to thrive. In an age when size matters for survival in the telecom world, XO is still small by some measures. It has less than 1 percent of the business customers and 2 percent of the revenue of Verizon. Unlike Verizon, it doesn't sell residential services or have a mobile-phone subsidiary. And the phone industry's giants are competing with new determination to win back XO's business clients.

XO competes primarily on price. It says its prices are 10 to 15 percent lower than those of most major local phone companies. And because its network extends nationally, Grivner said, it can offer service to businesses with branch offices in cities that regional companies like Verizon or Qwest Communications International Inc. don't serve.

In addition to local and long-distance phone service, XO sells Internet services, including high-speed lines and software tools that help businesses run their Web operations. Where the company does not own a phone network, it leases network capacity from other companies to sell under its own brand. It leases network capacity to other carriers as well.

Founded in 1994 as Nextlink, XO was among the most ambitious among hundreds of new telecom companies that sprang up in the mid-1990s. It invested more than $5 billion to build networks across the country. But XO ran into trouble after investors pulled back from the overbuilt telecom industry in 2000.

XO, which filed for bankruptcy in 2002, caught the eye of Icahn, who is known for his takeover of Trans World Airlines in the mid-1980s and for parlaying stakes in companies like Texaco Inc. and Nabisco Group Holdings Corp. into hefty profits. When XO emerged from Chapter 11 bankruptcy protection, Icahn owned 82 percent of the company.

Like some of its competitors, XO's sales continued to fall. During the first quarter, the company's revenue was $261 million, down from $286million during the same period a year ago. The company lost $48.5 million during the quarter, compared with $20.5 million a year ago. The company's stock has fallen steadily from about $7.20 a share a year ago to its close Friday at $4.

Since taking control, Icahn hasn't sought to change what the company does. He simply wants it to be bigger.

"There are a lot of" telecom companies up for sale, and "I think there will be opportunities for them to be rolled up," he said in a 2002 interview, a sentiment he echoed in later conversations. Through a spokesman, he declined to be interviewed for this article.

XO's bread-and-butter business is still selling phone service to mid-size companies like Philip Services Corp., a scrap metal recycling company based in Houston that needed phone and Internet service in its 215 locations around the country, and Abra Auto Body & Glass, a car-repair company in Minneapolis that has 60 locations.

There is growing competition for that market these days, said Steve Hilton, an analyst with the Yankee Group in Boston, including from Verizon and the other Bell companies that once were part of AT&T. "The Bells are extremely focused on the small- and medium-sized business space, which wasn't the case prior to the last year," Hilton said.

As the phone giants watch their residential business erode and large corporations cut back on their phone orders, they are re-tuning their marketing to target XO's sweet spot, he said.

But Icahn is tough and likes a good fight. He isn't a frequent visitor to the Reston offices of XO, but typically lets executives run its day-to-day operations, keeping a close eye on the financial statements -- especially the cash that flows in and out, according to XO executives and analysts that follow the company. Icahn and his investment team in New York mostly focus on shopping for good deals, cheap assets that would fit well if merged with a company like XO.

"Even since we announced [the Allegiance] acquisition in February, we've been looking at other companies," mostly smaller, regional companies to augment XO's customer base, Grivner said. With the purchase of Allegiance, the need to acquire is diminished, he said, but the company will continue mulling such deals.

XO was a classic Icahn buy. He quietly bought up enough of its debt to give him control over other creditors. After the company exited bankruptcy, Icahn put Grivner and a number of his own managers in place.

Since then, Icahn has gone after several other big telecom targets, including Global Crossing Ltd. and Cable & Wireless USA Inc., although he lost both to higher bidders.

Before XO starts bidding again, analysts said, it should focus on making the Allegiance merger work.

"They have to execute," said Vik Grover, an analyst with Needham & Co. XO's computers that handle administrative functions like billing and processing new orders were in need of an upgrade, he said. Integrating those functions as well as the sales, advertising and marketing operations with the new company can be complicated, he said.

After the dust settles, though, Icahn may concentrate on buying competitors.

"There is no possible way the number of [small local phone companies] we have in the U.S. can exist in the next two to three years" because they need to be bigger to compete against the Bells, analyst Hilton said. Companies like XO/Allegiance, and the recently merged Broadwing Communications Inc./Focal Communications Corp., which is owned by Corvis Corp. in Columbia, will continue to try to merge with others, he said. In particular, Hilton predicted XO may try to merge with Nuvox Communications Inc., a St. Louis area company which recently combined with NewSouth Holdings Inc. of Greenville, S.C."I don't think anyone can challenge the Bells across the industry," said Royce Holland, Allegiance's founder, who left the company after completing the deal. But a challenger can succeed by focusing on a narrower market, he said, such as serving small- and medium-size businesses. "I think XO is the only one today that has that ability."

Others think Icahn ultimately will do what he has done with other investments in the past: Sell, for a considerable profit.

Going up against the Bells will always be an uphill battle, considering their mammoth size advantage, according to Needham's Grover. "I think the company will eventually go to a Bell," he said.

XO Communications needs to grow, chief executive Carl J. Grivner says.